What Nex for EBS?

This is an updated story that was first published in the September issue of Profit & Loss before a new EBS Brokertec CEO was appointed.

News that Gil Mandelzis, CEO of EBS Brokertec, is stepping down from the role has triggered the usual speculation over a successor and the business conditions the next CEO will face. Without doubt, the next head of EBS will be taking the reins of a very different company to that inherited by Mandelzis.

Historically, EBS was considered a G3 spot inter-dealer platform that, along with Reuters Matching, was the primary trading venue for when the banks needed to clear risk.

As HFTs started to become more active in the FX market generally post-2008, so their presence grew on the EBS platform. This in and of itself was not a problem, but it did perhaps mark the first major shift away from EBS’ traditional identity within the FX market.

As this shift occurred, there was a growing discontent from some banks about the way that some HFT firms behaved on the platform and the perceived manner in which EBS distributed its data to some of these firms.

Thus, when Mandelzis was put in charge of EBS in 2012, it was at a time when volumes on the platform were declining and, as he put during an interview with Profit & Loss at the time, there was “a justifiable sense of disappointment from some of our customers over how they were interacting with EBS”.

Mandelzis was always careful not to distinguish between bank and non-banks, instead focusing on curbing what he termed as “disruptive” behaviour on the EBS platform. To this end, the firm introduced a number of changes that same year, including a move away from decimalisation, which, as Profit & Loss reported, initially received praise from both bank and non-bank participants.

But these were to be the first of many changes at EBS.

Under Mandelzis’ watch, the firm launched EBS Direct, the disclosed trading platform; EBS Select, an anonymous, segmented, bilateral liquidity pool; EBS Hedge, a midpoint price matching liquidity pool, BrokerTec Direct, a relationship- based fixed income platform; and eFix Matching, an electronic service that executes buy and sell interest at the most popular benchmarks.

In addition, since 2012 EBS and BrokerTec have been combined, MyTreasury was combined into the FX portfolio and EBS Institutional (EBSI) was created after the firm acquired Molten Markets in October 2015. The firm also launched FX forwards on EBS Direct and licensed derivatives software for FX options from FX Bridge Technologies.

The overarching purpose of all these changes was clearly to diversify the EBS business away from being a G3 spot interdealer platform and towards being a multi-asset, multi- product venue capable of catering to a wide range of market participants.

This makes logical sense considering that a combination of lower trading volumes across the board, increased competition from new trading venues and the growth of internalisation amongst the banks had been eating away at EBS’s core business when Mandelzis became CEO. It is also notable that since then there has been a broader slowdown in spot FX trading across the board.

Spot Declines

The official data available on Icap’s website clearly shows that volumes on EBS have been trending down for some time, from its high watermark point in 2008 when it recorded $214.1 billion in average daily volumes (ADV) to 2016 where year-to-date it is averaging $89.8 billion per day on its various platforms.

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The vast majority of this decline occurred prior to Mandelzis being appointed CEO and, as previously stated, is largely commensurate with a broader decline in reported spot FX volumes in general.

For example, although the combined Thomson Reuters/FXall only publishes its FX volumes going back to 2013, a similar slowdown in spot activity since then can be witnessed in its data.

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Yet one glance at a graph showing all the trading activity on Thomson Reuters’ FX platforms and it is immediately apparentthat its overall volumes are trending in line with the non-spot products rather than the spot products.

Thus, despite ADV being down 17.3% in spot, overall volumes are actually up 9.6% since 2013. This highlights why EBS needed to diversify its offering.

Growth Markets

In some areas, EBS has been successful in this regard. Perhaps the two most obvious successes since Mandelzis took charge have been the launch of its EBS Direct platform and the growth of CNH trading on EBS Market.

Launched in November 2013, EBS Direct reached an ADV of $20 billion in the first quarter of 2016, according to Icap’s annual results. This represents a 37% year-on-year increase, and with the launch of FX forwards on the platform in December 2015 it seems likely that volumes will continue increasing in 2016.

