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CME Europe, What Went Wrong? Six years after launching CME Clearing Europe and three years after launching CME Europe, the Chicago-based exchange group has announced that it will shut both operations at the end of this year. Although the move was something of a surprise, Galen Stops discovers there are some compelling reasons why the initiative failed. He asks what went wrong and what does this move mean for CME's remaining European operations as well as the ongoing efforts by its competitors to get a European FX derivatives business off the ground?
Unshackling the FX Market Darren Jer, CEO of MarketFactory, talks to Galen Stops about flash crashes, the new latency arms race and how technology will enable the FX market to keep growing in size. Galen Stops: What’s going to be the main focus for MarketFactory as a company in 2017? Darren Jer: Well let me just start by saying that FX is the biggest market that not everyone knows about. In the equities market last year, $114 trillion was traded across all exchanges; in FX, that figure is $1.4 quadrillion. In FX we talk in average daily volume (ADV) numbers all the time so we’re just used to the size of the market, $5.1 trillion per day, but the general public and traders in other asset classes don’t know the degree of notional liquidity.
Explaining GTX's Bespoke TCA Tool In February, Profit & Loss reported that GTX had partnered with Ideal Prediction, an independent trading analytics and data science company, to offer its clients analytics aimed at optimising their FX trading. GTX first hired Ideal Prediction to optimise client liquidity pools and trade execution performance in March 2016 and the perceived success of this project, combined with the management teams’ strong working relationship with Ideal Prediction CEO, John Crouch, from his time working at Credit Suisse, prompted the two firms to look for more ways to utilise the data at GTX’s disposal to help its clients. The end product of this was the analytics tool that GTX began offering to firms in February.
A Lighter Footprint Increased attention on market impact has prompted non-bank market making firm XTX to release a new analysis tool, XTX-ray. Colin Lambert takes a look. Market impact has grown steadily as a topic of conversation in the FX industry, thanks in part to the events of October 7, 2016 in Cable, but also due to the increasing instances of “mini” flash moves in markets. As risk warehousing activities have been scaled back across the banking industry, a crucial buffer is being thinned out, meaning orders that previously had minimal or no impact on market levels, now do.
Will 2017 be the Year that Blockchain Becomes Real? After two years of endless hype, Galen Stops looks at whether 2017 will be the year that distributed ledger technology broadly starts getting put into production within mainstream financial services. Last year saw numerous firms producing proof-of-concepts (POC) regarding the potential application of distributed ledger technology (DLT), issuing whitepapers about the technology and hosting “hackathons” and other events to discuss and promote its use within financial services. Profit & Loss covered the major developments around DLT last year, but the editorial team started expressing frustration towards the end of the year regarding the disparity between the PR and subsequent press coverage surrounding DLT and the actual amount of tangible projects being put into production using this technology.
CTA Performance: Decline or Dip? Galen Stops looks at why CTA strategies struggled in 2016, examines why there is enthusiasm from these managers bubbling up for 2017 and looks at the trends that are shaping the managed futures industry. 2016 wasn’t exactly a vintage year for CTAs. The SocGen Prime Services SG CTA Index ended the year in negative territory for the first time since 2012, showing returns of -2.89%. Likewise, the BarclayHedge CTA Index was -1.14% for the year. One explanation for why these firms struggled was the continued low interest rate environment, which has kept bond prices low and helped drive up the stock market.
Best Platform P&L Report Card: A recurring theme of this year’s awards is going to be familiarity – in that with so much work going on behind the scenes there were few major changes to the front-end product set at many institutions. Regulatory compliance has been a big issue amongst the banks for several years now and it shows little sign of slowing down, with 2017’s hot topic being MiFID II, which was, as we have noted, this year’s number one theme. Having already been delayed once, some institutions are comfortable they have the right structure in place to remain compliant and to help their clients be so as well – others are less confident.
Best FX Platform P&L Report Card: It seems hard to credit that just 18 months ago some very senior people in the banking industry were promoting the agency-only concept so strongly to Profit & Loss that we even started to think there might be something in it. As it turns out, there wasn’t, because the sheer number of liquidity events – let alone their severity – in FX markets has highlighted the value of a principal-based business. It is quite amazing the impact that the odd price gap and (occasionally mini) flash move can have on thinking and we believe that the resurgence in interest in the single dealer platform in FX has, at its genesis, client concerns over liquidity.
2017 Profit & Loss Innovation Award P&L Report Card: It is becoming a familiar refrain of this section of the Digital FX Awards – true innovation is harder to find in this compliance dominated world. Put simply, half of the industry is not encouraged to think innovatively – and the other half doesn't want to! That is, of course, overstating the issue, for there are different thinkers in the industry, but inevitably when you are faced with such a broad and mature product offering, innovation is likely to take place at the edges. Looking ahead, we are genuinely excited by some of the ideas coming out of places like Citi, JP Morgan, Credit Suisse, Morgan Stanley and BNP Paribas (others do exist before you all write to your MP/congressman!) but as always, the proof will be in the end product.
2017 Editor’s Choice Award P&L Report Card: In past years, this award has been given to the bank that I believed was most likely to make a serious challenge in the next 12-24 months, however, it is probably time to change that ethos just a little. The reason is yet more evidence of the impact of regulation on the FX industry – with just about everybody racing to be compliant in dozens of different jurisdictions, each with their own nuance on the rules, nobody has the budget or time to make a serious move.