In a move which confirmed the intention of BATS Global Markets to expand its presence outside of the global equity markets, the company has recently announced a strategic move buying the Hotspot platform from KCG Holdings for $365 million in cash.
Forex Magnates reporters have reached out to the company to obtain more details about its intentions and provide an insight into the thinking of what is likely to be a new major player in electronic FX trading.
The president of BATS Global Markets, Chris Concannon, spoke to Forex Magnates about the acquisition, the rationale behind the decision of the firm to get into the FX market and about the challenges which the industry is facing in the aftermath of the Swiss franc crisis.
Why did BATS decide to enter the foreign exchange market?
As you know, BATS is not just a US company - we run the largest exchange in Europe and the second largest exchange in the US. Being a global company, we have been looking at asset classes outside of cash equities.
Through our distribution channels, our client list and the way we connect to our clients and the relationships that we have with them, we saw that of all the other asset classes that they are involved in, FX has been the one that showed some substantial historical growth rates.
In our views it is also a very rapidly evolving one, which created an opportunity in FX. We see Hotspot as a chance for BATS Global Markets to step into an asset class that is global, traded 24 hours a day and provides us with an opportunity to Leverage our client base into this market.
What do you think can be done better in the FX market?
The costs and the complexity of the infrastructure which constitutes the foreign exchange market today have become a problem. The fragmentation that has occurred in this asset class has been another issue - you have FX aggregators and a variety of ECNs.
The marketplace has been transformed from an industry that is not used to technology, to a technically complex infrastructure-dependent one. We see an opportunity to offer a very competitive service to a broad group of FX clients.
Where do you see the growth potential in the current marketplace?
Our view is that FX as an asset class has not only been growing, but has a lot of structural reasons to grow further. Geopolitical disruptions and changes in the dominant payment currencies around the world are some.
In the short term a lot of currency fluctuations are due to government intervention, but in the long run we see a market that is becoming more and more adopting of technology, which will solve the execution problem and increase further the velocity of trading. We see that in other asset classes, and foreign exchange is ready for that change.
We also see instruments that could come into the market over the long term that will add a great deal of growth to the market. In particular, the non-deliverable futures (NDFs) market in some of the larger emerging markets' currencies which aren’t freely traded has substantial room to grow.
China, India, Brazil and many others are all thriving economies with high demand for their currencies, yet given the government restrictions in place, they do not trade as a normal spot currency. One day when those restrictions are lifted, it will be like having an IPO in the FX spot market.
Have you been paying attention to the latest events related to the Swiss franc cap removal? How do you think the event will change the landscape of the industry?
There’s no question it will have an impact on the industry. Probably a more targeted one on the retail side of business and some other areas where leverage has been extended to a large extent and to very high levels. Long term, the impact will be minimal when talking what will happen to the overall volume in FX.
What made you go after an established platform like KCG Hotspot instead of building your own from scratch?
When we looked at the market, we saw one that is cleared by prime brokers. The entire over-the-counter (OTC) FX market is prime-to-prime clearing. That’s a big infrastructure and the prime clearing industry is becoming very risk averse and very operationally risk averse. Connecting and clearing more venues introduces exponential risk each time they add a new one.
The ability to organically launch a new market in FX has become increasingly difficult because of the concerns about the risk associated with the next new venue. Hence, the venues that already exist have a huge advantage in the current environment because it's very difficult for new entrants to get established. This issue has been exacerbated in the aftermath of the Swiss franc event.
Why do you think so many banks have been exiting prime brokerage services in the past 12 months?
The business has large risks to it, as we have seen in recent events, and it has been a very competitively priced business. When they evaluated their revenue against tail risk, some banks have come to the conclusion that the value at risk proposition is not worth it.
The costs associated with infrastructure required to provide a prime brokerage are growing. The costs associated with the processing and evaluation of the risk, and the tail risk alone, made a number of banks decide to exit the business or limit the clients that they take.
Will you be targeting a particular type of clients?
No. What’s great about Hotspot is the broad diversification of clients. Over 200 of those connected to Hotspot are a broad range of clients from large banks to mid-tier banks, regional banks, brokers, institutional investors, proprietary traders, hedge funds, etc.
It’s a really broad list which is very similar to the current BATS Global Markets clientele in Europe and in the US. The overlap of clients is high and we already have established relationships with them. Putting Hotspot in the hands of an independent market operator is very helpful for clients before we even get through the door.
