Was 2023 a subdued year for FX volumes?
It wasn’t so much that 2023 was subdued but I think it was always going to be difficult to compare to 2022, which saw monetary policy divergence, with each central bank needing to combat inflation and raise rates as they saw fit. Rates and FX move in tandem and are highly correlated so, as a result, there was a lot of FX volatility and high FX volumes during 2022. We did see some macroeconomic events which caused some spikes in 2023 but nothing like the levels seen in 2022 and market volumes were lower. What was pleasing from Cboe FX’s point of view was that, despite this backdrop, we continued to see year-over-year growth in volumes and records across our spot and NDF platforms.
What are your expectations for 2024?
This year, we think two things will happen. Firstly, we’re seeing the peak of interest rates and several central banks have discussed bringing down rates. If we see that, it won’t come all at the same time and we think we might see a replication of 2022’s volatility and volumes. Also, clients are becoming a bit more choosy as to where they want to trade. There’s a huge amount of platforms out there and what we’re seeing over the last few years is concentration of volume amongst the leading platforms and we think that will continue in 2024. Cboe FX should be a net beneficiary of that. Clients are choosing platforms that have product innovation, new trading protocols and we do have offerings which are either unique to us or we pioneered, which means we’ve got a critical mass of customers. We’re quite optimistic in general for 2024. We think that 2023 was a bit of a lull in terms of FX volatility, but we do think it’s going to come back this year.
What is driving increasing interest in NDFs, particularly given recent launches in Asia?
There are several aspects to look at. Firstly, G10 currency trading is highly commoditised and given volatility was quite low in 2023, investors are looking for higher yielding products. We’re also seeing a natural progression towards electronification in the industry. How electronification generally works is there’s a demand from clients to see streaming prices versus traditional RFQ. That happened a few years ago in NDFs, probably three or four years ago. What we saw last year was that market makers or dealers started risk managing as well. So Cboe SEF, our NDF platform, really has grown because of dealers looking for offsetting trades or offsetting risk in the market amongst dealers. As with spot, the primary NDF markets have been around for a long, long time but now there are a number of alternative platforms that are launching offering various trading protocols.
Our platform grew about 40% year-on-year in 2023 with strong growth in Asian and Latin American NDFs and we’re now competing against the primaries. The same teams that were market making or electronic trading in spot are now taking over NDFs – that has been our playbook: looking at asset classes where the reputation we have built in FX and our technology, our scalability and so on, can be replicated in other asset classes. We started with NDFs and now we’re looking at US Treasuries as well.
What more can participants and platforms do to increase transparency in FX?
Cboe FX has the benefit of being owned by Cboe Global Markets, a global exchange operator in multiple asset classes. When we look at other asset classes in which the group operates, for example equities, you know what each platform is doing from a volume and market share perspective every day, which is good for the end investor. In FX, it’s more opaque, and although the FX Global Code has made some progress in getting platforms and dealers to be more transparent, there’s more to be done. Some platforms don’t report volumes daily – some report them on a monthly basis, combining multiple platforms together. So, it’s very hard to understand as a platform operator, but more so as an end user, where trading is happening and where liquidity resides. At Cboe FX, we have really tried to make an effort to focus on transparency and we’re going to launch more granular data on our website this year to try and guide the end client as to where trading is actually occurring.
The end game is effectively for the end client to make the right decision when they execute, so that both the liquidity provider and liquidity consumer have the best possible experience. Our website is extremely granular in terms of what’s trading when, but we think the industry needs to step up and produce that kind of data everywhere so that it mirrors more the equities ecosystem.