It hasn’t taken long in the new year for an old favourite to roll around – platform sales. The rumour mill currently has two platforms in the process of being bought – obviously by unnamed exchange groups – and a third under consideration.
I have learned to be cautious of such chatter and as I will discuss in Monday’s column (yes, I have, probably for the first time, actually planned ahead on these things) one has to question the timing for the buyers.
So to the chatter. First up, an old friend. Sources tell me that State Street is close to a deal to sell Currenex to an unnamed exchange group. I think it was five years ago that I first wrote of whispers in the industry that the New York Fed had questioned the wisdom of State Street owning a multi-dealer FX platform and every month since there have been rumours of a sale. Occasionally I have been told that the asking price was a barrier to a deal, and it is interesting to see what price it would fetch because volume on most platforms is lower, at the same time as the BIS says activity has gone up.
I understand that Currenex has a slightly different model in that it white labels a lot of technology around the industry, but in terms of the value to an exchange group there would be one big question – where’s the unique data? It’s hard to argue with those who believe the value in an FX platform is the data nowadays, but given the amount of recycled liquidity, inevitably the value of data away from the primary venues will be limited.
I think it is also worth asking the question of any buyer, why only Currenex? Just as I argued when rumours were swirling that FXall was being sold and not the other Refinitiv FX platforms I don’t see why a buyer would not want FX Connect as well. Of course, State Street has a longstanding and vested interest in FX Connect, but the links between that platform and Currenex have grown over the years and that makes separating them much harder.
State Street has, I believe, employed one or two consultants who just happen to have expertise in the single dealer platform space and while there is no hard evidence to suggest that the bank is looking to build something out so it can offload its interest in the multi-dealer world, it also can’t be discounted. To me, a Currenex/FX Connect combination is pretty valuable to a buyer in the exchange space; Currenex alone, I am less sure.
So unless State Street is getting desperate for a buyer and is willing to drop its price – and five years is a long time – this may be a slow burner, so what about the other platform?
Again this is not the first time we have heard such chatter but FXSpotStream is again in the rumour mongers’ sights. Previously, senior figures involved with the platform have been quick to refute such chatter and, of course, they can’t exactly confirm anything if there was a sale thanks to the rules around these things. There is no doubt that FXSS is an attractive prospect as one of the few platforms to show serious volume growth over the past two years – and yes, it was still in a growth phase for part of that period, but the increase in ADV remains impressive from a decent base.
There is a question, once more, over the value of any data – but then I would argue FXSS could be attractive to a non-exchange group as well. The model appears to work, it’s pretty lean with a good client base and limited number of LPs – it feels a clean market.
This may also be reasonable timing for a sale given how it has outperformed the competition. At some stage growth will slow – there is evidence of it already as, for the first time, the platform actually registered a couple of small year-on-year drops in the last quarter – and inevitably some owners will want to monetise. There is a carrot that can be dangled for potential buyers, however, in the promise of further growth from new products. If FXSpotStream does half as well in terms of its growth in FX swaps over the next two years as it has the last two in spot, then volumes will spike higher again.
So there are sound reasons for a deal here as well, but again, I am unsure there is a real desire to actually sell. Of course, shareholders talk about such things but talk and actions are very different. I also wonder if the banks that back the venture should not be just a little cautious given their experience elsewhere. It was bank consortia, after all, that sold FXall and saw it thrive, and more importantly, it was these owners that sold EBS only to complain about subsequent developments at the platform pretty much from day one!
Finally, rumours of LMAX Exchange being in talks refuse to go away. CEO David Mercer has publicly stated that no such deal is imminent and how happy he is running a private company but of course things can change and, again, if it does, he can’t exactly trumpet it from the rooftops. So would a deal here make sense?
In some ways it would because LMAX is renowned for having a good tech stack and there are a few platforms that could do with a serious upgrade – even though it would probably be cheaper to do it yourself than buy a successful incumbent.
LMAX is making good money and volumes are decent without knocking down doors, but it does have one advantage in the data stakes – not only is there a diverse customer base there that often does not engage with the primary venues, but the no last look model gives it some real value. To put that into some perspective, CboeFX publishes volume executed on firm liquidity (an initiative for which I think it has not received enough praise), which currently shows that the last 30 days – and yes that does include the quieter holiday season – saw ADV of about $7.5 billion. LMAX doesn’t formally publish its FX volumes, but I am told that is a reasonable estimate for what goes through – in other words the firm pricing, which produces more valuable data is broadly similar across the two venues.
On the counter side, I wonder how losing LMAX as an independent player would be received by some of its users? I am not sure the banks care about any platform one way or the other, but – and again this stresses the firm liquidity angle – there are those on the buy side who admire the firm’s stand against last look (as indeed do I). Inevitably there would be a fear that a new owner would seek to leverage the excellent technology in a rush for better numbers by introducing a last look model, the reaction to such a move from the all-important liquidity consumers would not be insignificant in determining the success or otherwise of the deal.
So, of the three deals there could be three different motives for the buyer. One is a volume play with a bit of tech thrown in; the second is about the model and growth potential, the third is a tech, revenue and data play.
The rumour mill is very good at throwing up such storylines although there is often something of a ‘cry wolf’ feel to its machinations to the extent that we hear about it so much we are sometimes surprised when a deal is actually done.
This year, however, there does appear to be a different feel about the chatter, so something could be afoot, if not with all three at least with one, maybe two. All of which leads to a rare instance of me actually planning a column; for on Monday I will explain why any buyer would need their head examining!