Finex Europe First Anniversary Sees Continuing Product Growth

After one year of operation, officials at Dublin-based Finex Europe, satellite of the New York Finex financial futures and options exchange, say that they are pleased with the growth of the exchange and its U.S. dollar and Deutsche mark based currency products. The exchange has continued to launch new products, including the April start of four Deutsche mark-based forex option contracts, as well as a Swedish krona/Deutsche mark futures contract currently awaiting CFTC approval, officials say.

In the past year, Finex Europe has added substantially to the seven organisations and nine approved floor traders who inaugurated trading on the exchange's new floor in Dublin's International Financial Services Centre (IFSC) last June (FXW, June 27, 1994). Allied Irish Bank and the Bank of Ireland are currently making markets on the exchange floor, while Morgan Stanley and AIG Trading make them through floor brokers from "upstairs" trading rooms.

The original number has since grown to include 12 organisations and 14 independent floor brokers, with two more organisations due to commence floor operations over the next three weeks and an additional seven applications currently pending, according to Hunt Taylor, managing director of Finex Europe and chairman of NYCE's Finex division. While exchange officials are unable to specify the identity of their two new members, one was described as a Milan-based company that provides financial services to a network of 2000 Italian corporations, while the second is a global, U.K.-based clearing organisation.

Hunt argues that Finex Europe has prospered despite the fact that currency-related product volume has declined significantly year-over-year on major U.S. and European exchanges such as the Chicago Mercantile Exchange (CME), Matif, and the Philadelphia Stock Exchange (Phlx) (FXW, May 8). Finex's own figures (see related story, this issue) show that the exchange has largely held its own, although its U.S. dollar index basket (USDX) and dollar/mark futures contracts have lost some ground this year.

He says that the exchange is increasing its participation in the face of declining interest from banks and investment banks in exchange-traded markets generally. About two months ago, for example, Chemical Bank closed its year-old dedicated FX brokerage unit and Chase Manhattan announced that it was exiting the futures execution and clearing business. Banks have also been reviewing their forex cash-futures arbitrage activities recently, with Lehman Brothers and Oppenheimer closing down their arb desks in New York (FXW, April 3 and February 27). While Chase did have a floor team in Dublin, Taylor says that he hopes to see this group working Finex's Dublin trading floor under another banner shortly.

Decreasing liquidity in the OTC forex markets, particularly in EMS cross-rates, has also been a concern of market participants recently (FXW, May 8). Despite these general trends, Finex's contracts have attracted the interest of banks and fund managers, some of whom are increasingly looking towards its cross-rate contracts as a supplemental source of liquidity in these markets, Taylor claims.

The fact that Finex is the only centralised marketplace for these contracts is one reason underlying this development, as is the anonymity of conducting business on an exchange. "Interestingly enough, the contraction in cross-rate trading has counter-intuitively been somewhat of a boost for Finex's cross-rate products," says Taylor.

He says that a number of participants who have typically been price-makers to the exchange based on its order flow are currently investigating using Finex as a source to take prices because of the contraction in cross-rate liquidity. "All of a sudden, and much to our surprise, we had banks talking to us about looking to the exchange as a source of liquidity rather than a source of order flow," says Taylor.

One U.S.-based EMS bank trader says that while Finex may eventually be able to serve such a purpose, he doesn't believe it is there yet. "We're very dedicated to supporting EMS prices during the New York day," he says. It would add liquidity only if a sufficient and steady flow of orders develops, he adds.

Finex has grown to the degree it has by focusing on innovation and identifying niches within the financial futures and options markets that it can capitalise on. When the EMS widened its trading bands back in 1992, Finex saw the opportunity to launch its cross-rate futures contracts, says Peter Burton, a Finex director. A second factor in its decision was the existence of the Dublin floor. "Since we knew it was primarily a European product, we felt having the European floor was essential to their listing," he says.

Extending trading hours to accommodate European business, a tack taken by the Phlx and by the CME and other exchanges through mutual offsetting of contracts and electronic trading systems, just isn't the same, according to Burton. "It's the difference between providing sort of a trading facility for when events dictate positions be moved around during the middle of the night, but in order to get business from a centre you have to really be located within that time zone," he says.

Rather than trying to replicate OTC contracts, such as Phlx has done with its Ucom forex options and its 3-D Deutsche mark contracts and the CME has accomplished with its 'rolling spot' and forward futures contracts, Finex has adopted the trading style and mechanisms behind the OTC market and adapted them to exchange-based trading. "We're trying to provide as many of the services available through a cash desk as we possibly can," says Taylor.

Relying to the degree it does on large financial institutions for liquidity is an issue of contention for the exchange. Says Taylor, "Block pricing has made us much more liquid than some other exchanges. If a customer calls the exchange for a price, he can request a specific amount and he'll get a price for that amount." He adds that the exchange's bank market-makers quote directly on the amount being requested rather than the amount and price resulting from tallying up quotes on smaller pieces made by independent local brokers.

While Taylor argues that this has led to greater price transparency on Finex and reduced its dependence on a steady flow of smaller orders, others argue that without a healthy population of independent locals and a constant supply of paper moving through its trading pits, Finex's contracts won't attract the amount of interest from banks and other large market participants that it potentially could.

"My honest opinion is that so far but for one particular participant I don't believe it would be succeeding," says one bank trader who watches the Finex contracts for arbitrage opportunities. If this player stays in and the exchange is successful in attracting additional participants, he believes that Finex Europe will eventually succeed, however.

Having an active and large group of independent local brokers is critical to Finex's success, says this source. "I do believe that they're on to something there [listing cross-rate contracts in Dublin]," he says, but adds that to his knowledge no new contract has ever succeeded without the support of a committed local user base. "Why would I try to arbitrage any contract against cash, or employ a full-time arb person dedicated to Finex, if I knew its liquidity depended on a) other banks who are probably looking to do the same thing, or b) a fund who's probably trading upstairs as well as downstairs," says the source.

As to Taylor's argument regarding the ready source of potential liquidity available through the exchange's bank market-makers, this trader says that accommodating large, block orders is only one intermittent part of a contract's deal flow. "These trades don't come through all that often, and what do you do the rest of the time? You need the ability for upstairs participants to arbitrage the floor against the cash market on a regular basis, and the only ones who'll take the other side of these trades are the locals," says the trader.