FX Platforms in 2020: A Review

At face value, the multi-dealer FX platforms had a decent 2020, but as Colin Lambert reports, the headline data hides a few uncomfortable facts, especially for the major players.

We will try to get away from the use of the word “unprecedented” when discussing FX markets in 2020, mainly because, for those with a long enough memory, while the causes of market upheaval may have been very unusual, the reality of market behaviour was we have seen it all before. The long term characteristics of the market – long periods of relative quiet interspersed with brief(ish) spells of high volatility – remained the same, and, generally speaking, so did the names of the main players.

2020 was also not that different for the major multi-dealer platforms – at least those who publish data on a regular enough basis to analyse their business. At face value, average daily volumes on six of the eight venues to publish monthly data rose from 2019, in some cases significantly.

In keeping with what appears to be a very long-term trend, growth was scarce among the primary spot venues. CME Group will probably be disappointed that both its core FX futures and options product suite (-2.9%) and the EBS business it bought in 2018 (-4.9%) saw ADV drop from 2019. The third primary venue, Refinitiv’s Matching, may have seen growth, however the firm does not break down spot volumes across its platforms, that said, ADV in spot did rise 2.4% from 2019.

From there, the news gets steadily better, however, for CboeFX managed a 7.6% increase from 2019, 360T’s spot business rose 9.3% and Euronext FX rose 16.9%. Two other platforms, Integral and FXSpotStream, managed to up the ante even further, with rises of 17.8% and 18% respectively, however it should be noted that these firms’ volume data is not limited to spot only.

It is instructive to view 2020 performance through the prism of 2018 as well, given how, for many, 2019 could, in the long term, turn out to be the outlier in terms of FX volatility…

So all is rosy in the garden it would seem. Volumes are growing steadily rather than spectacularly, but who would not take that against 2020’s macroeconomic background?

The reality may be a little different, especially for the primary venues. Firstly, there is the factor that FX markets generally do well, in terms of volume traded, in crisis conditions. Given the whole of 2020 seemed to be a crisis in some shape or form, one could reasonably expected volumes to have risen further, especially on these primary venues.

Secondly, there is the “Q1 Factor” to consider. With the exception of Integral, which, as noted, reports volume is all FX products, February and March were significant outliers for all the platforms – March especially as the full force of the pandemic hit. Taking out Q1 volumes – and it needs to be accepted that the reality is these businesses did see these deals and profited accordingly, however the surge is unlikely to be repeated in 2021 – and the performance data changes somewhat.

CME’s FX futures and options ADV for the last three quarters of 2020 were down 11% on the 2019 average, while EBS suffered even more, dropping 16.2%. Refinitiv was down 6% on the same measure, and CboeFX was down 1.2%. 360T managed to maintain a small amount of growth at 1.4% higher for the last three quarters of the year and EuronextFX certainly outperformed with a 9.3% increase by the same measure.

Again, however, the performance was more improved at those venues to report all product ADV, FXSpotStream would still have been up 12.4% and, impressively, Integral would have been up 15.2%.

It is instructive to view 2020 performance through the prism of 2018 as well, given how, for many, 2019 could, in the long term, turn out to be the outlier in terms of FX volatility. Inevitably, FXSpotStream, which has in the interim added more LPs and clients, has maintained an impressive rate of growth. Integral too, is  higher, although complete data for 2018 is unavailable.

Of the other five platforms that were reporting in 2018, however, the story is less positive. EuronextFX volumes are barely changed, being less than 1% down, while the CboeFX saw a 7.2% decline compared to 2018. Things get really messy at the primaries again, however, for compared to 2018 Refinitiv is down 12.4%, CME drops off 17.2% and EBS drops 21%.

Rather than any business weakness it could be argued that the primary venues are merely falling victim to market structure change. For whereas FX volumes in general appear to be rising, certainly according to the FX committee survey reports, the disclosed channels appear to be favoured. Throw in competition from venues such as LMAX Exchange, which is widely acknowledged to have more up-to-date technology powering its trading platforms, and the outlook for the primary venues looks a little stark.

It may not be the case, though, for if nothing else what we could be looking at with these venues is another popular phrase of the moment – a “new normal”. Liquidity providers generally have flexed their muscles and pushed their better streams to disclosed venues, but that does not mean these firms have abandoned the ECN-type model. The spike in activity on these venues when volatility and uncertainty rises highlights how they remain important to the market, the challenge for those businesses is understanding that compared to the first 15 years of this century there are significantly more options available to market participants and their importance is diminished.

For the disclosed models out there in the multi-dealer world, a more steady outlook awaits, however it will be interesting to see where any growth comes from. These venues largely rely upon buy side clients to drive volumes and unless a new seam of clients is out there to be mined, growth in the future comes from attracting business from competitors.

In all likelihood, in 2020, had it not been for the pandemic, these platform’s models would have come under increased scrutiny, especially around the cost of trading. Client business is being evaluated more strictly than ever before and this inevitably throws some of the limelight onto the venues on which they choose to deal. It is crass to talk about client business in terms of quality, what we are really talking about is profitability, but there seems little doubt that going forward platforms will be judged on the quality of their client portfolio as much as on what individual clients do.

It remains a mystery to some, how FX volumes, in the form of the semi-annual turnover surveys, continues to rise, but generally speaking volumes on the platforms do not keep pace. The answer is those aggregation providers that have grown in number over the past few years, but as regulators in Europe in particular, look at how these venues are judged from a regulatory perspective, even this could change.

So a mark for the platform industry in 2020 inevitably comes with multiple riders. Generally speaking, the primary venues can be said to have just about scrapped a pass mark, whereas the second and third generation platforms have done better. Looking at the issue in a different fashion, those venues reliant upon spot business, especially those counting a high percentage of professional dealers in the client ranks, are not really growing strongly. Those relying upon client business in, more importantly, multiple products, seem to be doing better.

Nowhere more is this more illustrated than in the data from 360T and Refinitiv in non-spot products. The former saw an increase of some 4% from 2019 to 2020 (it was up 2.2% for the last three quarters of 2020 compared to 2019), while the latter saw a less than 1% increase in overall volume in 2020 (and a 1.6% decline in the last nine months).

The answer, therefore, as far as the platforms are concerned, would appear to be hold on to what you have in spot and incrementally try to grow, but if you want insurance against shocks to the system, get into other products.