weeklyFiX's coverage of FXMS
FXMarketSpace (FXMS) officially published its turnover figures for the first time at the beginning of May, even though they were freely available on Reuters before then. And whatever gloss the company managed to put on them, most industry observers believe they must be disappointing. The platform’s average daily volume through April was just $331 million, which was significantly short of the $16 billion a day that the company says is necessary for it to break even.
When the platform was announced last year, its two parents, the CME and Reuters, said start-up losses would be around $20 million to $25 million and it would be profitable by 2008. However, unless volumes pick up, the estimation on the start-up losses is likely to prove too low, and the timeframe to profitability too optimistic.
There appears to be a growing feeling that FXMS is either a concept launched too late or too early – in other words there might have been a need for an exchange-like model five years ago and there might be one in five years’ time but at the moment there is not. FXMS has widely touted the advantages of its use of a central counterparty, CME Clearing. This removes the issue of credit risk but while FXMS naturally disagrees, few in the market see this as an issue.
In research published at the end of April, consultancy company Aite wrote: "A long-term commitment from both the CME and Reuters will be necessary to ensure that FXMS can stay competitive in the marketplace. Active participation from dealing banks will also play a key variable in the success of FXMS. Perhaps most importantly, however, is that the ultimate success of FXMS may depend on whether or not the market believes that the central counterparty clearing approach of FXMS is a superior model to the existing prime brokerage/CLS model in addressing the counterparty and settlement risks inherent in the FX market."
Mark Robson, FXMS’s chief executive, told Euromoney’s weeklyFiX that the platform does offer something fresh. "I notice in recent months that you seem to have come to the conclusion that our FXMarketSpace platform has no real differentiation; and not unexpectedly, I see it differently," he said.
Robson said he believed the market’s structure had excluded many regional and domestic banks from accessing the best prices, because of their credit ratings. He also claimed that many high-frequency traders felt that EBS and Reuters were "architecturally antiquated" and that they wanted a more powerful platform to trade on.
FXMS appears to be in the process of repositioning itself, although the company is unlikely to admit this. Robson believes that the forward market offers real potential but again this remains to be seen. According to Justyn Trenner, chief executive of consultancy ClientKnowledge, FXMS faces two major hurdles.
"The challenge for FXMS can fairly be expressed as two connected aims. The first is to ensure that the net cost of transacting is materially lower than on other venues, especially for the high-frequency community that seems to be their initial key target. The fees look like working out lower than traditional prime brokerage levels but they need to sort out the netting issue – something both Hotspot and EBS/ICAP have addressed through Traiana Netlink.
"The second is to reach that critical level of liquidity that ensures more and more market participants look to FXMS as a key liquidity outlet – that’s about building the book of resting orders, depth of book. Then it can’t be ignored. That has yet to arrive, but if they can reach that critical mass, then they will take off. They may well need the high-frequency community to get them there, and that is why the first point is key."
At the time of writing, there does not appear to have been any significant and consistent increase in volumes. The sell-side liquidity providers appear to be playing a waiting game. Officially, most of the big players are connected but they appear not to be rushing in. If they do, FXMS’s optimism might well prove to have been well founded. But for the moment that appears to be a very big if.