The foreign exchange (FX) market entered a new era on March 26, 2007, when FXMarketSpace, CME's 50/50 joint venture with Reuters, became fully operational and open for trading. FXMarketSpace is the first centrally cleared, global FX platform for the over-the-counter (OTC) FX market. It brings much needed price transparency to the market as well as the credit and operational efficiencies that stem from a central-counterparty model, and is the first electronic platform to offer truly anonymous trading, both pre- and post-transaction.
“The FX market has talked about a centrally cleared platform for years,” says Rick Sears, president and chief sales officer, FXMarketSpace, “and we have been able to make it available to everyone for the first time. By utilizing the core competencies available to us at CME, Reuters and within our own team, we have created a platform that can transform the cash FX industry and take it to a new level.”
The OTC FX market is the world's largest financial market, with more than $2 trillion a day in turnover. But it has been comparatively slow to move online. It has been estimated that by the end of this year, electronic trading will account for only 44 percent of total FX market volume. In contrast, more than 90 percent of the trading volume is electronic in CME's FX futures market.
Considering the planning and resources needed to develop and support a sophisticated electronic trading platform, FXMarketSpace has progressed from initial announcement, in May 2006, to launch in a short period of time. Less than six weeks after announcement, FXMarketSpace released member details of its Early Adopter Program, consisting of banks, prime brokers, hedge funds and proprietary trading funds, which were involved in the platform's development and participated in customer testing and launch phases.
“There was a significant amount of knowledge transfer required for FXMarketSpace to understand the capabilities of the CME Globex platform,” says Ari Studnitzer, technology project manager, who is responsible for the IT-side of implementation. “There are also continual opportunities for improving the efficiency and capabilities of the CME Globex platform and specifically FXMarketSpace.”
Platform development was also a priority with a focus on leveraging existing technology available through CME and Reuters. Trading systems leverage CME iLink for order entry, CME MDP for market data and CME Clearing for post-trade processing. Reuters developed the trading graphical user interface (GUI) for FXMarketSpace. The FXMarketSpace trading GUI can be deployed on any of the 100,000-plus Reuters 3000XTra or Dealing 3000 desktops worldwide. Straight-through processing is also available via Reuters RTNS as well as other vendors.
A customer testing program began in December when customers successfully tested connectivity and trading using sample data on FXMarketSpace. The program encompassed both automated trades dealt via direct connection to the CME Globex API, and offered connectivity via a number of top front-end trading vendors – including Trading Technologies, GL, Patsystems and FlexTrade, and screen-based trading using FXMarketSpace on Reuters. Reuters, meanwhile, will tap into its global FX network, with connections to more than 100,000 Reuters FX customers.
Unlike other platforms, FXMarketSpace has made it a priority to develop a community of customers that is globally diverse and reflects diverse trading styles. At launch, more than 80 customers were either live or in the process of joining, significantly ahead of initial expectations. Some of the participating banks and prime brokers include ABN Amro, Bank of America, Barclays Capital Prime Services, Bear Stearns Forex, Calyon Financial, Citigroup, Credit Suisse, Deutsche Bank FX Prime Brokerage, JPMorgan, RBS, Societe Generale Corporate & Investment Banking and UBS. Other financial institutions include D|Square, FX Concepts, GMO, Infinium and Saxon Financial.
The backbone of the platform is supported by a massive distribution network. CME Globex is renowned as the largest and fastest trading system in the exchange traded derivatives space, with local access points around the world.
FXMarketSpace is staking a unique claim in the fast changing global FX market, which until recently has consisted primarily of banks dealing among themselves as well as on behalf of corporate clients. This has shifted as hedge funds, CTAs and proprietary trading firms have become a force in the market and are now the fastest growing segment of the FX market. These leveraged funds are looking to trade on platforms that offer them access to interbank prices, full anonymity and the ability to deal both manually and using algorithmic trading models.
“This is truly the first anonymous market for the cash world,” says Studnitzer. “FXMarketSpace provides the ability for anyone to trade with anyone, which just by itself tightens the spread. In today's FX market, it's bilateral credit-based, which puts a lot of limits and restrictions on who can trade, and as a result, creates inconsistent pricing and a wider spread.”
And as large as the OTC FX market is, it is still growing. Average daily turnover in FX rose 57 percent, from $1.2 trillion in 2001 to $1.9 trillion in 2004, according the Bank for International Settlements (BIS). Of that, spot FX trading grew at an even faster pace from $387 billion in April 2001 to $621 billion in 2004, a 60.5 percent jump, BIS reported.
Daily turnover for non-bank financial institutions rose from $58 billion in 2001 to $108 billion in 2004. Nonfinancial institutions, which accounted for $111 billion in spot turnover in 2001, almost doubled that to $213 billion in 2004. Interbank business still represents the largest share of the spot currency market, and its daily turnover has grown as well, from $218 billion in 2001 to $301 billion three years later.
FXMarketSpace currently offers spot (immediate delivery) FX across six major currencies - the euro, Japanese yen, British pound, Australian dollar, Swiss franc and Canadian dollar against the U.S. dollar. It also offers four cross-currency pairs. These currencies account for 80 percent of the volume in the FX market as a whole. FXMarketSpace plans to expand its offering to include forwards, currently targeting first-quarter 2008, with options on the horizon later that year.
www.cme.com/cmefxmarketspace