by Ganesh Iyer, Director, Global Product Marketing, Financial Markets Network, IPC

Budapest – Hungary’s historic capital and the “Pearl of the Danube” – is hosting the World Exchange Congress this week. Leaders from exchanges and other liquidity venues from around the globe will convene at the iconic Corinthia Hotel to discuss the challenges facing the exchange community in today’s rapidly evolving technological, regulatory and business landscape.

Challenges abound, but there are five key issues many exchanges and liquidity venues are looking to tackle:

1. Growing liquidity –Deep liquidity ensures strong financial markets and continues to be an important goal for exchanges.Exchanges that are connected to more market participants and make available more financial products are likely to attract more business. A highly liquid market can provide significant benefits especially during volatile markets or correction and consolidation periods.
2. Attracting a diverse investor base – This continues to be one of the biggest challenges for liquidity venues. A liquidity venue is likely to be viewed as more attractive if it can be accessed by a large and diverse range of institutional investors such as pension funds, sovereign wealth funds, corporate treasuries, foundations, endowments, insurance companies, family offices, hedge funds, asset managers and even private equity firms. A diverse base of investors can potentially have a positive effect on liquidity by enabling the provision of more capital and improving corporate governance standards.
3. Increasing the pool of securities and associated financial products to include fixed income, FX, derivatives and ETFs – Low investor participation in many markets can be directly attributed to the lack of investment opportunities. Liquidity venues overcome this challenge by not only expanding the number of listings but also by expanding into other asset classes such as fixed income, FX, futures, options and exchange traded funds.
4. Creating a regional exchange ecosystem – Another strategy to grow liquidity, attract a diverse investor base and drive economies of scale is to develop regional market linkages and create a regional market.
5. Attracting order flow and distributing market data in new geographies – Liquidity venues are increasingly looking to attract institutional investors, asset managers, hedge fund and market makers outside their primary market to fuel profitable and sustainable growth. Also, investors often seek access to new sources of liquidity if they find that their home market is saturated.

Given that the global investment community is constantly looking for new ways to create alpha, source liquidity, diversify portfolios, manage trading costs and mitigate risk, it has become imperative for exchanges to address the pressing challenges discussed above.

To tackle these issues, liquidity venues are implementing technologies that provide adaptive, on-demand connectivity throughout the trade lifecycle across asset classes. Additionally, these technologies can deliver ready-made access to a diverse ecosystem of financial market participants. Ready-made access is important because building a new network is extremely difficult, both in terms of the underlying technology and the time it takes to construct the essential connectivity to exchanges.

Ecosystems and connectivity play a vital role in:

• Facilitating liquidity
• Providing access to a diverse investor and issuer base
• Enabling the trading of multiple asset classes
• Reliably and securely connecting liquidity venues
• Empowering liquidity venues located in one part of the world to attract order flow and distribute market data in new markets.

Ecosystems and connectivity also create an efficient environment for electronic trading, algorithmic execution, direct market access and enhancing market data. The ability to sell short as well as borrowing and lending securities is heavily dependent on a connected market.

As a result, the most successful exchanges will be the ones implementing state-of-the-art communication infrastructures to solve the biggest challenges they are facing.