By Eva Szalay –
The electronic venue for emerging markets earns praise for its wide impact
Emerging markets (EM) have two major advantages over developed currency pairs: margins and growth potential. The space, which sees between $80 billion and $120 billion of turnover a day, has until recently been largely untouched by electronic trading, with the majority of contracts still making their way to customers via voice.
But since 2013, London-based R5FX has been working on kick-starting the electronification of EM currencies, going live in 2015 with its first trade, following an investment from Deutsche Borse the previous year
The selling point is simple: a focused, niche player in EM currencies, which will create a central price-discovery pool for banks and thus benefit the spread of e-trading in EM pairs.
“R5’s strategy is very aligned with our own around innovation, EM focus and international coverage,” says a customer of the platform, who praised the R5FX team’s level of expertise.
This focused approach and the development of an initiative that already had a marketwide impact, earned R5FX a Highly Commended title in the 2016 FX Week e-FX Awards, in the prestigious e-FX Initiative of the Year category.
“I was approached by three banks whose clients were demanding EM trading on their single-dealer platforms, and the banks wanted to make EM trading more efficient for themselves,” says R5FX chief executive Jon Vollemaere.
“The problem was that the banks had no reliable reference on which to base their electronic pricing. That oversimplifies things, because once we started talking with the sell and buy sides, we found there were many nuances to EM, which meant we had to build something from scratch,” he adds.
After the initial approach, Vollemaere realised several issues existed around liquidity, access, credit, regulatory change and flaws in the existing market infrastructure.
In response, the R5FX team and its founding banks designed a platform, with the aim of combining the benefits of over-the-counter and exchange-trading models on a central limit order book. R5FX operates a central credit model, reducing the number of credit lines needed by clients to trade EM currencies.
Since going live in 2015, the platform has seen consistent quarter-on-quarter growth and a steady pick-up in volumes. It plans to launch six EM spot currencies this summer, with the Chinese renminbi in the lead, as well as additional electronic non-deliverable forwards. R5FX is also in the process of on-boarding 25 early-adopter clients, who have already signed up as participants.
As for emerging markets, the future looks bright, according to Vollemaere, who expects to see an explosion of volume growth in the space.
“The margins in emerging markets are much more attractive than G10, and we have delivered a purpose-built EM trading platform. Remember what e-FX did for G10 volumes from 2000? I expect to see similar rates of growth. Not necessarily the same volumes, but never say never,” he concludes.
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