Exchanges still competing in the FX Space: Deutsche Börse moves into FX derivatives

The growth of the FX OTC market has put pressure on recognised exchanges across the globe as volumes were shrinking

by Adil Siddiqui, Independent Financial Services professional.

The growth of the FX OTC market has put pressure on recognised exchanges across the globe as volumes were shrinking in traditional products like equities and bonds. CME offers FX futures on around 50 pairs, including majors and emerging like the Korean Won and Russian Rubble, and a daily volume in the range $100 billion plus (notional value). Other leading exchanges like the SGX and Eurex also have some sort of FX offering.

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Deutsche Börse Germanys leading exchange has acquired a minority stake in Digital Vega, a small London based company which provides electronic FX options trading technology to buy and sell-side firms.

The Digital Vega system broadcasts request for quotes (RFQ) from buy-side asset managers, corporates, hedge funds and regional banks for FX option transactions to sell-side liquidity providers. The service is supported by seven of the largest FX banks, with a further five banks looking to provide pricing services in the near future.

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The investment – in the “single digit million range” – gives The German exchange operator a foot-in-the-door in the FX derivatives space, and positions it for up-and-coming reforms mandating the provision of pre-trade price transparency to institutional investors.

Peter Reitz, managing director of Deutsche Börse believes that the investment in Digital Vega shows the Börse’s commitment in recognising the changing industry landscape, Deutsche Börse aims to support the G20 commitments for improving the integrity and safety of the OTC markets.

Exchanges have found the FX markets to pose difficulty, the Chicago Mercantile Exchange launched ‘FXMarketspace’ in collaboration with Reuters. The product was given much attention as it would offer spot FX trading where trades are centrally cleared by 12 prime brokers and banks. With liquidity crisis during 2008 and the Lehman crisis the project was halted as both parties were unable to maintain profitability.

Exchanges provide traders with enhanced transparency as the order book is published, they reduce counterparty risk as the exchange is principal and matches sellers and buyers; and costs can be reduced as spreads will be consistent and won’t move from broker to broker.

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