Exchange Consolidation Wave Is Expected to Continue in 2008
"What you'll find is that a true equity exchange in itself probably won't exist in the short term," predicts Joe Cangemi, managing director at BNY ConvergEx Group. "It's more about multi-asset class, multi-currency global functionality and technology. So the next clear winners will be those that have the global reach and technology and an infrastructure that is sound enough to be scalable."
The exchange that emerges on top "is going to be an exchange that trades everything," adds Kevin Chapman, managing director and head of international trading at Nicholas Applegate Capital Management in San Diego. "Why can't you have everything traded on one exchange?"
One reason exchanges are entering multiple asset classes is to leverage technology synergies. "Once an exchange is running a technology platform, the cost of adding incremental products isn't as expensive as adding the first product," says Rosenblatt's Gawronski.
More important, however, exchanges are diversifying their business mix to generate higher revenues. "U.S. equity exchanges like the NYSE and Nasdaq want to be multi-asset class because that's where the growth is," contends Gawronski. "The NYSE Euronext and Nasdaq want to grow by going into or expanding their futures and options offerings, and they want to grow into product classes that have been growing a lot faster."
Gawronski points out that unlike equities and options, which trade on a multitude of exchanges, ECNs and dark pools, futures exchanges have proprietary rights over the products that are created on them. "Your intellectual property is protected, and the product that can be offered is only limited by one's imagination," as opposed to the number of companies willing to list, he says. Further, "The way the clearing works in futures, if you buy it on CME, you can't sell it elsewhere," Gawronski notes. "It's not fungible like equities."
But that doesn't mean that CME Group, the world's largest futures exchange, won't look to get into other asset classes. "I would be surprised not to see the Chicago Mercantile Exchange get involved somehow, whether it's buying the CBOE, the Philadelphia or the Amex," says a buy-side trader who spoke on the condition of anonymity. "I would be surprised if they didn't join the fray, if they didn't get into equities or the cash end of the business." In fact, the CME already is eyeing expansion into Latin America. In October, it announced plans to buy about 10 percent of Brazil's BM&F derivatives exchange in return for a 2 percent stake in CME that is valued at about $700 million.
But just because the exchanges diversify doesn't mean they will be successful. "After all these parties jump into these asset classes and into new countries, the question becomes how well they execute on their strategy, and that's what determines which venue will become successful," says Dimitri Galiametdinov, director, equities, at Advanced Execution Services (AES).
The Fastest Exchange Wins
As new players enter the field, buy-side traders say speed and technology is what matters most. "What it's going to take is really speed of execution," relates Nicholas Applegate's Chapman. "If somebody's system is faster than another's, I think you're going to gravitate there. That's why Instinet has been so successful with Chi-X," he continues, referring to the Pan-European alternative trading system that Instinet launched in London to take advantage of MiFID. Chi-X is 10 times faster than the LSE and the per-ticket charge is lower for the brokers that sponsor the buy-side trades, Chapman notes. "When the buy-side is implementing trading decisions, "the fastest is better," he says.
"Alternative trading venues are putting the pressure on exchanges to adapt and upgrade their systems quickly [if they don't], there's going to be a grab of volume that they don't get back," says Chapman. "The NYSE is a perfect example. They didn't adapt fast enough and now they're losing liquidity big time. If I'm buying IBM and now I'm getting it on Nasdaq rather than the NYSE, I don't care."
But according to NYSE Euronext executives, the exchange has improved its speed and has plans in place to become much faster. "We've dramatically cut the latency down to about 110 milliseconds from over 200 not that long ago, and our goal is to be sub-10 milliseconds," said Larry Liebowitz, NYSE Euronext's EVP and COO, U.S. Markets, speaking at Lehman Brothers' 5th Annual Financial Services Conference in September. Ivy is Editor-at-Large for Advanced Trading and Wall Street & Technology. Ivy is responsible for writing in-depth feature articles, daily blogs and news articles with a focus on automated trading in the capital markets. As an industry expert, Ivy has reported on a myriad ... View Full Bio
Tweet This