The Last Look…
Posted by Colin Lambert. Last updated: March 19, 2024
One question popped up from correspondents more than any other after last week’s column – how successful has the exchange foray into OTC FX markets been?
No doubt the question was prompted by the EBS volume data I discussed last week, which in itself highlights how those numbers got peoples’ attention, but was it merely a kneejerk reaction on the part of those who saw it as evidence that exchanges have yet to succeed in FX? Let’s have a quick run through of the runners and riders.
At a high level, and speaking in very anecdotal terms, I think it’s fair to say that Cboe and Deutsche Börse are happy with their purchases. Hotspot, with the exception of 2018-19 and (very slightly) 2020-2021, has seen year-on-year increases in volume, which is the headline act for any platform. Also, Hotspot has managed to maintain the reputation it has amongst LPs and takers as a “fair” venue, where neither side has an advantage. There are areas that Cboe FX would like to build out I am sure – FX Point relaunched last year and Cboe Swiss was wound down last year, for example.
Likewise, Deutsche Börse should be happy, especially given how – to date – Eurex has not really managed to challenge in the FX trading arena. With the increased focus on capital, however, and the growth of 360T’s forwards volumes, any crossover to clearing will benefit the parent group. 360T has also seen spot volumes grow, as well as – as noted – its non-spot volumes, although I am not sure that activity on the GTX ECN has been all the exchange would have wanted.
One group that I still think is awaiting the jury verdict is Euronext. Volumes on the former Fastmatch platform have increased, by 11.4% in fact from 2018, but the sense is the platform is still seeking a direction. What hasn’t helped has been management upheaval at the highest level, and insiders express concerns over the lack of FX experience at those high echelons. There is indeed a lack of FX pedigree at the parent company – but there is also what is seen in some quarters as a lack of initiatives to actual build out the FX product suite. The spot business is going OK, but has been outstripped by some of its rivals, partly due to the popularity of disclosed, relationship trading, but beyond that there doesn’t seem to be much impetus.
I am unsure whether, in the current era of foreign exchange, a platform can really thrive on spot alone, and this is why the jury is out on Euronext. Adding products is not easy – CME abandoned EBS Direct forwards recently as evidence of that – but the sense is it has to be attempted to keep the business moving forward.
Other platforms have succeeded to various degrees in non-spot, NDFs in particular seems a thriving market, but there is little – if any – noise on this from Euronext, not even around potential FX futures or clearing initiatives.
One exchange-owned venue that does have a healthy non-spot business is LSEG FX, although even here, identifying growth can be tricky and it is definitely too early to cast judgement on the LSEG buy of Refinitiv. What can be said is since the 2018 sale of 55% of then-Thomson Reuters to Blackstone, volumes have drifted in spot, by 4%, and risen, by 6%, in non-spot. Overall, they are up some 4%, less than many others, but a rise nonetheless.
LSEG FX represents an interesting business, though, because in contrast to Euronext, there are plenty of initiatives that tweak the interest. If – and it of course remains an ‘if’ – the firm can bring together all the disparate parts of its business then it could become the dominant player.
It has the forwards, it has the largest non-futures FX clearing business, it has the optimisation tools and it has primary and secondary venues. It seems strange to say that the worry with LSEG FX seems to be in the trading platforms. Matching has suffered a volume drop as has EBS, although it has retained some volume thanks to the broader currency spread, and feedback from the industry is that FXall needs a tech upgrade. Deliver that in a timely fashion, and joined up manner, and you have to think that LSEG FX is in the best position of all. Certainly, if the firm doesn’t establish a leadership position it can be no-one’s fault but its own..
Another exchange group move that is also too early to discuss is SGX’ ownership of BidFX and MaxxTrader, purely because there is little data with which to work. SGX drops the odd hint of volumes on BidFX, which seem to hover around the $100 billion market in good months, but beyond that, apart from asking the question why isn’t the exchange posting those volumes – I’d rather let people know when I am growing than when I am fully grown – there is little to go on.
All of which brings us back to what started this stream of consciousness – has CME’s buy of EBS been a success? The first thing to note is that it was more than EBS of course, and it retains a 50% stake in Osttra, which can challenge LSEG’s Quantile in the compression stakes and has the Traiana piece. Equally, that deal brought BrokerTec into the fold, but even here I hear of potential issues – namely that its ADV is dropping because bank traders in particular find its trading environment toxic thanks to the presence of HFTs. Sound familiar?
If some exchanges feel they have yet to really extract value from their OTC platform deals, I would argue it is not about the product they bought, it is more about their failure to build upon it
On FX though, in spite of a horrible decline in EBS venues – ADV has fallen 37% from 2018, when the deal was done, to 2023 – there are still reasons for optimism, as I noted last week. CME’s FX Spot+ initiative is still in its early days, but the more I think about it, the more it needs to be the pathway to one limit order book for CME’s spot FX business. The market data side of the business is inevitably going to come under pressure – the decline in primary venue volumes is being spoken about at the highest levels, as we note in this week’s Any Other Business column in the newsletter – and that makes the issue urgent for CME.
There are those who argue – and I am not absolutely against the point – that losing its primary status could be good for EBS because it would no longer be the last place someone wants to execute part of a trade, and therefore volumes would recover. This ignores the value of the market data business, however, which is why I think CME has to find a way to bolster EBS volumes. Spot+ could be the answer, and while this could lead to the cannibalisation of EBS itself, it would mean CME saves something from the deal before it is too late. A whole generation has grown up with EBS on their screens, that can remain the same, albeit in a slightly different form.
If this happens, and Spot+ is a success, then people will inevitably ask why CME bought EBS in the first place? That’s a fair enough question, but as I noted, it was part of a bigger deal. Not only that, but even at 20-30 yards a day of OTC spot volume, EBS would still be contributing to the new world (and CME combined would probably be back to the biggest spot venue in the market).
Overall then, I would say that the exchange experience in OTC FX should generally have been OK, and that those firms that are not seeing the rewards might benefit from looking in the mirror. OTC FX was never going to be a market that could be integrated fully into an exchange environment, those deals that were done, were widely seen as adding another string to the parent groups’ bows, and that needs to be remembered – they were building blocks. Spot FX alone was never going to cut it in the growth stakes, it needed building on, which means investment.
If, therefore, for whatever reason, some exchanges feel they have yet to really extract value from their deals, I would argue it is not about the product they bought, it is more about their failure to build upon it.
