The manager of Norway’s sovereign wealth fund, the Government Pension Fund Global (GPFG), says the fragmentation and increased competition in the stock exchange sector has led to “worrying developments”, and that exchanges must adapt to new circumstances.

In a research note on the role of exchanges in well-functioning markets, Norges Bank Investment Management (NBIM), which manages the NOK7.2trn (€793bn) fund, said it wanted exchanges to consider changes, such as a return to local exchanges.

NBIM said: “We view exchanges as critical to well-functioning markets, both in their function as listing venues, and as the final arbiter of the price discovery process. 

“However, if they are to re-assert their central role, they must adapt and innovate to enhance their attractiveness to institutional investors who have supplanted the many small retail investors that exchanges were originally designed to serve,” it said.

Its main concerns were that stiffer competition between exchanges and alternative trading systems could lead to poorer regulation and governance and that the efforts by exchanges and dealers to keep up with the speed race could end up harming all market participants.

“For-profit exchanges are now challenged to maintain their regulatory and corporate governance duties in this competitive landscape,” it said.

As an example of how the push to increase speed of communications could be detrimental, NBIM cited the current speed race amongst providers of network infrastructure, so-called microwave data-link providers.

These providers were able to earn increasingly “super-normal” profits, it believed, to the detriment of all financial market participants. 

“We support efforts to remove complexity that leads to this form of over-investment,” the manager said.

”We view the current latency race as ultimately a dead-end,” it said.

Efforts by exchanges to increase availability of liquidity in size would be welcome, it said.

“Supporting the development of batch auctions and experimenting with size versus time priority models are all initiatives in the right direction, in our view,” it said.

NBIM also said it was worried about the fall in the number of listings in the US and Europe in recent years.

“We do not believe economies benefit when going public simply means cashing in, rather than raising capital,” it said.

It added: “We encourage exchanges to develop new solutions in this area, be they in the form of new listing classes, or potentially even a return to local exchanges.”