How Exchange 4.0 will digitally transform the financial market infrastructure



The move to Exchange 4.0 is well underway, with far-reaching implications for financial markets.

Forward-thinking companies are already positioning themselves for a future powered by DLT. But behind the buzzwords are lingering questions. What benefits will digitization bring, both for trading venues and the market players they serve? What are the main obstacles to Exchange 4.0, whether they come from outdated thinking or misaligned incentives from stakeholders? And what kinds of changes can we expect as digitization takes off?

I summarize the highlights and perspectives of virtually all stakeholder groups involved in the digitalization trend as well as my own opinions.

Introducing Exchange 4.0

As the world experiences a fourth industrial revolution, sometimes referred to as 4IR, financial exchanges are starting their own technological revolution. The 4IR concept is the driving force behind the Internet of Things, where AI and web technology combine to create smart products. A similar idea is taking hold in the world of financial market infrastructure enabling exchanges on the stock exchange, as DLT, smart contracts and tokenization facilitate true portability of assets while connecting distant liquidity centers. .

But there is great confusion about how distributed technology will change financial market infrastructure so that it can transition, whether it is fit for purpose, and what benefits it will bring. There are also major blockages, whether it is an outdated way of thinking or actors defending their territory. Experts say it is only a matter of time before these obstacles are overcome. The first step, they say, will involve trading platforms and participants developing a new mindset, which embraces open source practices. As Exchange 4.0 becomes better understood and businesses move from proof of concept to bottom line, we can expect a series of major changes. New malls, new products, new ways of doing business, and new ways of enabling post-commerce are all on the way.

Create the network effect

A growing number of exchanges and trading companies are embracing distributed ledger (DLT) technology and tokenization, recognizing a surge in interest in crypto asset trading from retail and institutional investors. But many sites are replicating silo-based models and missing out on the most important lessons of the digital revolution. DLT, tokenization, and crypto asset trading offer the potential to create much larger market ecosystems by making it easier for participants to trade cross-border and facilitating the portability of assets. Rather than dividing the pie, it’s about making it a lot bigger.

“The key thing about this is asset portability,” says Hirander misra. “If you look at the markets in this space, there is a lot of trade around the world and there is tumbleweed growing in most of them. How do you create this network effect? But then also, how do you focus on what you’re really good at? “

Misra says the problem starts with exchanges adopting a silo mentality, where they seek to exclusively serve customers rather than building a more collaborative model. Trading, clearing and settlement end up being offered in a closed environment. “Essentially, these exchanges are just pockets of their own liquidity. ”

But the future could soon be very different. “You’re going to see exchanges, custodians and other services interconnect in a more transparent way, with the ability to exchange services and assets between jurisdictions and between different types of users to achieve this network effect. This is a build that I labeled Exchange 4.0, ”says Misra.

What the experts expect

Provided this network effect can be created, what kinds of benefits can businesses expect? The list is long and varied.

Alokik Advani, Managing Partner, Fidelity International strategic businesses: “You have to try this in pockets of smaller assets, where it can be really effective – private markets, alternative assets, private equity, venture capital, real estate, private debt. All of these obscene things are ineffective. They trade like bulletin boards today. If you wanted to bring this to a certain level of exchange-like infrastructure with DLT support and clearing and settlement speed, that’s a revolution.

Charles Kerrigan, partner, CMS London: “You see the move towards digitalization as a prime example of capitalism forcing change. You speak of another wave of creative destruction. We have digitized the front office of financial institutions – what you see as a customer – but the real benefits will come from the digitalization of the market infrastructure. Crypto shows how it can be done. Payments have learned the lessons. The issuance of securities follows. We are simply following the logic of the information economy. It’s a big problem.”

Hirander Misra, Chairman and CEO of GMEX Group: “With Exchange 4.0, let’s say you are an existing exchange and you have an existing infrastructure. You might want to set up a digital exchange, but you might not want to replicate everything you have. You might not need another match engine, you might need digital custody or a show. The advantage of Exchange 4.0 is that you can combine the services you have with other services or augment the ones you already have. So you don’t have to create another infrastructure in silos.

Jessica Naga, Head of Legal and Compliance, SECDEX: “There is something to be said for countries which are taking the plunge and are now doing it quickly. They will have the pioneer advantage if they build the necessary legal framework and infrastructural ecosystem in a sustainable manner. The obvious advantage of tech and FinTech companies is that their business is cross-border and therefore from a single hub they can serve the world.

Anoop Nannra, world leader in the Blockchain segment, Amazon Web Services: “We are looking at Exchange 4.0 and the digital asset creation opportunities in virtually every aspect of our business. I think it’s really exciting to be able to create a futures index based on solar power production in real time. Until the second. You are creating new models and opportunities for liquidity to occur. Historically, capital will shift to environments where liquidity is easiest to obtain. “

Nicholas Philpott, Director, Zodia: “The places and cities that will be successful in the future may not be the same as they are today. It’s a lot more even competition now. If you can create a virtual exchange without any of this physical infrastructure, it opens up the possibility of very interesting developments when it comes to new shopping malls of the future. You are expanding the market to a wider range of participants. More people can access it.

Duncan Trenholme, Co-Head of Digital Assets, TP ICAP: “It is possible that some of the licensed private blockchains will be successful in some areas and solve some use cases, but over time we believe that unauthorized open blockchains will consume market share. The idea of ​​managing your own distributed ledger, centrally, misses what this technology can do. It’s repeating the boundaries of the vertical silos once again. As people go online, they will increasingly experience the benefits of trading on an open, interoperable, and programmable financial system.

A way forward

All of this is forcing traditional sites and market players to prepare for a radical change in the way they operate while continuing to conduct business here and now. At the same time, many new exchanges have sprung up with DLT technology and digital assets that can only be traded on one platform.

By forging the DLT-based world of the future while continuing to serve traditional assets in the traditional way, we will see a hybrid model that will bridge the gap between digital and traditional financial market infrastructure. This will serve to eradicate current silos and fragmentation to facilitate better portability of assets by interconnecting the entire capital market value chain of participants, across international nodes (jurisdictions), to negotiate, clear and settle more. easily.


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