VINJETT VINJETT

1 MarketView

a magazine for the exchange industry

Cross-market surveillance

All marketplaces benefit from a central pool of expertise instead of maintaining their own real-time surveillance system.Mike Prior, Vice President Surveillance, IIROC

Trend:

Cloud computing Spotlight:

The role of government

no.4:2012

The Canadian approach

pCollateral optimization pReducing cost of ownership p

2 MarketView

my view

contents 4:2012

2012 was a good year for the U.S. stock market, yet ironically, equities trading volumes are down. In a climate of global eco-

nomic uncertainty, investors are shying away from direct share purchases and leaning toward less risky instruments.

Indexes and ETFs have benefited from this trend as half of every dollar invested today goes into an index product. Indexes and ETFs provide a way to reduce risk through diversi-fication. With one purchase an investor can gain expo-sure to the broad market, sector or geography. It is also easy and inexpensive to rebalance the asset allo-cation of a portfolio based on ETFs. Simply sell the ETF representing the over-weighted portion and buy a different one that repre-sents the under-weighted segment.

ETFs have certain advantages over mutual funds. ETFs trade intraday like stocks, whereas mutual funds are priced at the close of the trading day. Investors in ETFs buy and sell shares in the ETF itself, whereas every purchase or sale of a mutual fund triggers the purchase or sale of the underlying shares. There are gener-ally tax advantages to investing in ETFs as well. In the U.S., ETFs that track the S&P 500 tend to have fewer capital gains than their corresponding mutual funds. Moreover, most index ETFs have a lower expense ratio than index mutual funds.

ETFs are a global phenomenon. The U.S. and Europe have broad, liquid ETF

markets; the markets in Japan and India are growing, and China recently launched its ETF market. That said, ETFs are structured for specific regions, so they are not easily fungible.

Given these trends, it behooves exchanges to develop a robust ETF offering as a way to grow their listings, trading volume and liquid-ity, and generate direct and indirect visibility into the underlying securi-ties. To make this happen, exchanges need to work with market participants to educate the public about these products and make it easy for them to invest. Investors need to under-stand how they can select a family of indexes and build a strategy focused on a sec-tor, country, region and the globe. Further, investors need access to data so they can conduct analysis.

To build a successful index and ETF offering based on baskets of equities, fixed income securities and commodities, marketplaces will need to leverage fast, scalable technology and robust data sets. The platform should offer several years of back test data that can be used for analysis. They should consider licensing indexes; purchas-ing price, weights and components feeds; and outsourcing their index calculations.

Index and ETF investing will con-tinue to develop over time. Having the right technology is a major step toward taking advantage of this growth oppor-tunity.

John JacobsExecutive Vice President and Chief Marketing Officer, NASDAQ OMX

04 Monitoring fragmented markets Exchanges, regulators and brokers tackle cross-market surveillance.

07 cloud control Cloud computing can reduce costs for  brokers and significantly increase business agility.

08 collateral management Clearinghouses can help their members transform their collateral under the new requirements for central clearing of standardized OTC instruments.

10 taking on tco Managing total cost of ownership helps marketplaces achieve operational excellence.

12 the public interest The relationships between exchanges and governments vary across the world.

A heyday for indexes and ETFs

exchanges need to work with market participants to educate the public

about these products and make it easy for them to

invest.

MarketView 3

news

Genium INET Nordic integration wins FOW Best Innovation AwardFutures and Options World (FOW) has awarded NASDAQ OMX the Best Innovation by an Exchange Award for 2012 for the Genium INET platform integration in the Nordic and Baltic markets. FOW said: “…In March 2012, (NASDAQ OMX) completed the migration of commodities onto the Genium INET trading platform finishing a four year process to offer all asset classes on a single trading platform. … Based on NASDAQ OMX’s INET technology, Genium INET is a comprehensive multi-asset trading and clearing system with ultralow latency performance and high reliability and operating capacity and is a pioneer in what one judge touted as ‘the holy grail of single platform, multi-asset class trading…’”

Dalian Commodity Exchange and NASDAQ OMX sign MOUDalian Commodity Exchange (DCE) and NASDAQ OMX signed a memorandum of understanding (MOU) with an aim to seek new business opportunities on a global scale as well as substantial business exchanges and cooperation in more fields.

