24 Exchange Launching FX Swaps Trading
Posted by Colin Lambert. Last updated: April 12, 2021
The still nascent race to deliver electronic FX swaps trading has a new entrant with 24 Exchange launching an anonymous order book for what is the largest FX market in the world.
Progress has been slow in delivering electronic FX swaps trading for the interbank market, it has long been the preserve of LSEG’s Refinitiv Matching and, more recently, Deutsche Boerse’s 360T launched MidMatch for FX swaps. Other platforms have been circling the issue, seeking either an angle or the investment required to deliver a successful FX swaps trading platform, but have now been trumped by 24 Exchange, which is delivering on a promise made by founder and CEO Dmitri Galinov, to deliver a multi-product trading business.
The launch of FX swaps comes as 24 Exchange records a series of new highs in its NDF business, the most recent being April 6 when it handled $800 million single count.
“FX swaps is the biggest market in the world,” says Galinov. “We already have the infrastructure and connectivity in place and we have validated our model in NDFs, so this is a simple process for us to launch a new platform – that is the way we have designed 24 Exchange.”
Standard Chartered Bank (prime broker division) is the initial central counterparty on the platform, although Galinov hints at additional banks joining in the coming months. Trading is by GUI or API and will initially focus on G10 pairs, although with the firm’s existing service in NDFs, NDF swaps are planned for future iterations. “We are well-connected in emerging markets thanks to our NDF business,” says Galinov. “The technology is in place, so it’s really a question of when we want to grow the currency pairs we support.”
The platform has all the major tenor dates out to one year in its initial iteration, with streaming prices in swap points. Users are also able to leave resting orders in swap point terms, including peg orders to mid-market, thus enabling automatic matching if two pegged orders to mid-market coincide.
Perhaps the big differentiator for 24 Exchange at this stage is its collaboration with market infrastructure provider Cobalt, which enables the dynamic allocation of credit – long seen as the bottleneck for the automation of the FX swaps market. Sources at other platform providers have confided in the past to this writer that the biggest challenge in any FX swaps project is convincing banks to allocate hard credit to the venue, something they are reluctant to do until meaningful volumes are trading there.
By solving for the fragmentation of credit with Cobalt, 24 Exchange is able to provide participants with pre-credit screened executable prices. “By using Cobalt and a central counterparty we are able to normalise credit on the platform,” acknowledges Paul Millward, head of product at 24 Exchange. “All the counterparties on the platform can utilise Cobalt to dynamically update credit exposures and allocation, not just the central counterparty.
“Our ethos is to look at every product out there and where there are deficiencies, fix them”
“Additionally, our use of a central counterparty means it is possible to offer two parties to a trade the ability to independently have a choice of where they settle including clearing,” he adds. “It doesn’t impact the liquidity available to a bank, but it gives them flexibility over where they settle, which can really help them manage regulatory requirements like capital allocation.”
Perhaps in keeping with the different way 24 Exchange thinks about market structure, the platform is offering free trading for sub-one week contracts, meaning it is raising the competition stakes in what remains the largest segment of the FX swaps market thanks to the large number of mechanical rolls that take place every day.
In the 2019 Bank for International Settlements’ FX Turnover Survey the average daily volume of FX swaps with under seven days’ maturity was $2.06 trillion – almost 65% of all FX swaps turnover. By making this free, 24 Exchange is expecting to thwart the plans of those firms seeking to build a strong revenue stream by focusing on the short end – into the bargain it will inevitably prompt some introspection at LSEG’s Refinitiv, whose volumes of Matching for Forwards are dominated by short dates.
“We have created the market place for banks to quote and trade FX swap points fully electronically,” says Millward. “Equally we can provide valuable market data – which will be free to 24 Exchange Participants – unlike a lot of existing data, this will be based upon tradable prices.”
Another key element in the 24 Exchange offering could be the focus on interbank trading. Returning to the BIS survey, just under half of all FX swaps trading is between Reporting Dealers, typically the largest 30 banks in the world plus regional specialists, and that means they are likely to be using the solution for similar needs, thus helping build trust. As Jason Woerz, president of 24 Exchange, observes, “Streaming liquidity in an anonymous environment is a trust game and while Dmitri, Paul and myself have built trust based upon our decades of experience in the industry, it helps when there are similar motivations for trading.”
Going forward the firm will look at offering broken dates, probably on an RFS-basis given the lack of core liquidity in individual dates – initially it will be trading same amount only across the two legs. The challenge of bringing manual traders into the fold is also likely to be on the agenda, although GUI-based trading is normally a successful entry point for this according to experience in other products.
“Our ethos is to look at every product out there and where there are deficiencies, fix them,” says Woerz. “That’s what we did in NDFs where we saw a lack of competition and in swaps, it’s also under-served. People forget that there is a lot of information given away during the RFQ process, so there is a need for anonymity and streaming prices.
“When we surveyed the sell side there was clearly a view that people are keen on bringing new technology to the FX swaps market but no-one was really doing it,” he adds. “We believe that the best way to trade is on streaming liquidity, anonymously and with credit solved for – that is what we are delivering.”