Competition is hitting CME’s dominance in FX Futures trading

European competition among large execution venues has been looming for some time now, with such magnitude that some of the established heavyweights are beginning to feel the pinch.

Along with the continuing interest in exchange-based FX trading for a whole host of reasons, among them the need for transparency of order flow and pricing, as well as regulatory considerations in North America and Europe, comes a potential requirement for one of the most dominant FX trading venues, CME, to reduce its prices.

With the entry of Eurex into the FX business very recently, CME’s recent volume figures have displayed a decline in trading volumes in the last several months over the year-ago period across almost all derivative classes, other than interest rate derivatives, after a solid start to 2014.

Similarly, NASDAQ OMX experienced a decline in trading volumes of derivatives during the current quarter, but had also demonstrated its willingness to add FX to its offering.

According to a recent report by Forbes, CME witnessed a strong demand for FX trading in the first half of 2013, largely driven by trading of Japanese Yen products. CME’s management mentioned that much of the demand at that time was coming from Asian markets.

Overall trading volumes in Asia grew by 48% year-on-year in Q2 2013. However, trading volumes of FX products suffered in late 2013 and early 2014 due to the benchmarking scandal and low levels of volatility. As a result, the company reported a 28% y-o-y decline in FX traded products for the first half of 2014, with the average rate per contract of derivatives down by 4% year-to-date.

The company expects FX trading to grow due to the increasing adoption of exchange-traded FX futures, which CME Europe is in a position to offer. More recently, the company witnessed a 14% sequential increase in FX trading volumes to 765,000 contracts traded per day in the month of June.

Eurex’s entry into the exchange-traded FX business serves as a harsh reminder to the established contenders that this particular arena is becoming highly competitive, with a pricing model for transactions on FX contracts which is likely to put the cat among the pigeons and cause the stalwarts to battle it out. The fee charged by Eurex is about 10-12% lower than CME’s pricing on average.

This is likely to become a burden on CME’s trading volumes in the long run. However, it could take a period of time before FX trading on Eurex gains traction given that it failed to attract any trades on its debut on July 7 this year.

Slowly but surely….

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Competition is hitting CME's dominance in FX Futures trading


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