DCE President and CEO Liu Xingqiang said: “Through exchanges and cooperation with NASDAQ OMX, DCE will

be able to keep up with the latest trends of technology innovation in the global leading markets. Signing of the MOU has laid a solid foundation for further cooperation with NASDAQ OMX. This new partnership for DCE will establish an in-depth and sustained strategic partnership with NASDAQ OMX to make new progress in technology innovation and opening-up.”

BVC extends technology contractBolsa de Valores de Colombia (BVC), the fourth largest stock exchange in Latin America, extended their current technology contract with NASDAQ OMX for an additional five years. This extension is part of BVC’s ongoing initiative to continue strengthening its position in both the regional and international exchange arena.

Juan Pablo Córdoba, President of BVC said: “We’re thrilled to be using a platform that allows us to conform to international standards, thus making our equity and derivatives markets attractive to foreign and domestic investors, as well as raising the bar for our market participants. At 100% uptime, there was no questioning our decision to extend our current contract to continue running on NASDAQ OMX’s X-stream solution.”

SBI Japannext and New Zealand Market go live on X-streamSBI Japannext, a Japanese proprietary trading system (PTS), has successfully launched a new NASDAQ OMX powered X-stream INET trading system. The PTS and its members will benefit from significant ultra-low latency and throughput capacity and strengthen performance abilities.

The New Zealand Market (NZX) has launched the world-recognized X-stream trading platform, paving the way for a new era in global connectivity and product innovation going forward. The multi-asset trading platform provides flexibility in the creation of new products allowing for further innovation and growth in New Zealand’s markets, including dairy derivatives and the launch of equity derivatives in 2013.

NASDAQ OMX acquires 25% of TOMNASDAQ OMX announced the acquisition of 25% of the Dutch cash equity and equity derivatives trading venue, TOM, The Order Machine. The agreement also includes an option for NASDAQ OMX to acquire an additional 25.1% of the remaining shares and secure a majority stake in TOM.

NASDAQ OMX will act as market operator for TOM, and will provide a Genium INET based trading platform in London, according to an 8 year contract the two firms have signed. The partnership also builds on TOM’s current usage of NASDAQ OMX-powered market technology, specifically Marketplace for Hire (M4H), a multi-market, multi-asset marketplace solution for trading.

NASDAQ OMX launches Global Index Family built on INET technologynAsDAQ OMX has launched the nAsDAQ Global Index Family, representing more than 98% of the global equity investable marketplace and will result in the development of 24,000 indexes. The nAsDAQ Global Index Family is calculated with the new state-of-the-art Global Index Calculator powered by IneT, the world’s fastest trading system technology. with this upgrade, nAsDAQ OMX has strengthened its position as a premier provider of real-time and end-of-day data.

Lars Ottersgård, nAsDAQ OMX

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4 MarketView

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in focus Cross-markET surVEIllaNCE

Three dimensional surveillance

monitoring fragmented markets changes the way brokers, exchanges and regulators conduct business.

phoTo Mike ford

real-time vs. post-trade soMe cross-Market surveillance activities must be done real-time, whereas others are best done post-trade. as a rule of thumb, events that could lead to market intervention should be monitored real-time. for example, a significant price movement in a company’s shares could indicate material news has been released or has leaked out. it also could be the result of a fat finger error or a malfunctioning algorithm. in such cases, the exchange must react quickly to level the playing field.

trade through monitoring can be done effectively on a post-trade basis. trade throughs occur frequently for several reasons including time stamping issues, race conditions and data

latencies. if there is an interruption in a data feed, the trader might not be aware of a better price quote. Latency can cause trade throughs because some brokers receive data faster than others depending on where their servers are located. to this end, it is most effective to review all trade through alerts in batch mode to detect brokers or traders who are systematically and repeatedly breaking the rules. similarly, it is more effective to monitor for manipulation scenarios, such as layering and spoofing, by analyzing several days of alerts.

iiroc’s Prior points out that it is best to monitor for front running (when an inventory trade is executed before a client order) on t+1. if front

running is investigated on the same day as the trade, the trader can blame it on a marker error and book all the executions on the client’s account.

“You’ve got to let the trades get processed and booked into their accounts because that speaks to the trader’s intent,” he explains.

outside north america and europe, and to a lesser extent australia and india, most of the world’s markets have one dominant exchange. cross-market surveillance may not be an issue for them now, but it could be in the future as their markets evolve. fortunately, they will have precedents to follow.

coMPetition in the financial m a rkets h as i nt roduced greater efficiency and lower transaction costs. Yet conduct-ing cross-market surveillance

is a significant challenge for exchanges, regulators and brokers alike.

