Hotspot plans to increase competition in the FX markets by creating a price war, Chris Concannon, president and CEO of BATS, said of the recently acquired FX platform.
Speaking at Profit & Loss Forex Network London 2015, Concannon outlined the exchange group’s plans for growing Hotspot, but warns the FX industry not to follow the example of the US equities market, particularly in terms of market structure.
“Do I see the FX market looking like the equity market? The answer is no,” he added. “I think it’s adopting certain things from the equity markets, algos for example, but the regulatory structure and the interaction of the market structure is very different.”
According to Concannon, the FX market also cannot just migrate to a pure exchange model and still places huge value on customised liquidity solutions. “I would argue that the equity market needs more customising,” he explained.
BATS is heavily involved in the ongoing US equity market structure debate, but Concannon warned the FX market not to follow this example. “Given that the FX market is a global market, I don’t think just one regulator can step in and dictate market structure, but what they can try to do is dictate market behaviour. That ultimately affects all banks and participants.”
Concannon argued that FX regulations are being determined by the “next great settlement”, which he believes is a problem for the market in itself as “regulators should not set policy through enforcement”.
In addition, he said that the FX market is not just fragmented within one jurisdiction, but rather that it’s fragmented around the globe across the full 24-hour period.
“There are liquid periods and very illiquid periods. When you have a fragmented, but fully automated market you get a thin layer of electronic liquidity. Once you pierce that layer you have an SNB event, a mini-flash crash,” he said.
As an industry, we now need to spend some time deciding what the proper collar is to put on our market – where we stop and think whether that price is rational – and start trading again, Concannon added.
But he did not believe there would be a role on Hotspot for latency buffers, etc, and said there are no plans to drive the ECN into a super-fast, pure “all-to-all” market.
“It’s a mix of both – firm quotes and non-firm quotes,” he said. “I think that’s more important than raw speed. There’s only a few exchanges that have implemented latency floors and there’s probably a reason for that.”
Instead, he saw the main challenge for Hotspot, and the industry, lying in liquidity management and working out how to grow liquidity over time.
As the end user becomes more sophisticated in terms of technology, then all flows become sharper, he explained.
When weighing up the relative benefits of acquiring Hotspot, Concannon said that one key factor was that the Hotspot client base is near-identical to the BATS global client base.
Growth for Hotspot is expected to come organically, and as the overall market grows year-on-year, he added.
“We can differentiate Hotspot in terms of technology, service and ultimately cost,” Concannon explained. “When a market goes through structural change – where a component that was once principal-based converts to agency – then cost control becomes a focus.”
In the early stages, there are a number of structural changes the company has to make, he added, including the launch of a London hub and relocating the existing Hotspot data centre to the BATS data centre in New York.
Precious metals is a market that has also been underperforming, according to Concannon, and it’s also a market that is very London based, particularly for spot gold, etc.
He added: “We want to grow that spot market. It’s been very dominated by futures, partly due to regulatory pressures. The spot gold market has been very much underserved.”
Further down the line the business plans to look at adding other FX products such as swaps, forwards, NDFs and FX options.
While BATS is currently “very close” to being the number one US equities exchange, Concannon said it is also planning on becoming the number one US equity options venue, as well as number one in FX for electronic execution in terms of ECNs. BATS is already the number one stock exchange in Europe by market share, and operates Europe’s largest trade-reporting facility.
“Are we heading towards a price war? That is our intention,” he said. “I want to create a price war. And we’ve already started.”
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