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Euronext and FastMatch: the Perfect Combination?

As reported
earlier
, European exchange group Euronext is buying a majority stake in FX
ECN FastMatch. Not only is this a deal that has long been rumoured (only the
identity of the buyer was unknown) it also appears to be a deal that makes a
great deal of sense.

Euronext is buying a 90% stake in an FX ECN that is seeing
tremendous volume growth – the first four months of 2017 have seen average
daily volume of $18.1 billion compared to $11 billion the same time in 2016 –
and FastMatch is gaining access to a potentially huge distribution network.

“Euronext is an excellent partner because FastMatch has been
very US-centric,” explains Dmitri Galinov, CEO of FastMatch, who will –
importantly – continue to run the business. “Most of our volume goes through
our New York matching engine but we all know that Europe, and especially
London, is the centre of the FX universe, and Euronext has a strong presence
there. It is the jewel in the crown of those markets in which it operates a
stock exchange.

“With the Euronext footprint, we will be able open doors to
any corporation, investment manager or financial institution and improve their
FX experience and execution quality,” he continues. “This deal provides us with
a fantastic distribution network to go with our great technology.”

Although the headline aspect of the deal will be the
opportunity for FastMatch to add more trading clients, there is another
potentially extremely valuable opportunity – market data. FastMatch is in the
final stages of launching the FX market’s first Tape and the distribution
network available via Euronext would appear well-suited to deepening the Tape’s
impact.

Galinov believes that the blend of a distribution network
and fast market data will prove irresistible. “When EUR/USD trades at a new
level, 40% of the time it the new print is on FastMatch first,” he claims. “We
have the fastest market data in the FX world and Euronext has well in excess of
100,000 market data users – it’s a perfect combination.”

Away from existing products, one line that caught the eye in
the statement from the firms announcing the deal was the opportunity for new FX
products on FastMatch. While the ECN currently supports some short-dated
forwards on the platform for those clients that are too small to require SEF
registration, Galinov says that there are plans to add NDFs, forwards and swaps
to the platform. “From a technology perspective we have always been able to
support these products, but we didn’t want to direct valuable resources towards
meeting the regulatory requirements in these products,” he explains. “Euronext
already meets these requirements so it is very easy for us to concentrate on
building the right technology – which is what we are good at.”

Although there has been no little hype around the deals that
have seen exchange groups buy OTC venues in recent years, there is still the
question of how well the two distinct business models fit together. One source
suggested earlier today that some of the exchanges have failed to completely
grasp the nuances involved in such a huge OTC market and as such growth on the
OTC venue has remained subdued.

Something that may help this deal is the structure, under
which Euronext has only bought 90% of the firm. Obviously this clears up some
of the lingering issues around FXCM’s stake in FastMatch – the recently
re-named broker has been keen to offload its stake to pay down a troublesome
debt with Leucadia – but it also means that one of the key elements that have
made FastMatch a success, the people, remain in place.

FastMatch has obviously been doing things right – the proof
is in the volume data – and as such it would seem to make sense for Euronext to
not only let that continue, but also allow it to do so on a much broader scale.

Further down the road there will inevitably be further
structural shifts that could see clearing take a bigger role in FX trading –
especially the swaps market – and while there is no immediate likelihood of
this happening, this deal would mean if it does then FastMatch’s customers will
be well-placed to benefit.

If there is an issue for FastMatch that has not been
resolved by this deal it is – like so many others in this space – the lack of a
strong Asian presence. If the recent trend that has seen Asian centres grab
more market volume continues then some sort of increased investment will be
needed in this region. The benefit for FastMatch from this deal is it will have
access to much deeper resources to be able to facilitate such a move, should it
be deemed necessary.

A sale of FastMatch has long been rumoured and the noise
levels around the firm have increased commensurately with the volumes. Clearly
the firm has been in discussions with several suitors but one gets the impression
that Galinov is very happy where he ended up in terms of the partner for the
deal.

Nothing is guaranteed in business and there will,
inevitably, be obstacles, but at face value this looks like the proverbial
win-win for both parties.

Colin_lambert@profit-loss.com

Twitter @lamboPnL

Twitter @Profit_and_Loss

Colin Lambert

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