© 2007 The Tower Group, Inc. May not be reproduced by any means without express permission. All rights reserved.

After the Starting Gun:

October 15, 2007Rob HegartyManaging DirectorSecurities & Investments

The Race for Domination in Global Capital Markets is on!

2007 Annual Meeting

© 2007 The Tower Group, Inc.

Agenda

Globalization is all the rage How do we know that globalization

is for real?

Stronger than ever TowerGroup’s annual health

check on the global securities and investments industry

Opportunities and challenges in a globalizing economy

Conclusions

© 2007 The Tower Group, Inc.

Key Take-Aways “Globalization” isn’t just a catch phrase in securities –

it’s a key driver for expansion

The securities industry continues its torrid pace of growth, buffeted by a strong global economy

Technology has moved from supporting role to primary – and required – enabler for growth

The combination of new geographies, new asset classes, and new business lines is creating once unimaginable opportunities for “landlocked” companies

The globalization of exchanges foreshadows a truly global investing marketplace

© 2007 The Tower Group, Inc.

So how do we know that globalization is for real?

DaisukeMatsuzaka

© 2007 The Tower Group, Inc.

The cost of globalization:The Red Sox’ perspective

$14-21 millionAnnual Advertising and Marketing revenue

Annual Tourism Economic boom to Boston $14 million

Cost to speak with Daisuke’s Japanese club $51.1 million

Cost to sign Daisuke to a 6 year contract $52 million

Annual Merchandising boom to the Red Sox $6 million

Becoming the recognized global leader in U.S. Sports Priceless

Annual estimated ancillary Red Sox revenue $10 million

$103.1 million

$44-51 million

© 2007 The Tower Group, Inc.

The drivers of the Red Sox global expansion are eerily similar to the securities industry’s Legal/Regulatory

The new MLB Collective Bargaining Agreement and its “Posting process”– Created the ability for MLB teams to

bid on players in other countries• Payments to post do not count against

the salary cap and are not subject to the 40% luxury tax

Competitive Landscape changes The premium on pitching has

skyrocketed– Elite pitchers now get ~$500,000 -

$1,000,000 per win

Drive for new revenue sources Look to new geographies

Back to RealityGlobalization in the Securities Industry

© 2007 The Tower Group, Inc.

The market is stronger than ever, and not just in the United States

Note: (f) = forecast.

CAGR = -9.1%CAGR = 25.2%

Global Securities Industry Revenues by Country/Region (USD in Billions)

Source: Securities Industry and Financial Markets Association (SIFMA)

OTHER LATINAMERICA

OTHER ASIA

CANADA ANDAUSTRALIA

BRICKs (Brazil, Russia,India, China, Korea)

JAPAN

EUROPEAN UNION(except UK)

UNITED KINGDOM

UNITED STATES

© 2007 The Tower Group, Inc.

0

20

40

60

80

100%

1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004

UNITED KINGDOM UNITED STATES

OTHER DEVELOPED MARKETS EMERGING MARKETS

US share of global capital markets has declined since the early 1980s

US Share = 56%

US Share = 39%

Source: Securities Industry and Financial Markets Association, S&P Global Stock Markets Factbook 2006

Percentage of Global Market Capitalization by Region

© 2007 The Tower Group, Inc.

Growth is in smaller, less-developed markets

Source: Securities Industry and Financial Markets Association, S&P Global Markets Factbook 2006

Market Capitalization (USD in Billions)

0

10,000

20,000

30,000

40,000

$50,000

1980 1983 1986 1989 1992 1995 1998 2001 2004

EMERGING MARKETS

DEVELOPED MARKETS

© 2007 The Tower Group, Inc.

