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Consolidation of Cash and Derivative Markets Technology

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Consolidation of Cash and Derivative Markets Technology CONSOLIDATION OF CASH AND DERIVATIVE MARKETS TECHNOLOGY Table of contents 1. Executive summary ............................................................................................................................. 5 1.1. The arguments in favour of consolidation ..................................................................................... 5 1.2. The reasons that Exchanges have given for not consolidating .................................................... 5 1.3. Optimal model ............................................................................................................................... 6 2. Background to study ............................................................................................................................ 7 2.1. Participating Exchanges ............................................................................................................... 7 3. Business issues ................................................................................................................................... 8 3.1. Member’s perspective ................................................................................................................... 8 3.2. Budgets required for member spend on connecting to new system ............................................ 8 3.3. Congruence of members’ activity ................................................................................................. 8 3.4. Congruence of members technology .......................................................................................... 10 3.5. Differences between markets ..................................................................................................... 10 3.6. Potential Exchange savings ........................................................................................................ 11 3.7. High volume markets .................................................................................................................. 11 3.8. Clearing and settlement issues ................................................................................................... 11 4. Technical challenges ......................................................................................................................... 13 4.1. Project scale ............................................................................................................................... 13 4.2. A single market increases risk .................................................................................................... 13 4.3. Functional complexity of amalgamated system .......................................................................... 13 4.4. Change management ................................................................................................................. 14 4.5. Backward compatibility, FIX ........................................................................................................ 14 4.6. Market data Issues ...................................................................................................................... 14 4.7. Network rationalisation................................................................................................................ 14 5. The optimal model for integration of systems ................................................................................... 15 6. Start-up derivative markets................................................................................................................ 16 7. Conclusions of study ......................................................................................................................... 17 8. Case Study 1 : Australian Securities Exchange ................................................................................ 18 8.1. Description of the technical environment prior to consolidation ................................................. 18 8.2. Factors which led to the consolidation ........................................................................................ 19 8.3. Approach to migration from SEATS ............................................................................................ 20 8.4. Technical environment post trading platform merger ................................................................. 21 8.5. Changes to environments : ......................................................................................................... 22 9. Case Study 2 : Budapest Stock Exchange........................................................................................ 23 9.1. Background to the Budapest Stock Exchange ........................................................................... 23 9.2. The introduction of the Equities and Derivates markets at the BSE ........................................... 23 9.3. Description of the consolidated technical environment .............................................................. 24 10. Case Study 3 : Deutsche Börse Group ........................................................................................... 26 10.1. The evolution of the technical architecture at Deutsche Borse Group ..................................... 26 10.2. The technical environment of Deutsche Börse Group .............................................................. 27 10.3. Market Data .............................................................................................................................. 29 10.4. Deutsche Börse Group IT strategy ........................................................................................... 29 11. Case Study 4 : Hong Kong Exchanges ........................................................................................... 30 Page 3 CONSOLIDATION OF CASH AND DERIVATIVE MARKETS TECHNOLOGY 11.1. Technical overview of the HKEx’s trading systems. ................................................................. 30 11.2. HKEx’s view on cash and derivative consolidation ................................................................... 33 12. Case Study 5 : Korean Exchange ................................................................................................... 35 12.1. Merger of markets and the ISP project. .................................................................................... 35 12.2. Technical overview of the KRX trading systems – pre consolidation. ...................................... 36 12.3. The Next-Gen Architecture ....................................................................................................... 38 13. Case Study 6 : NYSE Euronext ....................................................................................................... 41 13.1. Evolution of the systems at Euronext ....................................................................................... 41 13.2. Technology at Euronext.Liffe .................................................................................................... 42 13.3. NYSE Euronext’s IT strategy going forward ............................................................................. 44 14. Case Study 7 : OMX ........................................................................................................................ 45 14.1. Technical environment at OMX ................................................................................................ 45 14.2. The evolution of separate systems at OMX .............................................................................. 46 15. SGX Case study .............................................................................................................................. 48 15.1. Technical environment at SGX pre consolidation ..................................................................... 48 15.2. SGX Quotation and Execution System (SGX Quest) ............................................................... 50 Appendix A: Functional differences between cash and derivatives systems ........................................ 53 A.1. Core functionality ........................................................................................................................ 53 A.2. Specific to a derivatives system : ............................................................................................... 53 A.3. Specific to Fixed Income : .......................................................................................................... 54 Page 4 CONSOLIDATION OF CASH AND DERIVATIVE MARKETS TECHNOLOGY 1. Executive summary The driver for consolidation of markets is to increase efficiencies with an amalgamation of services and expertise, providing members of the Exchange with fewer entities to deal with. A large part of the costs in running Stock Exchanges, and therefore the charges to their members, lies in Technology. This study examines best practises in respect of the merging of cash and derivatives market technology within a national jurisdiction. Several Exchanges were targeted who have either merged cash and derivative markets, or who have created a derivative market having established a cash one. The study showed that there is no clear best practise as such, that each case needs to be examined on its own merits. The study does show that there are surprisingly more reasons not to consolidate technology than to do so. 1.1. The arguments in favour of consolidation Cost savings and rationalisation Significant savings of up to 30 % can be realised in the reduction of trading systems
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