Competition from electronic OTC trading forcing down exchange fees as LME slashes fees by 44%

We take a look at what factors from within the OTC FX industry are forcing traditional venues such as LME to reduce their fees by almost half in order to retain market share.

Members of some of London’s most prominent exchange trading venues are piling the pressure on senior management to lower the fees associated with exchange trading, with one of the most likely causes being the vast amount of institutional-level competition from vastly less expensive OTC electronic trading establishments in London.

London Metal Exchange (LME) is one of the last remaining traditional venues which continues to operate an ‘open outcry’ trading room, albeit a very plush and well appointed one, its interior a bastion of modernity, rather akin to a turn-of-the-Millenium Bentley Arnage – a brand new lesson in luxury and opulence, underpinned by a 450bhp 6750cc warhorse of a powerplant with pushrods whose origins date back to the 1950s.

Whereas CME Group Inc (NASDAQ:CME) and Intercontinental Exchange Inc (NYSE:ICE) intentionally styled themselves as institutional technology providers for the digital exchange sector, Britain’s venues remained true to their iconic roots with suited traders adorning the trading floor, known colloquially as ‘the ring’, with a telephone placed over each ear, conducting trades via voice conversations and by giving hand signals to dealers.

The establishment has been challenged by the upstarts, which are no longer upstarts at all.

Far from it indeed.

Traditional exchanges marked out the wood paneled chamber image of London’s Square Mile over 100 years ago, thriving physical materials venues which attracted traders in their droves. Only during the last 20 years has the OTC derivatives sector developed into the world-leading ecosystem that it represents today with publicly listed giants including IG Group and CMC Markets, both multi-billion dollar companies, dominating the country’s retail market, with CMC Markets now heading toward the realms of the institutional FX sector to join ADS Securities, AFX Capital and the dedicated Prime of Prime service providers that have massive presence in the city.

Sophisticated institutional OTC derivatives providers overshadow the traditional venues

Today, London Metal Exchange caved into pressure from brokers and members and lowered its fees by a remarkable 44% to 50c (US).

There would possibly be no such pressure should other alternatives be less expensive and have greater execution efficiency. It is entirely possible to execute trades via institutional firms today for just a few dollars per million per side, therefore competition in the Square Mile is very high indeed, especially since the institutional route has been taken by so many firms.

IMG_6359-1024x682-300x200
Hanging onto tradition: LME’s open outcry trading floor

Indeed a group of LME traders recently broke away and formed their own group, an occurrence that would have been unthinkable just 20 years ago.

Just three years after LME’s acquisition for £1.6 billion by Hong Kong Exchanges and Clearing in 2012, the venue increased its fees in January 2015 at which point a group led by the LME’s pre-takeover Chief Executive Martin Abbott started plotting to launch a rival trading center.

Charles Li, CEO of Hong Kong Exchanges and Clearing continues to deny that members were being ‘ripped off’ but has agreed to reverse the fee increase, with the reduction set to be implemented in September this year, however some traders consider further concessions necessary.

The interior of today’s London Metal Exchange, which is circular, and surrounded by high definition curved screens which display the real-time prices of all tradeable assets, whilst traders concentrate on getting the right deal from the comfort of semi-circular red leather seats.

London Metal Exchange is something of an institution, having been in existence for 139 years. Throughout the heyday of the 1980s, the venue was in its prime, the day of the beige bakelite Motorola cellphone and pinstripe suit was well and truly in full swing across London, and traders on the floor spent their time between ‘the ring’, SW3 and Hampshire whilst the M3 motorway was lined with Zinnobar Red BMW 325is and Laser Green VW Golf GTis.

With the decadence of the 1980s and its lifestyle acoutrements having long since been consigned to the history books, in has come modernity and efficiency.

The squeeze is being felt by brokers and traders on LME at a time during which OTC firms at institutional and retail level are absolutely committed to providing multi-asset environments.

Tom Higgins, CEO of MetaTrader 4 integration technology company Gold-i, whose technological understanding of the inner functionality of exchange systems is extensive, with technical tenures at some of London’s major exchanges including LIFFE behind him, spoke to FinanceFeeds with regard to the possibility of virtual pseudo-exchanges which emulate a venue but have low fees and operate as a bi-lateral arrangement perhaps taking effect.

“This is fine, because it gives a central execution point, but you still have counterparty risk. Where you invoke a central clearing house, you are then removing the counterparty risk because you are then novating all of your trades into the central clearing house” explained Mr. Higgins.

The costs of operating in London have already been dwarfed by America’s innovative futures venues, which tread a highly technological path and the manual operation is not only a distant memory in Chicago, but has been completely replaced by the very highest technology.

Indeed, the venerable retail platform, MetaTrader 4, is now becoming a focus for connectivity to futures exchanges, signaling the end of the days of traders attending a physical venue and being charged a fortune for executing manual trades.

The dynamic began with MetaQuotes having gained substantial traction among emerging exchanges in the Middle East such as DGCX (Dubai Gold and Commodities Exchange) which now has 10 firms connected to its executing venue, using MetaTrader 5 to execute futures contracts, mainly on the Indian Rupee.

That is all very well, however DGCX cannot be compared to the institutional electronic venues of Chicago such as CME and ICE.

However nowadays, things are changing because for the very first time ever, with the assistance of highly advanced integration technology from oneZero, DirectFX has connected to futures exchanges and is offering a US futures trading facility which is actually integrated within MetaTrader 4.

Think about this: This brings previously out of reach trading of futures on America’s esteemed electronic exchanges into the realms of the retail trader and within the budget of the retail broker.