Of all the markets that allow compe-tition, Canada is probably the farthest up the learning curve when it comes to conducting cross-market surveillance. The Investment Industry Regulatory Organization of Canada (IIROC) regu-lates and monitors all 11 equities venues across the nation. IIROC is able to effec-tively conduct surveillance of all equity markets on an intra- and inter-market basis through its Surveillance Technol-ogy Enhancement System (STEP). In lieu of monitoring venues separately, it provides significant cost efficiencies for all market participants. STEP also enables both real-time and post-trade

analysis to detect trading patterns and trends, identify harmful trading behav-ior and inform policy development.

“This arrangement saves the indus-try time and money,” says Mike Prior, Vice President Surveillance, at IIROC. “All marketplaces benefit from a central pool of expertise instead of maintain-ing their own real-time surveillance system and the human resources to support it.”

IIROC also maintains an open line of communication with the Montreal Exchange, which regulates and per-forms surveillance of listed equity derivatives, although currently there are no plans to integrate their surveil-lance efforts.

In the U.S., the exchanges and the Financial Industry Regulatory Author-ity (FINRA) have also made inroads into cross-market surveillance. In the last few years, alerts have been designed

to reflect new trading behavior and the use of high-speed technology. Whereas five years ago surveillance efforts focused on executions, now exchanges scrutinize what traders do with their orders. Cross-market data is included in the order patterns, and while it is pos-sible to detect a violation on another exchange, it takes several steps to iden-tify the perpetrator.

But surveillance will become easier once the Consolidated Audit Trail (CAT) is implemented. Customers will submit orders with price and volume. Brokers should record them as order originations and submit to CAT on a T+1 basis.All self-regulatory organizations (SROs) will be required to share order flow and trade data and, at the same time, will benefit from more granular cross-market sur-veillance alerts. The rule requires that data only be used by SROs to meet their surveillance obligations.

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in focus Cross-markET surVEIllaNCE

regulators adjust to the new normal severaL Years ago, it was not uncommon for traders to take six or seven seconds to respond to quote changes. It was easy to reconstruct a sequence of events as long as the time stamps were accurate to within a second or so. But high-speed trading has made this task more challenging.

Today, traders’ systems can react to market changes within a few milliseconds, and if the time stamps on trades and orders are off by even one or two milliseconds, sorting the events in the right order can be a challenge for regulators. Trading venues in Canada are required to synchronize their system clocks using Network Time protocol (NTp) offered through the National research Council. however, synchronization is not precise – even differences in the way some venues correct for time drift throughout the day can lead to variations of up to 5 milliseconds or more.

Compounding the problem is data latency. an event such as the posting of a new bid or offer may be observed at different times by traders’, marketplaces’ and regulators’ systems due to physical limitations on the speed at which data can travel. a system that is co-located at a market center will see a new bid or offer sooner than a system located in a different city. Canadian trade-through rules take this into account – compliance is measured by the quotes that a particular trader (or system) saw at the time of order entry, not by the actual state of the market at time of execution.

For this reason, regulators need to build alerts that will compensate for latency. It is not enough to simply compare an event such as a trade to the NBBo as determined by the regulator. Quotes received before and after the event must also be considered, because it is possible that the trader involved may have observed a different NBBo than the regulator.

The exchanges and FINR A are working to produce a plan for CAT. Once approved, the system will be rolled out in phases over a four year period.

Implementing CAT will be a complex technological process for brokers and exchanges. The CAT processor must capture, record, sequence, normalize and aggregate data across different exchanges. All the data relating to an order needs to be fed into CAT in the correct format in T+1. Some of this data has not been routinely captured before. Among the new data fields is a unique order ID and client ID that must pass between the broker and the venue where the order is sent. How this will be done has yet to be determined. The additional fields will expand the size of the messages sent to the exchange, but exchanges are working on an approach to minimize the impact on throughput and latency.

Collaboration between the stake-holders is key to the success of CAT. According to John Zecca, Senior Vice President and Head of U.S. Market Regulation at NASDAQ OMX, the broker community has come to the table with some good ideas, and while they are supportive of the concept, they are mindful of the cost.

