Notes from the WFE General Assembly: four major trends for market infrastructure operators
By Magnus Haglind, Phil Mackintosh and Paul McKeown
We recently had a great few days with our fellow exchange industry leaders in sunny Malta at General Assembly of the World Federation of Stock Exchangeshosted by the Malta Stock Exchange.
The Annual Meeting is an invitation-only event, where leaders from global exchanges, regulators, the buy side, industry experts from academia and the media gather to address key issues surrounding the industry. of the stock market. The conference tends to range from a briefing on “trends” and “next steps” to broader (policy) discussions around the relevance of public procurement for household financial security and economic prosperity.
While a lot has been covered, here are a few takeaways on some of the recurring trends that were on the mind on stage and on the sidelines.
1. Macro-environment and preparation for the next wave of change
In light of the global pandemic over the past two years, market operators have focused inward, prioritizing resilience, employee well-being and maintaining their markets with a healthy workforce. dispersed work. And while markets are certainly not immune to the repercussions of major geopolitical or economic events, they are now positioning themselves to look ahead and prepare for the next wave(s) that will shape capital markets. Here are some hot topics shaping these waves:
- Liquidity and fragmentation: as fragmentation increases, search (liquidity) costs are not included in regulators’ search for competition. Less and less liquidity on the exchange means less price fixing, less direct matching with other investors. This, in turn, could undermine the role of centralized exchanges in lowering trading costs for investors.
The vast majority of regulators seem to agree that public markets, with companies making public accounting statements, and asset prices in continuous markets, and real investors able to negotiate between them at the best price, are all “good” – but policy tends to be competition-focused, leading to segmentation and often significant regulatory differences that create unequal conditions of competition.
- ESG: There has been a rapid rise and focus on carbon markets and ESG ratings and indices. Assets are growing, but acceptance by regulators globally is not, and data standards remain complicated and inefficient.
- Individual investors: We are seeing a significant increase in retail activity globally. This is particularly due to direct access via apps, which has changed the way retail investors trade and the way exchanges need to interact with retail liquidity.
2. The definition of digital is changing
Last year, when we conducted a study focused on the CIOs of market infrastructure operators in partnership with Celent, agility was the number one goal when planning a future technological state. After agility, was product creation, Client orientation and regulation/resilience completing the first four.
Based on our conversations over the past week, agility remains front and center, with a combination of the other three topics making regular appearances.
As the market landscape continues to rapidly evolve – whether serving new customers or institutionalizing digital assets – many market infrastructure operators are also evolving their business and technology infrastructure to prepare for new investor demands and/or a changing landscape. post-COVID capital markets.
For example, with the rapid rise of ESG, pricing carbon emissions is a particular area that regulators around the world are beginning to focus on. Thus, many regulators have already begun to require carbon credits to be traded centrally on an exchange. Running this type of business often requires a unique approach and a comprehensive digital market infrastructure (and complementary services).
This is just one example, but given the global attention on ESG, the conversations we have with other market operators indicate that many of them are positioning themselves proactively, in particular by building or acquiring new digital infrastructures, to manage this growing business sector which has a significant impact on the financial markets as well as on the environment.
3. The opportunities and challenges of institutionalizing crypto
Unsurprisingly, anything crypto was a priority both on and off the official agenda. As crypto becomes more institutionalized, WFE members are finding potential use cases, including areas such as ownership of illiquid assets and keep. Crypto trading is also a legitimate challenge since the blockchain has high latency and usually the central limit order books (CLOB) and trading are usually separated from the blockchain.
Also in the spotlight:
- Market structure: The nature of crypto markets poses unique challenges. For example, the lack of a central limit order book – or the challenge of creating one – in a decentralized market can hamper the ability to provide the best prices to clients. Several distributed marketplaces leverage market quotes, filling customer orders based on quotes published elsewhere.
With the rise of crypto, 24/7 markets are becoming the new normal. Most crypto markets already operate 24/7, but many coins are highly illiquid and expensive to trade. Despite this, many market operators are predicting coin consolidation and, more specifically, the growing importance of stablecoins both for payment processing and also for crypto trading (as the other side of transactions). In the future, we may possibly have “Fed Coins” with the need for increased efficiency on business transactions.
- Regulation and safety: Defining cryptography has proven difficult, and defining jurisdiction is even more difficult. Crypto operates globally and 24/7. Businesses have more flexibility to change jurisdictions and can do so as regulations increase.
We are seeing many new approaches to regulation, creating a “patchwork” between countries and even within different regulators (eg Treasury/CFTC/SEC in the US). For example, spot crypto trading is often a different regulator than derivatives. Yet the bulk of crypto trading remains derivatives, which may be easier to regulate through banking sectors.
Although the regulatory approach to crypto varies from region to region, the focus is on standardizing how to protect investors in a world without trade declarations or confirmations (because it’s all “on the blockchain “). There remains a clear and urgent need for “TradFi-grade” investor protection to guard against fraud, losses, hacks and other nefarious behavior.
4. Markets are taking cloud application and adoption seriously
Much of the General Assembly discussion around the cloud focused on where it is used (i.e., closer and closer to the actual matching engines) and how it is used (i.e., “rent or buy” hardware, plug-n-play applications). While crypto and other non-financial markets are often cloud-native, the majority of public markets are on their own personal journey in adopting cloud in their operations, with the end game entirely focused on critical trading. And for some, the cloud remains a “nice to have”.
This view may begin to change as cloud service providers (CSPs) continue to expand their global footprint, giving market operators, especially those in certain frontier markets, the opportunity to scale. up and down and add customer-based services on demand. Leveraging the cloud provides convenient, out-of-the-box, structured scalable infrastructure as these exchanges evolve their business models.
As we enter the last quarter of 2022 and welcome 2023, having this opportunity to come together as a global community of market operators, regulators and ecosystem partners makes our industry stronger, better connected and prepared for the opportunities and challenges that will shape the market capital of tomorrow.