Tech investment: a must for emerging derivatives exchanges?

Key Takeaways

• Legacy systems and budget constraints hamper emerging market growth and investments.
• The need for tech investment is often undervalued.
• A strategic approach to investments may prove a competitive differentiator.

Investing in technology is essential across the financial services industry. It drives efficiency, improves customer experiences, ensures regulatory compliance, and fosters innovation. A strong tech strategy helps firms stay competitive and resilient in a constantly evolving market.

Derivative exchanges are no exception. For emerging derivatives exchanges, often operating in smaller economies with lower trading volumes, smart tech investments are even more crucial.

Investing in advanced technology is crucial to enhance competitiveness and efficiency in derivatives markets. Tools like artificial intelligence (AI), machine learning (ML), and regulatory technology (RegTech) solutions can significantly improve data analysis, risk management, market surveillance, and regulatory compliance. These technologies enable real-time market insights and enhanced surveillance to detect and mitigate potential risks while ensuring adherence to complex regulatory requirements.

Navigating challenges: Paths to financial market modernization and growth

Emerging derivatives exchanges face significant challenges, particularly legacy infrastructure that leads to inefficiencies and hinders growth. To handle increased trading volumes and attract global participants, it’s crucial to modernize and improve market access through scalable, high-speed connectivity. However, budget constraints often make this a tough task. Many exchanges are turning to cost-effective tech solutions, like outsourcing key functions such as market surveillance to specialist vendors. This approach has provided better cost and timeline predictability than in-house development, particularly when working with specialized providers.

As exchanges continue investing in technology, the balance between in-house development and outsourcing will likely depend on cost, efficiency, and the ability to work with specialized vendors to enhance resilience and long-term growth.

When pursuing digital transformation derivatives exchanges encounter common challenges. These include the need for robust, scalable IT infrastructure, enhanced cybersecurity measures, and streamlined trading platforms.

Derivatives exchanges also have extra technical demands due to the complex nature of their products. They require advanced risk management systems, precise margin calculations, and intricate clearing and settlement processes to manage derivative products’ inherent leverage and variability.

Addressing these challenges is vital for emerging derivatives exchanges aiming to enhance resilience and reliability, and achieve sustainable growth in a competitive market.

A mismatch between ambitions and actions?

An October 2024 Acuiti survey shows that while 90% of tier 2 and 3 exchanges attribute their growth to tech investments, only a third of emerging market exchanges see them as essential. This disparity suggests that, while many exchanges acknowledge the potential of technology, a significant number still undervalue its role in driving growth, potentially putting themselves at a competitive disadvantage in an increasingly tech-driven market.

Less than half of the surveyed exchanges have failed to conduct crucial investments, such as upgrading matching engines. These are central components of an exchange that match buy- and sell-orders in real-time, following price-time priority rules to ensure fast, efficient trading. This suggests a discrepancy between the ambitions for growth and efforts to achieve it, said Acuiti head of research Ross Lancaster.

The road to success: Investing in smarter, integrated tech 

Innovative products like sustainable energy commodities and crypto futures are the primary drivers of the surge in new derivatives exchanges. Their success hinges on adopting cutting-edge technology — scalable, cloud-based systems that enhance trading efficiency and bolster risk management. But it’s not just about the tech; staying compliant and transparent is crucial for attracting institutional investors and building market trust.

Collaboration among regulators, tech providers, and market participants is key to boosting efficiency in the derivatives industry. Technologies like automation, interoperability, and risk management solutions are available but must be fully integrated to cut costs and improve market efficiency.

A proactive approach: The way forward?

Investing in technology is more than just an operational or exchange infrastructure upgrade. It’s a strategic move that can enhance compliance, risk management, and overall market competitiveness. Adopting cloud-based trading platforms, automated risk management, and improved interoperability for emerging derivatives exchanges can drive efficiency and strengthen their position in the global financial landscape. A strategic approach to innovation will be key to long-term competitive differentiator in an evolving market.