“They’re going to have to help us come up with the right structure for CAT,” he says. “We can’t do it alone.”

Some are skeptical about whether a consolidated tape in Europe will be able to improve cross-market surveillance in a meaningful way. However, if a consoli-dated tape is inevitable, it is likely the reg-ulator in the jurisdiction where most of a company’s shares are traded will have responsibility for collecting and consoli-dating the order books from all venues that trade those shares. For example, if most of a company’s shares trade on the LSE, the U.K.’s Financial Services Author-ity (FSA) will be responsible for collecting and consolidating all the order books of the venues that trade those shares.

“nasdaQ oMX believes regulators should be able to delegate that responsibility to an exchange or third party, where there are compelling reasons to do so. In some regions, an exchange may be more capable of performing this function at a lower cost. Importantly, the European Parliament has taken this position in MiFID II,” notes Lorne Chambers, Associate Vice President at NASDAQ OMX. “That said, there are issues to be resolved around data sharing.”

For now, nobody knows how the con-solidation process will work in Europe. The European Securities and Markets Authority (ESMA) is working on the technical guidelines, and once they are known, the impact on exchanges and brokers will be clarified.

the broker’s perspectiveBehavior in two Markets may be correlated, but this does not imply cause. let us say a client is arbitrage trading between two exchanges. looking at the order-to-trade ratio on each exchange in isolation, it could appear that the client is trading with no intent to execute. The ratios from both exchanges may show the client trading on the exchange that consistently shows the best price and then adjusting the bid on the other. This scenario might happen when the client’s market algorithm or the executing exchange’s central matching order book reacts faster and there is deeper liquidity compared to the other exchange.

“It’s difficult for brokers to obtain a full market view and link the events even when their firms are members of both exchanges,” says paul Willis, Global Compliance officer at aBN amro Clearing. “That’s where the more advanced surveillance systems like smarTs Broker are starting to come into play.”

Nowadays, programmers and mathematicians control a large percentage of order submissions, but brokers need to under-stand more than their trading models. They need to understand their clients’ resources and the culture driving their behavior — how they are going to trade, their appetite for risk and their internal controls.

“If something looks wrong, it probably is wrong,” he says. “market abuse monitoring involves a mix of advanced technology to see what’s going on and behavioral psychology.”

Mike Prior is vice President surveillance at the investment industry regulatory organization of canada (iiroc).

Paul willis, aBn aMro clearing

MarketView 7

TREND CLOUD COMPUTING

GETTiNG sTaRTED: Start off with

a complete TCO analysis and keep metrics Identify low

hanging fruit Pick use cases

and projects When successful,

implement new use cases

Cloud in a perfect storm

CollECTiNG, storing and retriev-ing massive amounts of data incurs significant overhead. These costs have increased at a time when volumes, revenues

and profit margins have decreased. Bro-kers can navigate this perfect storm by finding new ways to save and increase efficiency, speed and agility. Cloud computing fits the bill.

Cloud computing has been referred to as “cost takeout as a service” because firms have the flexibility to pay only for what they use, when they use it. All the data is in one place so their internal systems can access it efficiently. Importantly, firms can concentrate on their core competencies and allocate resources to initiatives that are a source of competitive advantage.

An IDC study of 11 large enterprises running applications on Amazon Web Services’ (AWS) cloud computing platform found that on average the companies were saving more than 70% compared to the of cost self-hosting. Moreover, Bank Inter, an AWS cus-tomer based in Spain, reduced the time it takes to run risk simulations on its

private client portfolio from 23 hours to 20 minutes.

Cloud computing enables IT devel-opers to deploy applications rapidly. It may take a large company four to 12 weeks to provision their own servers, whereas it may only take a few min-utes to boot up a new environment in the cloud. As a result, companies can experiment more frequently.

“If experiments don’t work, you shut them down,” says Adam Selipsky, Vice President of Sales, Support and Market-ing at AWS. “You may have spent a few hundred dollars or a few thousand dol-lars, but not hundreds of thousands or millions of dollars.”

BRokERs sToRE ThousaNDs of gigabytes of sensitive data, so they impose strict rules pertaining to how it is transmit-ted, processed, stored and retrieved. As a result, security is paramount. They need a solution that incorporates pro-prietary key management and authen-tication, and transports encrypted data to the cloud provider over a private connection.

