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The first step is to adopt an outside-in perspective. Understanding customers’ business drivers and the resulting needs is key.
By Peter de Verdier Head of Corporate Development, OMX
Exchanges have come a long way in the past decade. In the wake of demutualization, most marketplaces have been transformed from mutually owned national monopolies into publicly traded companies whose owners require growth and profits. At the same time, deregulation has opened up cross-border competition and spurred the emergence of new players.
In this increasingly competitive environment, business development is crucial to future success. Exchanges have been forced to identify and meet the evolving needs of the market to ensure that they continue to grow their business. While incumbents have had varying degrees of success at this, they also have had many triumphs, including establishing light-touch regulation markets, such as LSE’s Alternative Investment Market, and creating trading networks, such as OMX Nordic Exchange and Euronext’s exchange network. And although competing for liquidity with a domestic exchange often has proved less fruitful, Singapore Exchange has successfully built and retained significant market share in Nikkei 225 futures by solving the needs of international firms – for example, by providing longer opening hours.
New players have also emerged, finding niches for themselves after careful market research. In response to investors’ demands for lower fees and faster execution, electronic communication networks a few years ago quickly captured a large share of the US market for NASDAQ-listed instruments. LiquidNet solved the demand for making large sized trades without moving the market by creating an anonymous block trading venue for institutional investors. Shareholder.com developed a suite of value-added services for issuers to complement the standard investor relations services provided by exchanges.
 | But there will always be new market needs to satisfy. Despite several attempts, a cost-efficient OTC clearing facility is yet to be established. The introduction of the new EU regulation MiFID has created several business opportunities. Under MiFID, firms entering orders on behalf of investors must select a market venue that fulfills “best execution” rules, taking into account not only the price of the instrument but also fees from the selected venue as well as clearing and settlement costs. This creates a need for a service that provides real-time best execution calculations. Within the clearing and depository segment, cross-border trading within the EU and Asia would be better facilitated if services were standardized and more integrated.
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The conclusion? Exchanges that want to stay ahead in the market must have a conscious strategy for business development. The first step is to adopt an outside-in perspective. Understanding customers’ business drivers and the resulting needs is key. This involves segmenting and sub-segmenting customers and analyzing their roles in the transaction value chain.
At the same time, exchanges must be realistic about which kinds of services they can offer with reasonable credibility; an exchange’s current position in the market can pose quality concerns or conflict-of-interest issues. Finally, in pursuing business development, exchanges have to accept that some bets will pay off and some won’t. But those that don’t try at all risk seeing their business slowly wither away.
Photo Anders Krison
MarketView 2007:1
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