Meanwhile, average daily CNH volumes on EBS were up 55% year-on-year at the end of Q1, reaching $7 billion in ADV. With China’s influence on global economics likely to continue growing as the country attempts to shift away from a manufacturing and export-based economy to one that is more focused on imports and services, and with Swift continuing to report increased use of China’s currency for global payments, it seems inevitable that this will be a growth market.

Given the strong growth of its CNH business so far, EBS looks well-positioned to capitalise on this growth, and the fact that it was selected by the China Foreign Exchange Trade System (CFETS) to provide technology for its execution services in mainland China is another sign of the firm’s successful strategy regarding China.

Crucially, EBS BrokerTec would not have even been in a position to pitch for this deal if it didn’t have the technology and capability to provide both fixed income and FX directly, which it didn’t prior to Mandelzis’ tenure as CEO.

It’s worth noting that the firm’s NDF business also continues to make good strides, averaging $5.6 billion during Q1, up 54% from the same quarter the previous year.

In Transition

But there are other areas where progress has been much slower, for example, sources indicate that EBS BrokerTec’s ADV in forwards and swaps is roughly $3-4 billion per day, still a paltry figure considering the size of these markets.

With 15 corporates live on the MyTreasury platform, it is unlikely that incumbents amongst this client type, FXall and 360T, are worried about EBS BrokerTec catching up any time soon, no matter how good its sales pipeline might be.

And yet it’s worth pointing out that only a few short years ago EBS would never have been able to provide all the products, the personnel expertise, the technology, the workflow integration and post-trade tools needed to support corporates.

Looking at the FX Bridge and Molten Markets acquisitions, although they got a fair amount of press for the moves, one source close to the firm indicates that there are currently no trades and no live customers on either platform.

“There was clearly a vision of creating a portfolio of products that could cater to all client types with all types of instruments, but there’s still a lot of gaps in the EBS portfolio, in particular asset managers, forwards and swaps are non-existent on its platform,” the source close to the firm says.

However, it’s should be noted that working with the asset management community involves a notoriously long sell cycle, with one source claiming that the EBSI group currently has 14 asset management firms in 9 countries in various stages of testing and onboarding. In addition, Profit & Loss understands that the first FX options trade is likely to be announced by EBS BrokerTec in the near future.

The result of this is that although EBS appears to have shed its original identity as a G3 spot inter-dealer platform, it is still very much in the process of transitioning to being this fully multi-product, multi-asset venue, with some market participants suggesting that it has yet to create a new identity for itself in the meantime.

“EBS wanted to change – and it did change – but through this change it forgot who it really served and what it was really good at. The market doesn’t know how to look at EBS anymore,” claims one market source.

A counterbalancing view offered by another source is that the real damage was done to the perception of EBS amongst market participants prior to Mandelzis’ appointment, at which point in time they say that the platform was viewed with great suspicion by many market participants, and that the steps it has taken since then and the products that it has managed to launch have helped alleviate this.

Lying somewhere in between these two views, a senior figure at a bank in London claims that the main shift in EBS’s identity began before Mandelzis took over the business, and that the firm would be better served by trying to win back some of its core base that are trading less and less on the platform.

“The firm needs to re-focus on its core market because the market needs a strong EBS platform. There’s a lot of point and click trading that didn’t disappear, it’s just gone elsewhere. They would be better served trying to get that volume back,” the banking source says.

More Change to Come?

Seth Johnson, previously head of strategy in Icap’s global broking division, has been appointed CEO of EBS BrokerTec, in something of a return to the business. previously he held the role of CEO of BrokerTec, but stepped aside when Mandelzis was appointed to head the combined business.

As he takes the reins at EBS he obviously does so at a time of major transition for the company that goes much deeper than changing its name. To a certain extent, Johnson will have to continue down the path that Mandelzis has started the firm on, but he will face important decisions about whether or not to slow or abandon some of the projects currently being pursued.

What areas receive priority in terms of resources, staff and attention will play an important role in shaping the company’s identity going forward.

Another issue for the new CEO to contend with is whether the new business lines being pursued by EBS are as profitable as its traditional spot business.

The percentage of its revenue growth from new product initiatives has grown from 8% in 2012/13 to 22% in 2015/16 and yet still this hasn’t been able to stop declining revenue or profits at the firm.