Much of the data brokers store is for regulatory purposes. In the U.S., any books and records data storage solu-tion must comply with SEC Rule 17a-4 and / or CFTC Rule 1.31 which require that data be Written Once and Read Many times (WORM). This prevents modification or deletion prior to expi-ration of prescribed retention periods. Brokers therefore must ensure that

continued availability of their WORM solution enables them to satisfy multi-year WORM storage / retrieval requirements.

To this end, NASDAQ OMX launched FinQloud® powered by AWS, a cost-effective, efficient management and storage platform for financial data. The core offering of FinQloud is Regula-tory Records Retention (R3), a patent-pending WORM data storage solution that enables brokers to save up to 80% off their regulatory mandated data storage expense. NASDAQ OMX and AWS have a contractual arrangement that ensures FinQloud can offer multi-year year arrangements to retain and manage documents in uninterrupted compliance with WORM requirements.

“There’s a lot of ambiguity and con-fusion regarding regulatory compli-ance and cloud computing,” says Gary LaFever, Chief Corporate Development Officer – FinQloud at NASDAQ OMX. “It makes sense for brokers to align with FinQloud because NASDAQ OMX is knowledgeable about financial regu-latory issues, and AWS is an expert in cloud technology.”

Ultimately, cloud computing helps brokers reduce the operational costs and complexities associated with data and infrastructure management. It also can provide greater f lexibility, access, reliability and deployment. In the long run, this contributes to more vibrant markets.

Brokers reduce costs and increase business agility by managing data in the cloud.

Cloud computing can help nagivate the storm by reducing costs and increasing efficiency.

Workloads commonly moved to the cloud include: Web apps (hosting

corporate and internal web sites, implementing new mobile or media sharing apps) Certified and

internally developed business apps (development, testing and production) Backup and

disaster recovery

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8 MarketView

trend Collateral optimization

“Customers need to be much more

liquid and will have

to maintain a good

supply of high quality securities.”

rich Hulit, Vice president, Business

Development and product

management, naSDaQ omX

With the expected shortage of eligible collateral on the horizon, clearinghouses can help members optimize collateral management.

Five years ago, collateral man-agement was perceived as a back office function, but this is about to change. Dodd-Frank and EMIR require central

clearing of standardized OTC instru-ments. This will likely cause a short-age of eligible collateral – estimated at several trillion U.S. dollars – and raise costs. Clearinghouses can add value by helping members and their customers optimize and transform their collateral.

Today, swap counterparties bilater-ally settle and collateralize their posi-tions for uncleared trades. Normally, when a bank transacts a swap, it extends a credit line to its customer. As long as the value at risk (VAR) of the customer’s trades stays below that credit line, no collateral is posted. Once the VAR goes above the credit line, the bank requires collateral. One way of doing this is by placing a lien against the customer’s assets at the bank, often in a custody account. The swaps portfolio and the collateral are valued periodically, usu-ally daily, and the amount of collateral needed is adjusted accordingly.

In lieu of a lien on existing assets, the bank may accept cash or securi-ties (whose value is normally haircut depending on quality) as collateral. Since the collateral does not actually move, the customer is still entitled to interest, dividends and capital appreciation.

Collateral on the move

Going forward, swaps will be cleared through a clearinghouse. When cus-tomers execute trades, they will have to post collateral with the clearing mem-ber, who in turn posts collateral with the clearinghouse. Eligible collateral typically includes: cash, government instruments and/or other high-grade securities, usually with a short matu-rity – i.e., under five years. Collateral must be posted with the clearinghouse by market open on T+1. The collateral is physically moved and held in the clear-inghouse’s custody account.

“Brokers won’t allow customers to trade through them unless they post the initial margin because they have the exposure to the clearinghouse regard-less of what the customer does,” warns Rich Hulit, Vice President, Business Development and Product Management at NASDAQ OMX.

getting the right securities in the right place at the right time and advising the various counterparties of those moves is a challenge. The requirements must be communicated, the position and the collateral revalued, and the collateral physically moved. If the processes do not work properly, members and their customers may pay too much.

In the cleared world, positions are marked to market daily. The counter-party whose position has depreciated must send variation margin in cash to

the clearinghouse which, in turn, will give that money to the counterparty whose position has appreciated in value. This protects the clearinghouse.

