Introduction
As the launch of the FMX Futures Exchange approaches in September 2024, the futures trading community is abuzz with anticipation. Spearheaded by Howard Lutnick, BGC Group’s chair and chief executive, and backed by ten global investment banks and market making firms, FMX aims to revolutionize the U.S. Treasury futures market. With its innovative approach and strategic partnerships, FMX promises to bring competition and efficiency to a market long dominated by the CME Group.
Background
Howard Lutnick, the driving force behind FMX, is no stranger to challenging the status quo. Having helped bring in electronic government bond trading in the late 1990s, Lutnick’s latest venture marks his third attempt to break CME’s monopoly on the U.S. Treasury futures market. His first attempt was in 1998 with the New York Board of Trade and later in 2007 with Citadel, which failed partly due to losing its clearing partner. Historically, the CME Group has held the lion’s share of this market, trading approximately $645 billion a day.
FMX Exchange Overview
FMX combines BGC Group’s leading Fenics UST cash Treasury platform – rebranded FMX UST – Repo, and spot FX platforms with its new FMX Futures Exchange. The exchange boasts a robust low latency trading infrastructure and a $667 million post-money equity valuation, thanks to strategic investments from major financial players such as Goldman Sachs, Citadel Securities, and JPMorgan Chase. This diverse investor base is expected to enhance FMX’s liquidity and market presence.
Technical Advantages
One of FMX’s key strengths lies in its integration with LCH for clearing and cross-margining efficiencies. This partnership allows for significant initial margin offsets on eligible portfolios, providing competitive advantages for traders. The co-location of FMX’s matching engines in NY4 alongside Fenics UST (FUST) ensures ultra-low latency, reducing costs associated with legging risk when trading the futures vs cash basis.
The new tick sizes introduced by FMX promise tighter bid/ask spreads, enhancing trading precision. For U.S. Treasury futures, the tick sizes are as follows:
- 2YR, 3YR, 5YR: 1/8
- 10YR: 1/4
- 20YR, 30YR: 1/2
For SOFR futures, the tick sizes are:
- First 2 years: 1/4bp
- Years 3-5: 1/2bp
Market Impact
FMX’s entry into the market is expected to drive innovation and competition, challenging CME’s dominance. The exchange’s simplified fee structure and volume-based fee reductions, with no membership requirements, offer potential cost savings for traders. FMX’s market share in cash Treasuries on FMX UST has already reached 28% in Q1 2024, increasing from 26% the prior quarter and 18% a year ago, highlighting its capacity to compete with established players.
FMX has strategically partnered with LCH as its clearing provider, which is already the largest clearer of interest rate swaps globally. This should provide traders with significant portfolio-margining benefits. This integration aims to deliver capital and operational efficiencies between OTC IRS (over-the-counter interest rate swaps) and U.S. futures positions.
Trading Opportunities for Proprietary and Retail Traders
As FMX prepares for its September launch, proprietary and retail traders are keenly observing the new opportunities it might present. The exchange’s innovative protocols and tighter tick sizes are expected to provide better execution and competitive fees. FMX explicitly states that no membership requirements will be involved, and fees will reduce on volume tiers. Whether it will be available on platforms like Xtrader and CQG is yet to be seen.
FMX’s simplified fee structure and margin relief options should be particularly appealing, offering potential cost reductions compared to trading on CBOT. The exchange’s focus on reducing transaction costs and enhancing market liquidity positions it as an attractive alternative for traders.
Strategic Insights from Key Players
Industry leaders have expressed their enthusiasm for FMX’s potential in recent press statements. Howard Lutnick, Chairman and CEO of BGC Group and FMX, highlights the value brought by strategic investors. Isabelle Girolami, CEO of LCH Ltd, emphasizes the partnership’s commitment to delivering product innovation and margin savings, while Geoff Weber of Citi and Kristen Macleod of Barclays also underline FMX’s competitive edge and the benefits it offers to market participants.
Bank of America, Barclays, Citadel Securities, Citi, Goldman Sachs, J.P. Morgan, Jump Trading Group, Morgan Stanley, Tower Research Capital, and Wells Fargo have all become minority equity owners of FMX.
Howard Lutnick points out that the wholesale U.S. Treasury market had previously been dominated by CME until BGC brought Fenics into competition with it and captured over a quarter of the market. He proposes to do the same with FMX treasury futures competition.
Regulatory Landscape
FMX’s journey has been marked by significant regulatory milestones. The exchange received CFTC approval in January, enabling it to operate a futures exchange for U.S. Treasury and SOFR futures, some of the most valuable futures markets in the world. As mentioned, last year these markets traded circa $645 billion each day on CME, something Lutnick calls “one of the great monopolies in America.”
Terry Duffy, the CEO of CME, said he takes the competition seriously. Many traders are fed up with ever-increasing data and exchange fees from CME, arguing that their orders make up the data and that they provide that order flow to the exchange for free only to be charged in return.
New rules were adopted by the SEC in December to push more of the trades in the $27 trillion cash treasury market into clearing houses in an attempt to reduce systemic risk, currently handled by the Depository Trust & Clearing Corporation’s Fixed Income Clearing Corporation (DTCC FICC).
Future Outlook
Looking ahead, FMX aims to rapidly grow its market share and establish itself as a key player in the U.S. Treasury futures market. The exchange’s innovative approach and strategic partnerships position it well to navigate potential challenges and capitalize on emerging opportunities. As FMX continues to sign up clients and connect them to the new platform, the futures trading community eagerly awaits the impact it will have on market dynamics.
Conclusion
The FMX Futures Exchange represents a significant development in the U.S. Treasury futures market. With its innovative trading protocols, competitive fee structure, and strategic partnerships, FMX is poised to offer traders new opportunities and reshape the futures trading landscape. As the September launch approaches, traders can look forward to a more competitive and efficient market environment.
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