11.23.2011
By Terry Flanagan

Exchanges Diversify

Once solely matchers of trades, exchanges are increasingly branching out into other businesses such as selling technology.

NYSE Euronext’s revenue from its technology business soared 145% between 2007 and 2010 to $318 million, while the exchange owner’s overall revenue increased just 12.4% to $4.43 billion.

A rapidly growing technology business can be found at many global exchanges, as the sector evolves from its roots as a trade-matching venue. Primary factors driving the evolution include technological advances and regulatory changes.

“When you move to electronic trading platforms, exchanges are in the technology business,” said Robert Schwartz, a finance professor at Baruch College and a veteran observer of the exchange sector. “It’s not just the platform itself, it’s also the connectivity and how it is being used.”

“Experience in using the technology that exchanges have is excellent experience for being in the tech business,” Schwartz said. “And the whole reorientation from a neutral to a for-profit organization fits right into that. You wouldn’t expect a neutral organization to be operating in this fashion, but when you’re a for-profit it makes sense to offer a suite of services.”

Exchanges are selling trading software as well as co-location and consulting services as a means of boosting profit margins that have sagged amid heightened competition and tepid volume growth in developed markets.

“As the trading business has become more generic, you don’t really get the profits there,” Schwartz said. “A lot of the technology they’re involved with has to do with high-speed handling of information. This includes orders, trades, generating informational reports tying things together, all the way down to co-location.”

Schwartz said industry education about market structure and other relevant trading issues is another area exchanges can expand into. “A lot of constituencies haven’t had hands-on experience with trading themselves, so education can cover quite a lot and fits in with other products,” Schwartz said. “You can always push the envelope further. Technology is very dependent on the vision and the imagination of the people developing stuff.”

Added Schwartz, “for investors it is well-known that portfolio diversification is a good way of controlling risk. Exchanges can help manage their own risk by diversifying.”

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