Stock market CVCs look for better infrastructure in changing markets

In October, the New York Stock Exchange announced plans to extend stock market trading to 22 hours a day. The following month, the US Securities and Exchange Commission approved the first near-round-the-clock exchange for 24X National Exchange, a Bermuda-based startup that will be offering trades 23 hours per day on weekdays.

This growing appetite for all-hours trading is a new challenge for traditional national exchanges, and an opportunity that their corporate venturing arms are investing in as they look for ways to make the exchange infrastructure more robust.

“Our first pillar where we invest in everything for the buy side in terms of trade analytics and connectivity to do investments. Secondly, on the sell-side, we are looking for new market models, electrification of existing asset classes, as well as new asset classes,” says Monika Fuchs, principal at DB1 Ventures, the CVC arm of German stock exchange Deutsche Borse.

Longer hours need better, scalable systems capable of handling higher volumes, a larger amount of data that needs to be analysed in real time, better cybersecurity and more. The infrastructure of the exchanges needs innovation, and this is where the corporate venturing arms of stock exchanges are devoting much of their energy.

“The interesting thing with infrastructure is that it’s like a road between cities. We are a private road operator,” says Fuchs.

“What we are looking for is infrastructure projects, of which we think, okay, this is an adjacent – we can not only offer the road, we can also offer the power stations and the toilets, and charge for them.”

Pipes and plumbing

Even in the relative quiet that has existed for IPOs in recent years, there are tens of billions of dollars moving through stock markets at any given time. Each type of stakeholder is looking for different tools.

Those on the buy-side – those who invest in stocks or derivatives, like asset managers, pension funds and others – will need tools that facilitate access to the markets, as well as data analytics platforms, while the banks and brokers selling securities constantly search for new market models and new asset classes.

Digital assets — such as cryptocurrencies — have been one notable addition to the mix. Despite a recent “crypto winter” which has lessened some investors enthusiasm for these assets, it is an area that DB1 Ventures is following closely.

“We don’t invest in the crypto asset class itself, more in the technology and how it could replace or benefit the current plumbing of the financial markets,” says Fuchs.

DB1 Ventures invested in Funds DLT – a blockchain-based decentralised funds distribution platform – in 2020, which Deutsche Borse later agreed to acquire in 2023, to serve as the on-chain counterpart to its Vestima distribution platform. It also invested in distributed ledger-based collateral management system HQLAX in 2018, and a year later launched a jointly-developed platform to streamline collateral swaps.

A lot of innovation is also being done on how the clearinghouses — the post-trade intermediaries — work. Outdated IT systems are giving way to “microservice” infrastructure, a more modular approach that allows for functions to be more self-contained in a way that allows changes to individual components like risk assessment, payment processing or collateral management without affecting the wider system.

With trading volumes expected to increase, stock exchanges are investing in these technologies. Last year, for example, L4 Venture Builder, the Brazil-based fund that has the country’s main national exchange, B3, as its sole shareholder, backed Sweden’s Vermiculus, which is building new clearing and trading systems.

Exchange-backed funds are also bullish on appropriating the exchange infrastructure for other commodities like energy. L4 is currently building an energy exchange in Brazil – called N5X – as a 50-50 joint venture with the European Energy Exchange (EEX), which is itself owned by Deutsche Borse.

“EEX is the largest energy exchange in the world. So we think that by putting capital from the largest [exchange] in Brazil, with the largest energy exchange in the world, we have a powerful combination in terms of shareholding structure to start a business that will be bring more credibility and transparency to the growing and thriving energy space in Brazil,” says Pedro Meduna, partner and co-founder of L4 Venture Builder.

The impact of AI

Like all sectors in the past couple of years, exchanges are adopting elements of artificial intelligence. Some of the most obvious areas of potential are data analytics, improvements on existing trading algorithms, predictive analytics and decision-making support in real time.

On the flip side, AI will bring in a need for better cybersecurity, anti-fraud and money laundering systems. This is another area that L4 Venture Builder is investing in. The team backed DataRudder – a Brazilian data analysis startup that detects fraud in financial transactions – last year.

The electrification of fixed income instruments — the higher-tech trading of bonds on the market, which has for a long time been traditionally done over the phone or email — has been going on for some time but continued to gain momentum in 2024 with better technology and more demand for transparency in the process. More retail investors are getting involved in this now, democratised in part by multi-asset trading platforms that let them trade bonds alongside other financial instruments. AI is a big factor here, too, as these trades are becoming increasingly automated.

DB1 Ventures, which was founded in 2016, was able to back some startups here quite early.

“ We’ve been an early investor in TruMid, an all-electronic bond trading platform in the US and they have developed very nicely. Their competitors, MarketAxess and Tradeweb, are multi-billion dollar companies and electronification is expected to come in the fixed income space,” says Fuchs.

Banks and trading houses are also looking for anything that would help them boost efficiency and reduce operational costs — such as algorithmic trading, automated settlement and risk management systems.

Over on the buy-side, meanwhile, there is more demand for direct offerings that bypass traditional intermediaries — along with their fees and delays — which could mean stock exchanges will need to develop systems to facilitate direct listings. For corporate venture units this may mean finding technologies that will help overcome the shortcomings of those direct routes, such as liquidity constraints, more complex compliance issues and investor education.

The growth of private market assets is also gaining steam, as asset managers want to stay diversified and grab up pieces from private equity, private credit, infrastructure and other asset classes that haven’t been publicly listed. Nasdaq Ventures – the CVC arm of exchange operator Nasdaq which was founded in 2017 – has invested in Nasdaq Private Markets, its parent company’s private assets marketplace.

Similarly, DB1 Ventures also recently looked to capitalise on the rise in secondary market transactions that have ballooned in the absence of other exit routes – with their November 2024 investment Caplight, a platform for connecting pre-IPO secondary transactions.

One trend that is on the wane, however, is the focus on ESG. “To some extent, ESG has had his hype just after COVID and is now a little bit in the backdrop,” says Fuchs.