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FEDERATION OF EURO-ASIAN STOCK EXCHANGES SEMI ANNUAL REPORT OCTOBER 2008NASDAQ OMXMarkus GerdienExecutive Vice President,Market Technology, The NASDAQ OMX Group"NASDAQ OMX leverages its expertise todevelop solutions that are in sync withtoday's fast evolving financial markets andchanging techology standards"Creating powerful partnershipsRapid developments in technology tied withmarket deregulation have lead to increasingconsolidation as well as increasedcompetition in financial markets across theglobe. In order to sustain or build an attractivemarket position, exchanges have begunpartnering with each other in order to createscale, reduce cost, simplify memberprocesses and last but not least, increaseliquidity. All categories of parties involved arecurrently considering this partnershipstrategy, and in particular for small andmedium size exchanges, this strategy canprove the difference between a fading and aflourishing future business.The partnership alliance should not be a goalitself, but should be set up to increase marketattractiveness. Typically, an alliance shouldstrive at turning the region into a globallyattractive marketplace by increasing themarket size, offering attractive products tolocal, regional and international investors andissuers while offering easy access to allmarkets in regulatory, technological andtrading models and by increasing costefficiency and operating quality. In order forthe alliance to be successful, the participantsneed to combine strengths and assets, whilststill allowing the local freedom to act.It is not only external benefits that can beachieved through an alliance but also internalbenefits that are of great importance. Bysharing technology, infrastructure, operationsand other processes, costs can be reducedand revenues be increased. Advantageswhich can be gained from a partnershipstrategy are potentially numerous, andinclude the opportunities to:• Secure an efficient market and technologyoperation - Offer a market structure andtechnology solution that can comply with therequirements of international standards andnew products and services. Flexibility andcost efficiency are crucial, and sharingdecisions and costs with partners are ofbilateral gain.• Becoming the leader in regional integration,facilitating growth for emerging markets -Smaller exchanges will have the opportunityto leverage both infrastructure and market bypartnering up with the exchange hub in theregion.• Creating benefits for local members andissuers - Pooled liquidity attracts moreliquidity, as does one access point and agreater distribution of shares.• Reduce cost to entry for remote members -Regionalized and standardized marketoffering will help attracting remote investors,as it will harmonize member applications andsurveillance rules.• Revitalize the market through regionalizedproduct and service offerings• Positioning the region for futureconsolidation - A region with a wellfunctioning infrastructure in place will be astronger and more attractive partner.As can be seen in the diagram below,different models can be chosen whenpositioning an exchange in the market inrelation to its peers, depending on itsprerequisites. National interests such asculture, historic heritage, religion and politicscan have huge impact on how disposed anorganization is at successfully partnering upwith another exchange. The success and theease of which an alliance can be set up andrun further, depends on financial criteria suchas currencies used, settlement principles,governance structure, legacy and the merecooperation spirit among the allianceparticipants, including goal alignment.A practical example of one of these marketmodels is NOREX, an example of apartnership strategy. NASDAQ OMX pursueda strategy to become the number 1 exchangein the Nordic and Baltic region and to reachthis goal, the NOREX alliance was launchedin 1997, comprising the stock exchanges ofSweden and Denmark. In the following years,the stock exchanges of Norway, Finland,Iceland, Latvia, Estonia and Lithuania alsojoined this alliance. Through technologicalcooperation, harmonization of rules andregulations as well as joint marketingactivities, technical and legal procedures weresimplified, making it easier for remotemembers to access all exchangessimultaneously. Only one technicalconnection was needed to access all marketsand although separate memberships wereneeded for trading on each and everyexchange, the application process wasstreamlined. Rules and regulations for tradingwere harmonized as well as the process forreceiving trader authorization.NOREX proved itself as a successfulbusiness model, and NASDAQ OMX has alsohelped other exchanges to develop similarpartnerships. The process of reachingcooperation agreements between equals isby definition very complex, and focusing onthe right sequential points is the key toprogress:1. Preparation phase – the strategic choice ofthe partner2. Project phase – building the alliance andcrafting the business model, the roadmapand governance model, operational modeland the