There have historically been two dominant tribes on Wall Street.
There’s the sell side, the investment banks, which, as their name suggests, mostly sell stuff. There’s also the buy side, the fund managers, which mostly buy stuff.
A third group – including stock exchanges, trading platforms, clearinghouses, and data providers – helps facilitate transactions between the two dominant groups.
Those institutions are sometimes called the “pipes and plumbing of global finance.” If you needed a reminder, pipes and plumbing aren’t sexy, and neither is this third group.
That’s beginning to change.
McKinsey is out with a big report on what it calls capital markets infrastructure providers, or CMIPs, and it's clear that stock exchanges and market infrastructure firms are poised to make up a bigger chunk of the financial services pie.
"This an industry that it's importance to the capital markets ecosystem, beyond purely facilitating transactions, is growing," Rush Kapashi, a partner at McKinsey, told Business Insider.
- Exchange groups, in particular, are diversifying, setting up businesses in just about every area of the capital markets value chain. Information is becoming a key battleground. CMIPs are forecast to deliver 5% annual revenue growth through 2020, outpacing revenue growth at sellside and buyside companies.
Here's some data:
Exchange groups are moving in to new territory
Exchanges groups are pushing in to new areas, including clearing, settlement, information service, technology infrastructure and alternative venues. The name of the game is "vertical integration," or owning just about every part of the value chain.
McKinsey said:
"Diversification into adjacent business areas, driven by margin pressure in some core activities and the need for faster revenue growth, is likely to be the primary driver of CMIP performance over the next five years. It will continue to blur boundaries between different parts of the value chain and offer astute providers the chance to build global portfolios across asset classes and services, reaping both significant revenue and cost synergies."
Information and technology revenues now make up a bigger chunk of their revenues
The effect of this is that trading and listing revenues now make up less than half of their revenues, with information and technology increasing from around $5.2 billion to around $9.6 billion between 2010 and 2015.
Here's McKinsey's take:
"As a result of diversification, larger players across the CMIP industry now offer solutions through the trade lifecycle and increasingly in information services such as indices, market data and analytics. Information services are becoming a key battleground, attracting a growing cast of actors, including exchange groups and interdealer brokers. Some established information services providers, meanwhile, have moved in the opposite direction, venturing into trading and technology infrastructures."
There are a handful of dominant global players
There has been a splurge in dealmaking in the exchanges space, with seven dominant players emerging from 20 plus firms that existed at the turn of the millennium. That's now running in to some opposition, as the final few potential deals involve politically sensitive cross-border transactions.
Here's McKinsey:
"Expansion will continue to be driven by diversification, often through mergers and acquisitions with adjacent businesses. Among exchange groups, the consolidation seen among large and regional operators since the start of the millennium will likely continue, but at the moderate pace seen in the past few years as opposed to the earlier frenzied pace. However, this is likely to happen only if cross-border mergers in areas such as trading, clearing and custody are not restricted. Transactions in less regulated areas such as information services or technology infrastructure, should be less problematic."
Capital markets infrastructure providers are forecast to deliver 5% annual revenue growth through 2020, a faster rate of growth than either the buyside or sellside
What does all this mean? It means that capital markets infrastructure providers are primed to grow faster than either the buyside or sellside, and make up a bigger chunk of the financial services revenue pool.