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Investors are not the only ones diversifying their holdings. Exchanges are busy expanding their offerings to include the trading of new asset classes and more instrument types. This strategy not only minimizes risk and boosts earnings, but it also presents customers with more choices.
Both NYSE and NASDAQ have recently announced that they will be trying their hands at the options business, while the Chicago Board Options Exchange launched the CBOE Stock Exchange in March 2007. They will be joining the Boston, Philadelphia and American stock exchanges, which currently support both equities and options. Similar trends have been prevalent in Europe, Asia and Australia, with many exchanges offering both cash and derivatives products.
Diversification in asset classes is also on the rise. For example, Euronext has recently introduced trading in commodities, such as raw sugar and rapeseed oil. According to Peter Redshaw, Research Director of Investment Services at the Gartner Group, exchanges are moving towards trading multiple instrument types and new asset classes to satisfy customer demand and to add revenue streams.
“Customer demand is moving increasingly towards structured products,” Redshaw says. “Customers want exchanges that can cope with more asset types. It also works for exchanges because they want to divest, reduce volatility and capture a bigger share of the market.”
If customers already have the expense of connecting to an exchange, it only benefits them to be able to access different kinds of financial instruments in one place.
Peter Redshaw, Research Director of Investment Services, Gartner Group. | However, Redshaw argues, this may not be the optimal model.
“At Gartner, we think a much better model is emerging,” he explains. “Rather than being tied to one exchange, we see business process networks [BPNs] being able to provide access to many exchanges from one customer connection. BPNs will act as the insulating layer that offers choice but minimizes the impact of change. It is the next stage in the evolution of open access to exchanges after direct market access. Customers will have simple access to exchanges on a plug-and-play basis. The trick for an exchange will be to make itself the ‘destination of choice’ for as many BPNs as possible.” |
»Industry consolidation...means changing –rather than disappearing – roles for smaller exchanges.« The launch of the ISE Stock Exchange by the ISE is a good example of the shift towards new business strategies. The ISE operates the first fully electronic options exchange in the US and has grown to be among the world’s largest options exchanges since its debut in 2000. In October 2006, ISE cut its teeth in the stock business when its MidPoint Match product – a continuous, anonymous and fully automated matching platform – went live. The ISE completed rollout of its stock exchange in February 2007.
“The opportunity to wade into adjacent space and leverage our expertise to deliver value into another arena where we perceived a need struck us as something to explore,” says Tom Ascher, the ISE’s Chief Strategy Officer.
Andrew Brenner, head of the new stock exchange, says it has drawn upon its membership, regulatory infrastructure, operational support, and connectivity to expand from options into stocks. The ISE’s options know-how as well as recent changes in US legislation created an attractive opportunity to expand into a new instrument type.
“Reg NMS certainly helped us in making the decision because now orders that are placed on the ISE have price protection and are treated just as orders are treated on NASDAQ or NYSE,” Brenner says.
The key has been to provide a differentiated product that offers its customers the opportunity to trade both stocks and options via their membership.
“There is absolutely no need for an additional exchange in the US,” Brenner says. “Unless we could come up with a product that differentiated the ISE from the other exchanges out there, we weren’t going to move forward.”
Industry consolidation seems to be an inevitable outcome of converging markets, but it means changing – rather than disappearing – roles for smaller exchanges. Redshaw predicts that despite the industry consolidation, with examples such as the NYSE’s acquisition of ArcaEx and NASDAQ’s acquisition of BRUT and INET in 2005, small niche “boutiques” will emerge alongside the industry majors. “There is no place for smaller markets doing the same thing as NASDAQ,” he says.
“Despite the high profile mega-mergers between exchanges, competition and diversity will remain. Changing regulations and new technologies will mean that monopolies will continue to be challenged, despite the huge economies of scale and liquidity that some of the global players will have. Going forward, exchanges will continue to diversify in terms of their offerings, not just to provide markets with more instruments, but also to provide additional services.”
So what’s the next logical step now that the single instrument type or one asset class exchange seems to be endangered?
The next challenge will be technical: integrating trading platforms to enable new services like real time combination trading of cash and derivatives. ASX in Australia has already launched an integrated trading platform, and Singapore’s SGX is on its way to doing so. Can the US exchanges be far behind?
By Charlotte West Photo Mattias Bardå Illustration Måns Adolfsson
MarketView 2007:1
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