12.02.2011
By Terry Flanagan

Challenges Facing Exchange Sector

With a slew of macro issues affecting the markets, exchanges are facing many difficult challenges ahead.

As uncertainty continues to plague the global financial markets, it is exchanges that face a particularly tough road. However, many have taken steps to help offset any potential difficulties.

The past several months have been difficult for market participants, with volatility high and trading volumes low, and as regulatory uncertainty looms on the horizon.

“It’s a combination of all of those really,” Joe Mecane, executive vice president and co-head of U.S. listings and cash execution at NYSE Euronext, told Markets Media. “Clearly, we’re primarily a toll collector, so the volume picture is very important to us. Globally, the competitive landscape continues to evolve.”

But with declining order flow coupled with increasing competition in the form of a plethora of exchanges as well as alternative trading systems, it has left margins, which were already on the decline, razor thin.

“Obviously the U.S. has seen significant growth in terms of competition and although it’s earlier on, Europe has had its share of competition as well,” said Mecane. “So the competitive landscape will continue to evolve with an emphasis on seeking to diversify as much as possible. Obviously, that’s behind our push in derivatives, it’s behind aspects of the Deutsche Borse merger, and we’re trying to broaden access and better serve our customers with as many products in as many regions as possible.”

Although exchanges have turned to mergers to face these challenges, some have chosen to face the challenges through alternative avenues, including through a diversification of revenue streams. The offering of technology services has been a common route, with NYSE perhaps the most successful in this regard. It’s NYSE Technologies unit is estimated to be a billion dollar business, and accounts for as much as 20% of NYSE Euronext revenue.

“I think we’ll continue to see efforts along those lines as people are trying to figure out ways to better, or more effectively leverage their infrastructure, better serve their clients, and establish a dominant position in the global marketplace,” said Mecane.

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