Thanks, Jason. Good afternoon, everyone, and Welcome to our first ever FMX Investor Day. A warm welcome to those of you joining via the webcast. I'm John Abularrage, the CEO of the BGC Group. First, let me explain why we called this day. I'll get out of the way and let you hear from the people who really drive this business. For most of the last 40 years, if you wanted to trade a U.S. interest rate future, you only had one place to go, one venue, one order book, one set of fees. That's not how any other major market works. In foreign exchange, corporate bonds, equities, and energy, clients have a choice of where to trade. Multiple venues competing on price, service, and technology every day.
But in the market that prices the risk-free rate for the entire world, the collateral base for the global financial system, there was but one dominant exchange and limited choice. This is what FMX set out to change. We were not alone in this thinking. Ten of the world's largest banks and market-making firms thought so as well, which is why in April of 2024, they did not just become clients of this exchange, they became owners. That is the single most important thing to understand about FMX. FMX was built by the market for the market. The people who use FMX own FMX. The people who own FMX use FMX. Many have said that this is a long shot, more than once, and sometimes not so politely.
We're up against a well-run incumbent, nearly 40 years of habit, real network effects, and there's a list of firms who have tried before and did not succeed. So let me tell you what we did differently. Eight years ago, we launched our Cash U.S. Treasuries platform with no market share against an incumbent that held more than 80%. We captured market share one client at a time by having innovative technology, tighter prices, and exceptional client service. Today, FMX UST is at 42% of the CLOB market, an all-time high, $84 billion a day up 35% year-on-year with more than 150 of the world's largest clients connected. FMX is the fastest growing cash treasury platform in the world eight years running. We began this journey more than 80 points behind, and today we trail by only single digits.
I can promise you, we did not enter this market to be number two. FMX FX is one of the fastest growing foreign exchange platforms in the world, more than tripling to $19 billion a day since our equity partners invested two and a half years ago, and we are following the same playbook for the US Interest Rate Futures Exchange. We launched SOFR in September of 2024. We then launched the two and the five-year U.S. Treasury futures contracts in May of 2025, followed by launching the full curve in August of 2026. Last quarter, FMX Futures averaged 80,000 contracts a day, up 49%, with a monthly record of 112,000 daily contracts in September. This momentum continued into the fourth quarter, where we achieved a daily record of 162,000 contracts traded on the 2nd of October.
With 12 FCMs already live on the platform, we have nearly 80% of cleared swap balances available to FMX. Finally, two more numbers to keep in mind before I take you through today's program. Those numbers are 82 and 68. 82% of the time last quarter, our SOFR bid-offer price was equal to or better than the CME's. On U.S. Treasury futures, that was 68% of the time. This achievement is by design and not by accident. We built this exchange with the tightest tick sizes in the market, supported by the owners of FMX, which are the largest traders in the world. Two years ago, FMX client meetings were largely about explaining our potential and our plans going forward. Now, these meetings have shifted to questions around speed of connectivity, how much of the book we can move across, and what it takes to maximize margin efficiencies.
Every FMX meeting now leaves me more convinced than ever of FMX's role in the market and its ultimate path to success. Now, on to this afternoon's program. We will have six sessions, then a closing keynote. Please make the most of the Q&A at the end of each session, as this is a great opportunity for you to discuss with FMX the people who actually use the platform and who run that business. First, Lou Scotto, FMX's CEO, opens with an overview of FMX, its vision, and strategy. FMX today is one marketplace across five of the largest markets in the world, cash Treasuries, interest rate futures, foreign exchange, inflation, and repo. Next, we'll address the strategic case for FMX from the people best placed to explain it, the owners and the users of the FMX platform. These are our partners.
Be sure to ask them why they became investors in FMX. After the break, you'll hear from the firms that trade on FMX about what makes our technology different. Then, Robert Allen, President of FMX Futures Exchange, will host a panel on our LCH partnership. I want to spend just an extra minute here setting this one up because cross-margining is probably the most complicated part of our story for us to clearly explain, yet it is perhaps the most valuable. It lives inside clearing mechanics described in a language nobody outside a margin team enjoys. So today, we hope to explain the mechanics in a simple and clear way. We are not going to talk about it in the abstract. Robert and the panel are going to walk you through real-world examples.
