Not Necessarily Consolidation But…

There isn’t much left up for grabs, but 2018 will see a deal in the platform world, says Colin Lambert.

In all the history of the Profit & Loss Crystal Ball, platform consolidation has been the most fertile ground…..mainly for critics! If viewed in terms of the number of deals, however, the story is a little different.

The headline has been in demand from exchange groups for an OTC presence, culminating in deals for Hotspot, 360T and Fastmatch, and it is hard not to see this continuing – in spite of CME finally deciding to do something about further penetrating the OTC space by  launching a service itself rather than entering partnerships.

The success or otherwise of CME’s FX Link could well be the big story of 2018, for a successful venture could go a long way towards positioning CME as the FX trading venue. As 2017 ended, the exchange was seeing good growth in its FX business and in September and December it seemed to benefit even more than other venues around events.

The latter could be significant, because previously one could argue that Matching and EBS Market were the “go-to” venues when things got busy. If CME is cementing its place amongst OTC traders, and will reinforce that further with FX Link, we could be on the cusp of a ground shift in the platform demographic.

So that would take CME out of the race for an OTC platform, right? Well not necessarily – it could actually be the circumstances to encourage such a deal, especially if NEX Group (which still must surely be the juiciest plum on offer?) doesn’t pull up trees in H1 in therms of revenues.

There is another reason why CME may look at the OTC world – competition from a close rival in the exchange space. ICE is not above making a big a big statement, and it has tried repeatedly (and to date unsuccessfully) to break into the FX space in a meaningful way. If ICE starts showing an interest – and it has previously – then CME may just be lured to the table to help protect what looks like being a strong position at the close of 2018.

As noted when Euronext kind of came out of left field to buy Fastmatch, and when Deutsche Boerse bought 360T, there is more to Exchangeland than Chicago and it would not be surprising at all if a relatively small or regional exchange group also dipped its toe into the market. It may be in a small way by buying a share in an existing OTC FX provider or it could be buying a platform with smaller volumes, but it would establish a presence and provide what the exchange groups all want – access to OTC traders.

The key to the identity of potential buyers will be, probably, the ambitions of their clearing business, because this could help drive revenues. Of course, under MiFID II, open access to clearing – in other words, trade where you like, clear where you like – is a core tenet of the regulation…apart from it isn’t; at least not until July 2020 it seems.

It could also be argued, as some sources have recently when talking to Profit & Loss, that in spite of all the best intentions, a clearing house is still more likely to pick up business from a platform under the same umbrella – as an exchange operator recently observed, “It’s called economies of scale.”

Something unlikely to happen in 2018 is one OTC platform buying another, although cynics suggest that some of the more (ahem) ‘experienced’ providers could do with a technology upgrade that could be brought about by buying a smaller tech savvy competitor. This has been tried in the past and the success rate doesn’t look encouraging, it has to be said. If a platform really is worried about the standard of its technology infrastructure, then the money it would spend buying a competitor is probably better spent on creating a whole new tech stack. The problem is that it isn’t sexy enough for stock market analysts who want to see deals, not enhancements!

One possibility for an OTC-to-OTC deal, however, is as part of a defence strategy – if a platform provider is the beneficiary of unwanted attention from a would-be buyer, it may decide to poison any deal with one of its own. Unlikely, but not out of the question.

Ultimately, however, there may be a bigger obstacle to the purchase of an OTC platform – they may not actually do that well in 2018. The volume story is a patchy one in FX at the moment; there have been plenty of event-driven spurts in activity, but baseline volumes appear to be pretty low – and staying there.

It’s all very well wanting to buy a platform for a broader strategy, but the path of wisdom may be to let the targets suffer in a low vol environment a little longer…

Galen Stops

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