Since the emergence of “Modern Portfolio Theory” and the “Capital Asset Pricing Model” in the late 1960s, institutional investors have taken a quantitatively driven approach to portfolio construction, looking to create portfolio diversification and obtain better risk-adjusted returns by balancing their asset-class exposures. This journey has seen several important advancements in thinking about how to optimally achieve desired results.
Funds that want to take the total portfolio approach first need to get the total portfolio view. To do that they not only need data – and lots of it – but a rock-solid understanding of exactly how they’re going to use it.
The new movers among stock exchanges
Advances in technology are behind a shift in ownership patterns among the world’s stock exchanges. In the past week, for instance, NASDAQ OMX acquired a small stake in the Turkish stock exchange and BATS Global Markets moved ahead with a proposed merger which will likely make it the largest exchange in the US.
In the Turkish deal, NASDAQ announced an agreement with Borsa Istanbul to provide technology and advisory services to Borsa, with NASDAQ receiving cash and a 5 per cent stake in the exchange in return.
The proposed BATS merger with start-up tech company Direct Edge, to be consummated by about mid-year, follows the takeover last year of the venerable New York Stock Exchange by InterContinental Exchange, a company which makes most of its money from derivatives trading.
BATS, which was founded in 2005 with a focus on low costs and high-speed trading, is already the largest exchange in Continental Europe, through London-based subsidiary BATS Chi-X, despite being headquartered in Kansas, USA.
BATS is privately owned with some of its major bank customers, such as Credit Suisse, Citi and Bank of America, on its share register. It planned an IPO in 2012 but called it off after discovery of an embarrassing glitch in its software. Since then, the technology has continued to be exported without any problems and BATS is now nudging NYSE for monthly volumes.
Chi-X Global, which is owned by a consortium of financial institutions, operates alternative exchanges in Australia, Canada and Japan.
Chi-X Australia, which launched in October 2011, reached an average weekly market share of just under 20 per cent in November last. John Fildes, the chief executive, said this represented critical mass for the Australian operation. The exchange claims to have delivered price improvement totaling $2 million a month to investors as well as other efficiencies.
