In recent years, large exchange groups have been lining up to buy OTC FX platforms. But in this game of musical chairs, what happens to the venues without a buyer when the music stops? Galen Stops reports.

One of the major trends in the multi-dealer platform space in recent years has been the acquisition of these platforms by larger exchange groups.

Hotspot was the first to go after it was bought by BATS Global Markets in 2015, which in turn was then acquired by Cboe Global Markets in 2017 and the FX platform was rebranded as CboeFX. 360T was also bought in 2015, with Deutsche Boerse Group being the winners of that bidding war, before it in turn purchased GTX in 2018. In 2017 FastMatch was acquired by the European exchange group operator, Euronext, and finally, in a deal which significantly surpassed all of the others in size and value, CME Group paid $5.49 billion for NEX Group last year.

The one obvious deal that bucked this trend was the purchase of a majority stake in Thomson Reuters Financial and Risk by a private equity consortium led by Blackstone, with the business subsequently rebranded as Refinitiv, however, this ownership structure is clearly a temporary state of affairs, with many in the market speculating that the FX platforms within Refinitiv are still likely to end up owned by one of the large exchange operators.

Does so many OTC FX platforms being swallowed up by exchange groups put pressure on those ones that aren’t part of a larger organisation, though?

Both CME and Deutsche Boerse have been fairly transparent about the business model that they’re pursuing in FX. For both exchange groups, the aim is to offer in one place the complete gamut of pre-trade, execution and post-trade services that trading firms might need, while also enabling them to trade the complete product range: spot, forwards, NDFs, options, swaps and futures.

Once all this is in place, the argument from these exchange groups is basically that by having everything in one place market participants will be able to unlock capital efficiencies whilst also having the technological and operational ease of being able to connect to one venue for all of their FX trading needs.

Size Advantage

For Cboe and Euronext, the focus is a little different. For the OTC platforms that they own, there are three main advantages that in theory can be derived from this ownership.

The first is that they can gain increased brand recognition from being part of a larger organisation and this can be more significant than it initially sounds. For example, when targeting buy side clients whose main focus isn’t trading FX, they are far more likely to know these larger exchanges and therefore be cognisant of the fact that they’re very stable organisations that have been around for a long time and have sizable balance sheets behind them.

The second is that being owned by these exchange groups gives the OTC FX platforms instant access to a new set of potential clients that they can try to sell to, and not only this but they can try and leverage the exchange’s existing relationships with those clients to this end.

The third benefit is that the resources available to these OTC platforms might be significantly higher now than under their previous ownership structures. And yes, this might mean that they have additional technology budget or are able to grow their headcount, but it also means that they no longer have to worry about maintaining their own human resources, legal, accounting, or other business support departments. This is especially beneficial in an industry that is increasingly subject to new regulatory requirements, or for platforms that are looking to operate across multiple geographical and regulatory jurisdictions.

With the potential to reduce costs internally, reach a wider client base and then offer existing clients greater efficiencies and product selection, there’s an argument to be made that in the long-term, OTC FX platforms that are part of larger organisations have a, shall we say, sizable competitive advantage.

Finding a Niche

There seems to be plenty of people in the FX industry willing to push back against this argument, however.

For starters, some market participants remain suspicious of the CME’s commitment to OTC markets and expect that it could meet some resistance in FX as a result. Publicly, the CME has always insisted that the futures and OTC markets have a symbiotic relationship where each benefits the other, but has said that where it makes sense it will look to introduce the clearing of OTC products so that CME users can gain margin benefits and efficiencies against their futures portfolios. Rightly or wrongly though, some market participants think that the exchange group’s end-game is really to try and “futurise” parts of the OTC market.

“I think that people can quite easily make the assumption that now CME has bought NEX it’s going to futurise certain products and LCH won’t be able to clear any of the OTC because the efficiencies over at CME will be so great, but I don’t subscribe to that,” says one market source. “Like it or not, the banks have still got a hold on the OTC market and they do not want to see that market become futurised over time.”

Another source at one of the largest OTC FX platforms also points out that while having scale makes it easier for them to reach a wider client base, operating across a broader set of clients comes with its own challenges. They point out that by servicing everyone from asset managers, insurance companies and regional banks to hedge funds, corporations and broker-dealers, they are required to be all things to all people, in order to keep all these different segments happy. By contrast, they say that as long as a smaller platform has some kind of secret sauce underpinning it, then by focusing on a narrow segment of the market and perhaps only offering a few specific instrument types, they might be able to cater to the needs of this segment more effectively.

Yet another source suggests that technological enhancements in the FX market might prevent the further consolidation of trading venues within the market.

“One of the things that pushes against this trend is that the use of aggregator technology enables a more fragmented market, and it enables platforms to experiment with different protocols and different types of customers. Then with analytics, firms are able to knit together the trades that they made on different platforms and look at them holistically. So between aggregation and analytics, it becomes safe to break up your transactions across multiple venues and then see what happened at the end of it in a consistent way,” they say.

Valuing Diversity

Meanwhile, David Mercer, CEO of management-owned LMAX Exchange, casts doubt on the idea that bigger organisations, such as exchange groups, are able to offer more efficient services to clients.

“I happen to think that doesn’t deliver efficiency for customers as a business model. For my sins, I worked in a investment bank for 10 years and the cost of running those organisations is unbelievable. Sometimes with greater size comes greater costs, not greater efficiency,” he says.

Mercer adds: “Look, I’d be foolish to run a bookshop on the high street and say that I wasn’t threatened by Amazon, but I think that there’s room in this market for an independent platform like ourselves that can move much quicker. The other question I would ask is: what difference have these exchanges actually made in the OTC space? I don’t think there’s been a massive increase in business for the once independent venues that have now been acquired by larger organisations.”

Indeed, some of the OTC platform providers see the recent spate of exchange-driven acquisitions as an opportunity to gain market share while rivals are distracted by, firstly, these transactions themselves and then, secondly, by the subsequent integration that needs to occur.

“As we look to grow our business, we cannot ignore the fact that these FX venues are changing hands. Even though the EBS deal only closed at the end of last year, the discussions leading up to that went on for months and were a huge distraction. FastMatch changed hands and then changed management at the top and suddenly their growth seemed to lose some momentum, then there’s questions about where FXall is going to end up. All of this disruption in the market helps us,” says the head of one trading platform.

Indeed, Mercer makes a similar argument: “I think that there’s an opportunity for us here and I’m already speaking to customers that I maybe didn’t speak to in 2017 because they’re looking for another option. You have to remember that clients across the board like diversity – you might be the best operator on the Street but no one is going to give you 100% of their flow. So sometimes when it comes to consolidation, one plus one doesn’t always equal two, sometimes it equals one and a half. And that can be an opportunity for an operator like ourselves.”

Of course, sources at firms that have been acquired are quick to play down any potential resulting disruption, insisting that the dayto-day operations and focus at their firm remains the same.

“I don’t anticipate the integration hindering any plans that we would have in isolation as we are continuing with the upgrades that we had planned,” says Seth Johnson, head of cash markets at CME Group, adding that he believes that the investment EBS is going to receive as a part of CME will mean it ends up with a better platform than it would have otherwise.

Regardless of whether or not you believe that exchange acquisitions have distracted OTC FX venues from their businesses, the logic behind the model that CME and Deutsche Boerse are pursuing appears to be a compelling one on paper, as do the advantages that FastMatch and CboeFX could get as part of a bigger organisation. And yet, FX remains a stubbornly fragmented market and this is unlikely to change any time soon. This means that OTC trading platforms that aren’t bought up by large exchange groups might not be missing out.

Galen Stops

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