Dan looks at news from three different trading venues and their unique approaches to try and achieve success.
IEX, Nasdaq Futures (NFX) and Seed Commodities Exchange (Seed CX) would seem, on paper, to be three vastly different trading venues.
There is IEX, which went live last week as the 13th US stock exchange after gaining approval from the US Securities Exchange Commission (SEC) back in June. There has been no shortage of stories written about the firm made famous by Michael Lewis' best-selling book "Flash Boys."
Then there is NFX, which celebrated its one-year anniversary this July. The Nasdaq-backed energy exchange is averaging 4 percent market share across crude oil, natural gas, refined products and US power and is looking to hit 10 percent by this time next year.
Finally, there is Seed CX, the newest Swap Execution Facility (SEF) to gain registration from the US Commodities Futures Trading Commission (CFTC). While most would agree there are already plenty of registered SEFs currently running—Seed CX is the 23rd—this one is a bit different. Edward Woodford, the firm's CEO and co-founder, said in a statement Seed CX's first product will be industry hemp derivatives.
Similarities in Differences
So what do a stock exchange, a futures exchange and a SEF have in common? A major foundation point of all three venues is disruption.
IEX was founded around the concept that the way the markets are run is not fair. In order to implement change, the exchange created a speed bump that fundamentally changes the way trading is done.
Anthony Malakian, WatersTechnology US editor, and I spoke on our podcast, the Waters Wavelength, about how the success or failure of IEX will have a major impact going forward on how the equities market is structured. That's only the case because of IEX's decision to install a speed bump.
NFX's form of disruption is a bit more normal, but still impactful. Looking to pounce on what it believes is a market that needs competition, NFX charges customers $0.25 when they trade and clear oil, refined and natural gas through the exchange and $1.00 on power contracts. This is significantly less than the average rate per contract of the two incumbents in the space, CME Group ($1.168) and Intercontinental Exchange (ICE) ($1.36).
I spoke to Magnus Haglind, the former CEO of NFX and the current deputy head of global commodities at Nasdaq, who said that while contracts will eventually go up, they will top out at 50 percent of what CME and ICE are charging.
Seed CX is quite possibly the most interesting of the bunch. The SEF space has long been considered overpopulated, but what this latest venue brings to the group is an entirely new product. Seed CX's focus is on emerging agricultural markets. Its first will be hemp, a product not to be confused with marijuana. Hemp contains less than 0.3 percent of THC, the primary psychoactive component of marijuana.
All three trading venues are in the very early stages of their existence. However, the success of each will be a telling indication of where the markets are headed. Consider each a canary in the mine shaft that is the capital markets.
Substantial success by IEX will show that there is indeed a belief by those in the space that the markets need to adapt and evolve. Continued growth by NFX, as long as it can maintain its low fees, will show that firms don't have any allegiance to CME and ICE as long as they continue to have higher fees. And trading on Seed CX will show there is a true interest in non-traditional agricultural products.
It may take years for us to get a true understanding of how impactful these three firms actually are, but it will be interesting to see how things shake out.
Bill Murphy, CTO of Blackstone, once again joins the podcast to discuss the private equity firm's new offices, designed to house its innovations team.Subscribe to Weekly Wrap emails