Hotspot FX volumes to recover as users ‘turn on’ again after Knight incident

By:
Russell J. Dinnage
Published on:

Volumes on Hotspot FX, the multi-dealer platform owned by Knight Capital Group, are set to rise in September after a sharp drop in August, says Hotspot FX managing director and business manager William Goodbody.

Goodbody says his firm is seeing users of the electronic brokerage facility "turning on" their connectivity to Hotspot FX again after Knight Capital’s near collapse last month.

Hotspot FX saw its volumes plunge by 19.2% in August, falling more deeply than any other multi-dealer platform in the currencies market.

In August, Hotspot FX average daily volumes (ADVs) fell to $21 billion compared with July, when the platform saw ADVs at $25.9 billion.

Comparatively, Icap's EBS August volumes were down by 11% compared with July. Thomson Reuters recorded a 12% drop month-on-month, FXall volumes were down by 7% from July and CME FX volumes were down by 9%.

A computer glitch last month linked to Knight Capital software caused a flash-crash and lost the company $440 million. A group of investors eventually reached a $400 million deal to bail out the equities broker and market maker in return for a 70% ownership stake.

In an interview with EuromoneyFXNews at the TradeTech FX conference in London, Goodbody says most Hotspot FX users were concerned about counterparty exposure to Knight Capital through Hotspot FX after Knight’s near-death experience.

"The people who trade on Hotspot – because of the multi-prime brokerage clearing model that Hotspot has – never have counterparty exposure to Hotspot, which is its own legal entity, or Knight itself," says Goodbody. "Once we reminded our clients of that, they were immediately comfortable."

While FX volumes on the Hotspot platform fell in August, the company saw a near-record number of users last month logging in to their trading accounts to trade at least once, says Goodbody.

"As long as the trading environment is there, then things at Hotspot are fine," he says.

On average, Hotspot sees around 600 users per month logging into the platform to trade. Goodbody says August was a "high watermark" for the platform in terms of active user accounts, with more than 600 log-ins.

Also, Goodbody says Hotspot’s year-on-year volumes performance in August, compared with its competitors, shows the company is doing well.

Year-on-year, Hotspot FX’s ADVs declined 33.5%, after the platform saw August 2011 ADVs of $31.1 billion.

FX volumes on EBS/Icap were down 49% in August compared with August 2011, volumes on Thomson Reuters were down by 30% in August year-on-year, FXall volumes last month were down 5% from August 2011 and CME FX volumes were down 26% year-on-year.

'Executing the game plan’

In addition to continuing to sign up new clients over the rest of the year, Goodbody says Hotspot FX and Knight Capital are working on several long-term plans to increase market interaction with the currencies platform.

Knight Capital is also planning soon to expand its sales team staff by one or two people in London, and also in Asia by one or two people, in an effort to expand the company’s FX business, he says.

One way that Hotspot FX is signing up new users is through a programme of sponsored bank access for small/mid-size and regional banks. These banks are looking to trade currencies but do not have access to the market because they cannot readily find bigger banks willing to offer them prime brokerage.

Hotspot FX is encouraging prime brokers on its platform to sign prime-brokerage-lite deals with the smaller banks, which grants them access to trade on the platform in the larger bank’s name, says Goodbody. There are two banks operating on Hotspot FX as sponsored bank access prime brokers now, and the company is looking to increase the number of banks providing the access to three or four soon, he says. 

Goodbody says the sponsored bank access initiative is a way for the largest prime brokers on Hotspot to comfortably let smaller banks use the facility through existing credit arrangements, just like normal-sized prime brokerage customers.

The programme has attracted around 12 small to medium-size banks to use Hotspot FX, he says.

"It streamlines the process very well, even though the smaller banks do not become a prime brokerage customer of the large bank that is a member on the platform," he says. "The potential for this programme [in the] long-term is huge. There’s hundreds of these types of banks all around the world, some very active traders, some more periodic, but we are happy to have them all."