Challenges and Web 3.0 opportunities for stock exchanges

November 27, 2008
Created By:
Marcus Cake
Categories:
Capital allocation and remote services, Critical path to Web 4.0, Equity Market, hierarchy 1.0 vs. networks 3.0, 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

The current global financial turmoil will transform the world’s financial markets. Recent events have hastened the development of financial markets in a long overdue restructure driven, in part, by the regulator. The traditional stock exchange has delivered significant shareholder value over the last decade through cost cutting, increasing trading volumes and a protected position in local markets provided by the regulator. However, these sources are unlikely to deliver further shareholder wealth to the owners of stock exchanges. This article introduces the Web 3.0 stock exchange.

Challenges confronting stock exchanges

declining transaction volumes. Less transaction volumes means less revenue.
declining number of companies listed on stock exchanges. Less companies are listing on the worlds stock exchanges (with the exception of a select few that have found niches to exploit)
customer acquisition is slow and expensive
cheaper technology driving new business models: The technology to establish a stock exchange has plunged. It may cost USD20m to setup a stock exchange. This exchange could service a global audience. Electronic contract networks provide cheaper order execution.
Benefits of cost cutting exhausted: Cost cutting has also contributed significantly to profitability. With growth unlikely and further opportunities for cost reduction minimal.
Many exchanges will be left out of industry consolidation
Business model of declining attractiveness: Stock exchange business models require large capital investments for a business with narrow, declining margins and declining volumes.
Participants in a stock exchange are charged high prices. The break-even point for a stock exchange is high and a stock exchange needs to charge a large amount from each company, or other market participant, if it has a reasonable chance of attaining break-even.
Only large companies can access the market. Stock exchange customers are restricted to servicing 1st and 2nd tier companies as a result of high market participation costs and compliance costs. Small and medium enterprises can not access the market.
Regulators less likely to protect stock exchanges from competition with preferential regulation
lower cost and lower compliance exchanges are gaining customers
Regional focus: stock exchanges generally focus on a local market because a local focus provides a critical mass of companies, advisers and investors. This provides a geographic barrier to further expansion.
Increasing customer churn in a global capital market: companies are no longer restricted to a stock exchange in their “home” country.
Customers want more than order execution: The core activity of a stock exchange is matching buyers and sellers. The value of this service is narrow and declining. The growth of private equity provides an alternative to companies seeking to raise capital.

Stock exchanges have defied predictions of their demise
“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.“

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

“

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.

“

A Web 3.0 online network (or Facebook) for the equity market
We have applied the transformative power of social networks to transform the equity market. Our Web 3.0 online network (or Facebook) for the equity market allows companies, advisers and investors to see straight through the market and collectively self-publish, match, learn, validate and consume 20+ types of equity market content in hours (not months). It provides a costless and immediate means to distribute information, facilitate collaboration, exchange content and facilitate transactions. The system provides applications to enable companies, advisers and investors to do what they do everyday in an open, transparent internet platform. Content includes Profiles (companies, advisers and investors, countries, industries), Classifieds (Research, M&A, Investment, Employment, Project, IPO / Bookbuild, Events) and News (Audio, Video, Blog, Article, Announcement, Report, Pictures). Additional information is available from A Web 3.0 online network (or Facebook) for the equity market and .

How does a Web 3.0 financial market overcome the problems confronting stock exchanges

Addressable market becomes global: anyone in the world can participate in a Web 3.0 financial market. Geography becomes irrelevant. The addressable market becomes global. The most valuable asset for a financial institution is an customer base. Traditional models in financial models have taken decades to build viable customer bases. In Web 3.0, millions of customers can be acquired in months.
Higher margins: enables collaboration in other parts of the value chain
New revenue sources includes subscription and transaction fees
Low infrastructure costs: the infrastructure to operate a Web 3.0 online network is a fraction of the cost of stock exchange infrastructure
service large and small companies: a Web 3.0 business model that moves beyond large companies and can service small and medium sized enterprises
an internet based community is a valuable asset and can be created quickly
greater customer retention with a new value proposition to existing companies, advisers and investors. A few stock exchanges are forecast to survive. Future stock exchanges will either be a consolidation of existing stock exchanges, or carve out a specialist and unique niche.
Order execution becomes a secondary activity to facilitating collaboration