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How the Exchanges Are Bouncing Back From Mega-Merger Mega-Flops

From the sale of market surveillance systems to forays into the clearing business, the global exchanges are moving on after their best-laid plans for consolidation collapsed.

Capitalizing on Market Surveillance

Aside from speculation over whether it would pursue LSE or the competing bid it put together for NYSE Euronext with help from the IntercontinentalExchange, Nasdaq didn't get as far into the global merger game as its rivals. But through its 2010 purchase of market surveillance system provider SMARTS Group, experts say, the firm is at the forefront of what's likely to be a big business in years to come.

"What we've seen in the wake of the Flash Crash and most recently the BATS IPO is, there's a need for restored confidence in the equities markets and the way they operate," Liquidnet's Loven says. "You do this by investing in market surveillance and supervision. This can be a differentiator in terms of competition once you've made this investment."

Nasdaq's SMARTS platform is designed to help compliance departments at brokerages monitor their traders and clients for illegal acts, such as insider trading or market manipulation. And while it could be viewed as a solution to shenanigans at the firmwide level, such as UBS's rogue trading scandal (which cost the company $2.3 billion), Nasdaq also is selling SMARTS to regulators and exchanges to help weed out malfeasance across the markets.

Regulators, brokers and exchanges in Australia, Singapore and China are now using Nasdaq's surveillance system, and the company recently submitted a comment letter to the U.S. Securities and Exchange Commission arguing that its technology could help the regulator finally construct the much-discussed consolidated audit trail. Nasdaq most recently struck a deal with Hong Kong-based brokerage China Merchant Securities, which will use the SMARTS system to monitor its equities trading operation, according to Paul McKeown, Nasdaq's VP of market technology. "All of a sudden, compliance and surveillance have been thrust into the limelight and have become a major area of importance for broker-dealers, regulators and, of course, exchanges," McKeown says.

[Read more about Nasdaq's move to export market surveillance to China.]

Tabb Group analyst Adam Sussman adds that surveillance systems not only are in strong demand at the exchange and regulatory level, but also on the buy side. "There's growing demand for market surveillance products at two levels," he says. "First, at the firm level, being able to do surveillance on your employees in order to alert the authorities to unscrupulous behaviors like insider trading before they find out. And then, of course, at the exchange and regulatory level, for looking at abusive trading patterns and for algos gone wild."

As the Senior Editor of Advanced Trading, Justin Grant plays a key role in steering the magazine's coverage of the latest issues affecting the buy-side trading community. Since joining Advanced Trading in 2010, Grant's news analysis has touched on everything from the latest ... View Full Bio

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