Dmitri Galinov, the founder and former CEO of FastMatch, is preparing to launch a new platform, called 24 Exchange, which he claims will offer market participants a more cost–effective way to trade with one another.
“The problem that we’re trying to solve with 24 Exchange is that the cost of technology over the past decade has plummeted, but while the large financial institutions participating on exchanges have seen very significant margin pressures, the exchanges themselves haven’t really felt this,” Galinov tells Profit & Loss.
He adds: “Everything at the exchanges now is automatic, it’s electronic, it runs on computers. But while computers have been getting cheaper every day for the past 10 years, the exchanges have become more expensive every day for the past 10 years. This just doesn’t compute.”
It’s unclear if the pun was intended.
Thus, by offering a trading venue where the decreasing costs of technology are passed on to the users, Galinov and his team hope to lure liquidity away from the incumbent platforms.
A multi-asset class platform
In terms of management structure, Galinov will be the CEO of the new exchange, with Jason Woerz, who was previously head of execution at Bridgewater Associates, serving as president, and Paul Millward, formerly the head of FX strategy at Cboe Global Markets, as head of product.
Galinov says that 24 Exchange aims to launch next month and, although it will do so with a focus on FX, the plan is for it to be a multi-asset trading venue.
“We’re starting with NDFs and FX derivatives because it is the easiest place to start due to the backgrounds of Jason, Paul and myself in FX. The fact that electronic trading is growing in this asset class very significant and there isn’t really a dominant player in this space. So it’s really good conditions for a new entrant to come into, especially as the main competitor – which we would consider to be EBS – was just acquired by an exchange,” he explains.
Questioned about which asset classes the exchange could subsequently expand into, Galinov highlights that US equities, fixed income and European equities as potentially attractive asset classes, the last of which he says is made more attractive because Brexit is fragmenting the liquidity available in the market right now. However, he stresses that “the situation is very fluid” regarding which asset classes 24 Exchange will target next.
The exchange will allow users to interact directly on a disclosed basis through its network, as well as offering RFQ, RFS and an anonymous central limit order book (CLOB) that will use a central clearer, although Galinov declines to name who this clearer will be, stating only that he is in discussions with a few banks regarding this role.
Galinov predicts that the CLOB will be popular amongst clients because it will offer them significant savings, both in terms of lower exchange fees and margin costs, which he thinks will be especially important as more buy side firms are caught by the uncleared margin rules (UMR) in September of this year and in 2020.
Remaining Outside the US
With regards to the potential client base of 24 Exchange, it’s important to note that for NDF trading the platform is operating as an off-SEF exchange. What this means is that the venue, which is based in Bermuda, will not have any “US persons” as members for NDF trading.
As a result, Galinov sees the initial makers on the platform being non-US banks and non-US non-bank market makers, and the initial takers being hedge funds, brokers and asset managers – but if any of these clients are located in the US, they will have to access to the platform via sponsored access from a non-US member of the exchange.
While 24 Exchange has its operations in Bermuda, the staff looking after the technology are based in its office in Stamford, Connecticut, and its servers are located in LD4 in the UK.
Despite 24 Exchange describing itself on its website as, “The exchange that is always open”, it will in fact initially be open for trading from Sundays at 5:30pm EST to Friday at 5:00pm EST, the same as most FX trading venues. Galinov says that the exchange could move to a 24/7 model, but that right now it doesn’t make sense to do so from a cost perspective.
An interesting point in the exchange’s official operating procedures, which have now been published via its website, appears regarding the FX Global Code.
“Each Participant must ensure that it, and its Registered Traders and Authorised Agents, as applicable, are familiar with, and abide by, the requirements of the FX Global Code,” it says in the operating procedures.
Pressed on whether this means that firms will be required to have signed the Statement of Commitment to the Code in order to use 24 Exchange, Galinov indicates that no final decision has been made on this issue.
“We would like all the participants to sign the statement and, if they haven’t, we’ll work with them to understand why not,” he adds.
Up until this point, Galinov has been financing the development of 24 Exchange out of his own pocket, but the firm is now closing in on its seed funding round. He owns a majority stake in the company, while noting that Woerz and Millward have “significant stakes” and that the firm “will also have outside investors, directors, advisors and flow providers to participate in equity”.
Of course, much of 24 Exchange’s pitch will depend on whether it can really provide comparable technology performance to incumbent platforms whilst also delivering the promised cost savings. One advantage it has is that, by focusing on NDFs to begin with, latency is less of an issue for the exchange.
“For the NDF market, when we selected the vendors we did not concentrate on speed because it’s not important in the NDF market, what’s much more important is credit, liquidity, etc,” says Galinov.
He adds that if 24 Exchange moves into asset classes where speed is important, such as equities or the FX spot market, it will select a vendor that can provide a low latency platform to partner with. Indeed, Galinov claims to have already identified a vendor that can offer “incredible speed” at low cost, should the exchange move in this direction, and stresses the availability of such technology.
“What I think people don’t appreciate is that technology has progressed so much and there are so many vendors out there,” he says.
Galinov says that some vendors already provide the underlying matching technology for banks and brokers, but that providing this for an exchange is much easier.
“So a vendor that has a decent matching engine can certainly run an exchange,” he adds.