The Coming Platform Revolution in Financial Markets

Trading Technologies

November 1, 2016

By Geoffrey Parker

Given the dramatic change now underway in financial markets and exchanges, it’s tempting to believe that the industry is in uncharted territory. And, as we’ll see below, there is some truth to this view. However, it’s worth remembering that the industry went through a similar phase of change when exchanges such as the CME became electronic instead of physical markets. Floor traders gave way to traders sitting at computer terminals and, increasingly, to algorithmic trading machines. Electronic completion offered a number of immediate advantages that included better price discovery, improved access to markets and a better ability to create customized products that better fit needs. For example, firms that wished to smooth the value of assets such as power plants or pipelines against commodity price volatility were able to tailor their hedging strategies to their exact needs.

Despite the electronic nature of the business today, my co-authors and I would describe the business model of today’s trading and data industry as a pipeline. What we mean by pipeline is that value is created in a linear fashion whereby firms secure inputs and transform those inputs into products and services through a number of value-adding steps. Financial exchanges such as the NYMEX, ICE, NYSE, Nasdaq and many more connect their markets to end users either directly or through intermediaries such as Trading Technologies. These entities complement market price information with other data streams such as weather, world news and the status of physical assets such as ships, ports and power lines in order to help users such as banks, industrial firms and traders to better understand and predict price movements. For the time being, end users are primarily responsible for the integration of data streams and order execution systems with their own internal systems for analytics and decision making. Thus, as in manufacturing systems, value is created in a linear pipeline way.

Going forward, we see change on the scale of the transition from human to computer traders. That change will be facilitated by the adoption of "platform" business models. Platform models underlie the success of many of today’s biggest, fastest-growing and most powerfully disruptive companies — from Google, Amazon and Alibaba to Uber, Airbnb and Tencent. Platforms use technology to connect people, organizations and resources in an interactive ecosystem in which enormous value is created and exchanged. And we believe that they are just beginning to transform a range of other economic and social areas, from health care and education to energy and government, and also to financial services.

In our book "Platform Revolution" (Geoffrey Parker, Marshall Van Alstyne, Sangeet Choudary), we explore the escalation of IT-driven platforms over established product leaders. Our research shows that even nimble incumbents need to overhaul many fundamental business concepts or else fall behind. As with supply-chain expertise, product excellence will still be a corporate asset, yet businesses must move away from a pipeline, or product-based strategy, to platform-based networks where value is derived from larger ecosystems. We noted in a recent Harvard Business Review article:

“Platform businesses bring together producers and consumers in high-value exchanges. Their chief assets are information and interactions, which together are also the source of the value they create and their competitive advantage…. Firms that fail to create platforms and don’t learn the new rules of strategy will be unable to compete for long.”

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