Opening Cross: When a Little Horizontal Spread Is a Good Thing

Who cares about Istanbul Menkul Kiymetler Borsasi and NYSE Liffe teaming up to offer futures and options based on the IMKB 30 Index? Well, apparently you should—because IMKB, aka the Istanbul Stock Exchange, certainly cares about you, and about attracting your investments to its marketplace.

Every so often I harp on about indexes, and how they enable investors to gain exposure to an asset or region without the risk of diving headlong into individual securities in far-flung places. Because despite some traders eschewing index benchmarks as the domain of unadventurous long-only asset managers, this is actually a growth area: In the past week, Nasdaq OMX unveiled the first phase of its global index family of 24,000 indexes overall, while over-the-counter equities marketplace OTC Markets and BNY Mellon launched a benchmark index of American Depositary Receipts, FTSE and the African Securities Exchanges Association announced a Pan Africa Index Series of benchmarks, and index and risk management technology provider MSCI completed its acquisition of real-estate indexes, performance analysis, research and market data provider IPD, to broaden its index asset classes.

“The point of us doing this is to highlight the quality of securities on our marketplace, so it’s a great way to get information to investors. There are a lot of indexes that could be created off OTC securities,” says Matt Fuchs, managing director of market data and strategy at OTC Markets.

This demonstrates one key reason for the current index activity: Firms want exposure to broader collections of assets, whether they be OTC equities, African securities or real-estate derivatives, and to be able to slice and dice benchmarks in whatever way they desire. Another reason is that individual investors are bypassing brokers and financial advisors in favor of trading markets directly themselves, and need investable benchmarks on which to base their investment strategies.

However, index appeal isn’t limited to this growing class of retail traders. In fact, data, charting and trading software provider CQG cited demand from futures commission merchants for access to derivatives on the Norwegian OBX 25 index as a key reason for recently connecting to the London Stock Exchange’s Turquoise Derivatives platform.

But benchmarks must fulfill their role without undue influence. Last week, UK regulator the Financial Services Authority solicited feedback on proposals for how the Libor rate-setting process will be regulated and monitored in future, while the Federation of European Securities Exchanges set out its own opinions for pan-European regulation of benchmarks, which are linked to over $560 trillion in notional outstanding OTC and listed products, according to estimates from the Bank for International Settlements.

Ultimately, everyone wants to broaden the scope of their target audience—in the case of indexes, to appeal to investors seeking out niches that might become the next big thing. But in the write-up of Inside Market Data’s recent webcast on Infrastructure Management in this week’s issue, Neil McGovern, senior director of solution marketing at SAP, says firms need to take the same approach to dealing with data, citing the increasing volume, velocity and expanding definition of market data as factors that will drive investment in data infrastructures to support these new datasets.

Broadening a target audience is also the philosophy behind plenty of other activity to be found in this week’s IMD: SuperDerivatives releasing its DGX data terminal, Emulex’s entry into the network monitoring market via its acquisition of Endace, ModeFinance’s new credit risk data portal, S&P Capital IQ’s integration of its RatingsDirect content, and BT’s call for data vendors to integrate its collaboration tools are all designed to broaden those vendors’ addressable markets—all of which makes perfect sense, because if your market is contracting vertically, look for ways to expand horizontally.