The Last Look…

FX platforms have largely been immune from the need to cut costs that have dominated so many banks’ thinking over the past decade or so – the sheer level of competition in the multi-dealer world means it has been onward and upward, in terms of both people and products. Now, though, things seem to be changing, and the platform operators are starting to look more closely at their business.

Late last year, word swept the market of CME making staff cuts, largely focused on EBS. In the last 10 days, there was a flutter of excitement over LMAX cutting staff, almost exclusively from that part of the ranks that came with the acquisition of FX Hedgepool some 18 months ago. Also in the last few days, several sources have forwarded a note from LSEG stating that FXall Orderbook will no longer be supported from 28 March.

I am not sure any of these moves should be a surprise given the strategy of each individual firm. CME has always run a tight ship when it comes to foreign exchange, and while there are still those who question its long-term commitment to EBS, the fact is the Merc has to commit. The data shows that OTC is continuing – and will continue – to dominate FX. Futures have their place, but amidst the mayhem of last year, was the only product not to see significant growth.

It is always tough when people lose their jobs, but there had to be an element of doubling up at CME, especially since the FX businesses were put on the same technology. It’s somewhat similar at LMAX, although I will confess to be surprised at one name mentioned to me in the cuts. The fact remains, Hedgepool was a business doing well from start-up status, but as with all start-ups the time comes when management realises it is probably a little top heavy in staffing. Equally, from a technology perspective, there would have been doubling up, which was needed until at least the tech teams understood the other part of the business.

LMAX has been clear from the start that the Hedgepool acquisition was very much about building it out into a broader FX swaps venue, rather than just the peer-to-peer service it was. My thoughts on P2P have been clear over the years and they remain the same – in its purest form it is a business with limited growth potential, there are only so many matches available on the buy-side.

Sources familiar with the matter tell me the FX swaps project is still going ahead at LMAX, I would be fascinated to know how quickly, because the more I look at FX swaps, the harder I see it for anyone trying to disrupt the current structure. At some stage the settlement function will speed up and have an impact thanks to tokenisation, but actually getting firms to trade more in a mid-book environment? Tricky. 360T has a very healthy non-spot franchise but my understanding is that SUN, the mid-book matching platform, is still struggling to gain meaningful traction.

The multi-dealer world has proceeded smoothly for many years now, continuing to add products and people, but the sense is this is unlikely to work going forward

Hearing and reading about the third change mentioned at the top of this column – the closing of FXall Orderbook – my initial reaction was “about time!” This is a project that has largely mystified from the start – and also highlighted how the buy side likes to stay in their lane. FXall remains hugely popular with the buy side in its original form, but I am struggling to think of additional launches that have really made the grade elsewhere on the venue.

Orderbook started life at FXall as Accelor ECN, and at the time you could perhaps see the need for an anonymous venue to sit alongside the original RFS model – even though it was really little more than an “us to” project. From the start there seemed to be problems – namely volumes remained stubbornly low. A couple of decent-sized asset managers looked at it, and even occasionally used it, but it never really took off. When Thomson Reuters acquired FXall in 2012, that was probably the time to realise that there was little point in running an ECN that was limping along and a CLOB (one that was, at the time, part of a dominating duopoly).

Somehow, transitioned into Orderbook, the product limped along for another 14 years. The changes of ownership of what was Reuters could not have helped, but there is also the sense that an emotional attachment to the product was part of the decision-making process, something that often happens in a start-up situation where the original team retain control. By closing it now, my take is that LSEG is making a sensible, and overdue, decision, that can help it focus better on where it is already strong – but facing challenges nonetheless – in the FX arena.

All three snippets of news generated some excited chatter about pullbacks from the FX business, but I am not sure any of them can be judged as such. This is not to say that, for example, LMAX will build a successful business in FX swaps or that people grounded in futures can maintain a healthy OTC business, more it is to say that in each case, at a high level, it is business as usual.

In the bigger picture, however, these moves should be of interest to everyone in the FX venue world, because times are changing. The market structure in FX is probably in as much flux as I can recall since the days of first Reuters Matching and then EBS shaking up the spot world. Not only is competition continuing to grow in the market, but the buy side seems more open to different ways of trading, and then, inevitably, there is the potential impact of tokenisation and stablecoins.

Firms will need to be nimble and, importantly, have sufficient resources in the right place to exploit opportunities in these new fields as they emerge. Those who believe the status quo in this segment will continue were probably justified by the lack of evolution and true innovation over the past decade, when it has all been about filling gaps and getting faster. That could be about to change, however. I don’t think we will see dramatic upheaval, but the current structure and usual suspects at the top of the business might see their position eroded if they don’t react smartly and quickly.

Ultimately, the reaction to these three bits of news over the past few months highlights two things. First, people are always excited about the opportunity to jump on a rival the minute anything remotely negative emerges! Secondly, and more importantly, it also signals that people are on the lookout for change – they’re expecting it. My message would be, you’re right, it’s coming, be prepared.

The multi-dealer world has proceeded smoothly for many years now, continuing to add products and people, but the sense is this is unlikely to work going forward. For all the bluster at times over how these firms have been innovating, not a lot has really changed. Looking ahead, the winners over the next three-to-five years are likely to be those who truly innovate.

colin@thefullfx.com