Derivatives exchanges in emerging and frontier markets risk not being able to capitalise on international growth opportunities due to the limitations of legacy technology, a study by Acuiti has found.

Building Competitive Technology for the Exchanges of the Future was produced in partnership with Connamara Technologies and drew on surveys and interviews with 58 senior executives at derivatives exchanges across the globe.

The whitepaper finds that executives at emerging and frontier market exchanges are targeting new member growth – both domestically and internationally – as they seek to emulate the success of tier 2 and 3 exchanges in attracting new firms to the market.

Overall, 87% of the emerging market exchanges that took part in the survey said that investment in technology was key to their growth strategy.

However, less than half of the exchanges surveyed had conducted a major upgrade to their matching engine over the past six years, with emerging market exchanges lagging tier 2 and 3 international markets in their investments.

“The results of our survey suggest that there is a discrepancy between the ambitions of emerging and frontier market exchanges and the levels of investment they have made to achieve growth and attract new members,” said Ross Lancaster, head of research at Acuiti.

“Over nine in 10 of the tier 2 and 3 exchanges that had achieved significant growth said that investment in exchange technology was key to growth, with 61% saying it had been a crucial factor. Conversely, just a third of emerging market exchanges targeting growth thought investment in technology was crucial to realising their goals.

“This suggests that the importance of technology investment in achieving growth is undervalued by some in the market. Executives at frontier and emerging market exchanges therefore need to develop a cost-effective investment strategy to support their growth plans or risk missing out on the ongoing boom in listed derivatives trading.”

Emerging market exchange executives considering their investment strategies have a range of options to consider. With budgets more limited than at their larger peers, return on investment and predictability over costs is essential.

According to the findings, exchange outages remain a problem for many exchanges, particularly those running legacy technology stacks. 

In addition, 67% of respondents are either in the process of a major investment in their technology or preparing one for within the coming 12 months

The survey analysed how exchanges and new trading venues had approached investment across the technology stack and found that outsourcing was common in certain areas, such as surveillance systems, and less preferred in others.

However, firms that did choose to outsource reported better predictability over costs and timelines than those that built inhouse – a trend that was particularly notable for exchanges that worked with specialist vendors.

The most important factors that exchanges value when outsourcing technology are the ability to customise software, selected by 62% of survey respondents, and cost, selected by 56%

Jim Downs, Co-Founder & CEO of Connamara Technologies, said: “Acuiti's rigorous study validates the clear demand for exchange platforms that offer the cost-effective benefits of a pre-packaged solution while also providing the tailored features and flexibility of a custom-built platform.”