In past years, while the stock market landscape globally was fixated on responding to changes in regulation, modern trends have taken a different route – centering on revenue diversification and new technology, among others. This is according to Nicola Comninos, Head of Strategy and Business Intelligence at the JSE.

The exchanges industry has always been tightly linked to innovation and technology. Several years back, consolidation was centre stage, largely due to the number of mergers and acquisitions that had taken place at the time, says Comninos. In merging, different markets – which use different technologies – are brought together and must be integrated. Comninos notes that much of this pertains to economies of scale and choosing technology platforms on which to operate the newly merged platforms.

Today, technology remains a crucial point of focus with the different types of new disruptive technological developments, such as blockchain, receiving a great deal of attention. Comninos believes that although this may only be pertinent to certain parts of the trading process – and while it is seen as a disruptive force – in reality, it will probably only affect the settlement space, with little bearing on the trading and clearing space.

Another trend pertains to revenue diversification. ‘We have, in terms of the international landscape, observed that exchanges invested heavily to diversify,’ she says. ‘There has always been a higher dependence on trading revenue, which is volatile, so exchanges were looking at how to get more annuity income. They were acknowledging that to diversify their revenue streams they needed to consider other value-add services.’

As such, emphasis was placed on post-trade and data. This is evident at those exchanges with sizable cash equities markets, such as the Australian and London exchanges, as well as those with sizable derivatives markets, such as the Deutsche Börse and ICE, looking to develop value-add analytics, issuer services, clearing and risk-management services.

While many exchanges grew inorganically – for example by making acquisitions – the JSE’s strategy is somewhat different. ‘We built out our post-trade services and data divisions organically. We are still in the process of delivering on the Integrated Trading and Clearing project, which involves the integration of all our clearing and trading technology. At the end of this, we will have all of our markets on the same trading and clearing technology,’ says Comninos, adding that such integration will give the exchange economies of scale, increasing efficiencies.

Other noteworthy trends include exchanges focusing on listings’ ecosystem-type platforms, which allow different participants to connect within the listings space; new order types focusing on buy-side clients; geographic diversification – which allows emerging market exchanges in particular to hedge their currency risk; increased focus on derivatives growth; and more emphasis on passive rather than active, such as smart beta ETF products.

‘Exchanges – reacting to fierce competition – are expanding their businesses by investing in other entities along the value chain and are acknowledging that you don’t have to limit your business to traditional exchange business, for example owning an OTC trade reporting venue within your group,’ says Comninos. ‘Co-operation has also become more popular, with exchanges cross-listing each other’s products. So we have seen partnership models too, not just mergers and acquisitions.’

With regard to future trends and disruptions, Comninos cites unregulated OTC platforms as one of these, and others in the value chain, such as brokers and dark pools that have decided to enter the exchange space as another.

‘A dark pool in the US recently got an exchange licence, and is set to change market structure due to its speed bumps concept, embedded in its trading model, which limits high-frequency trading firms to trade at high speed on its venue,’ she says. And while exchanges have generally been hesitant to enter the brokers’ space, offering services they traditionally provided, the more exchanges are diversifying their revenue base, the more they are starting to challenge previous norms.

‘Exchanges are getting into analytics – a service traditionally offered only by brokers and data vendors. We could see this extend to exchanges starting to offer services only the buy-side currently offers. A lot depends on how much exchanges are pressured to expand their reach further along the value chain,’ says Comninos.

By Toni Muir
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