Traders venture into FX market that merges spot and futures

CME Group headquarters in Chicago, Illinois, U.S., on Friday Feb. 5, 2021. CME Group Inc. is scheduled to release earnings figures on February 10. Photographer: Christopher Dilts/Bloomberg

Currency traders are starting to use “implied prices” that connect buyers and sellers from the cash and futures markets, in a new effort to ease fragmentation in the industry.

CME Group Inc. said more than forty institutions are active on its FX Spot+ platform, which enables the creation of spot prices from FX futures liquidity and vice versa. The marketplace was launched last month and trading volumes reached $1.4 billion in the busiest day so far.

The idea is to allow traders to access a wider pool of participants to match orders off against, at a time when currency volatility has surged due to uncertainty on US trade policies. Luke Marriott, head of eFICC at ANZ, said it “augments the strong liquidity” available on other spot orderbooks with futures market liquidity.

“The FX market continues to be hugely fragmented, which can pose challenges to sourcing liquidity across the different time zones - particularly in times of heightened market volatility,” he said.

Read more: Liquidity Trap in FX Market Stokes Fears of Trading Turmoil

While still a small chunk of the overall market, FX futures trading has increased in recent years, with daily volumes at CME averaging $109 billion last month — up 28% from a year earlier. According to the Bank for International Settlements, the higher futures uptake reflects factors including real-time pricing data which attracts high-frequency trading firms, as well as lower capital charges due to futures being centrally-cleared.

That said, the two markets are not interchangeable, not least because of the small differences between prices in spot and futures. This so-called basis is primarily determined by interest-rate differentials between the relevant currencies, which impacts the income that can be earned by holding a position synthetically via futures compared to in cash.

CME’s new offering includes implied spot prices derived from futures and a separate platform called FX Link that trades the basis. It also has implied futures prices from its spot and basis platforms, and implied basis spreads coming from spot and futures.

CME said its new platform includes 20 banks that had previously not interacted with the FX futures market. That allows institutions that have not set up the necessary requirements to trade futures to access liquidity from the market.