Calling me from her kitchen in Dublin where she was preparing tostadas, Deirdre Somers discussed with me the major technological disruption story that took place within stock exchanges worldwide. Ms Somers was influential in strategically leading Ireland’s main stock exchange through this generational technological change and, after retiring from her position as CEO in the Irish Stock Exchange in 2018, it was clear that Ms Somers left her mark.
Before carrying out this interview, the extent of myknowledge of stock exchanges went as far as its portrayal in the renowned Hollywood film “The Wolf of Wall Street.” This film depicts the stock exchange as a bustling trading floor with people screaming down the phone, having animated conversations with potential buyers. Though this image accurately depicts the running of stock exchanges 20 years ago, I came to learn it is far from the today’s situation. Now, this whole ecosystem of people supporting the sale of securities in the market has been replaced by a quiet room with people on computer screens.
Her role as CEO
When it comes to how Ms Somers came to be the first female CEO of the ISE which is now known as Euronext Dublin, there was no great epiphany moment. She was simply in a senior management position when she applied for the job and she got it. For Ms Somers, she realised that other people would be very interested in hearing about her experiences in this high position and this attracted her to the role.
It was very clear from the beginning that her job would entail pivoting the organisation away from the commoditised aspect of the stock exchange and into more specialised human capital-based businesses where the organisation could still compete. For Ms Somers, the most attractive strategy to achieve this goal was to mimic the haute-couture model. This involved proviinge a better service with more bespoke products, products that other exchanges weren’t that interested in engaging in. “I used to say that we, the exchange, was a little bit like Gucci. Identifying as an haute couture line gave us national prominence, political positioning and a sense of pride and a sense of place for the people who worked there. We weren’t just another financial services company. We were the stock exchange and that held a currency.”
Ms Somers identified this gap in the market and took advantage of it. She used this currency to build other businesses that the larger exchange companies weren’t that interested in doing. For Ms Somers, she considered every challenge to be an opportunity.
“That was the most fundamental change in my world. I had to design that new strategy. I had to execute on it, otherwise the exchange was toast. It was that bad.”
Technology and its impact on the running of a stock exchange
With regards to the use of advanced technology in her day to day running of the ISE, Ms Somers stated she was more so involved in envisioning a strategy. She took the view very early on that the technological aspect was not their business.
The ISE didn’t have the capital to manage the technology properly. Digital advances divided the market between the small exchanges and the large exchanges. Smaller exchanges had an important national role but didn’t have any of the resources necessary to respond to this wave of new technology. Larger exchanges that have that national role, that sense of entitlement, massive political power, the ability to influence politics around them.
“There was WWIII for 10 years throughout the whole of the 2000s and technology won”
Now, the very large exchanges such as Nasdaq would express themselves as being tech companies that just happened to run exchanges. The purpose for which the technology was designed has become less important than the technology itself. Smaller exchanges like the ISE had to buy their technology from these larger companies because it gave them “passenger space in the tech arms race”.
They received a certain amount of inbuilt innovation by outsourcing their technology. In carrying out this strategy, Ms Somers had the competitive advantage of being able to stand on the shoulders of their innovation. “If these tech companies innovated and changed their core technology, by default you get it because that’s part of the deal.”
Everyday use of technology
Having said that, internally everything did become much more processed. Everyday tasks performed in the stock exchange relied heavily on digital innovations. When Ms Somers first joined the ISE in 1995, the business of the stock exchange took place on the trading floor or brokered over the phone.
The process of selling shares involved picking up the phone and proposing a price to a potential buyer. There was very little technology involved in this process. Ms Somers would receive large documents in physical form of up to 300 pages on which she would write her notes and send these notes back to the law firm. The law firm in turn would come back with a response.
There was little to no email. The response time of today was not expected. However, upon leaving in 2018, MS Somers remarked that the trading floor no longer existed in any stock exchange. Everything became fully electronic, with no business over the phone. They now had the ability to buy, clear and settle a trade in seconds.
The transformation of the business of stock exchange
Technology had a huge impact on the business of the stock exchange. Twenty years ago, there was a saying “everyone has a flag, an army and a stock exchange”. In order to conduct business, you had to have the physicality of a trading floor. With electronification, this trading floor became redundant. Geography no longer mattered. Stocks could be transacted in any jurisdiction. As a business leader, Ms Somers had to respond to that commoditization.
At the same time, there was an avalanche of new regulation following the 2008 financial crisis. This new regulation empowered new competition and took away the monopolies, opening the way to new competition. The new competitors were the electronic disruptors. They were those who spent a considerable amount on technology. These disruptors had the fastest, cheapest, most proximate and best-connected technology.
So, the transformation of the stock exchange wasn’t all due to technological advances. It was technology with regulation which reduced the barriers to entry. Technology on its own would not have affected the exchanges so drastically had it not been for regulators enforcing markets to be cheaper, faster and more transparent. The way to achieve this was competition.
Her reflections on the technology war
Upon reflection of her chosen strategy, Ms Somers stated: “All strategy always looks wiser in hindsight. When you’re going through it, you nuance yourself to whatever hits you on the day. I don’t think anybody at any stage recognised what the ultimate destination point of technology was going to be on the core business. I don’t think anyone in the exchange industry predicted in 2008 that their business was going to be fundamentally undermined by this new thing.”
“Everybody convinces themselves that they’re important. The reality is that if the market wants things faster and cheaper, they have to have it.”
The digital advances affected everybody. The brokers were in even more denial about the change than the exchanges were. Whatever about the exchanges having an ego, add a broker and by definition it’s an ego-lead business. Telling that group of people your business will be disrupted by these tech geeks, they didn’t take it seriously.
The cultural change in the industry was huge. Essentially, computers now replace the human being in the stock exchange. The consequence of that on financial stability remains to be seen. The computer is only as good as the algorithm that has been written.
What does the future hold?
According to Ms Somers, data is going to be the next war. The exchanges lost the last war of “faster cheaper”. They can’t afford to lose this one. The argument is that the exchanges are not the owners of the data. They shouldn’t be charging for the data. There is a massive argument in the exchange world now between the brokers and the exchanges. The big question is who is going to manage to monetise the data, package it and sell it? Who will be considered as the best data source?
Block chain is going to be the next big innovation. This innovation involves disintermediating the market. When carrying out a transaction, the market runs on the basis that you’re assured said transaction will execute. This is achieved through the use of central counterparties which are financial institutions located in the middle of the transaction. They act as an insurance in the market if a transaction does not take place. Block chains will result in the mutualisation of that insurance. No central bank has agreed to that yet. The day you see a central bank agreeing to allow block chain in inter-bank lending, that’s a game changer.
If there’s anything we’ve learned from technology, it’s that the innovators are rarely the winners. Such is the nature of business. Early adapters focus heavily on the conceptual framework of what they’re doing. They often end up losing their position to somebody who comes in without the legacy of the past, being able to leap frog over them using their innovation and win.
Technologically, it’s been quite the journey. With technology being such a new concept during Deirdre Somers’ time as CEO, Ms Somers couldn’t analyse the strategies of previous companies and thus identify the ideal strategy. She had to navigate this unchartered territory and find the strategy that would see her exchange safely through the technology war. With the ISE being the best performer in Western Europe in 2013, I think it’s safe to say that Ms Somers succeeded.