In an industry largely governed by technology, the ability to develop a focused strategy for the utilization and deployment of resources is critical. Indeed, as regulators seek to make traded markets safer, the robustness of technology systems will become an increasingly prominent issue.
Over the past five years, most execution venues have placed substantial investment into creating trading infrastructures and platforms that reduce latency, support small order or high volume flow, and disseminate market data. However, many of the recent outages have seemed to occur during periods of change, creating volatility that could potentially spread across products, markets and asset classes.
One development worth noting is the deployment of standard trading IT applications that can be accessed at relatively low costs, thus reducing one of the key burdens to setting up a trading platform. At the same time, many of the larger exchanges have begun to license their trading platforms to smaller, regional exchanges to enhance volume and build revenue. As a result, new entrants into the market may be able to leapfrog the incumbents, gaining a clear competitive advantage in terms of pricing.
A secure business?
As the threat of hackers becomes ever more present, cyber-security has become a major concern. With the high potential for financial and systemic risk, surveillance technology has become a critical necessity for exchanges.
Increasingly, we have seen a transition from bespoke surveillance applications towards vendor-based solutions. In part, this is the result of the standardization and harmonization of trading models that has made the introduction of ‘off the shelf’ solutions more effective. But these tools also carry the advantage of enabling surveillance across multiple exchanges, thereby allowing the overall trading environment to become more robust and resilient to market disruptions.
Technology-led cost efficiency
As in any industry, the ability to drive out costs is key to enhancing profitability. Many exchanges achieved substantial cost efficiencies between 2006 and 2009 through the implementation of new systems, particularly in Europe where trading and post-trading services appear to have become more cost efficient recently.
However, the drive towards cost efficiency is often made more complex by the existence of legacy IT systems that can often be expensive to update. Once again, this may lead to significant competitive advantages for new entrants who tend to enjoy lower operating costs as a result of their more agile and modern technology systems. As a result, many of the incumbent regulated markets may be forced to reduce their fees in order to stem the exodus of high-margin retail and HFT clients to Multilateral Trading Facilities (MTFs) and other new entrants.