Revenues at exchanges continued to grow at double-digit rates in 2018. Profit margins at leading exchanges averaged above 60%-although there are wide variations in the operational efficiency of exchanges, even after normalizing for trading volumes. The least efficient exchanges are SIX in Switzerland and SGX in Singapore. On the other end of the spectrum, ASX performs particularly well, on a par with the largest exchanges in the world, despite having considerably lower volumes. The Shenzhen Stock Exchange and Shanghai Stock Exchange have exceptionally lean operations and the lowest operating costs per trade in the world.
While exchange operations are scale businesses that have led to numerous rounds of mergers in the industry trying to capture greater economies of scale, we believe that greater operational efficiency can only be pushed so far, and that exchanges will have to embrace a higher level of innovation in coming years in order to maintain their growth rates. Some of the areas for exploration include alternative data, trading of digital assets, and capital formation.
Figure 1. Exchange Revenues by Line of Business 2012-2018