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President of Activ Financial Frank Piasecki on ICE-NYSE merger

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Traditional Exchanges Are In a Fight For Their Lives

It is no surprise that the exchange industry is seeing continued rationalization in the face of overcapacity, rising costs and regulatory burdens. The exchanges are coping with inexorable pressures on transaction-based revenue business models that are competing against the efficiencies offered by incredible advances in technology, which are also enabling new entrants.

The ICE /NYSE merger is an indication that traditional exchanges need to operate at scales, across asset classes and around the world in order to survive. This transaction merely reflects the globalization of both retail and institutional investor demands. Unless you are a very specific venue with natural barriers to competition, generic offerings will wilt under continually changing, costly technology and regulatory changes.

It does not help that we’re in year three of declining trade volumes, and faith in market structures themselves is plunging. One wonders what happens when the commodity boom and echo fade, such that even firms like ICE may suffer sustained downdrafts in transaction revenue.

Exchanges used to lead the trade lifecycle process. Dark pools and low-cost technology solutions to interact with and utilize alternative liquidity pools will continue to hound cash equity markets into the future.

Important questions remain to be answered: What does a for-profit exchange really mean? Will NYSE’s technology arm continue to exist under the discipline of Sprecher? Will ICE spin it off? Will Equinix finally buy Basildon and Mahwah?

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