The most effective studying experiences in my profession got here early once I spent 7 years at Bloomberg. It was a time of large enlargement for Bloomberg as they strove to catch after which go Reuters market share. Led by a visionary CEO and plagued by critical expertise throughout the corporate I used to be lucky sufficient to be workforce lead as we launched fastened earnings digital buying and selling on the Bloomberg terminal. For a few of this time the e-trading groups had been seated alongside the information gross sales groups, and it was my first expertise of the facility of information and the income potential. This piece will take a more in-depth have a look at the digital FX (e-FX) knowledge house and the potential for the following decade.
So typically in e-FX the story has been informed via the lens of buying and selling volumes, liquidity suppliers (LPs), and ultra-fast matching engines. What number of press releases from platforms appear to see Common Each day Quantity (ADV) because the bellwether to success? Nevertheless, in a world of unfold compression and LP stress on platforms to cut back prices there lies a quieter, much more worthwhile battleground.
Market knowledge
Whereas spreads in main FX pairs have lowered and commerce execution charges have turn out to be commoditised, market knowledge has turn out to be the asset class that provides e-FX venues most scope for contributing to EBITDA. It might be argued as one of many main causes main exchanges acquired FX platforms.
1. Why Market knowledge issues greater than execution
Not like equities or futures, FX is decentralised, that means there is no such thing as a single consolidated tape or official pricing supply. Each platform e.g. Bloomberg FXGO, LSEG FX All, Deutsche Boerse 360T, Cboe FX, FXConnect, FXSpotstream and SGX FX — contribute its personal “window” into the market resulting from their pricing methodology and their areas of energy (Regional, Product or Consumer based mostly).
This creates monumental worth to knowledge customers as a result of:
knowledge = transparency
transparency = benchmarks
benchmarks = buying and selling choices, threat, and valuation
Purchasers, which might be hedge funds, banks, OMS/EMS suppliers, exchanges, knowledge distributors, brokers…the record is lengthy, pays a premium for the cleanest, deepest, and most consultant worth streams. In lots of instances, the information product is value greater than the trades themselves to those purchasers.
2. The Market knowledge hierarchy: Why only some venues win
Not all FX knowledge is created equal. There are successfully three tiers of FX knowledge high quality:
Tier 1 — Main or quasi-primary venues (e.g. EBS, Reuters matching, Cboe FX, 360T GTX)
These have:
agency, nameless liquidity
massive, various consumer bases
lengthy historic time collection
constant quote and commerce behaviour
Their knowledge is used for algorithm calibration, TCA, threat fashions, valuations, and analytics.
These venues dominate the premium-priced knowledge phase.
Tier 2 — Specialist or relationship-driven venues (e.g. FXAll, SGX FX)
These platforms produce invaluable knowledge for particular merchandise or pairs (normally EM) or consumer segments, however not for your entire market and most costs right here will not be broad sufficient to be thought of a benchmark.
Helpful for:
regional buying and selling desks
EM pricing fashions
bespoke algo execution
Tier 3 — Single Vendor Platforms (SDP)
SDPs/ internalisers produce huge quantities of circulate, however the knowledge hardly ever qualifies as impartial or consultant as a result of:
it displays the LP’s personal skew
it’s client-specific
it doesn’t characterize your entire market
This knowledge is great for microstructure evaluation and for consumer TCA however has restricted exterior business worth. For this text I’m specializing in Tier 1 & 2 and leaving SDP knowledge out.
3. Why knowledge has turn out to be the actual revenue engine
Anybody lively within the e-FX house or monetary providers on the whole will probably be nicely conscious of the income alternatives within the knowledge house. At a latest lunch with a Head of Enterprise Information at one of many world’s largest multistrategy hedge funds I used to be knowledgeable that the e-FX house is comparatively naïve in comparison with different asset courses.
Many e-FX platforms nonetheless depart the information gross sales to the identical salespeople who’re promoting the buying and selling platform. I’ve seen this primary hand the place many salespeople both try to give the information away free of charge with no understanding of the distinctive proposition or others would try and extrapolate ridiculous costs for knowledge out there in lots of locations for a fraction of the price. I bear in mind saving one such deal over the cellphone with a NY fund when a senior salesperson overpriced the information value by 400% to a worldwide hedge fund.
Nevertheless, many e-FX platforms are nonetheless not seeing the actual potential in knowledge gross sales and the very fact it wants a knowledge gross sales specialist to promote the proposition. e-FX platforms can take some pointers from firms throughout a number of knowledge merchandise who do that nicely – CME in Q2 made almost $200 million in income from knowledge gross sales throughout their merchandise. Bloomberg don’t report figures however again in 2023 the FT reported an estimated $2BN a yr in knowledge income.