Over the past three years, EBS’s revenue has shrunk 8%, while the overall trading operating profit in Icap’s electronic markets division, overseen by Mandelzis, is down 31% over the same period. It should be noted here that the revenues in this end of year report do not include EBS’ data revenues and therefore it can be argued that they do not give a precise picture of how much is being generated.

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EBS Direct is one example of where EBS BrokerTec has pursued a business line that is significantly less revenue rich than EBS Markets. Leaving the question of to what degree the former might have cannablised some business on the latter aside, the fact is that EBS Market generates far more in revenue because both sides of the trade pay and there are revenues that can be collected around connectivity fees and market data feeds. In contrast, on EBS Direct, one side of the trade doesn’t pay anything.

But while declining profits will undoubtedly be a concern for the incoming CEO, one solution to the problem could simply be time and continued effort in building out the products already developed.

As pointed out earlier, the percentage of revenue coming from new initiatives continues to grow, and Mandelzis pointed out on an investor call earlier this year that these initiatives produced $80-90 million during Icap’s last financial year, and all have potential for further growth.

But, he argued on the call, these products need to reach critical mass before they can effectively offset the headwinds facing Icap’s traditional G3 spot business line. If Mandelzis’ optimism regarding these new business lines proves to be well placed, then the issue of declining profits may not be as intractable as might be assumed from looking at its recent results.

Another advantage in this regard for the new CEO is that the largest proportion of the technology and personnel investments for these products has in some cases already been made, meaning that equivalent revenue should lead to higher returns.

The other broader question hanging around the firm as it transitions into Nex is whether Spencer is priming the new entity for a sale.

There has been some speculation in the market recently about whether Icap, re-branded as Nex and shorn of its voice broking business, will be more attractive for a potential buyer.

In general though, sources at Icap are quick to dismiss the rumours as just speculation, although usually adding the caveat that they don’t know Spencer’s ultimate plans for the company. Although the rumours persist, they insist that there has been no evidence or talk internally of a sale, suggesting that the speculation is simply press driven.

Of course, as an external industry figure notes, Nex may have little or no choice in the matter. “The exchanges still have an interest in OTC platforms and EBS – in spite of lower volumes – remains the top attraction. If it becomes more affordable, without the baggage of voice broking, one of the exchanges may make an offer Michael Spencer cannot refuse.”

Whatever the future holds for the firm as Nex, it is clear that the EBS business is in a state of significant flux. If it wants to take a supermarket approach, providing all products to all client types, then it clearly still has some work to do. But proponents of the platform provider will argue that, just as a plane uses most of its fuel during takeoff, the firm has done most of the heavy lifting needed to poise it for future growth.

If EBS BrokerTec can build traction on the multitude of nascent projects that it has on the go then it has a significant runway for growth, and a runway that it didn’t have when Mandelzis was named as CEO.

This is, to say the least, a fairly sizable “if” considering the competition amongst various platform providers, the stickiness of liquidity in some products and just the operational and technological challenge of keeping so many plates spinning in the air at once.

Mandelzis was unlucky in the sense that his time in charge of EBS BrokerTec largely occurred during a period of muted FX trading volumes generally and at a time when a variety of other platforms came to market, chipping away at the market share of the primary venues.

In contrast, Johnson comes into the position ahead of some big macro events – such as the US election, a possible US rate hike cycle, geopolitical unrest in Europe and Great Britain actually invoking Article 50 to leave the European Union – that could boost volumes and put some initial wind in their sail.

The shift towards Nex could also potentially benefit EBS BrokerTec’s incoming CEO regarding this question of the firm’s identity in the market. A part of this transition appears to be a move from Icap, the brokerage firm, towards Nex, the technology company.

Stripped of the voice and hybrid brokerage, and some of the regulatory burdens associated with that, and with the firm’s overall headcount reduced, there is the potential to focus the firm’s image and identity in the market going forward. Whether this potential will be realised remains to be seen.

The business has certainly morphed away from the EBS of old, and is strategically better off for it, despite the declining volumes. But as it continues its evolution, having this clear and well-articulated vision of its own identity and role in the FX market could prove important to its future success.

Galen Stops

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