Stock Exchanges and Revenue Management – How to stay ahead during uncertainty

Rahul Banerji
Head of Europe Sales, ORMB

Revenue management in uncertainty

There are 100+ major global stock exchanges that range in size and trading volume from NYSE to smaller niche exchanges. The traditional stock exchange business model of buying and selling stocks, bonds, and other securities is under threat from multiple angles.

With advancements in technology and barriers to entry falling rapidly, the exchange business is a very dynamic game these days. Emerging markets are on the rise; however, the historical powers are still the largest in the game.  

New entrants are offering lower transaction costs and highly flexible pricing models. This is forcing exchange margins down as competition in the traditional space intensifies. Some of these new entrants have managed to secure market share not only through competing on price but also by offering traders alternative pricing models. 

The average value of trades has dropped considerably, but the volume of trades is increasing. This is driven by new trading paradigms like Algo-Trading and HFT (High-Frequency Trading), which because of advances in trading automation, allows for reducing the cost of trading significantly.

More recently, the coronavirus pandemic has reduced stock prices by an aggregate $6 trillion  (28th March 2020) globally.

Way forward

Overall new listings and investment flows fell the first six months of 2019, compared to H1 2018. The Asia-Pacific region held the lion’s share of global IPOs, drawing almost 60% of IPOs worldwide. Brexit related political uncertainty has had its fair share of effects on exchanges in Europe with a negative influence on the number of listings and investment flows in the EMEA region. 

Exchange-traded derivatives volumes showed an increase with the volume of options traded in H1 2019, approximately 12% higher than in H1 2018. The volume of futures traded in exchanges has also seen a similar trend. These gains are being driven by increases in volumes traded in a wide range of products and especially index options and futures and commodity futures.

There also has been a spurt of so-called vertical integration activities as an alternative to consolidation and a strategy to diversify revenue streams. New services that are offered by the exchanges include data and post-trade services like clearing and settlement. (LSE acquiring the European clearing house LCH Clearnet is a case in point). Regulators are forcing more transparency in the OTC derivatives market, driven by a desire to prevent a repeat of the 2007 financial crisis. With vertical integration, derivatives trading, clearing, and settlement services are being provided by exchanges – a one-stop-shop for the trade life cycle.

Some exchanges have been launching new products as an alternate growth strategy like carbon certificates and tradable energy securities. Some are thinking of more innovative new products such as luxury goods and arts. Swap execution facilities (SEF) are regulated platforms for derivative/swap trading, which provide pre-trade information (bid-offer spreads) and an execution mechanism for transactions among eligible participants. Regulations are driving more centralization, transparency, and accountability for such trades, and although unclear at present, many think that a significant amount of revenue will be transferred from banks to exchanges and SEF operators.

The Oracle Financial Services Revenue Management and Billing attraction

The attraction for exchanges for flexible revenue management software like Oracle Financial Services Revenue Management & Billing is evident from the above shifts in business models affecting the sector. 

Exchanges are vertically integrating into clearing and settlements (in addition to trading) and thus requires a unified view of the customer’s buying behavior and also to provide pricing based on the overall relationship with the customer instead of a silo-based approach.

Exchanges are feeling the heat of competition from new entrants meaning they have to offer more flexible pricing models and bring down the cost of existing transactions. Oracle Financial Services Revenue Management and Billing allows exchanges to price flexibly (stepped, tiered, volume-based.)

Exchanges are in defensive mode meaning, they are actively trying to retain existing customers and trying to cross and up-sell, and sell more new. By implementing a firm-wide enterprise pricing and billing engine, exchanges can sunset older applications, go to market quicker, and provide customers the transparency they need in these uncertain times, among many other benefits.

Getting into new territories like data services, post-trade, derivative trading means introducing new back-office processes effectively to get to market quickly, or it will be an opportunity missed. By implementing Oracle Financial Services Revenue Management and Billing, exchanges can manage new products more effectively and get to market quicker without pricing being a bottleneck.

Finally, with regulators breathing down the neck in all aspects of the financial services market place, complete transparency is the order of the day. Oracle Financial Services Revenue Management and Billing provide that transparency and flexibility required by exchanges who are getting into newer regulated business areas like clearing and settlements (and possibly dark pools and other newer trading areas) e.g., by providing an audit trail of any changes made to price lists, transactions, in one single system.

To learn more, feel free to message me to explore more, or have a conversation.

For more information, please visit:
Oracle Revenue Management and Billing Quick Start Program: Link             
Oracle Financial Services: oracle.com/financial-services

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