When will FastMatch exercise powers to force FXCM out of shareholding?

Almost five years have now passed since dynamic and highly regarded electronic communication network (ECN) FastMatch made its way to fruition, the product of a joint venture between Credit Suisse and FXCM.

At the time, one of its core tenets was to be able to manage market impact and lower execution costs when transacting FX spot interests, its structure including an equities crossing system which was the Credit Suisse Crossfinder matching engine.

Five years may not be very long when referring to the development cycles that occur with regard to new products and services in many commercial sectors, but within the electronic trading industry, especially on the non-bank institutional side, it is an eternity.

With FXCM now at its self-inflicted down-at-heel nadir, FastMatch, in which FXCM Inc (now Global Brokerage Inc) has held a non-controlling but large minority stake since its establishment, continues to fly the flag of high quality North American institutional trade execution prowess,  unineterrupted by the shadow that FXCM’s methodologies that were outed by the National Futures Association (NFA) recently.

The question is, with FXCM’s almost complete disintegration, and the reputational damage created by FXCM’s senior management which intentionally developed algorithmic systems that were operated by a market maker in which FXCM had an undisclosed interest in, in order to trade against its own customers and then take rebates from the market maker of up to 70% of revenues, where does this leave the high standing of FastMatch?

Unlike most of the OTC FX brokerages which begin their operations in the retail sector and then soon after realize that there is money to be made by selling a price feed to smaller brokerages and misleadingly adorning themselves with the institutional liquidity provider moniker, FastMatch was the product of a genuine partnership between institutional leaders and major Tier 1 banks.

Thus, the company has attracted the attention of some of Chicago’s large electronic listed derivatives venues in plans to acquire it for substantial sums.

Very recently, ICE, one of Chicago’s most prominent listed derivatives and futures venues, attempted to buy FastMatch from its shareholders who at the time were just itself, FXCM and Credit Suisse, for between $200 million and $250 million.

This not only represents the exchange sector’s will to invest substantially in gaining a presence in the OTC sector, but also shows that rather than lobbying the regulators in order to impose laws on it as they have done with many other regions with a large OTC derivatives industry in order to attempt to force the providers down and regain their retail business organically, ICE was interested in actually taking the business on as a going concern and was equally prepared to pay for it.

Led by the astute and urbane Dmitry Galinov from the outset, the company is well positioned as a prestigious ECN in New York, and with the buying in by BNY Mellon which joined existing shareholders Credit Suisse and FXCM in 2015, the longevity and elevation away from the retail shops was further cast in stone.

The question is, with FastMatch being of high standing, when will the existing shareholders band together and force non-controlling shareholder Global Brokerage Inc (Formely FXCM) out completely, for a nominal fee bearing in mind that the company is on its uppers.

It could be that for the right price, Leucadia may be a potential suitor, however it is FinanceFeeds opinion that shareholders in Leucadia may take the firm to task over its investment in FXCM, on the basis that no due diligence was conducted when FXCM very quickly and extremely proficiently brokered the deal with Leucadia for $300 million in funding in order to rectify the negative client balance exposures suffered on January 15, 2015 when the Swiss National Bank removed the peg on the EURCHF pair.

At the time, this was a masterstroke by CEO Drew Niv. who had no time at all to devise a solution which within a matter of hours was the savior of the entire corporate structure of FXCM, and Leucadia would have likely considered it to be a very good opportunity to acquire a major shareholding in one of America’s most widely renowned brokerages, however as a result of the trust that was placed in FXCM by Leucadia, and the completely unrelated factor that has been its undoing, shareholders of Leucadia will be very unlikely to take this potential $300 million loss lying down.

On this basis, they may have to overcome substantial boardroom and investor dissent to acquire any more FXCM assets, regardless of the potentially low price.

Therefore, the institutional and listed derivatives sector may take another look, however BNY Mellon and Credit Suisse would be well positioned to encourage a move in that direction as a motive toward detaching FastMatch from any association with FXCM is likely to be on the minds of the senior executives of all shareholding entities, both within FastMatch and its corporate banking partners, largely because what FXCM did in terms of its own execution process, that being produce public reports that did not contain a modicum of transparency, is at odds with FastMatch’s ethos of complete transparency toward all counterparties and participants.

The valuation process would of course be interesting, largely due to the commercial will to remove FXCM from FastMatch’s list of owners as well as mitigate any loss before FXCM finally shuffles off the electronic coil, but also because there are discrepancies in the amount held by FXCM.

Many consider it to be 32%, however FXCM (now Global Brokerage)’s own report to the SEC in December 2016 mentions that it is 34.4%, and 35.8% in other parts of the very same report.

For a firm that usually makes no errors whatsoever and has been operated by mathematical geniuses, this is peculiar and causes a smokescreen to investors.

FastMatch is a bastion of successful institutional trading and is highly respected, and most of all, is profitable, hence FXCM’s remit may be to attempt to fend off any attempts at takeover in order to keep its revenues, however it is FinanceFeeds opinion that this will prove ineffective and a purchase, for  very good price, will be made ultimately.

Image: FXCM’s global headquarters, Water Street, New York. Copyright FinanceFeeds