Moreover, it is estimated that there will be an additional requirement of up to US$2.5 trillion in eligible collateral once the new rules take effect in 2013, assuming that every participant posts all collateral gross. This shortage could climb to US$6 trillion over the next four years. However, Tabb Group believes this amount could be closer to US$20 billion, suggesting that efficiencies already achieved by centrally clearing swaps need to be discounted.

“Clearly customers need to be much more liquid and will have to maintain a good supply of high quality securities,” says Hulit. “Alternatively, they will have

MarketView 9

the nordic Clearinghouse accepts a wide range of collateral including bonds, equities, cash and bank guarantees. to meet regulator and market participant demands, it will introduce an improved model for handling collateral in 2013 where members and individually segregated clients will post collateral directly to the clearinghouse. the main objective is to facilitate closer control of posted collateral by members and clients, to continue to offer best-in-class segregation and to maintain a capital efficient model for clients and members.

“With this change we continue to prove that we are in the frontline regarding capital efficiency and client protection” says Göran

Bolin, Vice president at naSDaQ omX. “For members of the nordic clearinghouse, the new way of handling collateral is a big change.”

Bolin points out that clearinghouses need the right technology to be effective in the new environment. real-time processing is important from a risk management and operational point of view. By constantly updating the prices and collateral valuations, clearinghouses can minimize the margin requirements they impose on their members and customers. additionally, complying with standards enables clearinghouses and members to integrate their systems properly so collateral can be managed as necessary.

real-time technology is critical

to avail themselves of a service that will transform securities they own into what they need.”

Firms will want to optimize how they manage the collateral they post with the clearinghouse which means prioritizing and posting the collateral that is cheap-est to buy, will incur the smallest haircut or has the least amount of principal.

According to a Celent report entitled, Cracking the Trillion Dollar Collateral Optimization Question, optimization facilitates funding liquidity needs.

“The enhanced ability to optimize what collateral to give and receive also enables a firm to identify surplus collateral and free up valuable liquidity across listed and cleared derivatives,” says the report. “Beyond that, a firm can maximize value from securities finance transactions, where it can lend a portfolio of assets, pledged as collateral, in return for cash (with a spread payment to the ‘borrower’). This arrangement provides the lender with access to funding without the need to liquidate any underlying positions in non-cash assets held.”

some serviCe providers offer collateral transformation services, which enable customers to post a wider range of col-lateral than a clearinghouse can accept. Let us say the clearinghouse only accepts cash and government notes, but the customer only has corporate bonds to offer. The member firm can accept the corporate bonds as collateral, post gov-ernment notes on the customer’s behalf with the clearinghouse, and then charge the customer a fee for the service.

In addition to helping members man-age collateral, clearinghouses can help them achieve capital efficiency through netting and cross-margining correlated positions. However, netting rules are still not finalized, and going forward it may not be possible to net all exposures.

As Hulit points out, the dynamics of collateral management are going to be too large to ignore.

“Collateral management is the single largest challenge the industry is trying to solve today,” he concludes. “Every-body is paying attention to it, and all the major clearinghouses, custodians and vendors are evaluating how to best manage the issue.”

10 MarketView

trend cost of ownership

gaining efficiency

Businesses are cost conscious today, and marketplaces are no exception. By re-evaluating the support and organizational requirements

associated with their technology infrastructure, marketplaces can often reduce their capital and operating expenditures and improve efficiency.

To understand their total cost of own-ership (TCO), marketplaces must first determine how much equipment and human resources it takes to run their environment. Next, they need to break down the cost of the resources manag-ing them and vendor support services. Keep in mind the purchase price of the equipment is only a small percentage of TCO. It is also important to build in the cost of failure times, such as when the devices are taken offline to implement changes and perform upgrades.

One easy way companies often reduce cost is by providing employees with notebook computers instead of desktop systems. Notebook models can share docking stations, batteries, power cords and drive bay items, and computer manufacturers support these products for several years ensuring longevity.

In the data center, the same tasks can often be accomplished using less hardware, floor space and requiring fewer licenses. The footprint can shrink

through virtualization by consolidat-ing servers, databases and network devices into one cabinet and sharing servers, power, cooling and rack space.

“In the past, data has run over Ethernet, and storage has run over a fiber channel, for example,” says Steven Schultz, Marketing Director in Intel’s Networking Division. “By running over one Ethernet infrastructure, exchanges can eliminate very expensive storage cards as well as the storage switches, saving up to 20% of the cost.”

