FX: Bats eyes European expansion for Hotspot
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Foreign Exchange

FX: Bats eyes European expansion for Hotspot

FX platform Hotspot will launch a European matching engine later this year, after its acquisition by Bats Global Markets.

Expanding the global footprint of foreign-exchange trading platform Hotspot is a top priority for Bats Global Markets, after its recent acquisition of the business for $365 million, according to Bats’ European chief.

 We are very open-minded about the direction Hotspot will take

Mark Hemsley,
Bats Chi-X Europe

“Hotspot has traditionally been very focused in New York, and given our strong customer connections and technology base in Europe, we saw a great opportunity to expand the business here, and in Asia as well in the longer term,” says Mark Hemsley, chief executive of Bats Chi-X Europe.

The acquisition of Hotspot from KCG Holdings completed on March 13, and Bats this week announced plans to launch the platform’s first European FX matching engine in London later this year.

The matching engine will target European and Asian customers and specific currencies that dominate European and Asian trading hours.

“Once we have completed the initial integration, our priority will be to expand the business and create a much more global presence,” says Hemsley. “We are already getting incoming calls from our existing customers in Europe who want to talk to us about FX.”

Hotspot’s customer base includes more than 220 banks, market makers and buy-side firms, and its average daily volume during the fourth quarter of 2014 was $31.6 billion, up from $16.3 billion in the first quarter of 2010, when it first started recording its trading volume.

At times of significant FX market activity, Hotspot often sees a spike in volume. On January 15, for example, when the Swiss National Bank (SNB) announced the sudden removal of the currency floor it had maintained on EUR/CHF since 2011, Hotspot’s volume soared to $61.7 billion.

“The SNB situation happened as we were doing our due diligence and we saw that the Hotspot model performed well throughout that event, with very high volumes but no operational or position risks,” says Hemsley.

The acquisition of Hotspot marks the first foray into FX for Bats, which was founded in 2005 in Kansas City, Missouri. Having launched a successful alternative trading system for US equities, Bats expanded to Europe in 2008 and acquired Chi-X Europe, another large alternative trading system, in 2011.

Last year, Bats merged with US exchange operator Direct Edge, completing the full integration in January. As the company considered its next strategic move, acquiring an FX platform appeared to be a natural step, says Hemsley.

“Bats had been looking at expanding into other asset classes and geographies for some time, and FX is an attractive market,” he explains. “It is the only truly global market, with a lot of macro-economic action driving activity in major currency pairs.”

'Difficult times'

While geographical expansion is the first priority, Hemsley believes there might be opportunities to add other products to Hotspot, including swaps, forwards and non-deliverable forwards.

And as market participants continue to deal with the fall-out from the FX benchmark manipulation scandal, Bats’ experience in the equity market will be relevant, he says.

“The FX industry has obviously been through some difficult times recently, and given the regulatory environment we expect that transparency and fairer trading rules are going to be a key theme, which plays to our experience in the exchange-traded equity market.”

While Hotspot succeeded in growing its market share under KCG Holdings, and before that Knight Capital, some FX platforms have battled against falling volume in recent years. A combination of low volatility in major trading pairs and structural changes in the FX market resulted in a marked decrease in activity on Icap’s anonymous platform EBS Market, for example.

One challenge for platforms has been the growing participation of high-frequency traders in FX market making, and their trading behaviour led to widespread frustration among some large banks that were struggling to manage their FX businesses.

“Looking back, I’m not sure that the capacity and sophistication of the FX market was really ready for high-frequency trading a few years ago, which probably accounts for some of the challenges platforms faced,” says Hemsley.

“The activity of automated market makers is much more responsible today, and you see them trading in larger size, with tight spreads, adding liquidity to the market.”

EBS responded to the original frustration of banks with a complete overhaul of its business, installing a new management team and adding new execution channels. Bats doesn’t rule out adding new execution models to the Hotspot platform.

“At this stage we are very open-minded about the direction Hotspot will take, but our experience is in offering customers the execution model that suits them best, whether that is a model that trades in microseconds or minutes,” says Hemsley.

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