Exchanges Invade Currency Market

For exchanges that historically stuck to stocks and futures contracts, the hottest new bet is challenging banks' dominance in currency trading.

Deutsche Boerse AG, which runs the Eurex futures exchange and Xetra stock market, joined the battle on Sunday with the 725 million euro (US$793 million) purchase of currency market 360T. Its decision came six months after Bats Global Markets Inc., a stocks and options specialist, waded into the business by spending $365 million on Hotspot FX.

Banks have long served as the backbone of currency trading, but that could be changing following a rigging scandal and as exchanges seek new growth engines. Foreign exchange is a huge territory; roughly $5.3 trillion trades every day.

“I understand the rationale for 360T,” said Peter Lenardos, an analyst at RBC Capital Markets in London. “The foreign-exchange markets are the largest and most liquid in the world.”

Deutsche Boerse and Bats both have their roots in stock trading. Stock exchanges in the U.S. and Europe have generally seen profits eroded by regulations that have spurred competition. Nasdaq OMX Group Inc., a stock market, was among the final bidders for both Hotspot FX and 360T, according to people familiar with the matter. Bloomberg LP, the parent of this news organization, also operates in stocks and currencies.

CME Group Inc. was also said to be in the running for 360T. The Chicago-based derivatives exchange handles about 10 percent of electronic currency trading, according to Aite Group LLC.

Deutsche Boerse and Bats have recently hired chief executive officers who want to aggressively diversify into currencies.

Under CEO Carsten Kengeter, Deutsche Boerse also took full control of index companies Stoxx AG and Indexium AG for 650 million Swiss francs ($680 million). The diversification into index businesses mirrors similar moves at London Stock Exchange Group Plc and Intercontinental Exchange Inc.

“He indicated at investor day that he wanted to be acquisitive, and he's following through,” Lenardos said. Kengeter took the job in June following a career at UBS Group AG and Goldman Sachs Group Inc.

The deal for 360T will be financed through a combination of debt and equity. The transaction is expected to immediately increase its earnings per share. Kengeter is “buying at peak multiples,” Lenardos said.

Currency Market Share

360T had average daily volume of $70 billion in 2014 and $62 billion the year before, according to an Aite Group report from May. Hotspot's average daily volume in last year's fourth quarter was $31.6 billion. ICAP Plc's currency market had average daily volume of $105.3 billion in the 12 months through June.

There's another currency market that might be available: FXCM Inc., the broker that nearly went under because of the Swiss franc's massively volatile day on Jan. 15, said in March that it's trying to sell its stake in FastMatch.

It remains to be seen how Deutsche Boerse will seek to grow 360T's market share. A few months after buying Hotspot, Bats CEO Chris Concannon said he was starting a price war in some trading pairs.

The currency market has been under scrutiny following nearly five years of turmoil as some of the biggest dealers paid $5.8 billion in fines from charges that they had rigged the market.

Buying and selling currencies commonly takes place between a bank and its customer through over-the-counter trading. The big dealers will quote different prices depending on their relationship with the customer. They will also tweak prices according to the credit quality or sophistication of the client seeking to trade.

Banks were again buffeted in January when the Swiss National Bank shocked global markets by abandoning its price cap on the franc. Some dealers sought to reduce their losses by trying to renege on transactions, a move that wasn't lost on market operators who saw it as an opportunity to grow market share.

–With assistance from Rainer Buergin in Berlin.

Complete your profile to continue reading and get FREE access to Treasury & Risk, part of your ALM digital membership.

Your access to unlimited Treasury & Risk content isn’t changing.
Once you are an ALM digital member, you’ll receive:

Thought leadership on regulatory changes, economic trends, corporate success stories, and tactical solutions for treasurers, CFOs, risk managers, controllers, and other finance professionals
Informative weekly newsletter featuring news, analysis, real-world case studies, and other critical content
Educational webcasts, white papers, and ebooks from industry thought leaders
Critical coverage of the employee benefits and financial advisory markets on our other ALM sites, PropertyCasualty360 and ThinkAdvisor