The Last Look…
Posted by Colin Lambert. Last updated: December 12, 2023
CME’s announcement of FX Spot+ over the past few days looks like a move to fill a gap and create a more connected FX product set, but the move could also provide an opportunity to change the FX market landscape.
Quite a few people got in touch in the wake of the announcement to argue that major FX players can already access CME FX futures – and do – therefore why do we need the new pool that expresses futures pricing in OTC terms? My answer is fairly simple – although we need to recognise this is just an initial announcement, details remain a little sketchy at the moment – yes, the major players do have that access, but there are a lot of smaller players on EBS that do not. At this mature stage of the spot business, surely product launches are more about filling in gaps and adding at the periphery than they are about launching products that will revolutionise the world?
I also think this launch will give a timely boost to CME’s FX Link, I wrote when the product was first launched that it will take time to gain traction and patience would be needed and that has been the case. That said, it is probably getting near the time when the investment dollars have to be repaid, at least in part. The regulatory world is still not really impacting on the spot business, but it could be a useful product piece for CME to have up its sleeve in the future.
This announcement also follows up on the reorganisation of the CME FX business more recently, indeed I sense that the timing of the consolidating of the FX business into one unit was partly driven by the Merc’s preparedness for products such as FX Spot+, which brings the businesses closer together. Put simply, it makes sense for a company with control over two of the three primary market CLOBs to bring that liquidity together, although it is by no means clear that the actual outcome will be another spot FX venue.
The announcement does, however, raise an awkward question – one that has been asked in FX circles for a couple of years now – what does this mean for EBS Market?
CME doesn’t break out volumes between the spot CLOB and other venues, but it is widely accepted that volumes on the primary market have been in decline for some years now, thanks mainly to internalisation and the market impact implications of being a primary venue. By providing OTC-style pricing from its busier futures markets, what is CME saying about EBS Market?
Talk to anyone in the firm and they are quick to stress that EBS remains an important part of the FX business, but does EBS Market as a brand? The NDF business, on which there was also announcement this week (and again it made sense to bring the two pools together), continues to go well according to sources familiar with it; and while there are a few questions over the technological capabilities of EBS Direct, it offers the relationship model that CME Group lacks elsewhere in FX.
There is an argument to be made that merging FX Spot+ and EBS Market – two firm all-to-all venues – is what should actually happen in the long run. Again this is partly guesswork, but if EBS Market is handling 5 yards either side of $25 billion per day, and the FX futures franchise is doing $70 billion, then the OTC market doesn’t come out looking too well. The old adage is that liquidity begets liquidity, by launching FX Spot+ and making futures liquidity generally accessible to the wider market, will more business gyrate to the new venue?
The other interesting aspect of this – and my understanding is that this yet to be finalised – is what CME does with its market data business? Just as there are questions around the value of the primaries as trading venues, so there are around the value of their data. At some point volumes would hit a level at which the market data diminishes in value, no matter the merits of the venues’ rules of engagement. It will be interesting to see if CME will consider including market data from FX Spot+ in its packages – if it does the value is greatly enhanced, but again, this diminishes the value of EBS Market in and of itself.
Changing habits in FX markets – life generally – can be hard work, so actually shifting people from EBS Market to a new venue would be difficult and should not be undertaken lightly. Equally, however, it could be that EBS Market becomes the banner under which FX Spot+ operates in the future, thus making it more of an internal tech lift for CME than for any of its clients.
A move by CME to truly bring together futures and OTC for the whole market, under one product name, one(ish) connection, and one interface, could genuinely shake up the market landscape
The good news for CME is that the demographics of its futures and OTC FX business are quite different, although I suspect that it would have to be careful with market impact if new players are to be enticed into the semi-futures world, therefore there would be minimal cannibalisation. This move should also sound as a warning to the other primary venue that is also under the cosh to a degree – LSEG FX Spot Matching.
For decades I have had a regular groan when one of the primaries announces their intention to make inroads into the other’s core markets – it has never worked, and in the current format is very unlikely to ever. If, however, OTC market participants, through an existing connection and with a recognisable interface, can access for example, Sterling, AUD or emerging market liquidity from CME’s futures set, that could be game changing – to repeat, liquidity begets liquidity and CME’s futures often provide the deepest CLOB-style liquidity in those currency pairs.
Again though, this is an argument for merging EBS Market with FX Spot+, and in case I get too carried away, this is a product that hasn’t actually launched yet! There is little doubt in my mind, however, that rather than fragmenting the market further, a move by CME to truly bring together futures and OTC for the whole market, under one product name, one(ish) connection, and one interface, would achieve that rarest of things in spot FX. It would genuinely shake up the market landscape.
Rather than be seen as further fragmentation of the landscape, perhaps last week’s announcement is actually the first step to a valuable (and some would argue, needed) consolidation? Time will tell…