FXMS will naturally disagree with this view and can point out that its volumes in November showed extremely healthy growth, climbing 44% on the previous month to just under $1 billion a day. But rumours continue to abound that the number of clients using FXMS in size is really rather small, despite the company’s claim on its website that it has “the broadest, most diverse trading community”.
In many ways, FXMarketSpace is a victim of its own transparency. It is almost unique among ECNs in publishing its volumes – even Reuters doesn’t feel the need to do this. Being so open makes it an easy target and, although it would never say so, the company and its parents must be disappointed at its performance.
And for that reason this week, despite having been a long-term critic of FXMS, I was prepared to give the platform some credit. It was a bold initiative, and the company clearly has not given up yet.
Word reached me a couple of weeks ago that FXMS was poised to launch what it calls a JumpBall strategy to get it kick-started in 2008 (more detail to follow).
As a journalist who likes to play by the rules and always goes the extra mile to turn frequent rumours into rare concrete stories, I did the rounds of the FX market to see if JumpBall was true. And, of course, when I had put some meat on the bones I went to FXMS to seek confirmation and clarification of the story.
Despite my requests, FXMS failed to respond. But I was very confident of the details that I had gathered and was ready to press ahead with the story regardless.
Last night, at the ACI dinner at London’s Coq d’Argent, I had two contrasting conversations with FXMS employees. One was very polite, and informative, although he almost choked on his canapé when I asked him about the JumpBall strategy. Clearly I knew more than I was supposed to. The other, who will also remain nameless, was rather aggressive, haranguing me with his view that my previous FXMS stories were wide of the mark and telling me that I had “burnt my bridges” with his firm.
Perhaps I should have kept my big mouth shut. Because this morning, lo and behold I discover that FXMS had rushed out a press release confirming details of the JumpBall strategy. Coincidence? I’ll let you decide.
What the announcement does confirm is that FXMS admits its previous strategy was flawed. As I wrote recently, all trading venues are facing brokerage compression (see EBS to move to new tariff, November 23, 2007). Apparently, FXMS is planning on attracting liquidity by launching a profit share programme that will allocate 37.5% of its profit between its most active trading customers.
The press release goes on: “The JumpBall profit-share programme recognizes trading customers who contribute to the long-term success of FXMarketSpace. It is open to bank and non-bank participants and rewards the 16 most active traders on FXMarketSpace.
“Qualification for JumpBall begins on January 15, 2008 and runs until September 30. Customers with the highest average daily volume during the qualification period will have the right to receive a share of FXMarketSpace profits for up to four years.
“FXMarketSpace aims to reward the four most active banks and four most active non-bank participants with the highest percentage of profit share. An additional eight customers (both banks and non-banks) are able to participate in a smaller profit share in successive one-year profit share-pools.
“FXMarketSpace seeks to reward both short-term and long-term participation by allocating a significant share of its profit for up to a four years and guaranteeing a minimum profit share amount for both 2008 and 2009.”
Rick Sears, the president and chief sales officer of FXMarketSpace, found time to say to his own marketing team through a press release: “By introducing JumpBall, a term taken from equity trading meaning each firm is in direct competition for a piece of business, we are seeking to make our order book deeper and tighter, reward existing high-volume customers and attract new participants.”
Exchanges routinely provide market-maker incentives when they launch new products, often with considerable success. However, with very few exceptions, these schemes have not worked when it comes to trying to steal or build liquidity in established products. Ultimately, the only time the explicit cost of trading is relevant for most market participants is when there are two equal venues competing for business. Saving a couple of bucks in commission is completely irrelevant if you lose a couple of pips on the transaction.
I predict history will repeat itself. Eurex US tried the same thing when it launched in 2004 to challenge the CBOT in Treasury futures. Despite the fact that it had 17 active US institutions on board, the venture was ultimately doomed. Still, if FXMS does go down this route, it will at least be able to save some money when it writes up the press release by simply regurgitating the following quote and replacing the word Eurex with its own name. “The participation of these leading industry players in Eurex US through this equity partnership underscores the support for the Eurex US market model and the demand in the industry for a level playing field and low cost exchange. The governance of Eurex US will greatly benefit from the participation of a wide range of US industry participants from all major user groups.”
