Most brokers are very familiar with stock exchanges and understand their broad function as a complex marketplace. However, not all brokers really understand stock exchanges.

What do we mean by this? To properly understand stock exchange challenges, brokers need to know the challenges they face. Why? Most of these challenges will eventually have a flow-on effect that will impact brokers. 

Brokers who understand these challenges can strategize and take preventative measures to increase their resilience. Effective resilience eventually translates to profit and longevity. 

The basics: What are stock exchanges? 

To make sure we’re all up to speed, let’s start with a quick recap of the basics.

Stock exchanges provide an organized and regulated system, space, and framework for transactions and exchanges of securities like stocks, bonds, options, and futures — in a nutshell, they are a marketplace for trading. 

These marketplaces allow capital and assets to be transferred between investors and companies, at accurate prices. They also reflect global events and market sentiments, which creates valuable insights that help analyze global economies. 

Just like in a regular marketplace where we have different roles (shops, customers, goods, delivery services, security, advertising, etc), stock exchanges also host a large and diverse network of different functions and responsibilities.

Here are 5 examples:

  • Traders: There are two types of traders; retail and institutional. Retail traders are individuals who trade for their personal accounts. Institutional traders are professional traders who trade on behalf of institutions (e.g. hedge funds). 
  • Brokers: Brokers provide services that allow their clients to execute trades on the stock exchange. This might include a trading platform service that clients can access from their computer or mobile, along with services like trading analytics and media monitoring, charting libraries, alerts, trading tutorials, etc. 
  • Liquidity providers and market makers: Their job is to maintain liquidity and fair pricing in the market, by buying and selling their own securities (or those of the entity they represent). Market makers also issue derivatives (for example options and futures), meaning that they not only help to maintain liquidity but also create it. 
  • Regulators: Commissions and regulatory bodies (e.g. SEC, FINRA), oversee and enforce rules related to how a stock exchange must be run, including rules that apply to market participants (such as brokers). 
  • Technology vendors: Behind the scenes of trading services (platforms, account management, customer support) there is software. Technology vendors are the companies that provide the technology and software to firms like brokers, banks, and exchanges that in turn allow them to provide their services to their clients. 

Stock exchange challenges

Now we will take a step further and consider stock exchange challenges. We will also discuss the opportunities: how brokers can adequately prepare and proactively build resilience against the collateral damage of these challenges. 

Global market volatility 

Stock exchanges are super sensitive to global events. The market is constantly reacting to events that impact the price and value of securities. This could be events related to business, politics, international trade, resource availability, pandemics, and so forth (a very long list of catalysts!). 

For brokers, this means they must have access to real-time market data infrastructure, and risk exposure management tools so they can respond and adapt quickly to volatility. They will also need to ensure their platform and services are supported by an agile and responsive charting library that can keep up with fast-paced fluctuations. Retention also comes into play here, as traders will expect quality charting and market data integrations from their broker. 

Regulatory compliance 

Whether you are new to the world of trading or a veteran in the space, you will probably have heard or read about a ‘scandal’ related to regulatory compliance. 

Regulatory compliance is indisputably necessary for providing a fair trading environment that protects all parties involved in exchanges. Where it gets tricky is the nature of how quickly regulations can evolve. 

Brokers can be shut down overnight if they are not compliant. This might be because of blatant wrongdoing, or unfortunately, it can often be due to unintentionally using software and technology that is not compliant. Either way, the penalties are severe. 

When choosing a technology vendor, brokers should always make sure that their solutions are compliant with global regulations that align with the jurisdiction where the broker operates. Learn more about broker-dealer regulation here. 

Another tip is to choose a vendor that provides you with an exclusive trading application (not shared with other brokers). This means that if another broker ‘goes down’, you are not stuck on their sinking ship, and forced to suffer damage by association. 

Cybersecurity threats 

Stock exchanges are constantly under threat from cyber security attacks. This could include attacks like DDoS attacks, data breaches, and malware. 

Attacks can be detrimental to trust, and this is dangerous ground for brokers. Once traders and vendors start to lose trust in your brand, it is a hard, often unwinnable battle to regain it. 

Brokers must prioritize using software from a vendor that can demonstrate and show proof that it has experience in providing resilient technology designed to hold up against cyber-attacks. 

You should also choose a vendor that allows you to have control over your client’s data. Not only does this allow you to provide a better service to your clients by tailoring your offerings to their user behaviors, but it also reduces the risk of vendors sharing your client’s data with 3rd parties. Here is an insightful article on how to retain control over client data. 

Evolving technologies

An increase in technologies being used to optimize trading, such as algorithms and high-frequency trading (HFT), means stock exchanges need to be able to handle a large volume of trades being executed in very quick periods (milliseconds). To do so, exchanges need to invest in constantly updating their infrastructure. If not, unintended interactions between algorithms on a large scale can lead to what we call flash crashes. 

What does this mean for brokers? Brokers are subject to significant financial loss if they don’t have adequate contingency plans in place. Check out our tips on business continuity tips for brokers. 

Interested in a real-event example? Learn about how Devexperts managed to stay resilient for their broker clients in the turbulent pandemic period here. 

Summary 

The dynamic between stock markets and brokers is symbiotic. Without stock exchanges, brokers would not be able to provide their services to their clients and make a profit. With that comes the risk of being subject to the repercussions of stock exchange challenges.

As we have learned in this article, the good news is that there’s a whole range of measures that brokers can take to protect themselves against the fallout. 

It can be overwhelming but don’t make the mistake of putting risk-management, compliance, and careful vendor selection in the too-hard-basket. Devexperts is known for having a supportive team that can guide you through everything you need to know. Brokers can talk to real people, who are experts in the field. Contact us today to discuss your business challenges and goals.