Exchanges are making their foray into the currencies market in a big way, as they challenge what has traditionally been the preserve of banks. Veering away from their usual hunting grounds, players like Deutsche Boerse AG and Bats Global Markets Inc. are making inroads in the space.
Not just about stocks and futures
Exchanges are venturing beyond their futures contracts and stocks to garner a share of the currencies market. Earlier this year, Bats Global Markets Inc. had forked out USD 365 million for Hotspot FX. It had an average daily volume of USD 31.6 billion in quarter four of 2014.
The latest entrant to the race is the force behind Xetra stock market and Eurex futures exchange, Deutsche Boerse AG. It put down USD 793 million for currency market 360T. The deal is being financed with a mix of equity and debt. Other contenders for 360T were CME Group Inc., a derivatives exchange and Nasdaq OMX Group Inc.
Waning trust in banks presents opportunity
The banking sector has been riddled with scandals over the past few years, with stories of rigging and other scams tainting their reputation. The biggest players in the space had coughed up USD 5.8 billion against fines for the rigging. Over-the-counter trading is the industry norm, as currencies are bought and sold by banks and their clientele. However, dealers also modify prices depending on their relationship with a particular customer, the credit quality as well as the sophistication of a client.
This has opened up space for exchanges that are on the lookout for opportunities for growth and diversification. Of late, stock exchanges have suffered in both Europe and the US, on the back of regulatory changes.
And there’s plenty to go around, with about USD5.3 trillion worth of foreign exchange trades every single day. Analysts see the synergies and believe it is a logical step for these exchanges, with forex markets being among the most liquid and the biggest worldwide.
Both Bats and Deutsche Boerse have seen a leadership change with their new CEOs eyeing currencies in a big way. Carsten Kengeter, CEO of Deutsche Boerse is looking at acquisitions and other targets include Indexium AG and Stoxx AG. He is said to be buying at peak multiples. 360T recorded average daily volumes of USD 62 billion in 2013 and USD 70 billion last year.
More to come…
Broker FXCM Inc dodged a bullet during the Jan 15 Swiss franc volatility, but is now looking to sell out its share of FastMatch. This opens up a new currency market to interested parties, and if the case of 360T is anything to go by, there will be plenty of takers.