Fintech in action on stock exchanges of the ‘REST’

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Source: The money project (size accounts for all asset classes, not only stocks)

The Northern hemisphere clearly dominates in the world stock exchanges realm. This 35,000 feet perspective includes all the assets traded through these exchanges (fixed income and multiple derivatives) and of course, a slice of the private shares market. The best example to grasp this, is the Luxembourg stock exchange which is small on this global aggregation scale, but ranks on the top of the global scale with regards to international bond listings. BATs, also ranks on the top in ETF trading.

Roughly speaking, one third of the global trading volume going through exchanges, takes place in the “Rest” of the world and two thirds in the West (with the Americas seeing double the traffic than Europe).

In terms of tech innovations in the “Rest” of the exchanges, the Australian market steals the show and the explanation is not simply that it has been in the “developed” country club longer than the other Asian players (Japan is in the G7 group; Australia and Japan in the G20). Or that it is the only AAA rated country in the southern hemisphere and the “Rest” of the world.

Australia is a very unique financial ecosystem.

Australia is the only fully dematerialized equity market.

ASX owns the value chain of the post-trade business.

Both Europe and the US have broad and complex equity markets that are not 100% dematerialized (i.e. registered and transferred electronically). The DTCC still maintains a securities vault. Australian Stock Exchange (ASX) has a monopoly in the clearing business by owning a controlling stake in CHESS. This ownership will be soon challenged in order to promote competitiveness in the clearing business. This may not result in the creation of another clearing company but will at least, give access to other entities (like Chi-X that has entered the Australian market in 2011 and competes with ASX on the execution of equity shares) to the clearing and settlement services. Given the impeding reforms, ASX stated last month their intention to cut clearing costs by 10% and reiterated their blockchain work in progress as evidence of their digitization transformation. ASX also owns the settlement corporations. Lastly, but equally important is the fact that Australia is a rather small and contained market with only 2,200 entities listed companies.

ASX in partnership with DAH are developing the first national scale post-trade solution system for settling equity trades by using a distributed ledger technology. It is not clear yet whether the first version tested will be real-time settlement or a choice of same-day settlement (e.g. every 3 hours) that will reduce substantially the clearing-settlement fees currently charged by the ASX group. The latter or some such high frequency settlement procedure could also allow for short selling that is one main liquidity factor in mature markets. The Australian market is also idiosyncratic on the short selling front, since it allows very limited short selling capabilities to retail investors.

Ironically, the Kuwait stock exchange is one that is already functioning with real-time settlement. A stock exchange that is having troubles as a business because of low volume but operates on prepaid; and is now considering switching to T+2 settlement.

In the East, The Japanese exchange (JPX) is advancing to the second stage of POC with Nomura Research insititute (NRI) on use case of blockchain technology. SBI Securities and Mitsubishi UFJ Financial Group, are participating and the blockchain specialist is Currency Port who is focused on multi-currency payments. JPX is interested on applications for equities with low transaction volume and also on applications to prevent tampering with stock information. Nomura Research Institute (NRI), a leading provider of consulting services and system solutions, today announced the launch of the second phase of its Proof-of-Concept (PoC) to examine the applicability of blockchain technology for securities markets. This project will be done in collaboration with Asia’s leading exchange group, Japan Exchange Group, Inc. (JPX). Along with JPX, the PoC will be supported by Nomura Securities, SBI Securities, Mitsubishi UFJ Financial Group and others, to ensure the study is explored from various perspectives.

The JPX use case will run from April to June; the ASX will decide whether CHESS will be replaced by a blockchain based technology under development with DAH.This summer there is a funnel in Asia ready to generate a first important batch of POCs coming from the stock exchanges. Korea Stock exchange too is joining the gold rush with an intention to test in private shares, as announced this March. The platform will be first introduced for non-listed securities, which are widely exchanged directly between dealers.

Stock exchanges in Hong Kong and India are working on different issues. Hong Kong exchange (another exchange that owns the clearing house) is dealing more with the structural particularities of stock ownership, listing, and trading in China; and India is focused on synchronizing IT systems and catching up with a growing market.

Exchanges in the “Rest” of the world are also on our radar screen. Lots in the pipeline this summer.

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