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Exchange wars

Published in Automated Trader Magazine Issue 31 Q4 2013

Securities and derivatives exchanges around the world are facing severe headwinds, or depending on your viewpoint, "opportunities"...

Adam Cox talks to senior exchange executives and a range of industry players in this "six-part story" to examine some of the burning issues. Regulatory changes are encouraging new lines of business and new business models, merger and acquisition activity is dominating the headlines, venues are scrambling to come up with products they hope might catch fire.

So Automated Trader decided to take stock of some of the forces which are redefining the trading venue landscape. We've spoken to top executives, analysts and market participants to provide a snapshot of some of the main themes.

Regulatory changes are encouraging new lines of business and new business models, merger and acquisition activity is dominating the headlines, venues are scrambling to come up with products they hope might catch fire.

So Automated Trader decided to take stock of some of the forces which are redefining the trading venue landscape. We've spoken to top executives, analysts and market participants to provide a snapshot of some of the main themes.


Part 1: Pump up the volume

It's been a long time coming, but the market finally has something to cheer about in terms of volumes. Ultra-low interest rates, a post-crisis hangover, investor skittishness and a variety of other factors had all conspired to keep volumes slack. But that seems to be changing.

"For the first time since 2008, the value of share trading of WFE stock exchanges increased sharply (+23%) in the first half of 2013," the World Federation of Exchanges said in its latest report. Yes, there have been other positive growth rates since the Lehman Brothers bankruptcy (for instance, a 5% gain in the first half of 2011), but by comparison those were anemic.

Exchange overview

Source: World Federation of Exchanges


For exchanges around the world, this couldn't come at a better time. A lot of the credit goes to the Asia-Pacific region, where, as the WFE noted, the value of share trading jumped 52% in the first half of 2013. Japan notched up a staggering 111% growth rate while China turned in a mouth-watering 54% gain.

Arnaud Giblat, an analyst who covers the exchange sector for UBS, said there is a correlation between economies, market activity and turnover velocity. In a research paper, he predicted European exchange volumes would keep rising into 2015, based on the relationship he identified between trading and economic trends.

"Overall I showed that there is a decent correlation between activity levels and economic growth," Arnaud told Automated Trader.

Arnaud prefers to focus on turnover velocity - the number of times the market capitalisation trades itself - as opposed to pure volume because it gives a better indication of the underlying trend.

He views volume trends from a cyclical perspective and he suggested a recovery may be underway. He said volumes are currently well below the mid-cycle level. He also said 2007/8 volumes were abnormally high and the 2012 decline looked primarily cyclical.

Among the firms most likely to benefit from an uptick in volumes across asset classes were:

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