In an interview at Profit & Loss Latin America 2018 conference, Gary Flagler, Head of International Business Development, Derivatives, at MexDer, talked about the Mexican exchange’s future growth plans.
Profit & Loss: What’s been your focus since you joined the exchange last year?
Gary Flagler: We can sum up our international initiative in one word and three parts, and that word is: Connectivity.
When I talk about connectivity, I’m talking about connectivity to international clients, whether they’re professional trading groups, hedge funds, commodity trading advisors, asset managers and, to a lesser extent, banks, corporates, mutual funds, pension funds and retail.
The second part of the connectivity component has to do with connecting to trading platforms. It’s important for the clients that they can access our markets through a variety of different trading platforms, whether they are proprietary or ISVs. We had an order routing arrangement with the CME Group that lasted from 2010 up until 2017. We mutually ended that arrangement last August 2017. We’re pursuing a different angle now, replacing Globex with a NY5 Point-of-Presence (PoP) at the Equinix Data Center in Secaucus, New Jersey.
The third phase of connectivity has to do with connecting to US and international futures brokers so that their clients who are trading through them can also access our products.
P&L: Talking there about the importance of connectivity and building out international participation, why is it important to the exchange group to build out this international participation? Do they really need to look further abroad to expand?
GF: Yes, the importance of having international business is that it can contribute to better pricing. The professional trading groups provide a tremendous service to international markets and economies by providing liquidity and economic stability. So, for us it’s very important to get international business, not only from professional trading groups, but other buy side clients like hedge funds, CTAs and asset managers. To improve pricing. Create a better local marketplace. In terms of lower bid-ask spreads. And lower costs and more efficient markets for market participants.
P&L: What’s the case you put forward to international market participants as to why they should be trading on your platform specifically?
GF: Well the first reason is for the profit opportunity, but it’s also important to note that quality firms do business not only to make money, but also to contribute economically or socially. So, we are also appealing to international clients, not only based on the profitability opportunities offered by the MexDer financial products, but also on a sustainability role they can play to contribute to the ongoing improvement of the Mexican economy and marketplace. Price discovery for exchange-listed Mexican derivatives best promotes macroeconomic stability when those transactions occur locally. And a strong Mexican economy benefits everyone, not only in Mexico, but north and south, too.
P&L: Let’s talk about the FX market specifically. Who do you see as the real drivers of growth in this market? You’ve mentioned various different client types, but do you see this growth really being driven by prop trading firms or HFTs? Or is it the big pension funds [Afores] that need to hedge an exposure? Where do you see this growth coming from?
GF: Right now, about 50% of the business on the MexDer MXN/USD futures comes from banks. Approximately 25% comes from assets managers for mutual funds and pension funds. The remaining 25% comes from professional trading groups, hedge funds, corporates and retail.
I think the growth is going to come from the international professional trading groups. Also, international hedge funds, commodity trading advisors and asset managers. It’s like a swimming pool, once one person jumps in, then it gives other people the confidence to jump in right after them.
P&L: How do you see the technology shaping how the derivatives market evolves?
GF: Well in terms of execution I don’t see that much changing over the next one to three years. There may be a trend towards the automation of exchange for physicals, or EFPs, but that’s to be determined. I believe large-size block trade orders are going to continue to be done via the telephone. Traders want to ‘fill or kill’. They want it all done at once because a lot of times people don’t want to show their liquidity on a screen. By contrast, the smaller orders will continue to be executed via a trading screen.
Where I do see technology having an enormous impact moving forward in FX and listed derivatives is on the clearing side. There are developments in blockchain technology, for example the Australian Stock Exchange is starting to move towards a blockchain solution for daily settlement. It’s something that, as part of Grupo BMV, we’re looking into.
The other interesting technological development is on the trading side where we’re seeing hedge funds starting to allocate more money towards building artificial intelligence tools.
P&L: Looking ahead, where are you going to be focused on specifically with regards to growing the exchange?
GF: Well, in addition to building out international participation on the exchange, we’re also looking at new products.
Our primary products are the MXN/USD futures, our stock index futures and options, individual stock options and single stock futures. And we also have Mexican government bond futures. Foreign investors currently own over 50% of the Mexican government debt, but in addition to this, we’re waiting for regulatory approval to list a corn options contract down here. What the heck does that have to do with foreign exchange? Everything!
That corn contract is built for Mexican clients here – primarily the small farmers, but also for the government accounts that provide these small farmers subsidies and pricing. It’s going to be denominated in pesos, it’s going to be metric tons, there’s going to be an FX cross hedging opportunity between the CBOT corn and our contract. There’s also the mismatch between metric tons and bushels. So, this has enormous arbitrage opportunities – much like the arbitrage between the NYMEX versus ICE versus NFX natural gas contracts. The feedback that we’re getting from prospective new international and local clients is extremely positive.
We’re also looking later this year to list a local electricity futures contract. We are very excited about these prospects – we have interest from several international clients.
We are proud to be a part of one of Mexico’s most prestigious financial institutions. Bolsa Mexicana de Valores, the Mexican Stock Exchange, celebrates it’s 124-year anniversary this coming October 31st. The startup of the Mexican derivatives market marked a historic milestone in the development and internationalisation of the Mexican financial system some 20 years ago. We look forward to our 20-year anniversary with excitement and optimism for the future this coming December 15th.
Thank you, Galen, for the opportunity to chat with you here at the Profit & Loss Latin America 2018 conference. What a fantastic event. Thank you again!