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Cu?rex: Building a Bridge

Cu?rex founder and CEO Bill Dale talks to Colin Lambert about the firm’s
different approach to FX. 

While automation has been a driving force in FX
markets, there have been several sub-plots that have
also provoked debate. Can FX be an asset class? Can
you link OTC and exchange-traded markets? How can asset
managers better hedge international exposures?

These questions were central to the process undertaken by Bill
Dale as he considered the possibilities for a different type of FX
trading mechanism, one that linked the market with exchange-
traded products and offered transactional efficiency for asset
managers with international mandates. The result of his
deliberations was a commitment to provide such an offering, and
the Cu?rex business was born.

Dale, who co-founded Cu?rex Group in 2007 and is today chairman and CEO, says the idea is “to provide the intellectual
property around a different financial structure to link institutional
FX to the underlying exchange-traded products”. It does this by
underpinning products such as debt instruments, exchange-traded
funds and FX futures and options with spot FX liquidity. “This
design, which is patented, is signalling a new era in credit access,
liquidity distribution and vertical clearing,” he says.

The target of the service is very much “real money”, not only
in helping asset managers better hedge underlying exposures, but
also to provide them with access to investment opportunities
through FX as well as allow them to develop their own
investment products for their customers. “We established the
FTSE Cu?rex FX Index Series to create unique opportunities for
product issuers, as well as to help investors better risk manage
their investments,” says Dale. “Each product addresses a different
geographical region, or motivation for investment, for example
we have eight RMB products which are very valuable to Chinese
plan sponsors or another product that targets yield. You can create
whatever basket you want in this framework, but the indices have
to be executable.”

The indices are available in streaming, 15-minute snapshots, or
end-of-day formats and they act as valuation metrics. The firm
offers equally weighted currency basket products, as well as
Daily Accrued Net Interest (DANI) and Total Return indices –
Dale points out that customers can create their own tailored
baskets or FX pairs. The indices are re-balanced on a weekly
basis. “Exchange-traded product (ETP) providers can offer one of
our indices to their clients or create their own products,” explains
Dale. “We are not an ETP provider, we partner with those that are
– for example we have a partnership with BlackRock and are
working with others on a variety of products.”

He further adds that the ability to create their own products is
especially interesting to longstanding ETP providers. “The
original builders of exchange-traded funds are looking to innovate
and build a new set of financial products,” he explains. “Our
indices, especially their flexibility, are helping them attract a new
breed of investor to innovative products. Equally, an investment
manager looking at this type of product, can add measurable
performance to their portfolios in the form of additional yield or
improved diversification profiles, which is very important,
especially in an era of tight returns and competition for
investment assets.”

Away from the opportunity to innovate, Dale also points out
that executable benchmarks offer an interesting option to
managers looking to hedge their traditional exposures. “Recent 
events have heightened interest and understanding of the impact
of currency moves,” he says. “Asset managers and the exchange-
traded world in general have woken up to the importance of
currency management.”

Cu?rex FX

Key to linking the FX and ETP world is the ability to execute
at measurable rates. To allow for the executable element of the
offering, Cu?rex built an ECN, one that has, as Dale puts it, “an
exchange like rule set and transparency”.

Just as the indices have to be executable, Dale points out they
also have to be able to be validated “all day, every day”, hence
why Cu?rex FX was created, to provide streaming 24/5 prices.
“You need to be able to validate products as close to real time as
you can, it is not about picking a random time and executing
then,” Dale asserts. “Asian managers cannot wait for a London or
New York fix, they will have stale quotes in their system which is
unacceptable. We provide a streaming price to them, in the
required amount, or if they want an “end-of-day” fix, we offer a
benchmark fix from the ECN every 15 minutes so they can
choose the best time for their specific market.”

By operating this framework, the mechanism utilises real-time
audit technologies with third party validation of the price, thus
allowing, the firm says, best execution for asset managers,
fiduciaries and asset owners. Effectively, a customer can request a
streaming price in their amount and the (currently) 15 liquidity
providers to the platform provide that. “The liquidity providers
are there because we are introducing a specific type of order flow
that they want to see,” says Dale. “Because there has been no
direct connectivity with exchange-traded products previously, we
are providing a bridge between the two. We represent a new
opportunity to access a genuinely new type of flow that is

Liquidity on the platform is “no last look”; as Dale observes,
that would defeat the object of the benchmark process. “To the
type of new entrant we are attracting to the market, last look and
the liquidity mirage are foreign concepts,” he says. “We had to
create a platform that met their needs, and in the post-Libor era,
independent verification of prices has become vitally important –
our ECN offers that.”

