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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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Financial bubbles also lead to golden ages of productive growth

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Sir Alastair Morton had a volcanic temper. I know this because a story I wrote in the early 1990s questioning whether Eurotunnel’s shares were worth anything triggered an eruption from the company’s then boss. Calls were made, voices raised, resignations demanded. 

Thankfully, I kept my job. Eurotunnel’s equity was also soon crushed under a mountain of debt. Nevertheless, the company was refinanced and the project completed. I raised a glass to Morton’s ferocious determination on a Eurostar train to Paris a decade later.

With hindsight, Eurotunnel was a classic example of a productive bubble in miniature. Amid great euphoria about the wonders of sub-Channel travel, capital was sucked into financing a great enterprise of unknown worth.

Sadly, Eurotunnel’s earliest backers were not among its financial beneficiaries. But the infrastructure was built and, pandemics aside, it provides a wonderful service and makes a return. It was a lesson on how markets habitually guess the right direction of travel, even if they misjudge the speed and scale of value creation.

That is worth thinking about as we worry whether our overinflated markets are about to burst. Will something productive emerge from this bubble? Or will it just be a question of apportioning losses? “All productive bubbles generate a lot of waste. The question is what they leave behind,” says Bill Janeway, the veteran investor.

Fuelled by cheap money and fevered imaginations, funds have been pouring into exotic investments typical of a late-stage bull market. Many commentators have drawn comparisons between the tech bubble of 2000 and the environmental, social and governance frenzy of today. Some $347bn flowed into ESG investment funds last year and a record $490bn of ESG bonds were issued. 

Last month, Nicolai Tangen, the head of Norway’s $1.3tn sovereign wealth fund, said that investors had been right to back tech companies in the late 1990s — even if valuations went too high — just as they were right to back ESG stocks today. “What is happening in the green shift is extremely important and real,” Tangen said. “But to what extent stock prices reflect it correctly is another question.”

If the past is any guide to the future, we can hope that this proves to be a productive bubble, whatever short-term financial carnage may ensue.

In her book Technological Revolutions and Financial Capital, the economist Carlota Perez argues that financial excesses and productivity explosions are “interrelated and interdependent”. In fact, past market bubbles were often the mechanisms by which unproven technologies were funded and diffused — even if “brilliant successes and innovations” shared the stage with “great manias and outrageous swindles”.

In Perez’s reckoning, this cycle has occurred five times in the past 250 years: during the Industrial Revolution beginning in the 1770s, the steam and railway revolution in the 1820s, the electricity revolution in the 1870s, the oil, car and mass production revolution in the 1900s and the information technology revolution in the 1970s. 

Each of these revolutions was accompanied by bursts of wild financial speculation and followed by a golden age of productivity increases: the Victorian boom in Britain, the Roaring Twenties in the US, les trente glorieuses in postwar France, for example.

When I spoke with Perez, she guessed we were about halfway through our latest technological revolution, moving from a phase of narrow installation of new technologies such as artificial intelligence, electric vehicles, 3D printing and vertical farms to one of mass deployment.

Whether we will subsequently enter a golden age of productivity, however, will depend on creating new institutions to manage this technological transformation and green transition, and pursuing the right economic policies.

To achieve “smart, green, fair and global” economic growth, Perez argues the top priority should be to transform our taxation system, cutting the burden on labour and long-term investment returns, and further shifting it on to materials, transport and dirty energy.

“We need economic growth but we need to change the nature of economic growth,” she says. “We have to radically change relative cost structures to make it more expensive to do the wrong thing and cheaper to do the right thing.”

Albeit with excessive enthusiasm, financial markets have bet on a greener future and begun funding the technologies needed to bring it to life. But, just as in previous technological revolutions, politicians must now play their part in shaping a productive result.

john.thornhill@ft.com



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US tech stocks fall as government bond sell-off resumes

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A sell-off in US government bonds intensified on Wednesday, sending technology stocks sharply lower for a second straight day.

The yield on the 10-year US Treasury bond, which acts as a benchmark for global borrowing costs, climbed to nearly 1.5 per cent at one point. It later settled around 1.47 per cent, up nearly 0.08 percentage points on the day.

Treasury trading has been particularly volatile for a week now — 10-year yields briefly eclipsed 1.6 per cent last Thursday — but the rise in yields has been picking up pace since the start of the year and the moves have begun weighing heavily on US stocks.

This has been especially true for high-growth technology companies whose valuations have been underpinned by low rates. The tech-focused Nasdaq Composite index was down 2.7 per cent on Wednesday, on top of a 1.7 per cent drop the day before.

The broader S&P 500 fell by 1.3 per cent.

The US Senate has begun considering President Joe Biden’s $1.9tn stimulus package, with analysts predicting that the enormous amount of fiscal spending will boost not only economic growth but also consumer prices. The five-year break-even rate — a measure of investors’ medium-term inflation expectations — hit 2.5 per cent on Wednesday for the first time since 2008.

Inflation makes bonds less attractive by eroding the value of their income payments.

“I would expect US Treasuries to continue selling off,” said Didier Borowski, head of global views at fund manager Amundi. “There is clearly a big stimulus package coming and I expect a further US infrastructure plan to pass Congress by the end of the year.”

Mark Holman, chief executive of TwentyFour Asset Management, said he could see 10-year yields eventually trading around 1.75 per cent as the economic recovery gains traction later this year.

“It will be a very strong second half,” he said.

Line chart of Five-year break-even rate (%) showing US medium-term inflation expectations hit 13-year high

Elsewhere, the yield on 10-year UK gilts rose more than 0.09 percentage points to 0.78 per cent, propelled by expectations of a rise in government borrowing and spending following the UK Budget.

Sovereign bonds also sold off across the eurozone, with the yield on Germany’s equivalent benchmark note rising more than 0.06 percentage points to minus 0.29 per cent. This was an example of “contagion” that was not justified “by the economic fundamentals of the eurozone”, Borowski said, where the rollout of coronavirus vaccines in the eurozone has been slower than in the US and UK.

The tumult in global government bond markets partly reflects bets by some traders that the US Federal Reserve will be pushed into tightening monetary policy sooner than expected, influencing the costs of doing business for companies worldwide, although the world’s most powerful central bank has been vocal that it has no immediate plans to do so.

Lael Brainard, a Fed governor, said on Tuesday evening that the ructions in US government bond markets had “caught my eye”. In comments reported by Bloomberg she said it would take “some time” for the central bank to wind down the $120bn-plus of monthly asset purchases it has carried out since last March.

After a series of record highs for global equities as recently as last month, stocks were “priced for perfection” and “very sensitive” to interest rate expectations that determine how investors value companies’ future cash flows, said Tancredi Cordero, chief executive of investment strategy boutique Kuros Associates.

Europe’s Stoxx 600 equity index closed down 0.1 per cent, after early gains evaporated. The UK’s FTSE 100 rose 0.9 per cent, boosted by economic support measures in the Budget speech.

The mid-cap FTSE 250 index, which is more skewed towards the UK economy than the internationally focused FTSE 100, ended the session 1.2 per cent higher.

Brent crude oil prices gained 2 per cent at $64.04 a barrel.



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UK listings/Spacs: the crown duals

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City-boosting proposals are not enough to offset lack of EU financial services trade deal



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