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And Another Thing…

There are two ways of putting this; either I am indulging in idle speculation or I am sounding off on something about which I know nothing – you can be the jury, the subject is platform consolidation.

Unusually for me, nothing particular triggered the following stream of consciousness, rather this is the result of a few idle hours at the airport, therefore I need to make it perfectly clear that there is nothing newsworthy in here – it is pure and simple idle speculation on my part. The required disclaimers thus completed, here we go…

Should EBS buy Reuters Matching and Dealing? Or, if you prefer, should Thomson Reuters buy EBS?

Of course, the subject should be expanded way beyond those two concerns, CME Group is a typically cash rich company that might like to get its hands on a thriving OTC business, more to the point there are a host of “up and comings” that could be the subject of a bid. But I like to think the unthinkable every now and again, so I will focus initially on the traditional “big two”.

In the past a deal that brought together EBS and Matching would have been unthinkable because the industry demonstrated in the clearest possible manner, that it wanted redundancy in its core platforms. The world has irrevocably changed now though. As the events of the past few months have demonstrated, EBS does get a boost to its volumes when the euro especially, and the yen, start moving, and Matching gets good numbers when Sterling and the Australian dollar get busy. Neither, however, gets the boost it used to.

Put simply, volume has disappeared into a variety of venues, single dealer platforms through internalisation, competing multi-dealer venues and of course aggregation venues. It has hit EBS harder, but as things progress, the banks are likely to get better at internalising Sterling, Aussie and sundry other “Reuters’ currencies”, thus Thomson Reuters might find it faces the same decline in underlying activity.

So how to protect against that? This is where the idea of a merger comes in. Looking at the market, it is one of very few deals where there will be little cannibalisation of flow so one could expect the owner of such a venue to go from $110-140 billion per day to $250-280 billion per day.

So there would not be a dilution in market liquidity, but what about one venue owning so much flow? Would that not worry the banks? Well, maybe, but I am less convinced than I used to be. Firstly there are plenty of other venues capable of filling a perceived void in any currency pair so the fear of one party controlling the core market (G5/G7 call it what you like) is not really justified. Secondly, fragmentation is fine and has helped build a broader church in terms of participants, but it has made liquidity management for the core market a little harder. It could just be that the major liquidity providers in this industry would like to have a very strong core market existing in one (or two) place?

A third benefit I have already touched upon – the two businesses would be a good “fit” because rarely are they competing for business on a major scale, and they probably have relationships with different people in the respective institutions using their platforms.

Having said that this is idle speculation and the result of some down time (and proving this really is sometimes a spontaneous stream of consciousness) I think I know the genesis of this thought. At Forex Network New York it struck me during a panel on the platforms that EBS and Thomson Reuters had a different (and in most cases opposite) view of the world to the host of “up and comings”. This is not to say that their way is the right way, just that the established businesses had a similar view of the world and both have to defend long held ground against aggressive assaults from a host of newcomers.

I also think it is hard to see where the established players add “serious” volume to their businesses. Thomson Reuters has bought FXall of course, which has added something in the region of $40-60 billion of spot flow to the business, but there is bound to be a degree of cannibalisation, witness the impending transfer of several clients from RTFX to FXall. It is hard to see Matching or EBS for that matter hitting the $200 billion per day mark on a regular basis again. We have had some very busy days and these have served to reinforce the point that the new “norm” for EBS is around the $180 billion on busy days and around $150 billion for Matching when its currencies are active.

Of course, both businesses are now attuned to the new market reality and have cut their cloth accordingly so neither is going to disappear or see a decline in influence. Both will continue to be seen as “the establishment” and when either sneezes the rest of the market will reach for the medicine cabinet, but it is hard to see serious growth in volumes from here.

So, in sum, I don’t think this is going to happen, this has been a “what if?” exercise, but it is probably not as unthinkable as it once was. There are other, cheaper, targets of course and I do think the current number of platforms is unsustainable, so would expect to see a deal or two in the next year. Wouldn’t it be interesting though, if one of those deals was as described here?

Profit & Loss

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