Highlights from the World Exchange Congress, London March 25
In working with our customers, we gain the unique insight to see trends developing, both by region and across the trade lifecycle. There are 5 key trends I would like to discuss today:
1. The ‘West to East’ Market Development
It used be that market structure trends moved from West to East. Take high frequency trading for example, which started in U.S. and then moved its way across Europe and now is one of the most popular topics in Asia.
With markets being so specialized, but yet interconnected globally, will the ‘West to East’ market development continue? In short, we don’t think so. We are already seeing instances where this is not true.
In China and India, for example, we are seeing very sophisticated risk management procedures are being employed, and I should hope that the western countries will take notice and realize.
2. Evolution of Global Trading
While the needs for operational cost reduction, resiliency and reliability remain constant globally for all types of exchanges, we also see how exchanges are diversifying their offerings based upon the maturity of the regional market.
Exchanges globally are of course diversifying beyond equities into new interesting asset classes, and bringing traditionally OTC instruments on exchange. Outside of bringing OTC instruments on-exchange, I think one of the single most interesting developments to watch is in totally new asset classes like crypto currencies (bitcoin). However the regulatory situation here is unclear and without traditional exchange rules, regulations and infrastructures, I think that institutional investors will continue to have a “wait and see” attitude. The bitcoin block chain technology is certainly interesting and I think it has the ability to be a positively disruptive source of innovation in our traditional exchanges.
Our key 2015 recommendation for Trading: In such a highly competitive trading landscape, innovation and creative thinking about how you can better serve customers is key to differentiation. Ensure that you have a secure, reliable core technology foundation so that you have the ability and means to develop innovative new products and services that will truly set you apart from the competition.
3. Driving Market Integrity
Constant market structure innovation combined with new tradable instruments continues to breed complexity for risk and surveillance teams trying to maintain the reputation and integrity of their marketplaces. It can be a scary place out there for venues that don’t have the proper tools in place to manage the data and cross-market, cross-asset analysis needed to meet the requirements of the regulators. Things like social media, HFT and dark trading venues of course complicate matters more and more.
Our key recommendation for 2015: Globally there is more regulatory movement than we have seen in quite some time – and more coming! Start looking at some of these requirements early, so that you have time to interpret, determine the impact and properly prepare. Even if a particular regulation does not affect your immediate region – take notice. There is no telling how a mandate might influence something coming in your own region.
4. Post-Trade C’s: Capital, Competition, Consolidation
Post-trade teams are seeing more activity than I think they ever have before. With the proliferation of regulatory mandates in Europe and the US, and many of the emerging markets starting their first ever CCPs and CSDs, it is quite an exciting time in this space all over the world.
We are seeing clearinghouses look to consolidate exchange-traded and OTC siloes for cross-margining purposes and to drive more efficient collateral management. As recently as last year, our Nasdaq Clearinghouse consolidated its clearinghouses driving a reduction 50 million USD .in clearing capital and allowing cross margining between exchange traded and OTC position. The drivers for consolidation are two-fold: a CCP in a competitive environment needs to optimize capital efficiency for its members and also needs be able to offer the best possible fee structure and STP solutions for its members.
On the CSD and Custody side, we see various collateral solutions being developed and they are expecting great changes in the business models as an effect of T2S and CSD-R. New regulatory requirements for non-cleared OTC derivatives will force market participants to adapt to a ‘CCP-like ‘behavior when it comes to handling of the initial margin, variation margin and collateral management. We think that market participant systems will change as a result, and expect new types of collateral and margin calculation services to develop.
Our key recommendation for 2015: A strong technology backbone is key to surviving and thriving in this environment. It is critical to be able to compete and also flexibly adapt to offer new products and services to clients to differentiate.
5. Rising importance of Data
Marketplaces spend a substantial amount of resources producing, maintaining, and storing data but many of the venues we meet with are not aware of the full strategic value that it can hold. Venues can leverage their data, including adding new interesting data sets to the equation, and create much more value in their effort to become more business intelligent, competitive and efficient. This includes so much more than market data alone.
While we as market operators are - or aim to - collect more data than ever before you all know data is often diverse and rarely come in a perfect form. Furthermore, the challenge that we see is that data often resides in isolation in various business siloes.
Our key recommendation for 2015: Look at your data pool as an opportunity to do great things, not just an operational and financial burden. By allowing the exploration of all the data and correlations between it within various siloes, operators can identify hidden patterns as well as new business opportunities that were previously missed