Positive trend in US investors’ cross-border activity (1986–2006)

Source: US Treasury, TowerGroup analysis

Gross Purchases and Sales of Foreign LT Securities by US Residents (USD in Millions)

0

2,000,000

4,000,000

6,000,000

8,000,000

10,000,000

$12,000,000

1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006

EQUITIES

BONDS

Gross Purchases and Sales of Foreign LT Securities by US Residents(USD in Millions)

0

5,000,000

10,000,000

15,000,000

20,000,000

25,000,000

30,000,000

35,000,000

$40,000,000

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

EQUITIES

BONDS

© 2007 The Tower Group, Inc.

Gross Purchases and Sales of Foreign LT Securities by US Residents(USD in Millions)

0

5,000,000

10,000,000

15,000,000

20,000,000

25,000,000

30,000,000

35,000,000

$40,000,000

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

EQUITIES

BONDS

But it’s nothing compared to foreign investment in US markets

CAGR = 17.5%

CAGR =

14.

5%

Will the US investors be able to catch up?

Source: US Treasury, TowerGroup analysis

Gross Purchases and Sales of Domestic LT Securities by Foreigners (USD in Millions)

0

5,000,000

10,000,000

15,000,000

20,000,000

25,000,000

30,000,000

35,000,000

$40,000,000

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

EQUITIES

CORPORATES

AGENCIES

TREASURIES

© 2007 The Tower Group, Inc.

0

1

2

3

4

5

6

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

ASIA-PACIFIC

EMEA

AMERICAS

Americas led the charge in processing until 2000, when Asia-Pacific assumed the high-growth track

Source: World Federation of Exchanges, Towergroup analysis

Exchange Transactions (In Billions)

1995–2000

CAGR = 67.8%

CAGR = 53.0%

CAGR = 33.6%

2000–2006

CAGR = 20.5%

CAGR = 8.7%

CAGR = 43.5%

CAGR = 29.7%

© 2007 The Tower Group, Inc.

0

2

4

6

8

10

12

14

16

$18

1998 1999 2000 2001 2002 2003 2004 2005

AFRICA

ASIA-PACIFIC

EUROPE

AMERICAS

Although global growth in mutual funds has been very healthy…

CAGR = 4.2%CAGR = 16.2%

Source: Investment Company Institute, European Fund and Asset Management Association, TowerGroup analysis

Worldwide Total Net Assets of Mutual Funds(USD in Trillions)

© 2007 The Tower Group, Inc.

0

20

40

60

80

100%

1998 1999 2000 2001 2002 2003 2004 2005

AFRICA

ASIA-PACIFIC

EUROPE

AMERICAS

…the greater growth has been outside the Americas

Americas CAGR = 7.6%

Europe CAGR = 11.9%

Asia-Pacific CAGR = 10.4%

Source: Investment Company Institute, European Fund and Asset Management Association, TowerGroup analysis

Worldwide Total Net Assets of Mutual Funds, Percentage

Opportunities and ChallengesIn a Globalizing Market

© 2007 The Tower Group, Inc.

Challenge 1: NYSE is forced to expand overseas after losing internal market share

66.2%

32.5%

NYSE share = 88.4%

Nasdaq share = 2.3%

After breaking away from the pack in the early 1990s, Nasdaq has emerged as the only viable US-based competitor for NYSE-listed trading

Source: NYSE, TowerGroup analysis

Percentage of NYSE-Listed Equities

0

20

40

60

80

100%

1975 1980 1985 1990 1995 2000 2005

NYSE PSE CHX PHLX BSE CSE/NSX NASD

© 2007 The Tower Group, Inc.

0

20

40

60

80

100%

Jan-0

4

Apr-04

Jul-0

4

Oct-0

4

Jan-0

5

Apr-05

Jul-0

5

Oct-0

5

Jan-0

6

Apr-06

Jul-0

6

Oct-0

6

Jan-0

7

NYSE NASD CHX PHLX BSE NSX CBOE AMEX

The story for the NYSE is even more dire in recent months

NYSE share = 82.8%

Nasdaq share = 12.4%

66.2%

32.5%

Source: NYSE, TowerGroup analysis

Percentage of NYSE-Listed Equities

NYSE share drop after 12/05 can’t all be blamed on the Hybrid launch, but that certainly didn’t help

© 2007 The Tower Group, Inc.

