Sizing up SIX Digital Exchange (SDX): Will it kill off traditional trading?

The SDX business model and how it works

The business model of the SIX Digital Exchange (SDX) allows for the fully integrated trading, settlement and custody of digital assets. SDX members are regulated financial services companies with a minimum requirement of a FINMA securities dealer’s licence or equivalent.

With the new market infrastructure created by SDX, the relationship between the stock exchange, its members and end investors remains unchanged; the most significant technological change is that trade and settlement are no longer separated. As a result, there is no longer a need to mitigate risk. Time frames of less than a second mean there is no capital exposure lasting days, as is the case with T+2, and the clearing function simply disappears.

There will be gains, but when?

Over the next ten years, trading will experience greater change than at any time in the history of market infrastructures. By using SDX as the basis for a new strategy, SIX Swiss Exchange will enable even smaller companies to raise capital on stock exchanges and exercise ownership rights across asset classes such as real estate and art, for example by using security tokens, which are easier and more cost-effective to issue than traditional shares. It is important to note, however, that regulation is not keeping pace with technology. To ensure that the international market operates smoothly, all major financial centres have to agree to broadly standardised rules.

When it comes to their objective and vision, SDX benefits from the support of the Swiss banks as well as the owners and backers of both SIX and SDX. Nevertheless, it is worth noting that traditional banks have so far been somewhat hesitant to jump on the SDX bandwagon. SIX is therefore working on the assumption that it will be at least ten years before the full potential of the digital exchange can be realised.

What does SDX offer that other exchanges cannot?

The SIX Swiss Exchange is regulated and enjoys a strong reputation; together with SDX, the two can offer a combination of traditional and digital products. However, there is huge international competition in the specialised world of digital assets. In the long term, these new trading platforms will edge into the territory of traditional operators and represent a significant danger to outdated market players. Until then, the two worlds will exist in parallel. The new market infrastructure of SDX is a clever gambit on the part of the SIX Swiss Exchange, but the SDX product now needs to be developed to market maturity.