Trading venues are reviewing their business models and IT infrastructures to ensure they can compete in a post financial crisis environment.

Exchanges are facing more competition as regulators open up national markets to new entrants. As if that is not challenging enough, stock markets ended 2008 significantly lower than the previous year. In response to these dynamics, trading venues are reviewing their business models and IT infrastructure in order to reposition themselves to succeed in the new world order.

“Stock exchanges around the world are all very dependent on the global economy, so they have all felt the effects of the financial crisis,” says Stellan Råberg, Senior Advisor at NASDAQ OMX. “However, the turmoil in the market has also increased trading volumes, somewhat balancing the negative impact of the economic downturn on exchanges’ revenues.”

Even after the financial crisis abates, equity values will likely remain modest for the foreseeable future. The pressure is on to search for new ways to compete and expand business models. More time is being taken to prepare and hone business cases for investment. IT platforms are being evaluated so they can be leveraged to cut costs through efficiency and restructuring, benchmarking and improved post-trade processes.

Despite current market conditions, there are pockets of success. The BondDesk Alternative Trading System, an odd lot and retail fixed income electronic trading platform in the US, posted record results in 2008, and volumes continue to rise.

According to Peter Crosbie, Chief Executive Officer of BondDesk Group, the financial crisis affected the retail fixed income markets in two important ways. “First, there was a major inflow of new money to fixed income related products. Overall retail transaction volumes grew in excess of 50% from 2007 to 2008,” he explains. “Second, within the fixed income asset classes there was a significant shift toward lower risk asset classes.”

Most of BondDesk’s transactions are in the retail segment of the market. It services national and regional full service broker dealers as well as retail customers via online brokers and Registered Independent Advisors. The ATS has a significant share of odd lot trades (less than $100,000 per trade). Consequently, it is an excellent proxy for the broader retail US fixed income market, says Crosbie.

Market volatility and the need to react quickly to a series of unprecedented events required BondDesk to be flexible with respect to its technology priorities and to be able to closely monitor market events.

BondDesk’s IT infrastructure, along with development and technical support, is the backbone of the firm. Customer satisfaction is closely linked with performance in this area. “We aim to continuously improve our capability to meet and exceed our clients’ expectations,” says Crosbie. “To this end, we increased IT-related spending substantially in 2008 so we could meet the demands placed on the system by higher volumes and broader platform participation.”

During 2008, BondDesk also hired NASDAQ OMX Advisory Services to perform an independent review of its data center and networking infrastructure to both certify its current strategy and determine what, if any, changes were needed to fulfill the firm’s expansion plans. “NASDAQ OMX’s ability to provide us with peer performance benchmarking and technical guidance is proving to be valuable in support of our goal of maintaining a world class IT infrastructure,” says Crosbie.
 

As the dust settles in the industry, other trading venues will likely undertake similar exercises. Peer performance benchmarking and technical guidance help maintain a world-class infrastructure, which is so critical to success. 

BY HEATHER MCKENZIE