Moreover, Marketplaces do not need multiple database servers, each with their own application running sepa-rately. However, if they consolidate database servers, marketplaces have to be mindful that applications are not exposed to any security threats and ser-vice level agreements are not affected by performance issues.

Databases are among the most expensive parts of the infrastructure, so a three-tier storage model where certain technologies are dedicated to specific applications makes sense. More expensive Tier 1 storage can be reserved for high volume, high availability applications, such as order executions, that need immediate access and low latency. Exchanges typically retain data in Tier 1 storage for a short time frame before moving it to lower-cost solutions.

Managing total cost of ownership enables marketplaces to reduce expenditures and achieve operational excellence.

Measuring cost,

MarketView 11

Marketplace platforms can share the same architecture model for servers, storage and networks. By streamlining the number of vendors, contracts and technologies and reducing headcount, exchanges can significantly reduce capital and operating expenditures. Consolidating the environment enables operations teams to spend more time focusing on planning and strategic efforts.

For some marketplaces, it can be cost-effective to implement an asset light data center strategy. Instead of building U.S. and European data cent-ers, NASDAQ OMX leases space and still retains full control of its relation-ships in the data center. In a new initia-tive, the exchange is acquiring capacity on demand from Amazon Web Services (AWS) for its FinQloud service, and is considering opportunities to use AWS and other providers to deliver services to customers.

“We’re not restricted by not owning the real estate itself, so that strategy has worked for us,” says Louis Modano, Senior Vice President of Infrastructure Ser v ices , NA SDAQ OM X . “ T hat said, outsourcing is not necessarily applicable for exchanges that see their data center as a strategic investment in their market.”

reducing tco can also help market-places achieve operational excellence. For example, consolidating applications onto fewer servers lowers operational risk by simplifying the architecture, decreasing transaction path length and minimizing operational monitoring requirements.

“Once you’ve reduced the number of components required to support your business, you’ve reduced the points of failure that could have existed within the infrastructure,” Ahsan Syed, Principal Technologist at NASDAQ OMX explains. “In addition, the smaller infrastructure makes it more efficient to control and make changes to the environment, which leads to higher service levels.”

Mike Viola, Principal Technologist at NASDAQ OMX advises marketplaces to stay in contact with their technol-ogy vendors, who can provide tools and assistance to help reduce the footprint through current device optimization and technology refresh planning. To illustrate, new Intel server based proces-sors provide up to an 80% performance boost vs. the prior generation. They also provide up to 50% improved energy efficiency and up to a 30% reduction in input/output (I/O) latency.

Fur ther, marketplaces should periodically review solutions from other vendors as well because they could be doing even more with less. There are several TCO calculator tools on the market which can help exchanges plan for platform cost savings with all server vendors. These tools provide estimated savings for physical-to-physical consolidation as well as physical-to-virtual and virtual-to-virtual migrations.

Understanding TCO is the first step toward reducing expenses and improving efficiency. Faced with lower margins and more competition, it behooves marketplaces to take the plunge.

tco checklistit is important to look at overall technology, architecture and process to discover ways to reduce tco. some questions to ask:

is our architecture fragmented?

do we provide similar functionality because we have variety in our organization?

can we consolidate our organizational architecture and process to be more efficient by adhering to one standard?

do we have enterprise contracts and an enterprise view of our architecture, hardware, software? are we wasting money by double buying?

nAsDAQ oMX is considering several new technologies to further reduce tco. one is server power management technology. By optimizing and managing power and cooling resources in the data center, this technology extends component instrumentation to the platform level. this helps make the most of every watt consumed and potentially improving rack density by up to 40%.

Another is trusted execution technology. especially useful in public cloud computing, this technology verifies a clean boot with virtual machines, ensuring there is no malware or corruption. higher confidence contributes to lower tco.