signature of cooperation agreements.3. Partnership phase – implementing andoperating the alliance; starts when allsignatures are in place.During the initial stages of the process, thepreparation phase focuses on internal needsand capabilities. Often the question at handis: How do we build an attractivemarketplace? Depending on internal andexternal prerequisites, the characteristics ofthe other players in the region, and the longterm business vision, a partnership mightstand out as the most promising alternative topursue. Discussions with potential partiesthen need to be initiated.Once the parties have a commonunderstanding that a partnership is anattractive route to follow, phase 2 can bepursued; the Project. The first step is toestablish the partnership foundation: create acommon vision of what to achieve, determinethe scope of cooperation and integration, aswell as any high level sequencing.PAGE 18
FEDERATION OF EURO-ASIAN STOCK EXCHANGES SEMI ANNUAL REPORT OCTOBER 2008The alliance scope and degree of integrationcan vary, and NASDAQ OMX uses thefollowing model to determine the basis forfurther investigation.Once the alliance scope and degree ofbusiness integration has been set, goals,business model, milestones, deliverables,project governance and partnershipgovernance should be defined. Thegovernance model can then be adjusted toreflect the alliance phase. It is important toremember that a potential key to success is toensure that an efficient governance model isin place.Some of the other factors influencing the mostappropriate governance model are; therelative size, the perceived significance of theentities entering the alliance, and the numberof parties in the alliance. As the number ofparticipants within the alliance increases, thecomplexity increases, and the governancemodel must be dynamic and robust enoughto handle this. NASDAQ OMX hasexperienced that however successful, thealliance concept becomes insufficient as thepartnership expands beyond a certain level,and to capture the final synergies and expandcooperation further, 7 out of the 8 alliancemembers eventually merge.It is of uttermost importance to understandthat a fruitful partnership between equals isbased on the common will to achieve certaincommon goals. As soon as one party is notaligned with these goals or with the processleading to them, the partnership will find itdifficult to succeed.The operating model, including market andsystem models, operating responsibilities,technical contributions, integration anddevelopment cornerstones should not beassessed until the foundation of thepartnership has been agreed. In parallel, thecontractual suite can be drafted. To facilitatethe work and emphasize commitment, aLetter of Intent is recommended early in theprocess. The signing of the cooperationagreement marks the end of phase 2.The final phase, Partnership, starts withlaunching the implementation efforts neededto reach the early goals of the alliance, hencerealizing the partnership vision. In due course,this phase will transfer from implementationinto daily operations.About NASDAQ OMXThe NASDAQ OMX Group is the world’slargest exchange company. It delivers trading,exchange technology and public companyservices across every major continent and it isnumber one in worldwide listings, among themajor markets, with over 3,900 companies.NASDAQ OMX offers multiple capital raisingsolutions to companies around the globe,including its U.S. listings market, the NordicExchange including First North and 144APORTAL Market. The company offers tradingacross multiple asset classes includingequities, derivatives, debt, commodities,structured products and ETFs. NASDAQ OMXtechnology supports the operations of over 60exchanges, clearing organizations and centralsecurities depositories in more 50 countries.For more information about NASDAQ OMX,visit www.nasdaqomx.com.No.1 in marketplace solutionsWidely known for our electronic tradingplatforms, NASDAQ OMX provides worldleading technology solutions across thetransaction chain. Our systems and servicesare designed to help exchanges, clearingorganizations and central securitiesdepositories meet the extreme demands ofthe securities industry with efficiency andflexibility.NASDAQ OMX leverages its expertise todevelop solutions that are in sync with today’sfast evolving financial markets and changingtechnology standards. We offer systems,systems support, operational services, andadvisory services that promote efficientsecurities transactions.Through advisory services NASDAQ OMXoffers business insight gathered by people inthe exchange industry, delivered by peoplewithin the exchange industry. The advisoryteam brings together:• Exchange and securities industryprofessionals• Industry technology experts• Management consulting professionalsNASDAQ OMX is working world-wide,advising clients from the entire value chain.Projects are run in both mature markets andemerging markets.CONTACT INFORMATIONContact Name Mr. Adam Kostyal E-mail adam.kostyal@nasdaqomx.com Website www.nasdaqomx.comPAGE 19
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