This report reviews the market for traditional stock and derivatives exchanges. Since early 2020, equities trading volumes have increased significantly. This increased activity has continued into 2022 despite a market downturn. Conversely, derivatives volumes have been flat or even falling. Overall, exchange revenues in 2021 reached US$33 billion, an increase of about 10% year-on-year.
The exchange business is a scale business, and operational efficiency is largely determined by the volume of trades. However, volume is not the only determinant and even after normalising for scale, we see a wide dispersion. The most efficient exchanges have operating costs of about 2¢ per trade, while the least efficient are staggeringly worse at over $2 per trade.
Several decades of exchange mergers have been driven largely by the desire of capture greater economies of scale. However, not all mergers have worked, and we consider the successes and failures on this front.
Astoundingly, crypto exchanges managed to surpass traditional exchanges in revenues from trading in 2021 and we believe that the core lesson is that crypto exchanges cater to retail investors and not just institutions. While traditional exchanges are reticent to compete head-to-head with broker-dealers, we believe that the B2B-only business model may have run its course and exchanges should look to embrace the retail investor directly.