Chicago’s vast exchanges have got their eyes on retail FX customers: Massive M&A deals ahead

During recent months, several draconian moves toward changing the method by which certain electronically traded retail financial instruments can be provided have drawn opinion from several senior executives within the FX and CFD industry that the large global listed derivatives and traditional execution venues are attempting to lobby the major regulators in order to force the OTC sector onto exchanges.

FinanceFeeds recently detailed this in the form of a comprehensive investigation, at the time during which the British financial markets regulatory authority, the FCA, had issued its proposals last month which set forth substantial changes in the ways that OTC CFDs can be issued and provided to retail customers, that being the core business of many long established companies with good quality and loyal domestic client bases.

Today, further evidence of this has come about, as CBOE (Chicago Board Options Exchange) makes more progress in its preparation to acquire BATS Global Markets.

This, on the face of it, would not appear to have anything to do with the retail FX or OTC derivatives sector at all, and appears to be quite simply a merger of two large electronic derivatives venues, however looking closer at the two firm’s future interests shows that an economy of scale such as this would indeed make for a larger corporate force with its eyes very much on the retail market.

The acquisition of BATS Global Markets by CBOE was announced in September last year and is likely to involve a transaction worth $3.2 billion, the latest development in this having been the issuing by CBOE this week of $650 million aggregate principal amount of 3.650% senior Notes due in 2027.

CBOE will pay interest on the notes on January 12 and July 12 of each year, commencing on July 12, 2017. The notes will mature on January 12, 2027.

Pursuant to an Agreement and Plan of Merger, dated as of September 25, 2016, by and among CBOE Holdings and BATS Global Markets, CBOE will acquire BATS in a series of successive merger transactions. Following the consummation of the merger, BATS Global Markets will become an indirect wholly owned subsidiary of CBOE Holdings.

CBOE intends to use a portion of the net proceeds from this offering to fund, in part, the Acquisition, including the payment of related fees and expenses and the repayment of Bats’ existing indebtedness, and the remainder for general corporate purposes.

The transaction details are not the focus here, however, as large mergers are relatively common among global listed derivatives operators at that size and scale.

What is important is the interest by both parties in angling their services toward the retail sector.

In April last year, FinanceFeeds spoke to Catherine Clay of CBOE LIVEVOL at a meeting in Chicago, the global home of the electronic derivatives exchange industry.

During that meeting, Ms. Clay explained the company’s intended foray into the retail electronic trading sector, led by the launch of its Amazon-style website.

Ms Clay, who is VP Business Development at CBOE LIVEVOL spoke exclusively to FinanceFeeds to explain how the new site revolutionizes the method by which all traders can now obtain data, and the top level institutional information is now on its way to the retail trader.

Ms. Clay explained “This new market data website called is called Data Shop where we are offering clients the ability to customize an historical data set or data subscription with an Amazon-like shopping experience.”

“The client can go online, create an account, customize in fine detail, pay for orders and receive an automated instruction on where to collect their data” she enthused. “All orders will be remembered, as will shopping behavior, and therefore it streamlines their shopping experience, in a similar way to how today’s consumers are used to this methodology with e-commerce sites such as Amazon.”

“Market Data Express is expected to be migrated to this new website over the course of the next year (now completed – Ed), so that all of the data that CBOE has will now be available on this new website.”

Market Data Express ( MDX ) which is a benchmark institutional platform that gives users quick and easy access to market data, ranging from end-of-day summaries and comprehensive CBOE & CFE (Chicago Futures Exchange) Time-and-Sales reports to sorted to user-friendly OPRA Time-and-Sales data will be now available to all users across every aspect of the trading sector, including retail users.

Traditionally, CBOE LIVEVOL’s service has been aligned with similar services from companies such as Onetick, iVolatility, and Interactive Data, however the move to a new site heralds a new, cross section of users and reach for CBOE LIVEVOL.

Arriving on the market in May last year, Data Shop is built on Cassandra architecture with a Spark overlay, that allows such deep customization that even smaller clients will be able to buy data. “We are going from a fire hose approach to a completely customized experience with Data Shop” concluded Ms. Clay.

