Consolidation in the multi-participant trading platform space has long been talked about but it has now taken a step forward with news that State Street Corp. has agreed to acquire Currenex, the independently owned online foreign exchange trading platform for $564 million in cash.
"The acquisition will accelerate State Street's participation in the fast growing electronic foreign exchange trading marketplace," State Street says, adding that it expects the transaction to be neutral to 2007 results and slightly accretive to earnings in 2008.
"Today's announcement reflects our proven strategy of acquiring key technologies and platforms that enhance capabilities for our customers and expand our market share in high growth areas such as foreign exchange. This acquisition also diversifies State Street's trading customer base beyond traditional asset managers to include more active currency managers and hedge funds," says Joseph Hooley, vice chairman and global head of investment servicing and investment research and trading at State Street.
"The future of global electronic foreign exchange trading will be determined by who can provide the most efficient technology solutions that allow quicker access to markets and flexible, comprehensive trading solutions," he adds.
Although the two organisations are known to have been talking about cooperation in different forms for some time, market sources expressed surprise at both the timing of the deal and the amount paid. "Two years ago this deal would have made sense, but now I am not so sure," says a senior e-FX manager in London. "True, it does give State Street's FX Connect a good source to upgrade its technology – which it has been working on for some time now – but I am not convinced that the majority of users of FX Connect are that concerned about the technology. It has done well because it provides exactly what the clients want."
Another e-commerce source suggests the acquisition will help FX Connect finally deliver live streaming prices to its clientele. "However $564 million is a lot for that – it will be interesting to see where they think the value is. This values Currenex at just under three-quarters of EBS, which is the biggest player in the electronic market," the source adds.
A factor in the decision by State Street to buy Currenex could be the need to upgrade its streaming technology, something that has been on the company's agenda. Later this year, the MiFID directive comes into being, meaning that in certain transactions best execution has to be achieved. Currently State Street prides itself on the fact that, as it has told Profit & Loss frequently over the past two years, more than 90% of transactions are executed on a one-to-one basis. If asset managers – State Street's core client group – suddenly need to have access to many more quotes, then a major overhaul of the FX Connect platform is likely to be required.
Although Currenex does not publish volume data on its platform, the company is understood to have been cash flow positive for almost three years now, although this is also a result of its technology provision services, something that is undoubtedly of interest to State Street.
It is unclear what impact the ownership of State Street will have in the minds of rival banking organisations that have previously used Currenex for their technology support. An example may lie in the hostile reaction to Citigroup's purchase of Lava Trading in the equity (and FX) space in July 2004, which included some of Citi's rivals threatening to remove their business from the platform.
In the meantime, both parties unsurprisingly express their satisfaction at the deal. "Being able to offer our customers innovative trading tools through FX Connect and Currenex fulfils our goal of delivering leading-edge foreign exchange capabilities to meet growing market demand," says Stanley Shelton, executive vice president and head of State Street Global Markets, the company's investment research and trading arm.
"The two platforms are extraordinarily complementary with almost no overlap. Once this transaction closes, we will move quickly to integrate Currenex's technology with Global Link, our multi-asset class trading platform, and continue to invest in the platforms to deliver the most complete and technologically advanced set of products available in the market.
Clifford Lewis, chairman and CEO of Currenex adds: "This move leverages the strengths of two innovators who share a similar strategic vision of creating best of breed and flexible electronic trading solutions. This acquisition will enable us to continue providing sophisticated customers with the market-leading tools they need to maintain their competitive edge in an increasingly complex and dynamic global environment."