Last week, FinanceFeeds spoke to Tim Brankin at DirectFX who is a pioneer of this methodology. When he was at TradeTools FX, Mr. Brankin demonstrated to me the first fully integrated exchange traded binary options solution which was fully integrated into MetaTrader 4 during a meeting in Shanghai, China in December.

Mr. Brankin, alongside oneZero, has taken this further and DirectFX is now able to lay claim to being the first MetaTrader 4 provider to integrate US futures into the MetaTrader 4 platform.

Futures traders are often experienced and have portfolios of investments, their average deposit sizes being $50,000 rather than $6600 (US) and $3,300 (non-US) with much less leverage and much less likelihood of disappearing after three to six months.

Andrew Ralich, CEO of oneZero recently highlighted to me in a meeting about how to enhance the cause of connectivity: “Will the legacy aggregators such as FlexTrade, Currenex and Integral Development Corporation be able to engineer their services to cater all the way downstream to the retail broker, or will the providers such as oneZero, PrimeXM and Gold-i which have grown up in the retail space, be able to adapt to this specific institutional functionality to be able to move upstream for their clients?” This latest dynamic is a case in point.

With regard to where this will lead, FinanceFeeds spoke to those at the very leading edge of connectivity and integration, those being experts in the integration of MetaTrader into trading facilities, with Tom Higgins, CEO of Gold-i explaining “There are 1000’s of trading venues in the world and therefore MetaQuotes will need to continue to work with trusted partners like Gold-i to integrate with them. After FX and CFDs, commodities are a very interesting proposition for retail and High Net Worth Individuals to trade in as they have the necessary characteristics of high volatility, deep liquidity and global access.”

“Gold-i has already integrated commodity products into MT4 but due to the limited number of symbols that MT4 can offer they have never been as popular as I thought they should be. MT5, however, does not that this limitation, and so commodities as well as other on-exchange Futures products should prove to be very popular on MT5” – Tom Higgins, CEO, Gold-i

Looking toward the future of this dynamic, Mr. Higgins said “We are currently in the process of porting all of our MT4 Bridges to MT5 and will certainly be looking at adding more commodity products as time goes by.”

Despite this price squeeze, LME CEO Garry Jones has remained steadfast in his belief that open cry trading has a future, categorically telling many mainstream media sources that there is no argument over whether LME will close the ring, and that as the market evolves, LME will tailor the trading floor to suit it.

Remaining strictly institutional, LME has no plans to open up its exchange to retail traders. Mr. Jones stated “Retail trading in China on exchanges is popular, but we’re not going to do it. All trades have to go through bank members.”

Volumes at LME have remained relatively flat recently, and LME has reviewed on several occasions the viability of keeping the ring, especially since the firm’s acquisition by Hong Kong Exchanges and Clearing three years ago.

Latency Arbitrage

If all order flow is channeled through exchanges, retail traders could be able to be party to the HFT and algo model that is often conducted through the exchanges of Chicago and New York, however a distributed model with a smaller exchange in each region of the world, there would be no reason to take all of the orders going to New York and funnel them to, for example Tokyo, and if certain orders to not get routed correctly and latency causes others to have an advantage, the retail market would have execution factors to bear in mind.

If a modern technology was invoked, there perhaps is no reason why this cannot be achieved, however, despite all of these factors, the discussions which have permeated the board rooms of regulators, industry participants and technology companies which dedicate their services to the electronic trading industry such as FastMatch, Currenex and Integral over the past year or so have tailed off completely, and the OTC model is indeed in full force.

Clearly London’s original venues today are being viewed as somewhat idiosyncratic reminders of the City’s history as a pioneering financial center, however that is indeed what manual venues represent today – history.

Read this next

Retail FX

Prop firm The Funded Trader shuts down, claims relaunch in April

Prop trading firm The Funded Trader has ceased all operations, with claims for a relaunch in the near future.

Digital Assets

Ethereum-Based Tokenized Real Estate Platform USP Launches On Republic

How This Californian Startup Is Revolutionizing Real Estate Investment through Ethereum-Based Tokenization.

Digital Assets

Sui Spikes in Weekly DEX Volume, Joins Top 10 of All Blockchains

March DEX volume on Sui stands at over $2.88B – up more than 49% from February – with decentralized exchange Cetus and wholesale liquidity layer DeepBook leading.

Digital Assets

Prisma Finance suffers $10 million crypto exploit, attack ongoing

Liquid staking protocol Prisma Finance fell victim to a security exploit on March 28, resulting in nearly $10 million in Prisma mkUSD and wrapped stETH being stolen by hackers.

Digital Assets

Masa and LayerZero: Bridging Blockchains for Data Sovereignty

Masa Network is poised to revolutionize the personal data landscape with its upcoming launch as a cross-chain platform, making it accessible on a variety of blockchains right from the start.

Digital Assets

Big Time Generates over $100M in Revenue since Preseason

Innovative game developer Big Time Studios announces that its highly anticipated free-to-play multiplayer action/MMO RPG Big Time, has generated $100M in revenue. According to the team, players transacted a total volume of over $230M, without selling a single token.

Digital Assets

Centralized exchanges are 10 times more popular than DEXs in Western Europe

Western European traders are found to prefer centralized exchanges over decentralized ones as CEX traffic outpaces DEXs by a factor of ten.

Market News

Stock Market Analysis: Is NVDA Losing Its Leadership?

Since the beginning of the week, the S&P 500 Index (US500) has seen a modest increase of about 0.58%, whereas NVDA’s share price has experienced a decline of approximately 3.8%. This recent divergence raises concerns among Nvidia stock investors — could it signify a loss of NVDA’s market leadership?

Industry News

ESG: Australian regulator wins first greenwashing court case against Vanguard

Vanguard admitted that a notable portion of the securities within both the Index and the Fund did not undergo the promised ESG scrutiny.

<