As FinanceFeeds joins the conference with Euronext’s CEO and CFO this morning, a dialog is in place. OTC FX is on the agenda on a large scale: “Our core proposition is the spot business and market data” says Lee Hodgkinson, Head of Markets and Global Sales and CEO of Euronext London
This morning, FinanceFeeds broke the news globally that FXCM had finally conducted a mergers and acquisitions deal that had been our prediction since earlier this year.
During the months within which FXCM had begun to take its downward spiral following its censuring by the US authorities over the firm having continually maintained that its customers traded on FXCM’s no dealing desk platform, however the firm had an undisclosed interest in EFFEX Capital, a market maker that consistently ‘won’ FXCM trading volume and was therefore taking the opposite positions FXCM’s retail customers, meanwhile taking rebates of up to 70% from said market maker.
This resulted in the decimation of the company in all regions except for the Asia Pacific, in which Rakuten Securities owns the Hong Kong based FX business, whereas the remainder of the mainland Chinese business is still very much a cornerstone for FXCM, and pretty much all that the company has left.
FastMatch, however, has until now been the valuable asset held by FXCM, once the remainder of the company’s business has rapidly evaporated since February 17 this year, when the North American regulators made their findings clear.
FastMatch has built its business on every tenet that FXCM has gone against, that being transparency of execution and firm standing within its interbank and institutional origins, its original shareholders being BNY Mellon and Credit Suisse, alongside FXCM, and its equities matching engine and technology-led ethos creating a stir within the establishment alongside Thomson Reuters FXall, HotspotFX (now BATS Global Markets-owned), and Currenex.
It was inevitable that FXCM would relinquish FastMatch this year, whether via a forced decision by Leucadia to inject capital and recoup the losses incurred by Leucadia and mitigate any shareholder discourse over Leucadia’s investment in FXCM which at the time was a fantastic deal, but came with no due diligence and hence opened the firm up to exposures such as this later down the road.
Additionally, FastMatch maintains an enviable position in that it is renowned for being led by innovators rather than institutionalized old-timers, and has a reputation for execution exaction and speed, at a time when some other ECNs are moving away from low latency execution.
This positioned it as a merger and acquisition target for exchanges across the world, which are currently in a battle against the OTC world as they are unable to compete for retail business and have launched attempts to acquire institutional FX ECNs en masse via their might rather than ability to understand the topography of the OTC world at the level understood by the top OTC derivatives firms.
Right now, FinanceFeeds is present at a meeting between Stéphane Boujnah, CEO of Euronext, Giorgio Modica, CFO of Euronext and and Lee Hodgkinson, Head of Markets and Global Sales and CEO of Euronext London, in which a series of questions and answers were posed live by senior industry executives across the world.
Mr. Hodgkinson has just explained the method by which he considers Euronext’s ability to monetize core aspects of FastMatch, meaning that Euronext, unsurprisingly, has its commercial sights set firmly on spot FX and OTC market data.
It is worth of note that at the time during which Deutsche Boerse bought 360T and Hotspot was acquired by BATS Global Markets, ICE in Chicago was preparing its offer to buy FastMatch for between $150 million and $250 million, as further testimony to the will of the giant exchanges to mop up the minnows of the OTC world.
“FastMatch produces around 80% of Hotspot FX’s average daily volumes, thus the FastMatch product is very relevant to the market, and its market data is unmonetized. We will be working with the FastMatch team to deploy the expertise required to monetize that. We do not have any revenue predictions yet but this will be a new income stream reasonably quickly” said Mr Hodgkinson.
Mr Hodgkinson then elaborated on how specific components of the OTC market are of interest to Euronext as a means of expanding the product range across Euronext’s client base. “We are looking closely at non deliverable forwards, and how we can start to tap into that market. We think FastMatch is a fantastic business which is fast growing, therefore together with our network we can make these revenue opportunities fly.”
