FEAS Yearbook FEAS Yearbook 2003 | Page 18

COMPUTERSHARE MARKETS TECHNOLOGY THE TECHNOLOGY CHALLENGE FOR EMERGING MARKETS Philip Haynes Chief Technology Officer The advanced financial markets systems of Computershare are flexible, scalable and use the latest, proven and open technology to ensure reliability, performance and accessibility Without pause for breath after the initial successes of establishment and automation behind them, emerging markets are now looking to address new challenges. While these successes have been substantial, at the same time, the international financial market place has changed rapidly. With the pace of change showing no sign of diminishing, emerging markets are being challenged further than might have been expected. Electronic markets are now accessible from anywhere on the globe and the increasingly free movement of capital means that even emerging markets are feeling pressure from foreign markets, competing for listings of larger companies. Alliances and commercial groupings of European exchanges, consolidation of clearing and settlement organisations, EC directives towards harmonisation both within the EU and with US markets have hardly provided a stable environment for emerging markets to study or emulate. Without doubt, the drivers of change are privatisation (or demutualization) of exchanges and technological advance. Demutualisation has focussed larger exchanges upon growth outside their traditional sphere and technology has opened borders and broadened product offerings. Technology provides a key challenge and opportunity for emerging markets. THE CHALLENGES Amongst the very real challenges facing emerging markets in the next decade are: • Improving liquidity through connectivity to other markets with excess capital • Harmonisation of market structures with trading partners • Better serving the needs of local markets with improved product offerings • Lowering the overall cost of ownership of technology without compromising this innovation • Improved credibility with better market design, improved surveillance and transparency CONTACT INFORMATION Contact Name Mr. Andrew Hamilton Marketing Executive E-mail [email protected] Website www-uk.computershare.com In 1999, the FIBV in “Three Business Models for The Stock Exchange Industry”* identified three different categories of exchanges namely; • global Exchange • regional Exchange • diversified Exchange a division that is based upon the capital raising and allocation role for companies with global or regional focus of activities or their need for diversified financial products. This characterisation remains relevant. The majority of emerging markets, to start with at least, fall into the Regional Exchange category, but their objectives and development into another category will determine the overall success of the exchange. EMPOWERING EXCHANGES WITH TECHNOLOGY As a market establishes itself, the surrounding capital markets also develop. In time, this will lead to several expansion pressures, either; external pressure like competitors coming into the market to offer competing services or FEDERATION OF EURO-ASIAN STOCK EXCHANGES YEARBOOK 2003/2004 PAGE 16 internal pressures from the market itself to offer a richer set of products to trade or different ways of trading them to improve the price discovery process across all sectors of the market. Beyond the simple competitive pressures, exchanges are increasingly viewed as normal businesses and, as such, there is a need for them to find ways to expand their business. Expansion can be found by moving up the value chain, offering value added services to their existing customers or by looking to new markets into which they can expand. Returning to the three business models mention previously, this combination of threats and opportunities for an emerging market mean that they must develop a strategy that enables them to expand their regional coverage and/or to find a specialisation and diversify their business mix. Such a strategy allows movement from the “regional” exchange role in which most emerging markets are found into both the “global” and “diversified” exchange model. Obviously it is not possible for every exchange to become a global exchange, but the point is that when selecting their technology, exchanges must bear in mind selecting a solution that has; • flexibility to combine multiple markets as the exchange expands its regional coverage • flexibility to meet foreign investors expectations for harmonised trading rules • flexibility to serve the local market for more sophisticated products in one system to diversify cost effectively; and • scalability to handle the increase in capacity and sophistication of their customers to grow without needing to change the software itself. In other words, the critical success factors for an emerging markets technology platform are flexibility and scalability. FLEXIBILITY Flexibility, in the context of Exchange Trading Systems, manifests itself in several ways. First is by offering a rich variety of market types that are common too foreign markets, understood to foreign investors or to enable the exchange to operate the system in the way that is most appropriate to the market in which they are located. Second, is the ability to offer a wide variety of products to service the local markets increasingly sophisticated needs, in the one system. The final area of flexibility that we want to look at is operational flexibility. Harmonisation through market flexibility Market flexibility is the means by which an exchange can offer many different modes of trading the securities they list. This means from the primary auction of sovereign and corporate debt securities, through normal automatic matching limit order books, up to maximal clearing volume markets such as an equity opening match. On top of these fundamental market types, the system should offer call markets, the possibility of various forms of after market trading and crossing and the ability for trade reporting for those deals whose details are reached outside the normal markets operation. Clearly this list is by no means exhaustive, however, when comparing systems, it is the richness of the functionality along with the different order types supported (such as limit,