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Evolving Exchanges: Winners And Losers

May 05, 2020 11:39 AM ETBLK, CBOE, CME, IBKR, ICE, NDAQ, STT, STT.PR.D, STT.PR.G4 Comments
Kurt Dew profile picture
Kurt Dew


  • As the importance of investment management firms (IMFs) and their generic index products grows, market structure will inevitably change.
  • The evolving market structure will add a second transaction chain, focusing on the needs of IMFs and their customers.
  • The losers will be the incumbent stock exchanges. The winner, an IMF or a futures exchange.

This article compares present market structure, a transaction chain dominated by four big exchange management firms [Intercontinental Exchange (ICE), Nasdaq Inc. (NDAQ), CBOE Global (CBOE), and CME Group (CME)], to a future market structure where exchanges no longer hold the spotlight. This new market structure will be dominated by IMFs like BlackRock Inc. (BLK), State Street Corp. (STT), and Vanguard Group.

As the importance of IMFs and their flagship products, index funds and ETFs, skyrockets, the present market structure saddles IMFs with costly exchanges providing expensive unnecessary services.

But with shifting importance comes opportunity. New trading platforms arise to meet IMFs’ less expensive needs. As the markets evolve the old transaction chain linking securities issuers through incumbent exchanges to individual issue traders is unchanged. The new second chain focuses on IMFs’ needs and opportunities.

Present market structure

Individual issue traders, at one end of the existing transaction chain, seek to participate in, to influence, and to benefit from the decisions of corporate issuers at the other end. A middleman exchange provides services fueled by minute-to-minute changes in market information. But the incumbent exchanges are expensive from the point of view of IMFs and their users. Only individual issue traders need this expensive information.

Different needs

Products offered by IMFs are based on the principle of passive management. To wit: Efficient portfolios contain all positive market value instruments in proportion to market share. An important byproduct of this principle is that IMFs have minimal transaction costs and no need whatever for minute-to-minute market information.

The expensive services of the old exchanges are near-worthless to IMFs. They conduct two kinds of transactions. They revise their portfolios when new corporate shares enter an index or leave it. In addition, they access a liquid market for ETF shares. Thus, the change in market structure is not about what IMFs need. It

This article was written by

Kurt Dew profile picture
My primary interest is financial market structure. I write about market platforms, index instruments, and exchange management firms primarily. I was a member of the team that introduced index trading at the CME. Later, I pioneered the secondary market trading of OTC interest rate swaps.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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Comments (4)

Hide Not Slide profile picture
Hi Kurt,

Thanks for the thought-provoking article. I agree with some of the points you argue about how the big asset managers (BlackRock, State Street, etc...) are becoming extremely powerful as their AUMs grow, but I don't fully agree with your assertion that the services of the exchanges are "too expensive" and are becoming obsolete.

First, acquisitions like CME's purchase of NEX is an example of futures exchanges integrating with the spot market, making that Eurodollar separation you talk about less likely. That combined with CME's dominance in SOFR futures makes it unlikely they'll be behind the curve if/when LIBOR goes away.

Second, exchanges have diversified into the market data business, and have integrated themselves with the buyside more than just providing liquidity. For example, ICE-owned Interactive Data provides bond pricing information that most asset managers in the fixed income space need to do business.

Third, exchanges are innovating to lower transaction costs, not make their services more expensive. I'll point to "portfolio trading" pushed by MarketAxess and Tradeweb, slowly building to partner with the ETF providers and make the create/redeem process easier and cheaper.

Curious to hear your thoughts on the above. Thanks for the article.

Kurt Dew profile picture
Thanks for your thoughtful comment @Hide Not Slide.

I am suggesting a more fundamental sort of integration of cash and futures markets. Let's use your example of the Treasuries market. If you were around when God invented dirt, you will remember the abortive CME 1-year T-bill futures contract. The Fed "requested" that CME not list that contract, since there was no deliverable 1-year bill until the issue date. Thus to settle the contract, CME was "forcing" the Treasury to issue the bill. If CME has created a synthetic 1-year bill from existing Treasuries and settled the contract with that, the Fed would have had no leg to stand on. I describe the way an exchange could issue securities of its own design here. seekingalpha.com/...
Hide Not Slide profile picture
Ah, understood. Thanks for the response.
Thank you for the instructive and provocative article, Mr. Dew. I've been holding CME for a couple years.
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