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Finance’s ‘High Achievers’ to Outpace Growth in Banking, Asset Management

Stock exchanges and other market infrastructure firms are carving out a larger share of revenue in financial services, McKinsey says.

  • Staff

The firms powering capital markets are about to take on an even larger role in the finance industry.

Capital markets infrastructure providers – the “pipes and plumbing of global finance” comprising trading venues, interdealer brokers, clearing houses, information and technology services and securities depositories – have been “conspicuous high achievers” over the last few years, according to a McKinsey & Company report released Wednesday.

Stock exchanges and other market infrastructure firms saw global revenue rise to $159 billion in 2015, up $22 billion from 2010, as the industry registered a compound annual growth rate of 3 percent. Average operating margins, meanwhile, rose five percentage points to 38 percent, with firms benefiting from “rising demand for services, increased scale, and more electronic trading,” McKinsey said.

The capital markets infrastructure industry is expanding despite the “mixed fortunes” of the broader financial services sector since 2010, according to the report. McKinsey projects it will see a faster annual revenue growth rate of 5 percent in the five years through 2020, outpacing the expected 3 percent increase for fund managers and 1 percent for investment banking.

Capital markets infrastructure providers will represent 25 percent of revenue in financial services in 2020, up from 22 percent in 2015, the consultant estimates. The buy-side will keep its 38 percent share of the market even as revenue growth slows, while investment banking will see its portion slip to 37 percent from 40 percent.

Product diversification will help shape the market structure industry in the coming years, according to the report. The top firms have already diversified across the value chain into adjacent business areas, often through mergers and acquisitions, the consultant said.

At financial exchanges, for example, their trading and listing business shrank to 47 percent of total revenue in 2015 from 59 percent in 2010. Post-trade activities and information and technology services, meanwhile, have become a larger source of profit for these firms. The exchanges have also consolidated over the last several years, including most notably the purchase of the International Securities Change by Nasdaq in 2016.

Another key issue is technology, with McKinsey highlighting an increasing demand for data and analytics and the rise of financial technology providers as two major trends impacting market infrastructure firms. To remain successful, the consultant said market infrastructure providers will need to become leaders in data and analytics. They’ll also need to “double down” on new and fast-growing asset classes, the firm said, while strengthening their core business offerings.

They’ve already proven their ability to adapt.

“Capital markets infrastructure providers have taken advantage of changes in market structure to expand, increase revenues, and innovate,” McKinsey said. “The industry’s performance in recent years puts it in a strong position to continue its success.”