Mention “no last look” to a bank liquidity provider and often
you will be met with a resigned look – the concept is not popular
with liquidity providers but it is becoming an increasing part of
the industry. The practice is not a big issue on Cu?rex, however,
according to Dale, because of the type of flow the platform is
handling. “Our platform is about serious liquidity, helping real
money clients execute their business better.”

The trade off for liquidity providers is that customer flow
comes in the form of limit orders, thus they are less likely to feel
they have been “picked off’, and there is a minimum time-to-live,
patent pending, variable hold model operating on the ECN.
Liquidity providers, if they take the Cu?rex data feed, can see the
orders in the market, and the variable hold on customer orders
has been put in place to alleviate problems associated with
customers hitting across several platforms. In return, liquidity
providers have to stream a minimum number of currency pairs,
two sided in a minimum amount, throughout global market
opening hours.

Interestingly, and quite uniquely for someone in the ECN
space, Dale is keen to stress that volume is not the end goal of the
business as the firm earns revenue from managers indexing to the
benchmarking service (which obviously is intended to bring flow
to the ECN) as well as from the ETPs that use Cu?rex product IP
and technologies. “There is a lot that can be achieved when you
wrap value around your service,” he says. “We are not chasing 
volume for volume’s sake – that is a short term game that brings
long term pain – we are here to help create better investment
products and support long-term relationships that deliver these
solutions to investors. The FX market has a sense of
responsibility in how it interacts with all asset classes; we are
embracing that and scaling it by creating new products. These
new products, in the form of ETPs, will produce unique flow to
the ECN as a by-product of our business model.”

One senses that Dale is happy to embrace multiple markets
when the subject inevitably turns to high frequency traders. “The
equity world, indeed the ETP world lives at the behest of the
market makers and HFT firms are a big part of that,” he observes.
“We are very careful about what we bring to the market in terms
of various strategies, but HFT firms can certainly be involved – it
is about offering different types of flow, the debate has moved
beyond toxic/non-toxic, it is now about diversification.”

While Cu?rex FX may not be about building volume numbers at
any cost, it is about handling a huge amount of traffic, the
platform supports 200 currency pairs and provides real-time
updates to over 7,000 FTSE FX Indices. This means a lot of
emphasis on technology, but Dale believes Cu?rex has it covered.
“We needed an ECN with higher throughput, because we have a
very diverse set of products,” he explains. “Too many venues
have a limit on the amount of data you can put through and most
support up to 50 currency pairs.

“We are streaming liquidity and indices and this involves a
separate calculation for 2100 currency pairs,” he continues. “This
requires incredible capacity, so while the major platforms redline
around 130,000 messages per second, we have a throughput
capacity of 4,000,000 per second. This means we do not need to
throttle control as others sometimes have to, because we are often
using 5-10% of our capacity. We are taking engineering and
trading technology to a new threshold.”

Reaching Out

The design of Cu?rex FX is not only intended to build a bridge
between the ETP and FX worlds, although in terms of those
investors chasing yield through the carry trade it obviously fits
the bill nicely. Beyond traditional investors, Dale believes the
model can help bring together what would previously be seen, in
the FX market at least, as strange bedfellows.

“We are getting some interest from central banks, especially
those tasked with managing local market liquidity to ensure that
market has sufficient depth for investors,” he says. “Our prices
can connect, for example, HFT with policy investors. This helps
ensure that the local market’s integrity is maintained and the
primary market remains healthy in these local markets.”

Looking ahead, and accepting the notion that volume on the
ECN is less important to the Cu?rex business than some of its
potential rivals, it is hard to see a growing business unless the
firm is able to reach into the investor space and build investment
flows into the ETPs it supports. “Investors are looking for
something different, and ETP providers are looking to offer that,
and there is no better place to look than the spot FX market,” says
Dale. “By linking that market with ETPs we are offering
diversification through easy access, with no futures account, no
new regulations to worry about – this was built for the Dodd-
Frank era without even knowing it was coming – and no new
allocation processes. This is a workflow change that enhances an
investment portfolio.

“Currency still struggles to be seen as an asset class in some
circles but things are changing, and we are seeing increased
interest from the investment community,” he adds. “To attract this
community, you need products that are scalable and global – and
there is no better place to access that than the FX market.”

Paul Gogliormella

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