Challenge 2: Trading without a floor: Floor-based trading continues contraction

4Q05 1Q06 2Q06 3Q06 4Q06 2Q071Q07

UBS cuts 23 employees

(77%) of its floor operation

NYSE Euronext doubles profit.

Is it working?

BofA cuts 83 employees (50%) of its

floor operation

Van der Moolen cuts 55

employees (30%)

Credit Suisse cuts 9 employees (31%) of its floor

operation

Goldman lays off 30 traders as electronic

volumes rise

NYSE Hybrid system begins trading

Source: TowerGroup

© 2007 The Tower Group, Inc.

Drivers of globalization Opportunity

Regulation Restrictions in US are encouraging

migration to non-US capital markets Emergence of the Euro zone

– The sum is greater than the parts

Getting used to post-9/11 travel restrictions Business travel on rise after a 3-year

decline Travel is easier in UK, Europe, APAC

Generational shift From baby boomers to tech-savvy Gen X and Millennial generation

– Each new generation operates in a more borderless world

Borderless technology Web 2.0 makes software (and the data behind it!) More accessible

© 2007 The Tower Group, Inc.

Challenge or opportunity? The lines between buy side and sell side are blurring Buy-side firms are registering as

broker-dealers

Brokers are registering as advisors (because of AND despite the “Merrill Lynch” rule being upheld)

Hedge funds are registering as both

Sell-side analysts are migrating to the buy side, following the route of the traders

DE Shaw becomes the first hedge fund to join the NYMEX

© 2007 The Tower Group, Inc.

ExchangesExchangesExchanges

The rapid globalization of Capital Markets begins at the core – the exchanges

Exchanges

Source: TowerGroup

© 2007 The Tower Group, Inc.

The road to globalization has many obstacles

Information security remains a significant issue Information theft and fraud are far too commonplace Software As A Service (SAAS) will not be fully realized until the

information security threats are all but eliminated

Poor corporate governance leads to over-regulation, lower valuations Lowers firm valuation, making them less attractive to investors

and making it more difficult to raise capital

Cultural differences Although the cultural gaps are slowly narrowing

Politics Always the wild card

© 2007 The Tower Group, Inc.

The new, borderless technology paradigm will continue to drive global expansion Speed of change,

commoditization faster than ever

From process automation to network and community development and use

Once “landlocked” by perceived boundaries, firms are using technology to expand overseas

An entire industry has been borne of compliance Compliance Technology and Consulting The regulatory burdens will contract ever so slowly, if at all – there is too

much money at stake now

© 2007 The Tower Group, Inc.

So who wins and who loses in the race to globalization?

New YorkLondon

The middle tierScale and capital

Regional playersThe global economy

BrokersInvestors

EquitiesDerivatives

Floor-based tradingElectronic venues

LosersWinners

The “hold-outs”Technology-savvy firms

© 2007 The Tower Group, Inc.

Conclusions

The greatest growth opportunities aren’t away from USshores . . . they are on ALL shores

The demarcation between winners and losers is being defined by their global capabilities

New asset classes (e.g., derivatives) and new markets(e.g., Insurance/Securities) pave the road to globalization

The Red Sox are exploiting global opportunities. See what happens when you cross hedge funds and baseball

The foundation for global capital markets is being formed by the exchanges in 2007 . . . prepare for the next wave

© 2007 The Tower Group, Inc.

Questions

rhegarty@towergroup.com

?

© 2007 The Tower Group, Inc. May not be reproduced by any means without express permission. All rights reserved.

After the Starting Gun:

October 15, 2007Rob HegartyManaging DirectorSecurities & Investments

The Race for Domination in Global Capital Markets is on!

2007 Annual Meeting