Collaborative hubs are now a strategic necessity for stock exchanges

April 1, 2008
Created By:
Marcus Cake
Categories:
Capital allocation and remote services, Economic development, Equity Market, hierarchy 1.0 vs. networks 3.0, Private equity and venture capital, Specialist financial centres, Stock exchanges 1.0
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Pre-requisite reading: Financial markets are about to enter a transformational phase ; Are offshore stock exchanges becoming more competitive in the internet era? ; What will financial markets look like in 2015?: A perspective from Bearingpoint ; Regional stock exchanges are deprecated

Recent market turmoil is likely to eliminate the growth on stock exchange trading volumes. This growth had driven the growing revenue of stock exchanges in the last five years. Cost cutting has also contributed significantly to profitability. With growth unlikely and further opportunities for cost reduction minimal, stock exchanges will now seriously consider other strategic initiatives. Collaborative hubs are likely to be at the top of the list.

In a previous blog article called Financial markets in 2015, I extracted some comments from a Bearing Point article called has released a report titled “Shifting from Defense to Offense: A Model for the 21st Century Capital Markets Firm”. One of the more more memorable quotes is provided below.

“Shifting from Defense to Offense: A Model for the 21st Century Capital Markets Firm“.

““Another dramatic change ahead is an expanding role for the exchanges. From their traditional function as a price discovery venue, the exchanges will begin to permeate other portions of the capital markets value chain, from facilitating investment banking services to creating enhanced clearing and settlement utilities. Exchange consolidation, an initial step in this direction, is already under way.“

A recent McKinsey Quarterly article also highlights the need to get into other parts of the value chain. The article touches on, but does not provide any significant discussion about opportunities in other parts of the value chain. The publicly available extract from the McKinsey Article is reproduced below. The content is only available to Premium members.

Whats’s next for exchanges, McKinsey Quarterly, March 2008

Extract

Established stock and derivatives exchanges around the world have prospered mightily in recent years, thanks to record trading volumes and a proliferation of new products. So have new alternative trading venues and clearinghouses.
But a range of forces more laissez-faire regulation in Europe and the United States, centralization and rationalization of post-trading infrastructure, new technologies, and savvy entrepreneurs are making exchanges and their investors vulnerable to more challenging times ahead.
Since further consolidation is inevitable, leading exchanges should continue to examine opportunities to make acquisitions. But to preserve profitability as conditions change, they should also seek to refine their product and service offering, as well as explore sources of growth in other products, geographies, and parts of the trading value chain.

The decline of stock exchanges has been forecast for more than a decade. Patrick Young’s 1999 book Capital Market Revolution is one that comes to my mind. The wide ranging forecasts of this book can now emerge. Broadband internet pentration is approaching 90%, software and hardware to power business is now a fraction of the cost and the consumer is increasingly comfortable managing their financial affairs online. The pace of change will accelerate.
NOTE: We have developed a collaborative hub for stock exchanges and other financial institutions. Contact us for a demonstration.