One could argue that exchanges are at a crossroads in terms of their ultimate future competitive position. Over the last decade, through demutualization and becoming a legitimate publicly traded business, exchanges no longer function like an industry utility.
[The Bite Of New Market Realities]
In addition, competition has come from many different areas, including alternative trading systems and other exchanges, but most importantly from their former owners, the broker community. Increasingly, brokers are moving into the exchange transaction business just when the overall pie for transaction revenue is shrinking due to low trading volume and collapsing transaction fees. From the brokers' perspective, exchanges are increasingly using their SRO status (at least in the U.S. market) to add an unnecessary compliance burden as well as keeping market data fees high.
Given these market realities, it shouldn't come as a huge surprise to anyone that exchanges are trying to reinvent themselves as diversified, global entities. Through this transformation, exchanges will be able create a more stable foundation for growth, regardless of specific external conditions that may impact certain parts of their business. In essence, reinvention of their business model has become a competitive requirement.
Sang Lee is a co-founder and serves as the Managing Partner at Aite Group. Mr. Lee's expertise lies in securities and investments, and he has advised many global financial institutions, software/hardware vendors, and professional services firms in sell-side and buy-side electronic trading technology, market structure, retail brokerage technology evolution, and wealth management.