Is it all about technology?
It is remarkable how the world of exchanges, and its associated services and service providers, has become a technological journey. At the World Exchange Congress, it is normal to hear terms like nanosecond or millisecond latencies, FPGA’s to replace software (semiconductors where the electronic circuit can be “programmed”), PCI bus connections, multicasting, microwave and fiber optics communications. Sponsors are mainly from the IT domain (IT, hardware, datacenters) and the polished brochures from consulting firms that one would traditionally find at a professional conference, have made a place for displaying some hardware equipment. But this should not surprise you and it is in no way a bad thing.
The main costs of an exchange two hundred years ago would mainly be the prestigious building. Today the biggest cost for trading venue operators are human resources and computer resources. For a layperson, a modern trading platform business might be explained as a specific e-commerce business. Traditional e-commerce businesses (take a webshop for instance) are interested in offerings that streamline their IT/webserver needs. For example the complete stacks or images of webserver software, database software and e-commerce software that can be installed with one click on cloud-based web servers like Amazon AWS. Similarly, IT service providers now recognize a similar market need for generic stacks for trading platform operators, as David Malik from Cisco explains. As we are talking about securities trading platforms instead of traditional e-commerce businesses, such “stacks” should be understood to include things like routing systems, transport systems, risk management systems, etc. Such IaaS (Infrastructure as a Service) offerings will of course prevent new (or even existing) platform operators from having to start and design systems from scratch. Instead, only a limited amount of customization will be needed.
It is interesting to see how financial services have been one of the last “build” bastions in the build it or buy it conundrum, as Mr Paul Jameson from Cisco notes. There might be different explanations for this situation. One explanation might be that the initial IT systems have been designed by service companies (like ATOS), instead of product companies. They never really considered it as an opportunity to repackage the system as a product that could be marketed as a value proposition that is cheaper and better to buy, as James Davies from Trayport tries to explain.
Obviously, the emergence of the technology aspect has not been left unnoticed by the regulators. MiFID II and MiFIR institute circuit breakers (the early days of electronic trading did create some significant examples of what can happen in a short time, with the Black Monday in October 1987 as most noticeable event), fat finger rulers, and mechanisms to slow down order flow. Although the compliance level does not pose any insurmountable compliance problem right now, Jorg Sjoberg (CIO of Nordic Growth Market) recognizes that it can still become problematic to comply with the new and upcoming rules. Take the places where fat finger control and circuit breakers have to integrate in a system architecture: if you consider a setup where the trading gateway speaks to the pre-trade control subsystem, which respectively speaks to the matching engine, then the fat finger control will integrate in the pre-trade control subsystem and the circuit breaker in the matching engine. This poses specific concerns for ongoing compliance and ongoing maintenance of the system.
But as much as some focus is on the technology level for some, this also raises some astonishment for others. Christian Katz, CEO of SIX Swiss Exchange, highlights that many de-emphasize the importance of milliseconds, as they consider elements like surveillance and stability as higher ranked in terms of importance. In another discussion, Hans-Ole Johusem from Nasdaq OMX Europe stressed the need for orderly markets, even if in the last ten years there has been a dramatic move towards electronic markets: how to safeguard orderly markets should still be a key objective according to him.
Kristof De Buysere is a lecturer and researcher at the department of business law of Tilburg Law School (Tilburg University, The Netherlands). He was a guest blogger at this years World Exchange Congress.
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