When asked whether Euronext has a clearing arrangement with ICE for products such as NDFs, Mr. Hodgkinson said “We are not disclosing that yet, but we are thinking about the core proposition which is spot business and market data.”
“Our core proposition is the spot business and market data” – Lee Hodgkinson, Head of Markets and Global Sales and CEO of Euronext London
From that statement, the intention is clear – to bring the exchange firm into the OTC spot FX arena and take it global.
Following up on this, Philip Middletone, Managing Director, Equity Research at Bank of America Merrill Lynch asked Mr Hodgkinson “Could you talk about where FastMatch fits in, and what clients it attracts? You have spoken about low latency execution, an area which some executing venues have shyed away from. Who are you pitching to and what customer capital is sensible for return over cost?”
Mr. Hodgkinson replied “There is a strong overlap in current tier 1 liquidity provision space, but I like to think that we believe that we can bring our diverse range of participants from the continent. There are some buy side entities that would be very interested in this product, a very broad range of sell side firms along with some of the more tech savvy buy side.”
“On the corporate side, there will be only a limited number of corporates but this is not a product tailored for the corporate world. It is for the trading firms and existing community. Our branding power will build out that client community. We have such a diverse client base in Europe, not just in London but across EU where we have firms looking for new trading partners” – Lee Hodgkinson, Head of Markets and Global Sales and CEO of Euronext London
Greg Simpson, Associate Director Infrastructure & Cyber Security at International Financial Data Services and former Head of Infrastructure at the Bank of England asked “You make references to Hotspot, but it’s had flat volumes since BATS acquired it, as has 360T had since Deutsche Boerse bought it. How much conviction do you have to build market share and keep FastMatch’s usergroups, and what conditions are attached to the 10 million earn out?”
“That is a very interesting point” said Mr Hodgkinson. “This is something that we have watched carefully, and I would perhaps venture to say that we hope to learn from BATS and Deutsche mistakes. We have a very clear plan of integration with the FastMatch team, and relationships are good. We are taking that integration plan together in such a way that will enable Euronext to have the controls that a listed exchange operator can have, but we will be looking to get average daily volume targets up.”
Mr Hodgkinson continued “Paul Humphrey is on board (Global Head of Fixed-Income, Rates & FX, formerly of Tullet Prebon, ABN AMRO and Thomson Reuters – Ed), we have a very serious range of managers with OTC competence which is not the case elsewhere, therefore we have the right people in place. ”
Mr. Boujnah then continued, looking at the earn out aspect of the deal. “There is a strong incentive from a financial perspective, so when it comes to the earn out, that is linked to the delivery of the business plan and the key managers will remain invested with significant stakes for the medium term so the combination of the two entities will provide a different concept on the basis that we will be focused on working together to ensure this works according to plan.”
Owen Jones, Equity Analyst within Diversified Financials at Citigroup then asked “Could you give us an idea of majors in those volumes compared to those geographic regions. Do you have geographic expansion aspirations which would look at Asian currnecies, and on the integration point, do you have plans to take the founder of FastMatch onto the board or a subcommittee of Euronext re FX focus?”
Mr Boujnah answered “FastMatch will be operated with its current management team. We think it is very important when importing a group of entrepreneurs into our fold to keep the right entreprenenural DNA characteristics of a fast growing organization.”
Mr Hodgkinson then continued “With regard to the pairs, our customers will trade all the major pairs, and currently we are at the front line of price formation for EUR/USD, USD/JPY and Cable, and in terms of geographic expansion, we have initial plans to talk to clients, which we will start this afternoon with FastMatch. Assuming their needs are for liquid products we will start there but will be market led on that” he concluded.
This headstrong account is a clear message that the exchange fraternity has its eye very firmly on the OTC sector, and in the case of FastMatch’s immediate future, it will be of great industry interest to see whether this acquisition becomes a benchmark for the furthering of very avantgarde OTC entities by the large scale executing venues globally.
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