| TRENDS IN GLOBAL FINANCIAL MARKET |
Given the change in the economic
scenario, global financial markets are passing through
a phase of transition. Widespread changes have necessitated
regulatory reforms aimed at increasing market transparency
and building investor confidence. Reforms that were
introduced have revived optimism in the markets since
the beginning of the financial year 2009-10.
The global exchange industry has witnessed a paradigm
shift from the days of the open out-cry system to
the current, quote-driven, fully automated system,
which offers superior advantages in terms of time
and cost. With augmented application of information
technology, trading platforms are accessible from
anywhere in the world through trading terminals or
internet. Global financial trade is not only facilitated
by technology but is very much dependent on it. In
fact, one of the most powerful drivers of global trade
and financial transactions is technology, as it ensures
speed, reliability and verifiability.
The World Federation of Exchanges (WFE) recently recommended
broad regulatory reforms to mitigate systemic risk
in OTC markets and products. These include making
OTC trading standardised and transparent by moving
standardised portion of this market on to regulated
exchanges and developing a system for reporting and
disseminating OTC prices and other OTC trade information.
Also, clearing standardised OTC products through regulated
clearing houses was recommended. Technology will facilitate
this transition in the financial industry leading
to fewer intermediaries. The reduction in the number
of intermediaries could lead to a net withdrawal of
risk capital from the markets. Moreover, technology
will boost scalability, which would translate into
more customers and increase the transaction handling
capability. |
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Electronification |
| In recent times, exchanges have
witnessed increased transition from pit-based trading
venues to fully electronic models. Electronic Communication
Networks (ECNs) have widened the access for market
participants by allowing remote members to trade on-exchange.
Consequently, it has created a wider participant base
and driven volumes on exchanges. The growing amount
of liquidity on exchanges is the evidence of increased
market participation. The exchange industry has benefited
on account of increased participation, shorter execution
time and a cost effective trading environment. |
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| Technological advancements |
| All new exchanges operating globally
are electronic markets An exchange trading system
is a facility that provides electronic order routing
(the delivery of orders from users to |
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the execution system), automated
trade execution (the transformation of orders into
trades) and electronic dissemination of pre-trade
(bid / offer quotes) and post-trade information (transaction
price and volume data). The new exchanges have been
fostering greater efficiency through electronic trading
systems, which simplify connections and reduce cost
of operations. Technology has been instrumental in
the formation of networks of exchanges that have bolstered
liquidity, significantly increasing the size and role
of these exchanges.
Technology has been the key to rapid growth in the
exchange industry. The lower hardware and software
costs in trading and order routing systems, reduction
in lead time, increased used of smart-order routing
systems, and innovative solutions such as Direct Market
Access (DMA) allow high-frequency traders to connect
almost directly to exchanges and thereby reducing
the time and cost of transaction on exchanges. |
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| Competition |
Increasing competition both amongst
the market participants and exchanges has made technology
a weapon of choice. Exchanges and market participants
are making necessary upgradation in technology to
improve performance and meet the competitive demand.
Performance and capacity, coupled with the requirement
for round the clock (24x7) trading, and the need
for niche functionality to attract liquidity, will
require significant investment in the next-generation
trading technology. |
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| Consolidation |
Increased market activity and growing
volumes on exchanges have resulted in the rise of
multi-asset class exchanges, with survival of the
fittest being the rule of the game. Diversification
of revenues through vertical integration (pre-trade,
trade and post-trade value chain), significant cost
synergies and pooling of liquidity in identical products
has ensured access to deeper markets and volumes.
Increased revenue by cross-selling products, complementing
distribution channels and low integration risk with
limited dependence on human capital has been a compelling
rationale for the consolidation in the exchange industry.
Trends seen today will shape the financial markets
of tomorrow and the trends point to a stronger, safer
and more transparent markets sans borders and barriers;
exactly the kind of markets being created by Financial
Technologies. Leveraging economies of scale in technology,
operations, product innovation, clearing, settlement
and delivery across the pre-trade, trade and post-trade
lifecycles, liquidity, absence of counter-party risks
and transparency in price setting process are some
of the appealing propositions that are offered by
the network of exchanges promoted by Financial Technologies. |
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