looking forward

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Market View A magazine from NASDAQ OMX, the world’s largest exchange company. It delivers trading, listing, exchange technology and public company services across six continents. Address NASDAQ OMX SE-105 78 Stockholm Sweden Phone: +46 8 405 60 00 Fax: +46 8 405 60 01 marketview@nasdaqomx.com www.nasdaqomx.com Publisher Lars Ottersgård lars.ottersgard@nasdaqomx.com Editorial committee Ulf Carlsson, Peter de Verdier, Richard Hulit, Paul McKeown, Johan Toll, Ryan Wells Editor Lisa Selkin Lupo lisa.selkinlupo@nasdaqomx.com Managing Editor Sherree DeCovny +1 215 493 5394 sdecovny@decovny.com Publishing agency Appelberg PO Box 7344, SE-103 90 Stockholm Project Manager Mats Falck Phone: +46 8 406 54 17 mats.falck@appelberg.com Art direction Johan Nohr Layout and prepress Appelberg Language Editor Elizabeth P. Tierney Cover Photo Mike Ford Print Trydells, December 2012 The information contained herein is provided for informational and educational purposes only, and nothing contained herein should be construed as investment advice, either on behalf of a particular security or an overall investment strategy. Statements are not guarantees of future performance. Actual results may differ materially from those expressed or implied. Past performance is not indicative of future results. ADVICE FROM A SECURITIES PROFESSIONAL IS STRONGLY ADVISED.

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sPotLight GOVERNMENT

ost exchanges in the U.S. and Western Europe are structured as for-profit,

public entities, which in large part has led to greater efficiency, innovation and lower transaction costs. However, recent events have led governments and regulators in some emerging markets to conclude that a differ-ent structure may be more suitable to their needs. As they contemplate corporatization and privatization, they are reconsidering the role of government in ensuring the exchange serves in the nation’s best interest and furthers economic policy.

Some Asian countries, even those with developed markets, embrace a symbiotic relationship between gov-ernment and the exchange, the latter having a legal duty to balance public and corporate interests. For example, HKEx’s board comprises an equal number of government-appointed and shareholder-elected indepen-dent non-executive directors. Bursa Malaysia has similar statutory provi-sions that promote public interests in addition to investor protection.

India recently passed legislation requiring more stringent manage-ment of conflicts of interest than

those explored in IOSCO and World Bank forums. For instance, 51% of an exchange must be publicly held, and the exchange must be listed on a marketplace other than its own. Addi-tionally, there cannot be fewer public interest directors than shareholder directors.

Similar trends have appeared outside Asia. When the state-owned Warsaw Stock Exchange was priva-tized and listed in late 2010, the gov-ernment retained a 35% stake and the remainder was sold in an IPO that was 25 times oversubscribed. Today, the exchange plays a leading role in raising foreign and domestic capital. In 2011, it ranked #1 in IPOs in Europe and #3 globally. The shareholder structure by voting rights still favors state control, illustrating the strategic importance of the exchange in promoting policy-led economic development.

“One could argue that governments in certain emerging markets are justi-fied in retaining a stake in the national stock exchange,” says Emma Shand, Senior Advisor at NASDAQ OMX. “If exchanges are fully privatized too soon, they could fail, and in the absence of competition, failure is not an option.”

Governments in some developed markets hold sway over the exchanges too, even where it is not a shareholder. In 2011, the SGX-ASX merger failed on the grounds that it was in conflict with Australia’s national interest. Requiring both Foreign Investment Review Board approval and Parlia-ment to lift a 15% ownership cap on the ASX, Australia’s Treasurer Wayne Swan said, “Becoming a junior part-ner to a smaller regional exchange through this deal would risk us losing many of our financial sector jobs.”

“The financial crisis and recent market developments have undoubt-edly shaped a more insular, nation-alistic view on the role of stock exchanges,” Shand states. “However, this needs to be weighed against the benefits of market competition, when coupled with sound regulation and good corporate governance.”

Ultimately, exchanges that are considering demutualization and privatization must have a well devel-oped strategy and involve multiple stakeholders. NASDAQ OMX’s Advi-sory Services is well placed to assist governments, capital market regula-tors and exchanges in navigating the issues and making the transition.

M There is no one size fits all model. The determination de-pends on the objec-tives, circumstanc-es of the country, stage of economic development, mar-ket sophistication and dependencies.

Factors to consider include national in-terest, an equitable distribution of capi-tal and the optimal ownership mix.

Good governance and addressing po-tential conflicts of interest is critical.

Specialist expertise is required to han-dle the regulatory, governance, legal, accounting and tax issues that arise in corporatization, demutualization and privatization.

to consider

The route to national prosperityGovernments and regulators are re-evaluating the role of exchanges in securing the national interest and executing economic policy.

ILLUSTRATION: VALEro DoVAL