TowerGroup Update: Impact of Exchange Activities

The continued consolidation and globalization drive among exchanges will have "medium to high impact" on securities institutions, according to Dushyant Shahrawat, research director for TowerGroup's Security & Capital Markets service.In a presentation at this week's TowerGroup Financial Services and Business Technology Conference in Boston, Shahrawat said recent exchange activities will allow more direct execution on exchanges or DMA access for buy-side firms, as well as lower pricing from the increase in competition among exchanges.

For hedge funds, he sees the exchange dealings resulting in more high-frequency trading in addition to the lower costs. Both buy-side firms and hedge funds should be impacted in the medium range, said Shahrawat. While broker-dealers will see high impact as exchange activities threaten broker strongholds on OTC business and more competition for attracting buy-side order flow.

As for the recent Nasdaq/OMX announcement, Shahrawat said the offer was a direct response to the NYSE/Euronext deal and illustrates the continuing race for exchanges to globalize and enter markets beyond equities. "They had to do it, they have to get into the global game and that can't be done organically at this point," he said.

But the M&A scramble could be over sooner than he originally thought. Shahrawat said initially his thinking was the consolidation would continue for another three years, but he's since revised that down to around two years.