Please use this time to make sure you come away with an understanding of the importance of the cross-margining benefit. Then, BGC's Chairman and General Counsel, Stephen Merkel, will host a panel on legal and regulatory policy. He'll be joined by Alex Titus, Chief Advisor to CFTC Chairman Selig, George Canellos of Milbank, formerly the Co-Director of the SEC's Division of Enforcement, and his colleague Josh Sterling, who helped write the Dodd-Frank rules. Finally, we will conclude the presentations with Sean Windeatt, my fellow CEO at BGC, who will take you through the financials and the economics of the business. Lastly, a few thank yous before I hand it over. Firstly, to Lou Scotto, the FMX management team, and every employee who built this world-class platform. Exchanges are not built on strategy decks. They are built by people writing code, onboarding clients, and answering the phones at 6:00 A.M.
Many of them are here today, and to each one, thank you. To BGC shareholders and our 10 equity partners, building an exchange takes patience and belief, and you've given us both. Our equity partners brought liquidity, flow, and credibility, and put their names behind the idea that this market deserves and needs a second venue. To LCH, a genuinely unique partner and one that offers real capital efficiency to our clients. Finally, to those clients, many of whom took a chance on a smaller, newer venue before it was obvious. We have not forgotten who was there for us at the beginning. For those of you who are here as investors in BGC, I implore you to use the next few hours to determine the viability of a challenger in this market. Judge FMX on the four things that actually determine whether a challenger can win.
Its connectivity, technology, clearing, and ultimately, market share. You will hear about all four of those this afternoon from us and from the firms that use the platform. Please ask the hard questions where you feel you need further explanation. Competition in this market arrives one client at a time. It comes when clients choose a second venue that offers better service, better technology, and economics, exactly the way we did in the cash Treasury market. Today is your chance to look at FMX closely and judge for yourselves. One last thing, then I promise I'll hand it over. We close today with a keynote conversation with Professor Geoffrey Hinton. In addition to being widely accepted as the godfather of AI, Professor Hinton knows a thing or two about persevering through adversity and doubt.
For decades, Professor Hinton pursued his dream of artificial intelligence and building neural networks when those around him told him it couldn't be done. In 2018, Professor Hinton was rewarded for such perseverance by winning the Turing Award. In 2024, Professor Hinton won the Nobel Prize in Physics, making him only the second person to ever win both awards. It is my great honor to welcome Professor Hinton, and it's with great anticipation that Mark Rinaldo, the COO of FMX, and I look forward to having this conversation. After our conversation with Professor Hinton, there's a cocktail reception just outside this room. Please stay, have a drink, and ask any of the questions you might not have wanted to ask in the microphone. Thank you again for being here. We've a lot to show you today.
With that, please join me in welcoming Lou Scotto, the CEO of FMX.
Wow, John said a lot of what I was going to say. I will say yes to something he didn't say, and I'll tell you later what the yes was to. This is cool. All these people came out to acknowledge FMX. I'm excited. You excited?
Excited.
You need him to be excited. That's the COO. I'm kind of like the front guy. He's the guy making it happen. I want to take you back a little bit. Why is FMX here? The inspiration for FMX, and I love to say it was me, but it wasn't. It was two words, Howard Lutnick. Calls me in 2018. "Let's go. We're going to go into the electronic marketplace again in government securities and FX." Okay? We both sat there and said, "Why?" Competition's an issue. When competition is an issue, things become stale. There was no change from the time Howard Lutnick and eSpeed came into the market in the mid-1990s in government securities electronically, and at that point, in terms of the way it was trading. It was the same. We knew one thing.
Even though there was four competitors in there, one had about 85% of the market. That person wasn't being challenged, because you can't follow that person and expect success. You have to change the dynamics of what you're planning to do in order to introduce a viable alternative, and that's what the marketplace needed. If they didn't know they needed it, you should've been on the trading desk, like maybe Rob Allen was, or Eric, in mid-January 2019, when markets closed. Why? One relevant pricing engine is down. Think about that for a second. You have choices in everything in life. Here is a dependency on the most important market, or at least one of the most important markets, and the market's closed for business. You want to price anything? You want to price a deal? You want to price anything? You can't.
Not because I became more charming. Our pipeline vastly grew on the next day in 2019, and you'll see that on the charts. Because the marketplace realized we had come into the market, and we had a relevance that they thought could bring us forward and be a competitor. Fenics US Treasuries and Fenics FX, okay, those were the inspiration of Howard Lutnick. The important thing to remember in all of these are, you have to have competition. John talked about that. It was no more relevant than on that one day in 2019 when the marketplace said, "Oh, boy, we have an issue." An issue that got created by the market because they didn't insist on having competition in there. That was the birth of what U.S. Treasuries and FX was all about. Now let's talk about what FX is.
