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Foreign exchange data wars heat up as rivals take on ‘Big Two’

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Influential foreign exchange trading venues that act as the reference price for currencies are facing a battle to maintain lucrative charges for their market data feeds, as growing competition and declining trading volumes threaten their position.

Regulators in both the US and Europe have been closely scrutinising the amounts charged by stock exchanges for market data in recent years and the cost has sparked a fierce struggle between clients and trading platforms. Data charges in currency markets have received much less attention, partly because profits have been big enough to distract from this cost and because of less stringent regulatory requirements.

However now some FX trading customers are pushing back against these high costs and many are voting with their feet. This presents a challenge for the “Big Two” incumbent platforms, CME-owned EBS Market and Refinitiv’s Matching, which currently act as key market data providers for currencies. Both face an uncomfortable problem: how to keep charging top prices for information about exchange rates if the majority of the market trades elsewhere.

Traders say the cost of top-quality FX market data, about $50,000 per month, has not changed in a decade, but its quality and usefulness have declined.

“Ten years ago you couldn’t be in the trading business without having access to those two data feeds. Now there are other ways to get information about prices,” says Phil Weisberg, head of strategic planning at tech company OneZero.

Phil Weisberg of OneZero
Phil Weisberg of OneZero says ‘now there are other ways to get information’

For now, both platforms retain their crowns as the preferred inputs into the pricing models of the top echelons of market makers. However, over the past five years, average daily trading volumes have declined by a quarter on both platforms. As trading activity has inexorably shifted from the venues, the data feed becomes more critical and valuable. It carries the prices that flow through the market. EBS and Refinitiv declined to comment.

In the three months to September, transaction revenues from the EBS business fell 15 per cent compared with that period last year, according to a regulatory filing from CME. Average daily volumes were 19 per cent lower at $63.3bn than in the same quarter last year.

Growing competition means equity market operators have had to reduce the fees they charge for facilitating transactions, says Ken Monahan, an analyst at financial consultancy Greenwich Associates. “This meant they have had to cut fees where they directly compete, in transaction fees, but are still able to charge for things they can uniquely provide, like market data specifically from their platforms,” he says.

Exchanges in equity markets have benefited from being able to raise market data costs because of legal requirements that force large banks and investors to shell out for price information from all relevant markets to prove best execution.

But now US regulators are scrutinising the level of these growing charges in equity market data. In June, the US Securities and Exchange Commission and the US Department of Justice joined forces to act on equity market concerns.

Brett Redfearn, the director of the trading and markets division at the SEC, said in a speech at the time that the seven largest equity exchanges saw their market data revenues rise five times as much as their income from trading between 2013 and 2018. “These changes raise questions about whether the current level of various exchange fees for market data and connectivity are reasonable,” he said. In currency trading such obligations to demonstrate best execution do not exist in the same way, but market data is still a lucrative source of revenue for platforms viewed as “the price”. While costs have not increased, they have not fallen.

“Compared to the equities markets, the FX markets are much more decentralised,” says Chris Purves, co-head of global markets execution and platforms at UBS. “[This] has kept in check the price of FX market data.”

Chris Purves of UBS
Chris Purves of UBS says the relatively decentralised nature of currency markets has kept data prices in check © Handout

Currency trading takes place on dozens of platforms and the majority of deals are privately negotiated, meaning there is no clear “central price” accessible to all. Instead, investors use exchange rates supplied by EBS and Refinitiv as a reference to price deals in major currencies. Both were originally set up for the largest dealers to trade with each other, and by doing so to determine the real exchange rate.

But these deals now account for a “small fraction of the entire market”, according to analysis from the Bank for International Settlements.

“The two legacy venues can’t afford their volumes to drop much more because their market data will lose its value,” says David Mercer, chief executive of LMAX Exchange, a rival platform.

Currently, subscribers pay as much as $50,000 per month for access to EBS’s fastest and most granular data feed. Large banks and high-frequency trading companies need to spend about $1m a year just on getting access to price data in the highly fragmented market, according to people familiar with the matter.

“There is nothing wrong with monetising market data but we feel that competition is important and that fees should reflect the value of the data,” says Jonathan Weinberg, head of Cboe FX, which aims to compete with the dominant incumbents.

Jonathan Weinberg, head of Cboe FX
Jonathan Weinberg, head of Cboe FX © Juliet Lemon

The costs mean that the majority of end investors such as pension funds cannot afford to directly access this information and instead rely on being supplied with the day’s highs and lows from the banks they trade with.

