Source: The money project (size accounts for all asset classes, not only stocks)
Bats, speed bumps, Transatlantic M&A bids; are part of the tangled web of exchanges as we speak. I’ll focus only on equities on exchanges, even though they aren’t the largest asset class (bonds and derivatives – futures, options; are huge) but for the sake of simplicity. Stock exchanges have always been dependent on high tech software and hardware; OMX technology is one such provider and part of the OMX group operating 8 stock exchanges mainly in the Nordic and Baltic area through its other division, OMX exchange. Just a first glimpse of the intertwined entities, divisions, and complex ownership structure of the exchange businesses.
The OMX group with these two divisions (one tech and another with 8 exchanges) is owned by NASDAQ, Inc . (NADQ) which in turn operates the NASDAQ stock market and eight European stock exchanges, namely the Armenian Stock Exchange, Copenhagen Stock Exchange, Helsinki Stock Exchange, Iceland Stock Exchange, Riga Stock Exchange, Stockholm Stock Exchange, Tallinn Stock Exchange, and NASDAQ OMX Vilnius.
This is one strong link between the US and Europe and one factor that leads to a market capitalization in the order of the trillions (counting all asset classes). It also guarantees that the innovations coming out of NASDAQ around blockchain, will be quickly if not instantly routed over to the Nordics and the Baltics.
The other group company running a couple of exchanges in Europe is Euronext (NYX). The NYX is the first European integrated stock exchange. It was created in 2000 when the Paris, Brussels and Amsterdam exchanges all merged. Portugal has also joined and NYX continues to grow through acquisitions and maybe is eyeing the Bolsa de Madrid. Euronext has been considering blockhain technology but there has been no concrete information of any POCs. Probably, the fear and threat of the creation of another European giant in the exchange business from the potential merger of LSE and Deutsche Börse (DB), has kept them on standby mode. In Europe, LSE and Euronext are the largest in size (approximately same order but on an aggregate account – not only for equities) and then the second cluster has NASDAQ OMX, Deutsche Börse, and the SIX Swiss exchange (similar sizes).
Europe is in turmoil in the exchange sector. As regulators examine the LSE and DB merger proposition through their anti-trust lense, the NYSE had been considering a bid too; but recently, withdrew their intention. The parent company of NYSE, ICE (InterContenintal Exchange) was deterred probably from a publicly unfriendly stance of the LSE CEO. Analysts give a 50-50 chance of a competition approval.
And if you have been wondering “Why do I, as a Fintech-er, care?” about exchange businesses and their Club?
Stock exchanges have been tech companies long before Fintech was conceived
A bridge between NASDAQ and their “sibling” Tallinn Stock exchange has been the first use case of blockhcain technology for proxy voting; which is so prone to hacking. The technology was incorporated into Estonia’s e-Residency platform allowing a blockchain based e-voting service for users of companies listed on Nasdaq’s Tallinn Stock exchange. All of us can become e-residents of this platform and the value proposition is “Launch a location-independent business online“. e-Residency enables secure and convenient digital services that facilitate credibility and trust online.
NASDAQ has also launched Linq, a private blockchain company for a POC focused on private securities issuance. The LSE is also focused in the area of private securities and has launched the ELITE Connect program, a social network, for private companies to accelerate their process towards leaping into the public markets. LSE also signed a partnership agreement last summer with the Opportunity Network which has been integrated with the Elite program. This isn’t blockchain related, but is a real application of technology enabling match making deals for businesses globally. The LSE has joined the “Post trade Distributed ledger” working group with the CME group and two clearing houses, with the intention to experiment on post-trade processes. The focus is on use cases in the LSE central securities depository globeSettle. Also, LSE is collaborating with Kouvola, a Finnish business innovation group, and IBM on the development of new blockchain technologies.Deutsche Börse, has been less vocal in these areas, and has chosen to join the of The Linux Foundation’s Hyperledger Project. IBM has contributed code to the open-source Hyeprledger project, as a founding member, but is now moving onto the IBM cloud for development of blockchain related applications for the IoT.
Across the Atlantic, where NASDAQ is the second in size, after the NYSE; there are more innovations in the making. This February, the NYSE launched its new platform called Pillar, which aims to integrate various NYSE markets. I visualize it as being able to access the entire capital structure of a firm and not have to go to each individual market for the various financial securities linked to a company (equities, options, ect). The NYSE is the also the first exchange to launch a Bitcoin pricing index.
TMX in Toronto, the 3rd largest exchange in North America, is collaborating with Ethereum on the entire trading cycle on instruments with low volume (e.g. low volume equities, bonds and commercial paper).
Stock exchanges in the West can be considered as covered, with the last but not least mention of BATS exchange and IEX (not on the visual yet).
IEX is awaiting SEC regulatory approval in the US, as the first buy side owned exchange. IEX’s founders became famous as the heroes of Michael Lewis’s book “Flash Boys.” The book chronicled their fight against Wall Street and alleged the stock market was rigged by exchanges and brokers in favor of high-frequency traders. Citadel has been opposing the approval of the IEX launch and JP Morgan and Goldman Sachs has been in support. The last month, the issue has heated up. Meanwhile, Virtu Financial, that IPO’d last year, as the first HFT firm going public and testing their image and branding just announced earnings that reflected the nature of the business (i.e. make money when volatility and sentiment indicators are hyper active).
BATS (Better Alternative Trading System), is a 10 year old business that may not be blockchaining (yet) but has leapfrogged the giants in two specific areas: US equities and ETFs. They are now the 2rd largest in US equities exchange and No. 1 in ETFs!
In Europe, BATS Europe is beating the LSE and Euronext in stock trading; #1 in Europe. They are a true Fintech based in Kansas. They also successfully completed their IPO this past April, as the US IPO market counted less than 20 deal for Q1 2016! BATS has launched a program with free ETF listing as explained in “Finteching in ETF space”.
NASDAQ of course is a Fintech too, via transformation not by birth.
The Western stock exchange cluster continues to be alive, soul searching and active. Technology is breathing down their throats.
Where may the puck head to, in Western stock exchange realm?
- Stock exchange businesses may look to grow with more of a private equity focus to capture wider margins, the increasing size of the capital structure, and the low regulatory barriers. Could we see NASDAQ flirting with Angel List?
- Stock exchange businesses may merge with their clearing, settlement and custody partners; aiming to own the whole value chain. In Europe only Deutsche Börse owns its entire value chain (mainly through operating Clearstream and Eurex); German culture hasn’t been blowing that trumpet. In the US, nobody owns the entire value chain.
- Are dark pools increasing with AI in financial markets? What say you IEX on this matter? Will regulators demand more transparency?
- And then there is of course, the Blockchain technology phantom that is wondering in exchange land. Will the consortium approach survive and push forward the current POCs for financial services? Or will we see more technology providers promising platforms for developers to design blockchain as a service?
Western stock exchanges (no bonds, futures, fx etc) and their finteching, is on our radar screen.