It is a platform servicing 10 markets and five products. It includes Treasuries, and we have expanded from our initial government security benchmarks to Treasury bills and off-the-runs. We are the only platform that allows you to electronically execute off-the-run Treasury bonds. We see this potential as enormous, because we think eventually, as the clients, the banks adapt, and understand, and use it will become an important vehicle for them to trade with their client base using the FMX technology. Our inflation bonds, which is both Oh, oops. Whoa. There you go. I do not have enough issues yet. We have inflation bonds, inflation swaps. We now have them firmly on the FMX platform. We were able to roll out a CLOB competitor. The only one that had it was BrokerTec, the affiliate of CME.
Now, within less than a year and a half, we are 35% of that market and growing. Our overnight repo we have rolled out. We think that that is going to be an important product going forward as we look to now bring on the first ever electronification of the repo market in term repo, in a segment of term repo, which we have the capability of doing and our competition does not, because we have the BGC infrastructure of the desks that actually trade that. So we are working diligently on expanding our repo offering beyond overnight to term. Foreign exchange, we do both spot and NDFs, and we are vastly growing our capability there. We have made a couple of important hires over the last few months, and we are excited about the growth of that platform as well.
Finally, what you are all here to understand, what John was talking about, the need in interest rate futures for a viable competitor is even senior to the need that they need in the U.S. Treasury cash market, where they have 100% of the market. So we have two markets. One had almost 85% of the market. The other one has 100% of the market. We will see later how the first one is going, and we will talk, I am sure, a lot about where we are going with the second.
So let us take you through the timeline. I kind of touched on the pre-2021, when we orchestrated the U.S. Treasury Fenics development. Then in 2021, we have an important piece for success for futures, and one of them is our partnership with the largest clearing capability company, LCH, which pretty much is the dominant player in clearing of interest rate swaps.
In January 2024, we went through a process that was pretty challenging to get clear. We did not have a lot of fans, as you might imagine, from the competitive landscape, and you can figure out it was only one. So we really worked really hard to get that accomplished, and we did. Then in April of 2024, this one I will pause on. The relevance that we created up to 2022 brought the discussions to us from these major banks and liquidity providers about getting serious in terms of competing in futures. If we did not have that basic relevance in the cash market, if we were not an established platform at that point in 2022, we are probably 20%+ of the market, that relevance created that interest, and the partners sat down with Howard and myself and talked seriously about how to put it together.
April 2024, we were able to close that deal, and then in September, as John articulated, we launched SOFR futures, and in May of 2025, we launched Treasury futures. What has happened since that merger of people? First of all, the combination, when we looked at this, when Howard and I spent a lot of time, mostly Howard talking, me listening, it was focused on one specific item. Let us look at all the failures in the futures competitive market. Let us look at what they did not do, what they did not have, and let us make sure we have it.
So we looked at Eurex, ELX, CurveGlobal, everything. What we established was some had an LCH relationship, some had banking partners, but no LCH relationship, and obviously, here is a little prop for our firm, no one had the infrastructure and technology that we had at BGC. So we definitely had the first.
As I talked about it before, we landed LCH, and those two enlisted the interest from the banks to be that third piece. Now, we are the first one that had all three pieces in place. As John said, it was built by the market for the market, but it was built in stages with a lot of understanding of what we had to do and who we needed on a team in order to execute that strategy successfully. Like any other sporting event, you do not go in there without being really ready and prepped for the challenge. This team is ready for the challenge. This team covers everything you need to cover to be successful. What markets are we servicing?
We are servicing the markets with the banks and the clients as banks, investors, and investors as clients, as John alluded to, and this is our growth record since we launched the partnership. Those numbers are impressive, and you have to look at those numbers and understand we are now going to produce those kind of growth numbers as we look to our rates futures development. Here are the markets now we are involved with. Plenty of room to grow, plenty of opportunity. These markets are not going to get smaller, they are going to get larger, and the capability for us in these markets now is put in place. We are ready to attack these markets and be successful because we have the pieces in place to do it. Now, $84 billion sounds like a lot, okay? Because it is.