(A) Unfold compression has killed fee-based income
Why is knowledge now an vital battleground? As LP competitors elevated, spreads on main pairs lowered and as such e-FX platforms who would usually cost spot $10-$20 per M in 2010 are actually across the $1-$5 per M cost….and it’s solely heading a technique. Throughout this era the price of working a venue didn’t fall proportionally particularly if the platform wanted to get on board with regulatory pressures and set up regulated entities (particularly within the UK/EU). This pressured platforms to search for non-transactional, high-margin income — and knowledge was the plain reply.
Market knowledge sometimes has:
>75% gross margins
subscription-style recurring income
low operational value
This makes it one of the vital fascinating and scalable income traces in your entire FX stack and one with probably the most potential. Even when you had been to strip down the information potential to at least one subset of purchasers (hedge funds) there’s most likely at the very least $4-5BN of information gross sales out there globally with a good portion of that in FX. As one hedge fund stated to me ‘if it makes us cash, we are going to purchase it!’.
(B) Fuelling knowledge gross sales: Algorithms want knowledge — a lot of it
FX algos have turn out to be extra mainstream throughout the buy-side now. In my expertise working gross sales/income era at e-FX platforms the expansion of algos from financial institution internalisers. hedge funds, asset managers and extra just lately company treasurers has seen spectacular development and adoption.
Algos are data-hungry and require a minimal of 5 standards (under):
historic tick knowledge
venue-specific fill knowledge
order e book dynamics
time-of-day seasonality
volatility and liquidity heatmaps
e-FX venues realised this and anybody who has labored with an change at a strategic stage is aware of this was one main motive exchanges purchased FX platforms. It was a delicate level that might be cross utilised within the change group in addition to an space providing large potential.
(C) Regulation elevated the necessity for clear knowledge
Exchanges had been fast to grasp that regulatory stress that may transfer into the FX market would enhance the necessity for knowledge. Though spot FX isn’t a MiFID II instrument, a spread of regulatory and threat pressures have pushed companies towards TCA, Greatest Execution insurance policies, Audit trails, Vol and mark to market validation and threat governance. High quality knowledge is important for all of those.
Exchanges recognised this early and constructed whole enterprise traces round FX knowledge licensing. As soon as an FX venue is inside an change group, knowledge monetisation turns into dramatically extra environment friendly.
4. Exchanges apply a three-step technique to knowledge gross sales:
Step 1 — Bundle & rebrand the FX dataset
Flip uncooked tick knowledge into indices, consolidated feeds, analytic merchandise, real-time and historic bundles and threat/vol dashboards.
Step 2 — Cross-sell to current change clients
Take into consideration an Exchanges consumer record. FX knowledge will be offered to equities purchasers, futures merchants, company customers, threat departments, index suppliers and clearing members
The distribution is already constructed — FX knowledge merely plugs into it.
Step 3 — Add FX knowledge into enterprise contracts
Giant banks and funds typically purchase all the information from an change which creates high-margin, multi-year bundled agreements with FX being part of this.
5. The long run: The rise of FX “Information Utilities”
e-FX platforms will see new monetisation channels past easy “knowledge gross sales.” Some potential developments or tales that can proceed to develop:
The consolidated tape by no means took off, and a few firms tried and did not get the market to purchase in to the story however there is no such thing as a doubt with so many venues and no official benchmark, regulators and enormous buy-side companies may re-float this concept.
The large buzzword in all markets is AI. AI is data-hungry and LLMs, predictive fashions, and microstructure AI instruments will want clear tick knowledge and venue particular knowledge. The winners will probably be venues with deep, long-term historical past and versatile knowledge supply instruments.
Promoting bespoke market knowledge. Purchasers more and more need per-client TCA, customised liquidity heatmaps, venue-specific execution likelihood fashions and counterparty-specific skew behaviour
6. Information distributors/Analytics suppliers and their function within the e-FX house
We haven’t even touched on devoted knowledge and analytic distributors and their affect on this house. Firms like BestX, Tradefeedr and New Change. Maybe only for now it’s value mentioning some e-FX platforms who’ve taken a strategic method to aligning themselves with specialist suppliers within the house akin to LSEG FXAll strategic alignments with Tradefeedr and FXConnect’s collaboration with Greatest X on BestXecutor (each State Avenue owned). Could also be this can should be a observe up piece.
Conclusion: Market knowledge is turning into one of many Crown Jewels of e-FX
Buying and selling venues are now not simply matching engines. They’re knowledge factories feeding algos, analytics, compliance, valuation fashions, threat techniques and macro methods. In an surroundings of compressed spreads and low transaction charges, knowledge is probably the most strategic — and worthwhile — asset FX venues personal.
The warfare behind the scenes in e-FX is now not about buying and selling quantity. It’s about who controls the information that defines the market itself.
Readers can see extra of John McGrath’s articles on his Substack web page:
https://johnjmcgrath.substack.com
