The push by exchanges to boost their FX volumes has continued in earnest in the last few years. FX on the CME is currently trading at around $108 billion of daily volume, still a drop in the ocean compared to over-the-counter (OTC) volumes, but it is growing to attract at least a small sliver of the market.
Craig LeVeille, executive director, FX products, at CME Group, believes that the industry is looking for more structure, either through industry initiatives, or moving onto exchanges, because it can’t find the protection needed in the OTC market.
“The SNB-related market events left many traders figuring out their positions and P&L in the carnage that ensued,” said LeVeille. “Our market performed well, with full trade certainty. This particular event is a good example of how CME is leading the charge to implement comprehensive market protection features such as circuit breakers and velocity lodging logic, to protect against abnormal moves.”
Following the CME’s lead, in Europe, Eurex has also been moving into the business. Last May, the exchange introduced futures and options on six currency pairs. Volumes have been thin so far, which the exchange blames on a lack of market maker participation, but it says it has some new initiatives to help volumes to grow. These include bringing more market makers on board as well as introducing new currencies and— in a bigger move— bringing NDFs onto exchange.
Whether the highly-tailored FX market is really suited to standardised exchange-trading is, however, still open to doubt.
“The exchange model isn’t perfect for FX,” says John Adam, head of product management at Portware. “For the FX market, exchanges are concentration points for liquidity when you can’t get it elsewhere. The buy-side FX traders can find that liquidity elsewhere; they are getting a price based on their particular firm's credit, risk profile, and relationship with a particular bank—so even if you get an indicative price on exchange, it will not account for all the factors the bank is taking into account when quoting that price to the buy-side trader.”
The exchange market might be more attractive to systematic traders who are more used to trading on exchange venues. However, the main problem is, again, getting enough liquidity to attract new players who can boost liquidity themselves. LeVeille admits exchange growth will take time, but believes that concerns over market safety and greater transparency should see further volumes move on exchange in the long-term.
The other trend to see a potential revival is a hybrid model, combining the virtues of central clearing with OTC. This method has been tried before. FXMarketSpace (FXMS) was a centrally cleared FX platform for the OTC market. It was launched in 2006 as a joint venture between Reuters and the CME but was closed fairly quickly in 2008 due its inability to attract liquidity on the platform.