The Last Look…

It’s always interesting when there is a major change at the top of a major FX platform business, as it is an ideal time for reflection on where the industry is, and the possible ramifications of the change, which makes Jeff Ward’s shift to FXSpotStream from EBS worth discussing.

In terms of FXSpotStream, it is gaining a CEO who is widely respected and knows the business inside-out, but perhaps the greatest asset Ward will bring to the platform is his relatively recent background in establishing the NDF and forwards business at EBS.

The sense is that FXSpotStream has plateaued in terms of its spot business over the past 18 months, albeit around a healthy 60 yards a day. To see exponential growth, such as it has seen over the past seven years it is likely to have to add LPs to the platform, something that may risk diluting the value for others. I have written before how I like the brokerage model at FXSS, but felt it could be tweaked – indeed the firm did just that earlier this year – but a new LP has to be convinced that there will be sufficient value in joining, and the existing LPs probably will wonder what such a move would mean for their business.

Another factor is that pretty much all the major LPs operate on FXSS, (Deutsche Bank is a notable exception, and there are no non-bank firms) so would there be an improvement in conditions anyway?

If the firm is indeed at a plateau, this doesn’t mean of course that spot volume can’t grow, more that any increase would be at a much more sedate pace. The same cannot be said for other markets.

It is pretty much the same for all platforms at the moment, most of the growth in spot volumes has been the result of volatility, and as the past 10 years tells us, this is not guaranteed, therefore the growth has to come elsewhere. Over the past year it has been in NDFs as everyone chased that market, and there is probably still more meat on that bone, but the real feast probably comes in FX swaps.

There is an interesting juxtaposition between Ward’s old and new employers when it comes to FX swaps, because CME Group is in a position to take advantage of a shift to cleared products thanks to regulation, but FXSpotStream has that relationship model that could help boost its FX swaps activity.

If FXSS is to do this, then it probably needs to deepen the fringes of its client base, away from retail aggregators for instance. If it can build that, then another surge in volume could happen – although I would caution it will still be a slow-ish build. Ward’s experience is in that wider client base, therefore, again, FXSS seems to have selected well.

Looking at CME Group, meanwhile, people are wondering if this is the end game that was always likely to play out, with both the OTC and cleared businesses in one pair of hands. It is hard to say whether the purchase of EBS has proven successful for CME – maybe it is too early to say – but there is a sense that the Merc has been unsure what to do with its relatively recently-acquired primary FX venue.

I think it is fair to say that CME’s previous ventures into the OTC FX space have had mixed results. There was the launch of FX futures on Reuters back in 2005, and it could be argued this helped build CME’s presence in the FX banking industry by providing the connectivity, but there was also FX MarketSpace, a good idea that was either poorly executed or just plain unlucky in terms of the timing.

There could be a race between three major exchange groups to grab what could be a valuable piece of FX real estate in FX swaps

With the jury out on EBS, CME still has to convince the industry that it can deliver a thriving, growing OTC FX business, so will the latest changes do the job? The good news is that in Paul Houston, CME has appointed someone who knows the OTC world well from his previous experience in banking and prime brokerage. If anyone can help better align the businesses then he can – and that is, I think, what needs to be done.

Again, this is not really about the spot business – EBS’ numbers highlight how tough an environment that is – but perhaps blending the order books is an idea? The challenge with that will be it re-introduces the very type of firms that caused EBS such strife at the end of the first decade of this century with its banking clients. The broader data from the industry seems to show that the more active trading firms involved, the less the major LPs like the ecosystem, so would a merged order book actually kill off EBS? It could do if adequate data can be sourced from elsewhere.

To me, the alignment needs to take place elsewhere. EBS continues to tout the growth in its FX forwards volumes, but still doesn’t provide any hard numbers. That in itself is not an issue, but perhaps to really boost activity, it needs to build collaborative processes that deliver an entire workflow, rather than just the trading platform.

My sense is that there could be a race between three major exchange groups to grab what could be a valuable piece of FX real estate in FX swaps. On one hand there is LSEG that has, through acquisition, brought under one roof the trading of Matching for Forwards and FXall, with the optimisation services of Quantile and the clearing of ForexClear. That firm still has to truly bring those businesses together for an end-to-end solution of course, that takes time, but the pieces are in place.

Can CME do something similar? I would have thought it could. After all it has a clearinghouse, it has a stake in Osttra and it has an OTC FX trading platform. It could be this work is going on behind the scenes to build these processes, but it is certainly not clear it is, and this is why Houston could be the right person for the combined job at CME, because his background is in workflow.

The third player in this game remains a little under the radar in some senses, mainly because its headline FX business is its platform, but Deutsche Börse can also have a big say in how this plays out. As noted, it has the platform, it has a growing FX swaps and NDF business, and it has both a futures offering and a clearinghouse.

We will never know if CME planned to bring everything together at this time or if its hand was forced, but either way something that had to happen, has now actually occurred

Unlike CME, Deutsche Börse has made public efforts to align its FX workflows and has promoted its cleared/OTC capabilities – the story here is, the industry has yet to really react to it.

I should stress, of course, that there is potentially a fourth player in this game – Singapore Exchange – here though, the business is coming from a later start and the OTC acquisitions are more recent, therefore it is likely SGX has to properly align the business units before it can think about workflow tools.

Equally, it is important to note that any workflow development at any of the exchange groups should not just be along company ownership lines. ForexClear has been keen to stress that it will work with any and all providers in both the optimisation world and, as they develop, the platform world, and that is the right approach. Naturally, however, building connectivity and inter-operability along company lines appears to be the early path of least resistance.

To go back to the start of this column, the changes triggered by Ward’s appointment at FXSpotStream are interesting, not least because of what may happen at his previous employer. We will never know if CME planned to bring everything together at this time or if its hand was forced, but either way something that had to happen, has now actually occurred. The question therefore is, will CME succeed in building a truly combined business and what impact will that have on the rest of the industry?

The race is on.

colin@thefullfx.com