Nasdaq Puts Its Forex Plans on Hold

Nasdaq Puts Its Forex Plans on Hold

There is an ancient principle of prudence, “don’t fix what isn’t broken.” Thomas Jefferson alludes to it in the Declaration of Independence. Prudence dictates that institutions “long established” are not abandoned for “light and transient causes.”

It is possible that many of those who trade currencies today believe that the infrastructure for such trading isn’t broken, or isn’t as broken as advertised. So they aren’t especially eager to move their trading to an exchange. An OTC system works well enough, thank you.

This might explain Nasdaq’s apparent withdrawal from its plans to make a big splash in the FX world.

Nasdaq has entertained hopes of offering a new platform for the foreign exchange market since at the latest May 2014. But it is now pulling back from that ambition. The head of its Nordic fixed-income and Baltic markets told Bloomberg Monday, “We came to the point that we don’t feel customer demand is sufficient for us to launch any market in the foreseeable future.”

Banks, not exchanges, have generally dominated the forex market.

The SNB a Year Ago

This may have begun to change – or at least certain exchanges spied an opportunity to change it – early in 2015, when the Swiss National Bank suddenly abandoned a lid it had earlier imposed on the value of its franc vis-à-vis the euro. Some of the banks active in the forex world took a beating as a consequence, and some of them sought to limit the damage by reneging on losing positions: the list includes Bank of America, Barclays, and Goldman Sachs. Also, an online broker, Alpari UK, went bust altogether over those losses.

The fracas represented the worst in the over-the-counter system, often both opaque and unreliable. The SNB had given the exchanges a free pitch book for their efforts to offer an alternative.

BATS Global Markets bought a forex platform, Hotspot, from KCG Holdings, almost before the yodeling from Switzerland had finished reverberating through the Alps.  Hotspot was a prize: its average daily volume in the fourth quarter 2014 had been $31.7 billion, and it had a customer base that included banks, market makers and institutions, as well as hedge funds.

In July, Deutsche Boerse joined the race for a strong position in the forex world. It won an auction to buy 360T, a trading platform that had been around since 2000.

The Minor Leagues

Although Nasdaq does host some currency trading, it has been playing in the minor leagues. If the Bloomberg report is right, Nasdaq appears to have decided that it is going to stay in the minors.

If indeed it tested the waters and found there wasn’t enough demand to justify its initial plans, this is an important datum bearing on disputes over whether and how the forex system requires reformation. The SNB decision of a year ago and the brouhaha it generated fades already into the rear view mirror of a rapidly moving car, or industry.

A more pedestrian explanation for the Nasdaq decision, though, may simply be the recent turnover within Nasdaq itself. David Holcombe and Phil Harris, both of whom were poised to play key roles had Nasdaq’s initiative moved forward, have left the company of late.  Harris became the head of EBS Market, part of EBS BrokerTec.

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