What Is an Exchange? The Changing Landscape
This write-up is based on my keynote speech at the 63rd WFE General Assembly and Annual Meeting. I want to thank the moderator, Nandini Sukumar, CEO of WFE, and the distinguished panelists Jos Dijsselhof, Carlson Tong, and Kendal Vroman, from whose comments I benefitted tremendously. The views expressed are my own.
Financial exchanges have undergone profound transformation, adapting to new trends, technologies and market demand. While exchanges worldwide operate at various levels of maturity, many have evolved far beyond their original scope. Since the 1990s, the trend toward demutualisation has turned most exchanges into for-profit entities. Some of the largest exchanges are now part of broader Exchange Holding Companies where the exchange business contributes only a small portion of overall revenue and profits.
This article explores the key trends shaping financial exchanges, focusing on ownership/governance, product innovations, technological advancements and evolving regulatory frameworks. Examining these dimensions aims to provide insight into how exchanges can continue to play a critical role in global financial markets. Even smaller, traditional exchanges must recognise the opportunities and challenges ahead to proactively shape their future.
The Changing Landscape
Growth of Private Markets
The number of publicly listed firms in the US peaked at 7,300 in 1996 and has declined dramatically to approximately 4,000 in 2024, highlighting a shift toward private capital markets1. The rapid growth of private equity and private debt markets, with assets under management increasing from $500 billion to $6 trillion and $100 billion to $1.5-2 trillion2, respectively, over the past 25 years, has become a significant source of capital.
To meet this demand, exchanges have launched private-market platforms. Initiatives such as the Nasdaq Private Market, London Stock Exchange Group’s Private Intermittent Securities and Capital Exchange System, and Cboe Private Markets are creating liquidity solutions for private company employees and investors. These platforms serve as bridges between public and private markets, enabling exchanges to serve the needs of clients in private markets.
ESG and Climate Products
Investor interest in environmental, social and governance (ESG) products has grown, with exchanges at the forefront of sustainable finance. The demand for ESG-aligned products, such as green bonds, carbon credits and ESG-focused funds, varies globally, with Europe leading the charge. Exchanges have introduced platforms dedicated to carbon credits and are enhancing ESG reporting standards to attract sustainability-focused investors.
Crypto, Blockchain, and Tokenisation
The emergence of cryptocurrencies and blockchain technology has pushed exchanges to explore digital asset trading and tokenisation. In the US, trading in Bitcoin ETFs and derivative products has grown significantly. Exchanges like Boerse Stuttgart and the Nairobi Stock Exchange are pioneering blockchain-based platforms for tokenised securities. Nasdaq, for instance, leverages blockchain and smart contracts for efficient settlement in their carbon-credit offering. Despite its potential, blockchain adoption remains limited, with regulatory concerns around custody, security and compliance posing significant hurdles. The appetite to embrace crypto varies across countries and at this stage may not be appropriate for all markets. At this time, there are limited use cases of blockchain and tokenisation.
Prediction Markets and Event-Driven Trading
Prediction markets, which enable investors to speculate on political, economic and social events, are gaining traction. Platforms like Polymarket, Kalshi and Robinhood have witnessed heightened activity, particularly during the 2024 US election cycle. Although these markets are becoming popular in the US, they face regulatory scrutiny. The US Commodities Futures Trading Commission has taken a cautious approach and has disapproved of political contracts. However, the courts have allowed these firms to continue operating.
Technology Transformations
Partnerships with Tech Companies
Strategic partnerships between exchanges and technology companies are redefining the industry. Microsoft recently acquired a 4% stake in the London Stock Exchange Group (LSEG) and entered into a 10-year partnership to develop advanced data analytics and cloud solutions. Similarly, Google has partnered with the CME Group, investing $1 billion in non-voting convertible preferred stock to “co-innovate to deliver expanded access, new products, and more efficiencies for all market participants”3. Such partnerships will only speed up in the new world of AI and will transform the services provided by these companies.
Artificial Intelligence for Surveillance and Predictive Analytics
AI is transforming surveillance and risk management on exchanges. Predictive algorithms analyse trading patterns to detect anomalies and prevent fraud, allowing exchanges to maintain market integrity. AI also enhances order execution by optimising bid-ask matching, reducing latency and improving liquidity. Data-driven insights from AI are being used to forecast market trends, enabling exchanges to develop products that meet investor demand. As AI becomes integral to exchange operations, exchanges are investing in AI talent and partnerships to maintain competitive advantages and adapt to increasingly data-centric financial markets.
Regulatory Landscape
As exchanges evolve, regulatory oversight becomes crucial to balancing innovation with investor protection. The regulatory landscape is adapting to address AI, digital assets, and ESG, with implications for how exchanges operate globally.
AI Regulation
With AI becoming central to exchange operations, regulators are focusing on establishing guidelines to mitigate risks associated with AI, such as model opacity and data bias in order to protect investors without stifling innovation. Exchanges face the challenge of implementing AI in a manner compliant with emerging regulations, balancing automation and keeping in mind investor protection.
Digital Asset Regulation
Digital assets present regulatory challenges due to their decentralised nature and volatility. Regulators worldwide are exploring frameworks to address digital asset trading, custody and anti-money laundering compliance. Exchanges must navigate these regulatory frameworks to expand digital asset offerings safely.
ESG Standards and Compliance
As ESG investments become mainstream, regulators are standardising reporting requirements. The European Union’s Sustainable Finance Disclosure Regulation (SFDR), for example, mandates disclosures for ESG funds, pushing exchanges to improve transparency and enhance reporting standards.
In conclusion, the future of exchanges lies in their ability to innovate across products, technology and governance while navigating complex regulatory landscapes. As exchanges navigate an increasingly complex landscape, offerings will continue to expand and operational models will evolve to meet investor expectations and regulatory requirements. With continued innovation and adaptability, exchanges will remain pivotal to global financial markets, fostering economic growth, liquidity and transparency for years to come.
1 https://www.mckinsey.com/capabilities/strategy-and-corporate-finance/our-insights/reports-of-corporates-demise-have-been-greatly-exaggerated#
2 Preqin Global Report Private Equity 2024
3 https://www.cmegroup.com/media-room/press-releases/2021/11/04/cme_group_signs_10-yearpartnershipwithgooglecloudtotransformglob.html
Disclaimer:
The views, thoughts and opinions contained in this Focus article belong solely to the author and do not necessarily reflect the WFE’s policy position on the issue, or the WFE’s views or opinions.