The reason why it is, this is a very important piece of it. If you look at the bottom and you talk to what we do differently, one of the critical decisions, and I mean this was not an easy discussion, was talking about counterparty blocking. What does that mean? That means when you go into the game, you are down three touchdowns, because 30% of everything that is going to happen, you are not going to see it. When the bond market trades in Treasuries, you are not touching 30% of that market, because 30% of the market, we elected to be different and have a different client mix, and have a CLOB environment that allowed trading to be, for lack of a better word, without some of the toxicity of the other platform. But every day, we have access to 70% of the market versus 100.
That's why that $84 billion makes me a little bit proud, because we're doing that without access to maybe 25% to 30% every day. When these markets are volatile, that number is significant. We also, and we have our Chief Technology Officer over there, Bijoy Paul, who's amazing, and this curated liquidity, I would love to give you a detailed explanation on how I explained to Bijoy how to do it, but basically I said, "We got to do something that allows these double streams not to exist." When you trade on FMX, uniquely, you submit what you want to do, and then the technology's deterministic and will find the best path for execution. That's a very important piece, along with our tick size, which it's funny, we tighten the tick size, and trust me, that was an interesting conversation in the early days with the banks.
But we were able to prove that it was going to be eventually a good thing, and it has been. So much so that the competitive landscape followed, trying to match the tick sizes that we were trading at. That growth, 2018, we start, 2019, they have an event, and we grow from there. Then in 2024, we do the transaction, and you can see the eventuality of exponential growth on the back of the partnership. FX as well. You look at this chart, FX's growth has been dramatic. I think it will continue to grow dramatically through the next 18 months, and it started similar to our Treasury platform, and then it jumped significantly as a function of the partnership.
They came in, they realized the benefits of trading on this platform, both as a client with the technology that were being proposed and also as a partner in the FMX enterprise. Here's one we're proud of. That is, as I was just discussing, that is pipeline growth, bringing on over 150 clients onto the platform. In 2022, we onboarded probably four of the largest players in the government securities market. So they didn't exist from 2018 - 2022. Then we did the transaction, but you could see that steady growth. Steady growth is a function of continuous onboarding of new clients, adding more and more liquidity takers and makers onto your platform. That's what you do with electronic platform. You just bring them in.
It's not different from when you talk about Netflix and all that, and you talk about the subscriber and the growth in users and subscribers. That's us. 42/49. Now, if I asked everybody in this room if they were listening to me for the last eight minutes, remember, that 49%, without that 30%, is not greater than 42%. We don't do 30% of the market. So 49/42, we are there, and we're going to grow beyond those numbers as we go forward with more protocols, more product offerings that are involved. We're not going to slow our growth into 2027. We're going to continue growing beyond these numbers. What do we want to do in futures? Basically rinse and repeat. We want to take that playbook and run it again.
We proved it works, and we think with certainty, following the same path as Treasuries, growing a pipeline, onboarding clients, the natural next level will be a growth, maybe not as profound as Treasuries immediately, but exponentially growing over the course of the next 18 months because of what we see in the pipeline and what we see is coming on with the, as we get cross-margining benefits, which you will hear later, out to the client base. That is an important chart. I would call that chart one thing. Not easy.
But there was a saying in a movie that probably a lot of you saw, "Field of Dreams," "If you build it, they will come." I think that evidences that in real life it can happen, too, and that is a real-life scenario. Okay, where are we in futures? You can see the growth is going in the right direction.
Okay, we tightened the tick sizes. Our equity partners are in there. What we are right now coming to probably a good pivot point for growth. The technology that both the partners and the non-partners are now getting in place is critical to that number exponentially growing, and that means connectivity, meaning a trader's ability to point and click, is not perfect. It is connected. They can trade futures, but it is not perfect. Perfect is when your systematic trading people have an algo in place with a smart order router. Okay, and they take, for lack of a better word, less manual out of the execution and put in what we want, which is an API algorithmic execution strategy.
When we see our clients that have it in place, they are 10 times in terms of the number of contracts they do versus the people who are trying to get that technology in place. We expect over the course of the next, I would say, three months, a material amount of this is going to be finished, coupled with a pipeline of institutional accounts that are now coming onto the platform. They take longer because they want to make sure your contract, your volumes, are relevant. Relevant enough for them to get a green light to connect. Those universes are now coming in together and makes me feel really good about the next chapter of growth in futures. I think John alluded to this in his opening. This is an important statistic.