Trading Technologies also redesigned its platform earlier last year.

FinanceFeeds spoke to CMO Brian Mehta, who explained “Right now, our focus is the professional futures trader. Will we address retail? That is definitely an opportunity that we would like to explore. This platform gives us the possibility to explore different markets from our perspective.”

“We announced earlier this year that we are enhancing our charting and analytics capabilities. Other functionality that we will be adding is options trading. Our customer base has been asking for this for years, and for us to be able to offer this functionality will be great place for us and our customers.”

BATS Global Markets has already had its eyes on the retail sector for some time.

Hotspot FX, one of the world’s most renowned OTC FX ECNs was bought by BATS Global Markets for $365 million in January 2015, thus a venture this size, with such purchasing power, could pave the way to competitive acquisitions of further institutional OTC venues.

IntercontinentalExchange (ICE), a staunch rival of CBOE, attempted to buy FastMatch last year from its three shareholers, Credit Suisse, BNY Mellon and FXCM, for between $200 million and $250 million. Not very many retail firms or retail institutional venues have the wherewithal to be able to fork out that kind of capital to increase their mettle by acquiring institutional venues, but to the large listed execution facilities, this is a drop in the ocean.

FastMatch did not sell to ICE, however the mere notion that there was such a high value interest from an exchange operator would be enough to spur other members of Chicago’s elite to join forces if their ideology is aligned.

Specialists in futures and listed derivatives platforms know this clearly, as detailed to FinanceFeeds by Ryan Hansen, President of Tradovate.

Mr. Hansen, who is not only a stalwart of the listed derivatives sector but has a substantial background in retail FX having held senior positions at GAIN Capital where he was VP of Business Development at the company’s OEC futures division in Chicago for almost four years, a tenure which followed seven and a half years at PFGBest as Director of Vendor Integration.

In Chicago, Mr. Hansen met with FinanceFeeds and explained ““Futures trading on a retail electronic platform via exchanges is sustainable as the average deposit in futures is much higher than that of the average FX trader” said Mr. Hansen.

“This is because with futures contracts there is not a smaller sized component like there is in FX with its mini or micro lots. The margin requirements therefore necessitate a higher account size.”

“I am of the belief that exchanges provide a valuable service. Does it warrant what they charge? That is an interesting question. We need to hear more from traders on this. Currently we do hear a lot from traders on this subject, and in doing so we hear both sides of this, from the customers and the exchanges with regard to fees” he said.

Attractive to OTC traders due to spreads and ability to view limit order book on exchanges

This addresses the brokerage side of the equation which is typically over half the fees that would incur on transaction cost is now eliminated. The membership fee provides a fixed cost for unlimited, commission-free transactions per month.

“We want to reduce the cost for active traders” – Ryan Hansen, President, Tradovate

“As far as the existing market is concerned, we want to provide active futures traders a means by which they can reduce cost” said Mr. Hansen.

“OTC FX trading is quite different. Exchanges like the CME have FX futures, which we offer in full and mini and micro lot sizes. We would love to have people who currently operate in the OTC space that maybe want to trade on exchanges. In America, futures trading is very popular popular and we can extend this to a wide audience.”

Compared to OTC futures contracts, in particular CFDs, the spread is tighter on exchange-traded futures, and also the trader can see the limit order book because some exchanges provide depth of market up to 20 price levels. CFDs, being OTC, have wider spread and the trader cannot see the depth of market.

As the FX market continues to fragment, and higher regulatory costs for bilateral trades start to bite, exchanges are no doubt eyeing an opportunity to get closer to the FX market by offering capital efficient client clearing/counter-party risk mitigation solutions to the OTC markets.

It would therefore make sense for ICE as a vertically integrated exchange with a strong clearing capability, to look to enhance their position by buying a relatively small but growing FX platform like FastMatch.

It is clear from our research that listed derivatives exchanges are indeed moving toward attracting a larger group of retail clients.

Exchanges are onboarding retail platforms and firms such as Trading Technologies in Chicago have redesigned their entire trading environment to attract retail customers who would trade listed derivatives.