The head of trading at a large sovereign wealth fund says that, despite trading billions of dollars of currencies a year, the cost of accessing top quality data feeds from the two main markets is still prohibitive for most investors.

“It would be great to have but I just can’t make the business case for it,” the trading head says. “Yes, volumes have declined, but they’re still what people view as the reference price.”



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Copper hits record high with demand expected to rise sharply

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Copper prices hit a record high on Friday in the latest leg of a broad rally across commodity markets sparked by the reopening of major economies and booming demand for minerals needed for the green energy transition.

Copper, used in everything from electric vehicles to washing machines, rose as much as 1.2 per cent to $10,232 a tonne, surpassing its previous peak set in 2011 at the height of a previous commodities boom.

The price has more than doubled from its pandemic lows in March last year due to voracious demand from China, the biggest consumer of the metal, and also investors looking to bet on a big uptick in the global economy and protect their portfolios against potential for rising inflation.

Government stimulus packages and the shift towards electrification to meet the goals of the Paris agreement on climate change are expected to fuel further demand for the metal, which analysts and industry executives believe could hit $15,000 a tonne by 2025.

“Capacity utilisation rates of our customers are the highest in a decade and that’s before stimulus money both in Europe and the US has started to flow,” said Kostas Bintas, head of copper trading at Trafigura, one of the world’s biggest independent commodity traders. “That will be significant.”

The US and Europe were becoming significant factors in the consumption of copper for the first time in decades, he added. “Before, it’s effectively been a China-only story. That is changing fast.”

Concerns about the long-term supply of copper due to lack of investment by large miners has also pushed up prices. There are only a few large projects in a development, while most of the world’s easily produced copper has already been mined.

“The current pipeline of projects likely to start producing in the next few years represents only 2.3 per cent of forecast mine supply,” said Daniel Haynes, analyst at banking group ANZ. “This is well down on previous cycles, including 2010-13 when it reached 12 per cent.”

The upward march of other raw materials is showing no signs of abating. Steelmaking ingredient iron ore traded above $200 a tonne for the first time as China returned to work after the Labour Day holidays in early May. 

In spite of production cuts in Tangshan and Handan, two key steelmaking cities in China, analysts expect output to remain solid over the next couple of quarters. 

“Recent production cuts in Tangshan have boosted demand for higher-quality ore and prompted mills to build iron ore inventories as their margins are on the rise with steel supply being restricted,” said Erik Hedborg, a principal analyst at CRU Group.

“Iron ore producers are enjoying exceptionally high margins as around two-thirds of seaborne supply only require prices of $50 a tonne to break even.”

Elsewhere, tin on Thursday rose above $30,000 a tonne for the first time in a decade before easing. Tin is used to make solder — the substance that binds circuit boards and wiring — and is benefiting from strong demand from the electronics industry, which has been lifted by growing numbers of stay-at-home workers.

US wood prices continued to race higher ahead of the peak in the US homebuilding season in the summer with lumber futures rising to a record high above $1,600 per 1,000 board feet length, up from $330 this time last year.

Agricultural commodities also continued to rally as a result of a particularly dry season in Brazil, concerns about drought in the US and Chinese demand. Strong increases in food prices have started to affect global consumers. Corn rose to a more than eight-year high of $7.68 this week, while coffee has risen almost 10 per cent since the start of month, hitting a four-year high of $1.54 a pound this week.



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Wall Street stocks waver as investors await US jobs data

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Wall Street stock markets wavered, with tech losses dragging down some indices, but remained close to record highs ahead of US jobs data on Friday that could pile pressure on the Federal Reserve to rethink its ultra-supportive monetary policies.

The S&P 500 was up 0.2 per cent in the afternoon in New York, hovering slightly below its all-time high achieved late last month. The peak was reached following a long rally supported by the Fed and other central banks unleashing trillions of dollars into financial markets in pandemic emergency spending programmes.

The technology-heavy Nasdaq Composite, however, which is stacked with growth companies sensitive to changing interest rate expectations, was down 0.5 per cent by the afternoon in New York, the fifth straight losing session for the index.

The divergence of the two indices followed patterns from earlier this year, when investors sold out of growth companies over fears of rising rates and poured into more cyclical plays. That trade has been more muted recently but could be coming back, said Nick Frelinghuysen, a portfolio manager at Chilton Trust.

