Before getting onto today’s theme I have some sad news to impart. Gary Munday, known to so many dealers of a certain generation as a member of the powerhouse Marshalls’ dollar-mark team, died suddenly at the weekend, aged 59.
As I never traded dollar-mark Gary never took my line, but he did my institution’s and he was well-liked by my colleagues who did work with him. My condolences to his family and friends at this very sad time.
Turning to today’s theme, it struck me over the weekend that if ever there was an FX-related example of the triumph of optimism over reality, or hope over expectation, surely it must come in the form of Ice Futures US.
Last week the exchange recertified three of its “large” FX contracts, more commonly known from their launch in 2008 as Ice Millions. Ice continues to succeed with its popular Dollar Index futures contract, however when it comes to the institutional market sized contracts things are not so good. In fact, as far as I can tell looking back through the records (and having to attest every three minutes that I am not a robot) these contracts have not traded since 2014 in any currency pair and the last Open Interest was in early 2015.
The recertification of the contracts appears to be a standard procedure, Ice has done so for various dormant contracts in FX for three years now, but it does beg the question why? Surely the exchange can’t think that the value of these contracts will suddenly be discovered by the world after 10 years of very low volumes?
In some ways the apparent failure of the Millions contracts is a bit of a mystery to me, but I wonder if they were, to paraphrase former England football manager Sir Alf Ramsey, when talking about a member of that team, 10 years ahead of their time? The contracts offered the necessary fungibility and, importantly when talking to traders at the time (and very occasionally since) the fact they were in million dollar units were therefore easy to incorporate into a position largely based upon trading in OTC markets. CME’s contracts at the time were largely terms currency based, which made it harder to hedge in the OTC world.
The problem for Ice was multi-dimensional in hindsight. It was challenging an incumbent in CME that was on the up-and-up and, most importantly, was already handling $70-100 billion per day. Then there was the implosion of the global economy, which, while it should have worked for the cleared model, merely served to see people stay with the venues and methods they trusted – be they exchange-based or OTC.
Finally there was the problem of the participants – talking to banks at the time, they were too tied up in connecting with clients on sundry other venues and had little or no time or resources for a contract that was largely seen as an interbank resource. And of course, the inter-dealer FX market was about to suffer as banks put each other at arm’s length over credit issues, suffered accusations of collusion and generally become client-focused institutions at the expense of their own risk taking activities (see Thursday’s column for more on that).
So why, given all this misfortune, continue with the contracts? After all, looking at the Large EUR/USD contract, the last time it had multiple days over 100 contracts traded was 2012 and even then it was only on 13 days in the year.
The answer could be that, as noted, the contracts were simply years ahead of their time and that they will have their moment in the sun. Regulation in most markets is pushing for the cleared model and despite what some people argue, it must be easier for a firm to attract participants to their trading platform if they are clearing under the same umbrella.
Equally, and getting all “Oliver Stone” about it; it could be that Ice is still very keen on buying an OTC FX trading venue (Matching, FXall anyone?) and thinks it might see opportunities for its Millions contracts in such a scenario.
Either way, the first decade of the Millions contracts is an allegory for those seeking to punch their way into the FX market. The barriers to entry are indeed low, but the barriers to success are high. In this case, the market clearly had enough FX futures trading to satisfy those firms desiring it (and the old adage of volume begetting volume is relevant here as well) and it didn’t feel the need for another venue – even it if was offering institutional style products.
Maybe Ice is hoping that the Millions contracts will make a Lazarus-like return; maybe it thinks it has to keep the contracts to remain a “relevant” player. It could even be that it will cost too much money to erase the contracts, or will mean its FX market maker incentive programme will have to be changed (this, incidentally, has been extended to December 2018, having originally intended to end in December 2013).
Whatever the reason for the recertification, the overriding emotion around these contracts appears to be hope, and as most traders can tell you, that is rarely a strategy for sustained success.