09 Apr 2018 A Case of Perfect Timing — CME Group Expands into Cash with its Acquisition of NEX Group

CME Group’s planned acquisition of NEX Group most likely will turn out to be a case of perfect timing as it vaults CME into cash fixed income and FX trading, assets expected to see exploding volumes as global economic and political turmoil roil financial markets around the world. In our recent report, Burton-Taylor examines how the acquisition will plant CME firmly in the nexus of these two critically important asset segments, as it adds electronic global cash fixed income trading through the BrokerTec platform and electronic FX trading through the EBS electronic platform.

The potential integration of cash and derivative products into a consolidated (or at least closely linked) trading platform will drive volumes for the combined entity. Basis trading strategies will be facilitated across the range of assets traded on NEX Group’s platforms, including US Treasuries, FX, MBS and sovereign debt instruments, as well as repo on all of the above.

Not only will trading capabilities be enhanced through the combination of the two entities but margin efficiencies will be enhanced as well. Capital efficiencies for participants will offer additional attractions for clients, especially if CME is able to navigate the regulatory and operational intricacies of integrating FICC clearing of cash products with their existing CME Clearing franchise. The economic attraction will be considerable, given the level and breadth of trading by dealers in both cash and derivative markets.

More than Just Execution and Clearing

The acquisition provides far more than just FI and FX execution capabilities for CME, however, as NEX Group offers both analytical and pre- and post-trade processing solutions as part of its services. These solutions will enhance CME’s straight through processing solutions beyond listed futures into a broader range of asset segments including both cash and OTC swaps.

NEX Group will also significantly expand the range of data products available for sale to CME clients, a segment in which CME has struggled to grow as the dwindling population of futures commission merchants and shift to automated trading in its futures and options markets has pressured revenues. Adding real-time OTC price and reference information to the CME data product suite will quickly expand its data franchise to new markets with a growing user base.

CME Revenues Have Been Driven by Trading Activity…

…while NEX Group has Seen Strength in Trade Processing Services

Regulatory Pushback on the Horizon?

There are regulatory speedbumps that may impede the acquisition, however, as regulators around the world can be expected to take a hard look at the acquisition. The scrutiny will be particularly intense in the US, as CME will reinforce its dominant position in the critically important US Treasury trading market. CME dominates trading in US Treasury futures and with the acquisition it will also become a dominant player in cash trading of US Treasuries on the BrokerTec platform.

Market Approval is Essential

Market approval is also critically important, as the pitfalls of operating a trading platform supporting interdealer brokers can be challenging. Any potential disruption of the status quo for the primary dealer community needs to be approached with a light touch, especially given the experience of other platforms that have seen liquidity flee as ownership of the platform changes.

eSpeed–acquired by Nasdaq in 2013–has seen a measurable decline in fixed income trading revenues as dealers have opted out of trading on the platform and turned to voice and competing liquidity venues such as BrokerTec. CME should learn from this experience and will need to carefully evaluate how it approaches operating the platform after ownership. Any shifts in trading protocols or primary business model could result in falling volume levels as clients vote with their feet and turn to other liquidity solutions.

Key Take-Away

All-in-all, the acquisition looks like a well-timed trade, with CME acquiring NEX Group just as demand for its cash trading products begin to emerge as economic and political volatility returns to the markets. It also raises the specter of even more transactions in electronic fixed income markets, as competitors seek not to be left behind by CME’s surprise bid.

Andy Nybo is a Director at Burton-Taylor International Consulting where he is responsible for its Exchange vertical, focusing on how competitive pressures are forcing shifts in business models and strategic initiatives of exchanges. To learn more about CME’s planned acquisition of NEX Group see Burton-Taylor’s Company Focus – CME Group Acquisition of NEX Group plc report.