Technology is clearly emerging as the key motivator for consolidation among the worlds largest exchanges. The recent exchange mergers are driven more by the ownership of the clearing and settlement transaction than by liquidity or any other factor.
This is in stark contrast to previous trends within the exchange market, which had focused on the consolidation and concentration of liquidity. Historically, exchanges competed to provide the fastest liquidity access points. However, technology and fragmentation have made the consolidation of liquidity irrelevant through microsecond connections and co-location capabilities.
Going forward, value added services will be created through the leveraging of post-trade data and the settlement and clearing process across asset classes. Exchanges will look to offer additional services such as metrics on counterparty or concentration risk in addition to more robust market data feeds.
The risk revolution In the last three years, numerous risk management initiatives at financial institutions have emerged resulting from the financial crisis. In addition, as investors demanded greater transparency, firms began to focus on improving their ability to understand, engage and retain their clients.
Gaining a clear picture of concentration risk, counterparty risk and other various data points from a risk perspective are providing firms and their clients with significant advantages. In addition, the need for market risk data has placed exchanges in a position to offer multiple points of view to firms and their clients, delivering new types of risk metrics and services never imagined before in real-time.
Once this is achieved, the next phase for exchanges is to leverage the same set of data for multiple calculations and other uses to boost their return on investment.
The expanding role of data The industrys appetite for data is growing daily, and the traditional way of looking at data is being challenged continuously. Data is precisely where exchanges will gain new revenues. This is consistent with the trend of exchanges looking more like technology vendors than purely a liquidity destination, and a new twist on the old clich, he who has the most data wins.
Exchanges have an opportunity to consolidate data and offer value added services around not only risk, but also financing, collateral management, and a whole array of services that come with being the sole provider or source of data. Exchanges must adopt new data technologies, utilizing the emerging big data and graph-based data management techniques to offer a more constructive view of data and faster access to patterns.
Web giants Google, Yahoo and Amazon have all addressed this data challenge as part of their key offerings and competitive differentiation. They pioneered and continue to expand upon these data-driven techniques, and exchanges must do the same to provide flexible consumption by the end users.