ION’s Eugene Markman and CME Group’s Paul Houston discuss platform migration, market fragmentation and innovation in FX

Key Takeaways

• Streamlined solutions are key to navigating FX market complexity
• The number of execution modes, platforms, data sources can be daunting
• AI, algos and changing bank capital rules are areas to watch

ION executive Eugene Markman recently appeared on The Markets ConversatION podcast to discuss developments in FX.

He was joined by special guest Paul Houston, global head of FX products at CME Group. They discussed the integration of FX cash and futures platforms at the global derivatives exchange, how fragmentation in the market has evolved, the role of emerging technologies in shaping the future of FX trading, and the launch of a new platform.

Lessons from acquisitions and integrations

Looking back at CME Group’s integration of wholesale electronic trading platform EBS following the acquisition of NEX Group in 2018, Houston said that streamlined solutions are critically important for customers to navigate the complexity and fragmentation of FX markets.

Markman, COO of ION Markets (FX), highlighted the company’s own journey. “We have seven assets, seven different companies within ION FX that we are looking to bring together… It’s difficult, it’s tedious and it’s exciting.”

The migration of EBS onto the CME Globex matching engine was not without its teething problems but was executed efficiently, Houston said. “It was important to work with all elements of the ecosystem… no stone was left unturned. It was important not only to migrate the status quo but to try and improve things along the way.”

CME Group completed the migration in 2022, allowing it to start innovating across its futures and cash businesses. The company will go into client testing of an exciting and potentially transformative new FX platform called ‘FX Spot+’, in November this year, fully launching it early in 2025. The new marketplace is linked to FX Futures and FX Link and allows FX futures liquidity to be represented in OTC spot form and vice versa. The platform will use a technology called implication on Globex, commonly used in rates markets, adapted for the FX marketplace, and be available to both traditional futures and EBS customers, as well as new ones.

Markman noted a trend in which clients are now more reliant on CME Group FX futures data in addition to spot data, both on the hedge fund and dealer sides, for their price construction.

“We see them as complementary to one another,” the CME Group executive said and one of the reasons “why we’ve brought the business together to seek value out of both together.”

A different kind of fragmentation

The executives moved on to the subject of new platforms operating in the FX market.

“It’s a heavily fragmented marketplace, but a lot of new platforms, a lot of new initiatives have brought efficiency,” Houston said. Nevertheless, the array of execution modes, platforms and data sources on offer can be daunting, which is why CME Group is focused on offering as many valuable products as possible on one platform in a streamlined way.

He noted that the company has made changes around market data and market ecology, including minimum quote life, the latency floor, and new order types. “That rollout has happened sequentially because… when you’re making changes to such a delicate ecosystem, you don’t want to disrupt it.”

Markman said there is still fragmentation but of a different kind. “It’s not necessarily that you have more entrants, there still are new technology vendors that are new entrants into the space, but I think there’s now fragmentation within companies.”

There are more liquidity pools and more products, all with different APIs and different technology. “It’s kind of fragmenting in another dimension, as opposed to in the beginning when it was just another new ECN,” he said.

Houston concurred and added that the wave of innovation has been good for the marketplace. CME Group understands the importance of efficiency for all market participants. The primary market remains highly relevant when there is volatility and markets are moving fast.

CME Group’s standard, he said, is to have an open and transparent central marketplace.

Exciting innovations

Looking ahead, the executives expected to see technology such as digitalization, blockchain and automation drive progress in markets.

Markman said automation in the FX spot market was already advanced, and further automation is likely to come in other areas as markets start to consider settlement on a same-day basis (T+0) after the US, Canada, and Mexico moved to T+1 earlier this year. The path to T+0 inevitably will go through digitalization and automation. How much of a role artificial intelligence will play is yet to be determined.

“You have to automate… you can’t do things manually, but what I wonder is how much AI technology will be driving or facilitating some of the changes, and make it possible to automate more,” he said. “It might not come around next year, but I think next year will be the start of those conversations and thinking about how to incorporate those products.”

Houston agreed: “There’s a bit of a runway before it (digitalization and AI) impacts the FX market but… there are emergent technologies which have the potential to disrupt how we operate in the marketplace.”

Algos is another area that is one to watch, according to Markman, “especially as algos start moving away from spot and start driving automation in the non-spot market, like swaps options. It’s already started in NDFs (non-deliverable forwards). That’s the beginning into the non-spot market for me.”

Houston said another important dynamic is the changing bank capital rules around the standardized approach for counterparty credit risk (SA-CCR) under Basel III, an international framework that sets out international standards for bank capital adequacy, stress testing, and liquidity requirements. SA-CCR introduce a risk-based measure to calculate the exposure for banks of “off-balance sheet” of any derivatives, from FX to commodities.

These “can change the playing field in FX when they’re harmonized and rolled out and can make certain pockets of FX more costly, which, as we’ve seen in FX markets, stimulates more innovation and more ways to optimize.”