“It’s been a bit more ambiguous . . . in terms of what regime is leading this market higher, is it quality and growth or is it value and cyclicals?” Frelinghuysen said. “We’re in a little bit of a wait-and-see mode right now.”

The 10-year Treasury yield, which rose rapidly earlier this year amid inflation fears, declined 0.05 percentage points to 1.56 per cent on Thursday.

In Europe, the Stoxx 600 closed down 0.2 per cent, hovering just below its record high reached in mid-April.

With the US economy close to recovering losses incurred during coronavirus shutdowns, economists expect the US government to report on Friday that the nation’s employers created 1m new jobs in April. Investors will scrutinise the non-farm payrolls report for clues about possible next moves by the Fed, which has said it will continue with its $120bn a month of bond purchases until the labour market recovers.

Up to 1.5m jobs would “not be enough for the Fed to shift”, analysts at Standard Chartered said. “Between 1.5m and 2m, there is likely to be uncertainty on Fed perceptions.”

Central bankers worldwide had a strong “communications challenge” around the eventual withdrawal of emergency monetary support measures, said Roger Lee, head of UK equity strategy at Investec.

“If it is orderly, then you can expect a gentle continuation of this year’s stock market rotation” from lockdown beneficiaries such as technology shares into economically sensitive businesses such as oil producers and banks, Lee said. “If it is disorderly, it will be a case of ‘sell what you can’.”

On Thursday the Bank of England upgraded its growth forecasts for the UK economy but stopped short of following Canada in scaling back its asset purchases.

The BoE maintained the size of its quantitative easing programme at £895bn, while also keeping its main interest rate on hold at a record low of 0.1 per cent. The British central bank added that while its asset purchases “could now be slowed somewhat” after it became the dominant buyer of UK government debt last year, “this operational decision should not be interpreted as a change in the stance of monetary policy”.

Sterling slipped 0.1 per cent against the dollar to $1.389.

The dollar, as measured against a basket of trading partners’ currencies, weakened 0.4 per cent. The euro gained 0.4 per cent to $1.206.

Brent crude fell 1.1 per cent to $68.17 a barrel.



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Gensler raises concern about market influence of Citadel Securities

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Gary Gensler, new chair of the Securities and Exchange Commission, has expressed concern about the prominent role Citadel Securities and other big trading firms are playing in US equity markets, warning that “healthy competition” could be at risk.

In testimony released ahead of his appearance before the House financial services committee on Thursday, Gensler said he had directed his staff to look into whether policies were needed to deal with the small number of market makers that are taking a growing share of retail trading volume.

“One firm, Citadel Securities, has publicly stated that it executes about 47 per cent of all retail volume. In January, two firms executed more volume than all but one exchange, Nasdaq,” Gensler said.

“History and economics tell us that when markets are concentrated, those firms with the greatest market share tend to have the ability to profit from that concentration,” he said. “Market concentration can also lead to fragility, deter healthy competition, and limit innovation.”

Gensler is scheduled to appear at the third hearing into the explosive trading in GameStop and other so-called meme stocks in January.

Trading volumes in the US surged that month as retail investors flocked into markets, prompting brokers such as Robinhood to introduce trading restrictions that angered investors and drew the attention of lawmakers.

The market activity galvanised policymakers in Washington and investors. Lawmakers have focused much of their attention on “payment for order flow”, in which brokers such as Robinhood are paid to route orders to market makers like Citadel Securities and Virtu.

That practice has been a boon for brokers. It generated nearly $1bn for Robinhood, Charles Schwab and ETrade in the first quarter, according to Piper Sandler.

Gensler noted that other countries, including the UK and Canada, do not allow payment for order flow.

“Higher volumes of trades generate more payments for order flow,” he said. “This brings to mind a number of questions: do broker-dealers have inherent conflicts of interest? If so, are customers getting best execution in the context of that conflict?”

Gensler also said he had directed his staff to consider recommendations for greater disclosure on total return swaps, the derivatives used by the family office Archegos. The vehicle, run by the trader Bill Hwang, collapsed in March after several concentrated bets moved against the group, and banks have sustained more than $10bn of losses as a result.

Market watchdogs have expressed concerns that regulators had little or no view of the huge trades being made by Archegos.

“Whenever there are major market events, it’s a good idea to consider what risks they might have placed on the entire financial system, even when the system holds,” Gensler said.

“Issues of concentration, whether among market makers or brokers at the clearinghouse, may increase potential system-wide risks, should any single incumbent with significant size or market share fail.”



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