How Can Exchanges Gain A Competitive Edge In A Highly Complex Marketplace?


Anders Henriksson, CEO Cameron Tec, and Michael Buhl, Joint CEO CEESEG look at the changing nature of the exchange marketplace and what customers are demanding.

Exchanges today are operating in an environment that is vastly more competitive, fast evolving and regulated than ten or fifteen years ago. They face competition from alternative liquidity sources and are forced to compete in an environment that constantly demands consistent speed, dependability and attractive pricing. If exchanges want to compete effectively in the current marketplace, they need to make strategic choices particularly when it comes to their technology. According to Anders Henriksson, CEO at FIX technology firm CameronTec, “Today’s environment calls for building out solid infrastructure that can accommodate competitive needs, deliver consistent speed and foster reliability in order to secure customer confidence.”
Growing Competition
Exchanges once held monopolies over liquidity in their region and asset class, but over the past decade, market structures around the globe have evolved, creating more competition and fragmenting liquidity. With regulatory shifts, exchanges have had to deal with upswings in competition stemming from alternate liquidity sources such as Multilateral Trading Facilities (MTF’s), systematic internalisers, dark pools, etc. “As regional market structures evolve, exchanges need to spend more time thinking about how they can compete to better attract flow from both domestic and international traders,” says Anders Henriksson. “In order to survive fierce competition, exchanges are reinventing their business models. They are taking steps to diversify their revenue sources and increase their market footprint,” says Sang Lee, Co-Manager, Managing Partner of Aite Group. “This is creating a need for many exchanges to revamp their technology infrastructures to support trading across borders and different asset classes.” Competitive pressures force exchanges to focus on innovation in pricing, product offerings, order types, and speed of execution. But it’s also important to ensure that market participants find it easy to connect and trade. “Exchanges are increasingly leveraging FIX connectivity, which is helping them reduce both time to market in on-boarding new participants and latency through faster connectivity infrastructure,” says Anders Henriksson. The CEE Stock Exchange Group (CEESEG) is doing just that. CEESEG is an exchange group consisting of the stock exchanges of Vienna, Budapest, Ljubljana and Prague. They share a technology platform to “facilitate access to all exchanges within the CEESEG through uniform IT interfaces,” says Michael Buhl, joint Chief Executive Officer for CEESEG. “CEESEG FIX has been continuously developed to suit our market participants and considerably reduces the effort for market participants in terms of new releases of trading systems.” CEESEG is using CameronFIX in their gateway to route order flow to the member exchanges.
Demand for Greater Exchange Reliability
Outages can do serious damage to the market’s confidence. When outages occur, the order flow re-routed to a competitor, meaning that the exchange instantly loses transaction revenue. Once a customer has experienced such a confidence-shaking event, they are more likely to continue routing to the alternate venue. To avoid this sort of catastrophic occurrence, exchanges need to stack the deck in their favour by investing in systems that are resilient and reliable.
Outages also have a serious effect on market capitalisation for listed companies and on investor portfolios. “A recent incident on the Tel Aviv stock exchange sent Israel Corp.’s investments down 99.98% within minutes. Regardless of the exact cause, these types of events reflect badly on the exchange and shake investors’ confidence. The ability to identify issues, constantly monitor, take proactive actions and communicate effectively are all challenges that exchanges today must meet,” says Anders Henriksson.
According to Michael Buhl, “The Xetra® trading system as well as our FIX interface use state-of-the-art trading technology and are known for impeccable reliability. Investing in safe and reliable infrastructure is as important as process management and IT governance, which helps to efficiently reduce IT risks.”
Reconsidering Strategy
Over the past two decades, exchanges used acquisitions and consolidation as key tools to drive growth. However, this approach is starting to experience some pushback from regulators, as in the case of the proposed cross-border merger of Deutsche Boerse and NYSE Euronext. This deal was shot down by the EU, as they said that the combined company’s dominance of the European derivatives market would have smitten competition. Some cases such as the ICE/NYSE Euronext merger and the BATS/Direct Edge merger may successfully obtain regulatory approval, but exchanges cannot rely solely on mergers and acquisitions as a competitive strategy. Another strategic expansion approach involves cooperatives such as ASEAN in Asia, MILA in Latin America and CEESEG in Eastern Europe. This approach targets investors who do not limit their strategies to instruments traded in their geographical area. ”Particularly in emerging markets, growing wealth has created demand for opportunities to invest outside brokers’ home countries,” comments Anders Henriksson. “As regulatory regimes become more open to this cross border investment flow, it’s even more critical for exchanges to cooperate to facilitate this kind of trading.”
In the case of CEESEG, small regional stock exchanges of Vienna, Budapest, Ljubljana and Prague have combined resources in order to gain a stronger foothold in the global marketplace. Michael Buhl explains, “We believe that a regional approach is advantageous for listed companies as well as market participants. Listed companies enjoy the highest degree of attention in their home markets, because this is where they are at the center of attention of investors, analysts, and also as employers and the general public. As a group, we successfully manage to garner international attention to all stock exchanges within the CEE Stock Exchange Group.” According to Michael Buhl, “We facilitate access to all exchanges within the CEESEG through uniform IT interfaces such as CEESEG FIX. This user-friendly interface provides small and medium sized exchange members in the CEE region with easy and inexpensive market access by using their existing infrastructure.”
Overall, exchanges need to recognise that change in this business is a constant. Therefore, they need to invest in a strong technology platform designed to meet the needs of this ongoing evolution providing flexibility for evolving regulations, mergers, acquisitions, and more.
A globalised and fast-paced trading marketplace is creating an increasingly more competitive environment for exchanges. To get an edge, exchanges need to be paying greater attention to developing strategies that are aligned with this constantly evolving environment. A major part of this initiative should be investing in systems that are reliable, flexible, standardised, and offer cost savings that can be passed down to brokers.