Multiple Market Forces Drive Stock Exchange Evolution and Shift Eastward

Michelle Remo, “Big 4″ observer
April 27, 2012 /

Trading exchanges around the world are undergoing a transformation as M&A activity slows in traditional locations and competition heats up in emerging markets. Increased regulation, the ongoing surge of technology, shrinking trading volumes, and new client- and product- driven business models are shaping dramatic changes to the exchange sector, according to a new report from KPMG International.

The report, Winning Platforms – Choosing the right profile for the world’s exchanges, shares the insights of KPMG experts along with the views of 20 board-level executives of the leading exchanges, trading platforms and banks active in global capital markets.

“There are a raft of uncertainties caused by lack of harmonized regulations among nations and regions as well as some extreme macroeconomic forces today that are having a substantial impact on exchanges around the globe,” said Aga Lindenbergh, KPMG Global Coordinator, Exchanges and a partner for KPMG in The Netherlands.

“The observable shifts in the balance of trading volumes towards high growth markets such as the BRIC or Next 11 continue unabated as Western economies stall and the sovereign debt crisis remains unresolved. The exchange sector is not traditionally known for being quick to react but the changing environment calls for responsiveness, a sharpened focus and new approaches.”

With zero latency in accessing market data or initiating trades – the race to zero—critical to attracting and retaining customers, technology remains the defining competitive differentiator.

“With new trading models such as alternative trading systems, the high frequency trader, dark pools and the like, it’s even more imperative for traditional exchanges to embrace technology. Speed rules,” said Mr. Lindenbergh.

The growth potential for exchanges in emerging markets is significant as commodities trading rises and an increasing number of companies in some countries queue up to issue IPOs, conditions that point to a strong likelihood of regional and local exchanges taking a firm hold.

Yet even with M&A activity slowing down in the West due to government pressure, leading exchanges will continue to look for partners and alliances to round out product portfolios or expand the liquidity pool.

Yet even with M&A activity slowing down in the West due to government pressure, leading exchanges will continue to look for partners and alliances to round out product portfolios or expand the liquidity pool.

Yet the report also asserts that traditional exchanges can find opportunities by firming up their roles in both the pre- and post trade environments. Moreover, those exchanges that devise business models geared toward specific client groups, such as global or local, and new service offerings such as value-added data and co-location, are in a better position to retain clients.

“Choosing the right service offering for a target client group is only possible if the exchange has a clear understanding of the incremental cost of a specific service and the value each client segment brings to the exchange,” Mr. Lindenbergh noted.

“Focus is key for sustained success. With a constant evolving regulatory agenda, intense pressure to fulfill systemic mandates from governing bodies and increasing demands from clients there has been a tendency of some exchanges to be ‘all things to all people’,” stated Michael J. Conover, Global Capital Markets Sector Leader and Partner with KPMG in the United States.

“Exchanges must be clear over which segments and geographies they need, and are able, to serve on a sustainable basis.”

 

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