Best exchange for FX: CME Group

Following years of investment in its platform, CME Group has created an FX marketplace that provides market participants with a breadth of trading options that cater for myriad execution and trading styles and market conditions

CME Group has positioned itself as a true alternative to trading FX on the well-entrenched over-the-counter (OTC) market. With continual product innovation focused on cost reduction and flexibility, CME Group has created a marketplace that offers a genuinely impressive range of options to satisfy its FX trading needs, and provides flexible methods of execution well suited to managing risk during times of heightened volatility.

From the firm, non-last-look cleared and all-to-all liquidity found on its central limit order book to the various forms of disclosed trading options, CME Group offers customers a range of different use cases, making trading FX on an exchange an attractive option.  

Today, CME Group is a leading primary venue for price discovery and, being home to more than 90,000 traders, the platform is also the largest FX exchange in the world. Year in, year out, the exchange consistently breaks volume records, and 2022 was no different in this regard. That year, CME Group FX futures and options volumes again reached an all-time record ($85.5 billion, an increase of 24% year-on-year) and, on March 8, 2023, FX volumes on the exchange topped $297 billion, an impressive figure by any measure.

“Our success is the result of historical and current product development based on client feedback,” says Paul Houston, head of FX at CME Group. “The way we’ve positioned our products has helped us maximise growth opportunities in the FX market and has helped drive new adoption. We feel that the cost of trading and holding FX futures is lower than ever as a result of improvements we’ve made – and that has helped increase participation in our unique marketplace.

“The all-to-all nature of our marketplace also means that participants can trade passively to capture the bid and offer spread. Depending on their execution style, they don’t need to always take liquidity.”

By placing limit orders on the platform, many buy-side market participants are already actively capturing the spread between bid and offer prices on the CME Group futures and options exchange. Hedge funds do so 65% of the time, while retail traders and asset managers are also prominent users of the practice at 55% and 47%, respectively.

To decrease the cost of trading further, over the past five years CME Group has reduced price increments about a dozen times for a number of currencies, bringing down the cost to trade by up to 60% for end-users. 

Bilateral trading through block and exchange for related positions (EFRP) is gaining ground on CME Group for market participants that favour trading with their preferred liquidity provider while reaping the benefits of clearing against a central counterparty. With 20 liquidity providers now available for block and EFRP trading, volumes for these two products spiked in 2022 by 50% and 200%, respectively. 

“While block trading and EFRP are still a small part of our business, they do offer that flexibility for new customers to come in,” explains Houston.

Optimising capital efficiency

To optimise FX capital exposure, an increasing number of market participants – nearly doubling in 2022 – are using CME Group’s FX Link as a proxy for FX swaps by trading the spread between OTC spot and a CME Group listed future. Trading in such a manner can be particularly helpful for firms looking to minimise the impact of the uncleared margin rules (UMR) and the standardised approach for counterparty credit risk (SA‑CCR).

Despite the roll-out of the final phase of UMR in September 2022, Houston says the true impact on listed markets is yet to be determined as the situation remains dynamic. However, he believes SA‑CCR will have a more considerable impact on FX markets because it disproportionately hits products such as FX forwards that were previously capital-light, but are now brought into capital calculations for the first time. 

“UMR and wider regulations are having an impact on our marketplace,” says Houston, “but it’s too early to say the full extent they will have. Yet, whichever rules they have to comply with, CME Group offers participants attractive ways to optimise their capital costs.”

CME Group was named Best exchange for FX at the 2023 FX Markets e-FX Awards.

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