The rise of ATVs and the decline of the exchanges’ previous exclusivity has made efficiency and innovation crucial for the exchanges’ survival, and made it imperative that they be able to operate with lower cost structures.
For the exchanges, fragmentation and competition has meant that liquidity is dispersed across many more trading and clearing and settlement venues, which will require improved risk management throughout their value chains. Given the large number of execution venues, some sort of consolidation seems inevitable, at least in the developed markets, though further proliferation in the developing markets seems likely. The exchanges may also have opportunities to form partnerships or ventures with banks that have not built their in-house capabilities for internal crossing engines or for engaging in algorithmic trading.
5. Will the regulatory changes result in an optimal playing field for bankers, traders, ATVs, and exchanges that is level for all participants? The introduction of ATVs and the consequent fragmentation of trading to many different market entities has lowered costs for bankers and traders, but also raised questions about whether these new, smaller players have sufficient capital to absorb potential losses, creating concerns about counterparty risks and the robustness of the clearing and settlement process. Already, regulators are pushing for higher capital standards and other safety and soundness measures, such as the Obama administration’s financial reform legislation, the E.U.’s Capital Requirements Directive III, and the G20’s Basel Accord III.
An international regulatory regime that pushes back towards consolidation of trading venues could, as noted above, exacerbate these risks by concentrating counterparty risk in too few places. The sweet spot, for both industry players and regulatory authorities, is to have the optimal number and size of trading venues and organizations that best meets the needs of all market participants in an internationally coordinated manner to avoid regulatory arbitrage. The task for bankers, ATVs, and exchanges will be to carefully explore and determine their future positioning, to ensure that their business models are suitable for the changing market environment.
As all the stakeholders in the global financial system debate specific measures to fix the flaws in trading that have become apparent, they will need to be mindful of the larger goal: Creating a robust capital markets infrastructure that protects public-sector interests while allowing private-sector businesses to flourish. This will require some restraint on the part of regulators, as well as a willingness on the part of bankers, traders, and exchanges to balance their impulse for maximizing profits against the need for collective trust and security.
- Peter Golder is a principal in Booz & Company’s London office. He focuses on corporate strategy and risk management for leading financial institutions.
- Hussein Sefian is a principal in Booz & Company’s London office, focusing on strategy and risk management for investment banks and capital markets clients.
- David Wyatt is a Booz & Company partner based in Amsterdam, where he co-leads the local financial-services practice. He specializes in commercial and corporate banking, including market growth strategy, customer segmentation, client service models, and organizational design.
- Also contributing to this article was Booz & Company Senior Associate Yogesh Patel.