Some Initial Thoughts on the 360T/GTX Deal….

So the big news this week was that 360T has agreed to buy the GTX ECN for $100 million. This is obviously an interesting deal in a number of ways, and here are some of my initial thoughts.

Firstly, let’s look at the price per $1 billion of spot FX average daily volume (ADV).

We did a very rudimentary analysis of this when Deutsche Börse announced the purchase of 360T back in 2015 and found that it paid about $11.36 million per $1 billion dollars of spot FX ADV, compared to about $12.7 million per $1 billion of ADV paid by then-BATS Global Markets for Hotspot.

We didn’t bother even trying to do a similar analysis for CME’s proposed acquisition of NEX Group because it would make no sense to do so, given all of the other non-spot FX assets involved.

With the caveat that we have issued previously that it is a massive over simplification, let’s look at how the GTX ECN purchase compares.

Over the past 12 months, the ADV on GTX’s platform has been $12.3 billion and, before anyone starts complaining that this includes the surge of FX trading activity seen across the multibank trading platforms seen in Q1 this year and therefore is a positively distorted figure, it’s worth pointing out that taking GTX’s ADV from January 2017 until now means this figure only drops down to $12.2 billion. And just taking the 2017 volumes by themselves gives an ADV of $11.5 billion.

Source: GTX

Looking before 2017 seems rather redundant as the platform clearly made a breakthrough from trading sub $10 billion ADV per month to consistently trading above $10 billion ADV per month between 2016 and 2017.

Therefore, pick whatever time period for comparison you want from the three mentioned earlier and it ends up with Deutsche Börse paying between $8.1-$8.7 million per yard of notional spot FX volume. So from this perspective, the GTX deal doesn’t necessarily look like a bad one compared to other FX platform purchases.

Source: GTX monthly volumes

Now, let’s look at strategy – why is 360T buying an ECN?

My initial reaction was that it seemed like a strange purchase, given that 360T literally just announced the launch of its own ECN in April. Subsequently, I first assumed that this was the platform provider effectively throwing in the towel on that venture right at the outset. However, thinking about it some more, combining the two ECNs together actually makes a lot of sense.

The 360T ECN actually has quite an interesting credit model – you can read more about that here – and by combining it with the GTX ECN it will gain 150 clients, over $10 billion in ADV, connectivity via an API to a number of major market makers on both the bank and non-bank side, as well as third party aggregators. Plus, as already noted, GTX’s volumes have been trending up in recent years somewhat, albeit modestly.

So effectively, it looks to me like what 360T has done here is paid $100 million to jump-start its ECN business.

Another point to consider is that, while the liquidity providers on each platform will be largely the same, my understanding is that clients on the liquidity taker side are quite different, with GTX being more focused on large banks, active traders and some macro and retail clients, and 360T being stronger amongst the real money, corporates and regional and developing bank segments.

With all that said, there is a reason why most of the OTC spot FX platforms have been working hard to diversify their offerings in recent years by adding non-spot products, namely that spot FX has become a highly commoditised market, especially in the more liquid pairs, and therefore harder to make money from. And yes, I know the purchase has to be thought of in terms of how it adds to the broader FX offering and product suite that 360T is trying to develop, but the point still stands in terms of pure ROI on the asset.

One issue I have with this purchase, and this is purely a subjective and cosmetic gripe, is that it makes the branding for the company even more complicated. GTX, which is set to be imaginatively renamed 360TGTX, will exist as a product within the 360T suite. 360T sits alongside Eurex, the platform that offers FX derivatives. And then all of this is then owned by Deutsche Börse Group.

Back in 2016, I sat down with Carlo Koelzer, the CEO of 360T and global head of FX at Deutsche Börse, to talk about his plans to build a “one-stop shop” FX platform. Well from a branding perspective if nothing else, it’s beginning to look like a few different shops cobbled together rather than a single, cohesive platform under one roof.

And this point actually segues nicely into another interesting aspect of this latest deal. When CME agreed to buy Nex Group, there was talk of “building a bigger supermarket” – which is, of course, the same thing as building a one-stop shop. The FX strategy for both exchange groups then is to build out an FX offering that enables market participants to trade every product type, while also offering all the pre-trade services, data and analytics they could want, in addition to offering FX clearing and other post-trade solutions on the back-end.

From my perspective, the advantage that the CME has is that its derivatives business completely dwarfs that of Eurex, EBS does more volume across all its platforms than 360T and CME could potentially leverage the ancillary assets that it is set to acquire as part of the NEX acquisition – such as Traiana – to further boost its supermarket status.

The advantage that Deutsche Börse has is that it has a three-year head start over the US exchange. Make no mistake about it: assuming that the deal goes through, combining CME and NEX is going to be a complex, tricky and time-consuming operation and there’s a lot of “under the hood” work that needs to be done with this type of integration, in addition to reorganising (and sadly, cutting) certain staff and business lines. By contrast, although some of the branding for Deutsche Börse might be a little clunky, the actual structure and vision for the FX business is already in place.

It won’t necessarily be winner takes all, but there could be a clear advantage to becoming the first platform to get this supermarket/one-stop model fully implemented, especially when one thinks about the vertical silo model of which derivatives exchanges are traditionally so fond.

I think that this in turn creates an interesting dynamic, because now Deutsche Börse has to really push on in order to maximise the head start that it has. This provides another possible justification for buying an existing ECN rather than waiting for volumes to build up organically on the one that it just built. It also means that I wouldn’t necessarily be shocked to see further acquisitions in the FX space from Deutsche Börse in the next 18 months or so.

And finally, I just want to point out how well Profit & Loss’ managing editor, Colin Lambert, is doing with his prediction at the start of the year that there would be more deals in the platform world this year.  A real turn out for the books, that one!

Galen Stops

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