M&A in the FX Industry: 360T and Jefferies Group Creating Chatter – Update

Consolidation is taking form in the FX industry during 2015. Two names linked to deals that could cross paths are

Since Hotspot was sold for $365 million by KCG to BATS Global Marketplace earlier this year, it has put a price tag on all FX trading venues, placing them in play as possible acquisition targets. Among other names, one venue definitely on the block is Fastmatch. Following Swiss franc related losses by FXCM in January, the broker publicly stated that they were planning on selling their 35% stake in Fastmatch.

Becoming the latest trading venue to be speculated as a takeover target is 360T. In discussions with Finance Magnates’ sources, 360T is often cited as a possible takeover target, due to the German private equity firm having taken a majority stake in the firm in 2012, as well as having a history of seeking exits to monetize its investments. In addition, while 360T doesn’t publicly disclose volume activity on its platform, firm executives have been quoted as stating that they are experiencing steady growth, even during low volatility periods.

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A rival to EBS and Bloomberg’s FXGO, 360T operates an interbank currency trading platform, including spot, forwards, options and swap products. Among bank trading desks, 360T is a key platform for discovering liquidity to hedge internal risk, such as currency exposure of mortgages and commercial loans. In addition, 360T operates other services such as FinBird Trading Solutions. A financial technology company, FinBird provides brokers and banks with solutions to offer margin trading to their customers. Services include liquidity aggregation, MT4 white labeling, CRMs, and risk management tools to handle both STP and market making of customer order flow. In regards to liquidity, FinBird acts as a conduit for its parent company, providing its clients connectivity to the 360T platform.

Currently, speculation about the future prospects of 360T heated up last week after the Wall Street Journal published a report that it was in conversations of a potential sale, with a price tag of €600 million being floated. Finance Magnates has learned the group’s sale bid is represented by US based investment bank Jefferies.

Speaking to representatives of 360T, the firm couldn’t comment about the WSJ article or about potential buyers. However, it was pointed out that investor firms such as Summit Partners typically seek an exit on their investments after three to seven years. As a result, it was confirmed that in relation to 360T, Summit Partners intends on “monetizing this investment due to 360T’s solid performance and steady growth and of course an interest of strategic buyers.” Whether an exit takes place now, as the 360T investment has reached the three year period, or later, is yet to be determined but could ultimately rest on the strength of any offers for the company.

 

Market reshuffle?

Analyzing potential buyers, it would make sense to look into future exchanges seeking inroads into the forex markets. One notable player in this space is NASDAQ, which back in 2012 has reportedly sought acquiring Hotspot. The latter was taken by BATS Exchange, but NASDAQ reiterated its intention to tap fixed income and Foreign Exchange few months afterwards.

Interestingly, Jefferies Group itself is planning on expanding its involvement in the FX market as well. Their first main FX related deal for 2015 was as the bank that coordinated Leucadia Financial’s $300 million loan to FXCM in January (Jefferies is a wholly owned investment of Leucadia Financial). They have since increased their bonds with FXCM, having acquired the broker’s Faros Trading unit in April.

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Since then, the firm has recently made public their intentions to continue to implement plans in the FX market. Ray Kamrath, Global Head of FX at Jefferies, explained that the company’s plans included adding more FX services for their customers, stating, “Following the acquisition of Faros Trading in April, we will continue to enhance our capabilities. We are executing a plan that will position Jefferies as an important partner to our clients in FX.”

We are executing a plan that will position Jefferies as an important partner to our clients in FX – Ray Kamrath

While the firm hasn’t made public how they plan to “enhance” their capabilities in the FX sector, with their track record this year, it can be assumed that reviewing potential acquisitions is on their list of to-dos. In that regard, it may not be coincidental that Jefferies has gone public about planning to expand their FX services at the same time as 360T is being sourced to be in play.

When asked about potential acquisitions and connections to 360T, a Jefferies Group representative was unable to provide comment to Finance Magnates. However, with Jefferies having already done a deal with FXCM, continuing that relationship and making a bid for Fastmatch may make more sense.

In regards to Jefferies’ interest in FX, acquiring assets in the institutional space would immediately provide them with internal liquidity options to provide their existing customers. In addition, after Jefferies reported its Q1 results showing a 35% year-over-year decline in revenues due to a sharp decrease in debt and fixed income trading and related services. Therefore, boosting its FX solution may be seen as a way for the firm to diversify and normalize its earnings stream.

360T Price Tag

Within the FX industry, valuations for public ECNs and multi-dealer platforms have focused on the sale of Hotspot FX to BATS Global Market for $365 million from KCG. Volumes on 360T’s electronic platform are believed to be 2 to 2.5 times that of Hotspot. This estimate is based on bullish comments from company management as well as feedback from banks. Although the two firms do compete over business, 360T has a stronger core business supporting bank and corporate customers. This compares to Hotspot which has a larger focus on investment funds and traders.

Having a focus on providing customers with liquidity to hedge risk, among core features of 360T is its diverse set of liquidity providers. Namely, these include numerous regional banks making a market in spot FX and derivatives products of their local currencies. With the decrease of technology barriers to distribute liquidity, platforms like 360T as well as EBS, Reuters and FXGO are providing smaller banks a window to market FX pricing to a global audience. While primarily focused on marketing making of their local currencies, technology providers have commented to Finance Magnates that some regional banks are also gaining traction providing liquidity in other currencies.

The result is that a prospective buyer of 360T would find themselves in the enviable position of owning a platform that is tied to emerging markets, which is an area of growth in the FX industry. Therefore, using volumes as a proxy, a €600 million valuation of 360T would appear to undervalue the firm when compared to Hotspot’s price tag. However, 360T also competes in an area of growing competition, with EBS, FXGO, and Thomson Reuters actively courting banks and clients with new liquidity aggregation features. In addition, as liquidity has become commoditized, many in the industry believe the long- term future is a compression of trading margins and fewer major players. As such, this long-term trend poses a risk for any ECN operators.

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