In terms of volumes, Cboe FX indisputably had a great year in 2018. It’s average daily volume for the year was $37.4 billion, it’s highest ever recorded and a 27% increase from 2017. Breaking down this figure further, the ADV on the London matching engine doubled, there was a 35% increase in trading activity during European or Asian hours, CNH trading on the platform doubled to become the sixth most actively traded currency on the platform and there was good growth in its full amount offering which accounted for $3.5 billion in Q4 of 2018, up 600% year-on-year.
Discussing what prompted such an uptick in trading activity, senior staff at Cboe FX point to investments in technology and infrastructure that occurred in 2017, in addition to the fact that the full amount platform was re-built in 2018.
“We changed our approach to how we manage our liquidity,” says Jon Weinberg, head of FX product and liquidity analytics. “We have moved away from a qualitative approach that many other ECNs use to a pure quantitative approach based on maker and taker statistics. Basically, we’re trying to find the most appropriate matchoffs on the platform.”
Expanding on the platform’s more data-driven approach, Weinberg explains that Cboe FX found that it had limited success when it was simply sending large volumes of data to clients and expecting them to do all of the analysis. Instead, it adopted an approach of doing the analysis on behalf of the client and then sharing it with them. In fact, Weinberg credits this analysis as one of the reasons that full amount trading grew significantly on the platform last year – because clients could conclusively see through the data that in many cases chopping up orders and executing them across different places at different times was actually less effective than just trading the full amount.
“We’re not requiring a customer to analyse the data and then make decisions based on that. If a customer can give us a criteria to manage towards, we can then manage the experience on behalf of that customer and also provide the data that illustrates that we are effectively managing that experience,” says Paul Reidy, COO.
Reidy adds that a common refrain from market participants is that they’re being required to do more with less as technology budgets are constrained and headcounts have been reduced throughout the industry. As such, he says that the ability to effectively outsource the data analysis of their trading to Cboe FX is a significant value add, and distinguishes it from other platforms in the market.
“Historically, contrary to popular belief, the biggest factor in an order going unfilled is not last look, but has to do with clients missing the price,” says Weinberg.
Part of the 2017 investment also went to eliminating some of the latency on the Cboe FX platform, with Weinberg and Reidy again stating that the impact of this was largely felt only last year.
Reidy picks up on this point, stating: “By reducing latency we eliminated a lot of operational noise, meaning that customers can trust the quality and integrity of the data and the accuracy and timeliness of that data. It’s a much smoother experience and to the extent that the market becomes more discretionary about what venues it chooses to do business on, what’s going to drive that decision is where people get the best experience and the best quality data.”
More recently, Cboe FX announced in December that UBS had began acting as a Central Credit Intermediary (CCI) for certain counterparties wanting to access its platform. Essentially, this arrangement is designed to enable firms that might have limited bilateral credit to leverage UBS as a spot FX intermediary to alleviate this hurdle, settling all trades exclusively with the bank. In particular, this service is aimed at regional players who don’t trade through a prime broker, with the aim of bringing different types of market participants onto the platform.
“We will be measuring the success of this by the diversity of the clients that we onboard rather than the absolute volume that it contributes because these participants will naturally be quite small,” says Weinberg.
Perhaps the only real disappointment for Cboe FX in 2018 was the legal and technical integration time for onboarding customers for NDF trading, which it launched on its Swap Execution Facility (SEF) at the very end of 2017. The hope was that regulatory changes in the marketplace, combined with the increasing electronification of the NDF market would combine to produce a tailwind for moving liquidity onto that platform, but thus far this has not really materialised. Although staff at Cboe FX are pretty frank about this challenge, they also express determination to keep working on this product segment.
“We’re not where we need to be today, but our efforts are still nascent and we are committed to grabbing a piece of this market,” says Reidy