CME and NEX: Building the Supermarket

If there’s one thing that has become abundantly clear over the past few years, it is that many OTC platforms have decided that they need to scale their businesses up and out in order to be successful in today’s FX market.

This was made abundantly clear in a press call today when Terry Duffy and Michael Spencer, respectively the CEOs of CME Group and NEX Group, talked about the logic behind their $5.4 billion tie-up.

“Effectively, what we’re building is a bigger supermarket,” said Spencer. “Why do people shop in supermarkets? Because it’s convenient to buy everything in one place.”

He continued: “Every big trader in FX trades FX futures and FX cash and FX forwards, it makes sense to put it all together in one place and if you look at the US government debt market you have a dominant position in the futures market and BrokerTec hs a very strong position in the cash market and the repo market, all of that – to be able to buy it in one shop – makes life easier for the user.”

The supermarket logic certainly makes sense, the combined entity will be able to offer its clients more products to trade in one location, hence the assertion in today’s press release that the deal, “allows CME to introduce futures to the broad NEX user base, particularly in FX trading”.

However, Profit & Loss pressed Duffy on this assertion, pointing out that CME’s existing FX business is already well established amongst FX market participants and the exchange’s attempts to launch FX futures in Europe didn’t end particularly well (see: CME Europe, What Went Wrong?), and questioning whether NEX clients are really clamouring for more access to FX futures products.

Duffy responded by pointing out that the NEX and CME FX volumes combined still only represent a fraction of the overall $5.1 trillion per day FX market, and thus there is still room for both to grow. He added that “it’s no secret” that the plan is to eventually put the OTC and listed products onto one platform, and claimed that this will create both efficiencies and “significant” new business opportunities for the combined entity.

This talk of efficiencies highlights another important part of the rationale underpinning this supermarket approach.

In the release issued today announcing the deal, the companies projected run-rate cost synergies of $200 million annually by the end of 2021, assuming deal completion in 2018.

“Just take a simple issue like our global communications network, our data centres and our matching engines. The numbers there are really quite big, we have six big data centres at NEX group alone, plus our global network. We haven’t done the forensics on the comparison of our networks yet, but I’d wager there’s very material duplication. So from just a pure technology point of view, there will be considerable economic benefits from the economies of scale,” said Spencer.

Synergies are often over-estimated when deals are announced, often both in terms of their size and how quickly they will be realised, but clearly there will be savings on both sides. So there you have it: offer clients more products in one place while simultaneously saving on staff, technology and infrastructure. The supermarket model.

CME and NEX are hardly alone in seeking to adopt this model though.

Following its acquisition by Deutsche Börse Group, Carlo Koelzer, the CEO of 360T and now global head of FX at Deutsche Börse, talked about the firm’s strategy to build a one-stop shop for FX market participants, offering the complete range of potential FX products and all the pre-trade, execution and post-trade tools and services that clients might require.

Hotspot, first acquired by Bats Global Markets, which itself was subsequently bought by Cboe, has been broadening out its product set too. Last year it launched outright deliverable forwards on its anonymous central limit order book and NDF trading via its Swap Execution Facility (SEF).

“We expect the acquisition to enhance the trading experience by streamlining access for customers and to allow CBOE Holdings to provide greater scale, while significantly increasing operational and cost efficiencies,” said Cboe CEO, Edward Tilly, when announcing the deal.

When Euronext bought its 90% stake in FastMatch, the exchange emphasised that in the short-term, the focus would be on rolling out real-time and historical data products and that the mid-term the plan was to build out a presence in the FX derivatives space. In addition, Euronext said that the goal was to leverage its existing European presence to help FastMatch scale up on the Continent.

But while NEX is hardly the first OTC FX platform to decide that it needs to scale up, Spencer argues that this deal is far more significant than previous ones in this regard.

“There is competition out there in the OTC market, of course, and I’m not saying that NEX is without serious competitors,” he said. “But it is a fragmented marketplace and the other transactions that have taken place are from two exchange groups buying into the OTC space and have been what I would call relatively small scale, if I might say, sub-critical mass. Whereas what impressed me about this transaction is the CME is obviously, as we already know, the leading exchange group globally by market capitalisation and dominant in a series of products, particularly in interest rates related contracts and futures related contracts and NEX happens to be the biggest combined FX and fixed income platform in the OTC space covering not just the cash markets, but also the repo markets as well.”

Bats bought Hotspot for $360 million and was in turn bought by Cboe for $3.2 billion, of which the FX platform obviously only represented a small part of the value. Deutsche Börse bought 360T for $796 million and Euronext bought its stake in FastMatch for $153 million. Icap (the predecessor of NEX), acquired the EBS FX trading platform in 2006 for $775 million.

These sums of money clearly aren’t insignificant, but Spencer does have a point – relative to the $5.4 billion the CME will be paying for the NEX business, these are much smaller transactions, meaning that this deal could see the creation of the biggest supermarket of them all.

Galen Stops

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