The platforms of 2012: LMAX Exchange
FX Week, August 2012 – The launch of new trading platforms and the restructuring of incumbents has become a clear trend in the foreign exchange market in 2012. In the first of a series of articles seeking to assess the strategies and challenges of new and existing platforms, Joel Clark speaks to David Mercer, chief executive, and Steve Toland, head of exchange strategy, at LMAX Exchange.
The foreign exchange market has been dominated in recent months by news of new trading platforms in the pipeline and major revamps of older ones as participants brace themselves for a new era of FX trading, driven by regulation, new users, and an ever-increasing drive to differentiate on trading speed and price.
But while the launch of TraFXpure, FXSpotStream and tpSpot- Deal, coupled with the changes taking place at EBS and Thomson Reuters, might well have monopolised the headlines, it is a lesser known entity – LMAX Exchange – that FX Week has chosen to begin a new series of platform profiles that will aim, over the coming weeks, to offer a commentary and analysis of the changing world of FX trading.
Nestled away in a somewhat unlikely location in west London – some distance from its clients and competitors in the City – LMAX Exchange has been quietly working away over the past year on a business strategy that it believes offers a unique new approach to FX trading, based primarily on the strength of its technology. After a lengthy period of developing its strategy, technology and staff, the platform, which is a subsidiary of online betting exchange Betfair, is now ready to go public with its plans. While it might previously have been depicted as a rival to retail brokers such as FXCM and CMC Markets, and did initially pursue a similar strategy, the platform’s new direction sets it aside from those players, says David Mercer, chief executive of LMAX Exchange in London.
“Major retail brokers do three things primarily – sales and marketing, technology and market-making. In the nature of an exchange, we don’t run risk but rather we seek to bring participants together in an anonymous environment. Our greatest strength at LMAX Exchange is our technology, which is where we have chosen to focus our resources. We can execute trades in less than two milliseconds and our throughput can handle 100,000 messages per second. In a nutshell, we are reliable, quick and scalable,” says Mercer.
But it was not always this way. When it first launched in October 2010, LMAX sought to go head-to-head with larger brokers in pursuit of retail investors wanting to trade foreign exchange and contracts for difference. But with a far smaller sales and marketing presence than the larger players, the exchange found itself gaining clients at a slower rate than expected and began to refocus its strategy when Mercer became interim chief executive in April 2011, succeeding Robin Osmond.
“The change in strategy since LMAX Exchange launched has been that, rather than seeking business directly from the end investor, we now go through other brokers that have better distribution, better reach and perhaps even better ancillary tools such as news and charting. We have built valuable flow over the past year that comes from retail brokers, introducing brokers, money managers and high-net-worth individuals. Once they experience trading FX on the exchange, the vast majority continue trading,” Mercer explains.
A central tenet of Mercer’s strategy has been to move the perception of LMAX Exchange away from being a retail marketplace, preferring that it be recognised as a professional, regulated exchange or, in the language of the regulators, a multilateral trading facility (MTF). While the end beneficiary might still be a retail investor, LMAX sources its liquidity from six wholesale market-makers, which it terms ‘general members’. At launch, the exchange had three general members: JP Morgan, Goldman Sachs and Dutch proprietary trading firm Optiver. While Goldman Sachs divested its 12.5% stake in LMAX earlier this year, it remains an active general member, says Mercer. LMAX now has six general members, including the addition of BNP Paribas, and more are expected to be added next month.
The use of reliable partners to provide both liquidity and distribution has been a deliberate decision, according to Mercer, as it has allowed LMAX to channel its resources directly into the development of technology, which it believes puts it ahead of other electronic communication networks (ECNs) in terms of speed, throughput and reliability. Another difference from mainstream ECNs is that LMAX is regulated as an MTF by the UK Financial Services Authority – a factor that has been a positive driver in signing up new members.
“When we’re signing up banks, one of the upsides is the technology, but it’s also the fact we are regulated, which means LMAX Exchange is a trusted, professional market where trades cannot be rejected – once they understand the business model, they can make money on that flow,” says Steve Toland, head of exchange strategy at LMAX Exchange and formerly head of sales for Europe and North America at EBS.
Toland joined LMAX Exchange in January, and part of his remit has been to educate banks about the business model as part of the broader effort to pitch the platform to new members. In many cases, he says, it is the technologists within the banks that are most impressed by the platform.
“We’ve seen some good traction with the technology developers that understand this is disruptive technology, which is fast and scalable. Being able to scale is a big issue in today’s market because platforms often work well at low volumes but, unlike LMAX Exchange, run into performance issues when they start to gain critical mass,” says Toland.
It is still early days for LMAX, and its average daily volumes – now up to $2 billion – don’t yet compare to the more entrenched platforms, but the exchange’s position in the market appears to be fairly unique. It can’t be compared directly to retail brokers because it is moving away from serving end investors directly, but neither can it be set against ECNs, as it is driven by orders rather than prices, and participants can’t reject trades as they can on other platforms.
“For liquidity providers, it’s a different model to existing offerings – general members can’t match so they’re not playing against each other but rather providing liquidity to the market through LMAX Exchange. The advantage for banks is that 100% of the flow goes to them; it’s not filtered by the intermediaries. We are still small, but we’ve gone from nowhere to somewhere, and our job now is to get the message out and increase connectivity options so that the end clients start independently requesting that their brokers connect to LMAX Exchange,” says Mercer.
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Media Contacts
For further information please contact:
LMAX Exchange (London):
Barbara Pozdorovkina T: +44 20 3192 2510 E: [email protected]
About LMAX Exchange
LMAX Exchange Group is a dynamic, visionary and award-winning financial technology company. Recognised as one of the UK’s fastest growing technology firms, LMAX Exchange is leading the transformation of the global FX industry to transparent, fair, precise and consistent execution. Operating one global marketplace for trading FX, metals, indices and commodities, LMAX Exchange delivers open access, transparency and a level playing field to all market participants.
LMAX Exchange Group offers all clients the ability to trade on LMAX Exchange central limit order book, driven by streaming no ‘last look’ limit-order liquidity from top tier banks and non-bank financial institutions. Servicing funds, banks, brokerages, asset managers and proprietary trading firms, LMAX Exchange offers an anonymous, regulated, rules-based trading environment, order execution in strict price/time priority, and access to real-time streaming market and trade data, enabling all market participants to control execution quality and total trading costs.
Offering a comprehensive range of instruments and ultra-low latency execution, LMAX Exchange operates a global FX exchange infrastructure with matching engines in London, New York and Tokyo.
LMAX Exchange - a unique vision for global FX.
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LMAX Exchange is a trading name of LMAX Limited, which operates a multilateral trading facility, authorised and regulated by the Financial Conduct Authority (firm reference number 509778) and is a company registered in England and Wales (number 6505809).
LMAX Global is a trading name of LMAX Broker Limited which is authorised and regulated by the Financial Conduct Authority (firm reference number 783200) and is a company registered in England and Wales (number 10819525).