I was determined not to write anything about FXMarketSpace (FXMS) this week. But following my analysis of its volumes last week, I have had a fair amount of correspondence with Mark Robson, the fledgling platform’s chief executive.
“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,” Robson wrote to me in an email. “You seem quite open minded, so I’ll just relay a couple of key customer issues that repeatedly were brought to my intention when I used to run Reuters electronic brokerage business:
“1. Many regional and domestic banks felt locked out from trading on the Reuters and EBS central limit order books because banks would not extend sufficient bilateral credit lines for them to participate. They didn’t like the alternative of becoming prime brokerage customers into EBS and Reuters because they felt that this effectively meant they were withdrawing from having a real presence. They wanted to compete on a level credit playing field. How often do you speak to such smaller regional and domestic banks around the world?
“2. Many high-frequency trading customers complained that the existing EBS and Reuters platforms were architecturally antiquated (restricting their interest in using them) and asked for a more powerful platform to execute on. They also didn’t like the way most other platforms enable banks matching with a PB to often figure out who the PB’s customer was. Don’t you hear these things?”
Robson then asked: “Might this encourage a fresh look at what our platform has to offer our customers?”
Unfortunately I don’t talk to many regional and domestic banks. However, I very much would like to and I have always stated that part of what I see as my mission, first at Euromoney and now with the Weekly FiX, is to write about the industry from a broad perspective, not just one that is handed down by the top five banks in the FX poll.
Looking at Robson’s first point, I’m not sure that regional banks are as excluded as they once were. Prime appears to have worked very well and even if some banks do want their name to be seen in the market, how does FXMS address that with its anonymous central clearer? In addition, for some reason, the existence of CLS seems to have freed up spot credit lines in a manner that almost suggests it’s a clearing house, which it obviously isn’t. In short, I don’t believe credit is really an issue in spot FX.
There is no doubt that in the past both EBS and Reuters fell behind technologically. Globex, the platform that FXMS uses, is by all accounts superior in many ways. I would be happy to hear from anyone who has a strong opinion about their relative merits.
I have heard accusations that some of the ECNs are not as anonymous as they should be and there are rumours that some even hand over names to liquidity providers when asked to. Anyway, with PB customers assigned a numerical code, it is feasible that anonymity is not assured if institutions do want to trawl through trades and work out who is on the other side. But banks will have Chinese walls in place, and in most cases I’m sure these are well built. The same accusation of leakiness has also been levelled at CME clearing in the past.
If FXMS does manage to grow its business by bringing in fresh or disenchanted participants, the wider FX industry will applaud it. I still think it will be a tough task to attract the volumes to see it through to profitability, but it’s not impossible. Much depends on how committed the two parent companies are. One of these, the CME, is seen as a high-growth company, and while it is rich, it may not wish to see a prolonged drag on revenues. The other, Reuters, is about to be taken over by Thomson, which has a questionable record of running even the successful platforms it has acquired.
So how should I judge FXMS? Obviously, looking at its daily turnover and comparing it to its breakeven target is harsh, because after all, it is a start up. But as Devin Wenig, president of Reuters’ business divisions, said in a conference call with analysts when FXMS was announced: “Success in the early years will be measured on volume, and I am sure that we will provide guidance on that as we go forward.”
Part of the problem I have is who to compare it with. Looking back at how EBS did when it launched is not valid – that was the birth of a new market paradigm. However, EBS did reach profitability in 15 months; and I’m willing to wager that FXMS will not be cash flow positive by the end of 2008. Without seeing internal business projections, perhaps the only fair way to judge FXMS would be to compare it with other recently launched platforms. But none of these publish their figures, which – much to FXMS’ chagrin – leaves it an easy target.
