The Bite Of New Market Realities

The exchange business is no longer the cash cow it once was. In just a few short years, exchanges have gone from record to average revenues.

The Exchange Diversification PlayThis issue of Wall Street & Technology examines the evolving exchange business in today's marketplace. As the trading business continues to shrink, exchanges are selling technology and services to bolster revenues. The traditional exchange operators are offering cloud services, monitoring technology and more. To read more, download our September 2013 digital issue now.

This shift mirrors what's happening in the rest of the capital markets space. Trading volumes have plummeted, which severely bites into revenue for exchanges and brokerages alike.

Meanwhile, as electronic and algorithmic trading continues to grow, exchanges have been forced to improve bandwidth and processing capabilities to handle the massive number of messages from automated trading. Unfortunately, the volume of messages outnumbers trades by a large margin, sometimes 10-to-1.

So exchanges have essentially built an infrastructure that can handle 10 times the number of trades that are actually completed on their systems. Most other businesses "right size" their technology to match the business. Exchanges, on the other hand, have to oversize their capacity, resulting in even more profit pressure.

These changes are forcing industry participants of all stripes -- brokerages, exchanges, market data providers, asset managers -- to look for new sources of revenue. One of the most popular new sources is technology. The thinking goes: Financial market participants have invested heavily in their own IT, so why not resell it to others to help boost revenues?

The major exchanges have been busy expanding the number of technology products they have for sale. Data services have been a source of revenue for exchanges for years. More recently, they've started to offer cloud computing, market surveillance, data center space, risk management and more. Nasdaq OMX's FinQloud, a cloud service it began offering in 2012 in partnership with Amazon Web Services, already has 19 clients. Nasdaq also offers a host of technologies, including market surveillance and matching engines to other exchanges.

[Canada’s New Aequitas Exchange:Canada’s New Aequitas Exchange:No HFT Allowed , see Olivia LaBarre's related story.]

NYSE Technologies, NYSE Euronext's tech arm, launched its Capital Markets Community Platform in 2011 and opened two massive data centers to support the business, as well as host the exchange's matching engines. To date, NYSE Technologies has grown, but not as much as expected, according to observers.

Technology competition is also coming from other financial firms. Citadel Technology, formed in 2009 by mega-asset manager Citadel, offers many of the same asset management, risk, order management and portfolio management systems through a managed service developed for Citadel's own hedge fund. "At Citadel, the technology is in the DNA," says Stuart Breslow, managing director of Citadel Technology.

Likewise, State Street has taken steps to offer many of its technologies under a new organization, State Street Global Exchange. The group offers research and advisory services, risk analytics, electronic trading capabilities, software and information systems.

With so many players crowding the technology space, including established pure tech vendors, competition is just starting to heat up.