Exchanges Eye Innovation To Stay Ahead Of Curve

Terry Flanagan

With trading volume depressed and competition high, it has become imperative for exchanges to continue to develop new innovations and simplify the trading process.

“We are focused on giving our liquidity providers the ability to trade against high quality flow, as we continue to court retail and other natural types of order flow,” said Bryan Harkins, chief operating officer of equities exchange operator Direct Edge. “We want to provide a one-stop shopping capability for clients. We look to bring in market makers as well as counterparties that want to trade against that flow.”

Keith Ross, chief executive of PDQ ATS, an alternative equities trading venue, said: “The key is to have a better market structure that customers want to use. What is interesting is that the current attempts at solutions are all variations on same theme, mostly around speed. Speed and message capacity, quote capacity, the ability to quickly cancel and replace orders; and it seems that this will continue until exchanges can’t invest in it anymore.”

The International Securities Exchange, meanwhile, is considering starting up an additional exchange for the trading of options, and in bucking the industry-wide shift away from traditional trading floors and toward all-electronic models, the new venue could potentially have a physical floor. However, any floor that the ISE would create wouldn’t look like the traditional open-outcry trading pits. Rather, it would be something completely new and innovative, and different to anything currently on the market.

Some exchanges, though, have perhaps seen the writing on the wall as far as the commoditization of trade matching and have turned to alternative avenues for revenue. NYSE Euronext’s technology business has been growing substantially in recent years and has become one of its core operations. Last year NYSE Technologies brought in $490 million in revenue, while operating income rose 42% to $126 million.

NYSE’s technology business has grown to the point where it is being operated as a standalone business, separate from its exchange business. Such is evidenced by its move to open up its data centers to outside telecoms, service providers and even rival exchanges. The move is part of a shift to expand its non-trading services, as it aims for $1 billion in technology services revenues within the next three years.

Newly minted Canadian exchange Alpha is taking the same route with innovation. While it has been able to grow its market share to some 20% as a lit alternative trading system, it is challenging the incumbent Toronto Stock Exchange with new ideas and features.

Alpha chief executive Jos Schmitt told Markets Media last month that its listings value proposition will be unique and offer differentiating features.

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