Since the 2007 Financial Crisis, Financial Institutions, more especially Investments Banks and Asset Managers, are leading a complete transformation of their business model. This is a deep organizational and cultural shift, leading to a slow and in most case painful evolution of Industry’s characteristics.
We can sum up the ongoing transformation by the table below:
To cope with such a change, financial institutions need market infrastructures answering some of their key challenges (non-exhaustive list).
Liquidity crunch is now the first concern of Buy side players even before performance. Indeed, a shrinking liquidity, especially on Fixed Income instruments leads to wider spread especially when the volatility is up. In these conditions, there is a need for large and convenient asset pools, consolidating the liquidity from various players and bringing market efficiency.
Higher capital requirements with new prudential rules will lead to a change in the way real economy is financed, from banks’ balance sheet to Capital Markets. This “Originate to distribute model” revival will trigger a rise in securities issuances with the need for secondary markets and market makers.
Higher collateral needs with the evolution of regulatory requirements (Dodd Frank, EMIR or IOSCO) hit very hard OTC Derivatives business. Mandatory clearing for vanilla OTCD means a switch to electronic trading and we can also anticipate the so called “futurisation” of traditional hedging products. In addition, many institutions will need for collateral transformation offers to get the High Quality Collateral they need to meet CCPs or market counterparties requirements.
The rise of ETF/Listed funds is also a major trend for the Asset Management industry as it will also allow streamlining the legacy and fund subscription process. In addition, regulations such as MiFID II could limit the access to some distributors with listing becoming a good option to maintain an access to end clients.
The need for smart data to support investment strategies that more and more rely on data to detect trading patterns or to challenge a trading or an execution strategy (Best Execution, post trade/pre-trade transparency…)
So, trading venues are well positioned to increase their footprint outside their traditional playing field and have the opportunity to develop many supplementary businesses as illustrated below.
In this post financial crisis market paradigm, the strategy of trading venues should change, going beyond traditional M&A operations such as the merge between Deutsche Börse and the LSE. So, trading venues should led a strategic shift that can be summed up as following.