Evolving business models is not a new topic to stock exchanges. Historically, most exchanges were self-regulated, mutual bodies serving their broker members, and revenues were driven primarily by annual membership dues. Exchanges charged traders a fee to buy and sell stocks on a physical trading floor.
The first wave of demutualisations began with the Stockholm Stock Exchange in 1993 and included the Bombay Stock Exchange in 1995 and Bursa Italia in 1997. Demutualisation was followed by a second stage in which exchanges became publicly traded and profit-seeking companies listed on their own exchange, with the Australian Securities Exchange being the first to follow this model in 1998. Under this new model, non-brokers could be owners and the brokers were no longer obliged to be owners. Revenues of the new exchanges were now driven primarily by fees for a range of activities, including trading, listing, clearing, settlement, depository, custody and nominee services. Next came revenue streams of market data, analytics or information fees.
Today, most stock exchanges have become for-profit corporations and they derive revenue through a variety of ways, including listings and issuer services, trading, technology and software, and market data sales. The share of revenues from listing new companies and issuer services, which consists of new listing fees and fees paid by existing listed companies, dropped from 14% in 2004 to 8% in 2014. During the same period, revenues from derivatives trading and over-the counter (OTC) markets increased by almost half of total revenues in 2014. This made income from trading (cash, capital markets, derivatives and OTC) the largest source of revenue, with a total share of 48% in 2014.
Undoubtedly, global stock exchanges will continue to evolve their business strategies. The purpose of this paper is to share examples of how new approaches from stock exchanges and related entities could potentially disrupt the status quo of current stock exchange practices. Through a series of brief studies, the paper examines three potential disruptions, which include a shifting focus on long-term investors, applications for blockchain technology and mobilizing capital for positive impact.
The paper complements the ongoing work of the Sustainable Stock Exchanges (SSE) initiative, for which PRI acts as co-organizer, alongside UNCTAD, UN Global Compact and UNEP FI. The examination of the uses of new technology builds on the PRI’s recent megatrends survey with Willis Towers Watson, which found that institutional investors rated technology advances as having an ‘extremely significant impact’, and the PRI primer on the emergence of blockchain technology. The latter explored some of the ways in which blockchain could transform the financial system and the implications this may have for investors. The adaptation of exchange business models and technology to drive capital towards social and environmentally focused projects and funds builds on the SSE’s 2016 Report on Progress, which examined ways in which stock exchanges were contributing towards the UN’s Sustainable Development Goals (SDGs).
Ultimately, the aim is to prompt readers to further engage with stock exchanges and securities regulators on how to create more resilient financial markets that contribute to the broader objectives of society, as suggested in the preamble to the PRI’s Six Principles.
The case studies featured in the paper are not intended to be exhaustive, but rather as primers to facilitate discussion. The first of these will take place as a PRI organized side event hosted by Bloomberg LP during the 2018 PRI in Person annual conference. A transcript and summary of the event will be available for those unable to attend.
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Evolving business models and new applications of technology by stock exchanges