Nasdaq, which is currently the second largest exchange in the world based on market capitalization, is looking to get a slice of the $5.3 trillion per day forex trading pie by launching its own FX platform in 2016. Currently, electronic trading platforms are run by EBS (owned by ICAP PLC), Thomson Reuters Dealing, and systems offered by major banks.
Wait a minute. How can I tell I’m getting the right rates with this kind of decentralized system?
Excellent question! And the short answer is that you can’t! I’m sure you’ve read reports on the investigations surrounding forex fixing and interest rate manipulations by hotshot traders in financial institutions, highlighting the need for transparent pricing. Regulators have already stepped up their game in setting enhanced reporting and clearing requirements for OTC trades in the U.S. and in Europe, but Nasdaq aims to create a more centralized view of the forex market.
“There are two main problems in retail FX markets. How can customers be sure they receive the correct price and secondly the counterparty risk,” said Hans-Ole Jochumsen, Co-President and Head of Nasdaq’s transaction business. “The criticism of banks and the fines show the market is not transparent and compliant and it speaks for it to be organized more like a stock market.”
Aren’t brokers and ECNs already trying to provide a broader view of the forex market?
While the OTC market is fragmented among several banks and brokers, electronic communications networks (ECNs) are able to act as mini-exchanges by providing market liquidity to retail traders. This type of aggregation technology has allowed price-setting and order execution to become more efficient.
This is probably why some exchanges opted to acquire forex ECN platforms instead. Earlier this year, BATS Global Exchange, which is the second largest equities and options exchange in the U.S., completed the acquisition of Hotspot FX from KCG Holdings for $365 million to enter the lucrative forex market. Just last month, Deutsche Börse Group announced its acquisition of 360T, an institutional ECN platform based in Germany, for 725 million EUR. So far, their race to become a more dominant figure in the forex market has been off to a rocky start, with Hotspot FX recording consecutive monthly declines in trading volume.
So how will Nasdaq be any better?
For one, Nasdaq is developing its very own platform instead of acquiring an existing one, allowing it to retain the reputable brand that has built throughout the years. The exchange has already made a successful launch of its NFX platform for trading energy derivatives such as oil, gas, and power futures last month and could rely on the same technology and system for their forex platform.
In addition, Nasdaq already has FX options instruments available on major currency pairs to compliment is upcoming forex platform launch. These cover the Australian Dollar, British Pound, Canadian Dollar, Euro, Swiss Franc, New Zealand Dollar, and Japanese Yen which are traded on a fully transparent exchange market structure.
“We have a system ready that banks can test in their own systems, but we don’t want to launch it before we have enough banks committed to secure sufficient liquidity,” said Jochumsen. No specific date has been set for the launch but it is definitely something forex industry players are watching out for next year.