How you get measured in any kind of new platform is not only by your volumes, it is by how you are competing. How you are competing when your bid offer is out there. Are you way off of the competitor? Are you equal to the competitor? Are you better than the competitor? You can see in the second quarter of 2025, 18% of the time we were equal or better. But as the users came in and as our liquidity grew, we now stand on 82% in SOFR. If you look at Treasury futures, okay, similar story, especially in the last two quarters where the amount of volume has grown substantially. We continue to be able, with our technology and our client backing, get buy-in for the way we price ourselves in futures. This is our plan.
Howard spoke initially about what we want to do in the first year. What we want to do in the first year, give everybody a chance to go to the technology people and go through the dev queue, which is probably 20 - 30 pages long, and get the capability to put this and prioritize it. That was supposed to be year one, and in year two, that carried over, and we are now finishing up year two in SOFR, and we are going into year three. In year three, we expect, as we projected, or Howard projected in the first time he spoke about this, we are projecting exponential growth in year three, which starts now. October is the start of year three for SOFR. May would be the start of year three for U.S. Treasury futures.
We look at them together now, and we are excited about it because of the technology getting cleaned up. The buy side adoption is happening, and we are really excited. That side of my group is really excited about having the product. This side of the group is really, really nervous about that side of the group putting too much pressure on them. But we will deliver basis trading, and it will not only significantly allow us to grow our futures volumes, but the natural, it will grow our Treasury volumes alongside of it. That is a very big piece of the development. Finally, as we talked about it a million times, SOFR for us is all about the LCH's ability to give an 80% margin benefit to you when you transact futures.
The only thing holding that back right now is the technology that needs to be in place for the banks, FCM, and the clients to afford them the opportunity, which we again believe is finishing up as we go into the fourth quarter of this year. Those three in place should have a meaningful growth capability for our futures offering. We are now going to talk about market data. If you look at the numbers for CME, this number is astounding. It is 13% of their revenue. It is 6% of our revenue. We believe strongly that 6% grows as we, if you go back to the page before this, complete what we need to complete to become a relevant competitor in futures. The universe of Treasuries is in place. We have all those other government securities offerings. We have an FX platform with pricing.
When we add to it the futures, we round out the suite of products, we can go into subscription pricing and have them have a capability to buy that data, both for trading and more importantly for pricing and other compliance purposes. By us having that full suite of data makes us much more powerful in the offering we can have. So we are expecting this number to grow, maybe not seven points, but to grow maybe three or four points in the coming year. So we set records, and records, as you know, in sports, are meant to be broken.
We are very focused on having those numbers become yesterday's news as we move forward in FMX Futures, develop our FMX FX growth plan with the people that we've brought in to do it, and continue to roll out protocols and products in Treasuries to bring that number up and continue that growth that we've been seeing about a point a quarter. That's the goal. We talked about this. Our pricing, our technology, the consortium and the margin. We have everything.
All we have to do is get and continue to get more and more people on our FMX Futures platform similar to what we did in cash, and then we're going to see the benefit because they're going to realize the significant benefits to trading on FMX and getting the margin benefits that will be afforded to them as they trade, which are, as we talked about, and you'll hear a lot about that later. I'll leave it to you now. It's so good nobody has any questions.
I've got one. I don't know if-
Patrick, go ahead.
Yeah. Lou, thank you and everyone at BGC, FMX for doing this. Thank you. Patrick Moley, Piper Sandler. Lou, thanks for doing this, BGC, everyone here. Great event. Looking forward to diving in today. Lou, you mentioned the buy side adoption that has taken place to date. You also mentioned the bank's technology implementation as being maybe a bottleneck here in terms of driving more buy side adoption. Can you just give us a little more insight into your confidence that the banks will have that technology ready to go to offer those cross-margining benefits to their customers. And then as we look out over the next year or so, can you put a number around the number of firms that you expect to have onboarded, the number of buy-side institutions that you expect to be fully onboarded and trading on the platform? Thanks.
Thanks. I'll work backwards on that. We'll have 40 clients trading, 15 just onboarding right now from the buy side this year. We expect that number to grow next year, sometime by the middle of next year, by another 15 to 20 clients. I would expect, and if I show you the growth pattern of Treasuries, I think in the first year we went, and after 2019 happened, we had 65 clients on the platform in the first two years. We're following that. We're getting really, really strong calls now that we've achieved the. Really, a lot doesn't happen, Patrick, until you get to a certain number of contracts where the buy side believes it's irrelevant to connect. That's number one.
Number two, contingent on our delivering on a contract side is the importance of the margin benefits that we'll port to those clients when they trade. Where are we with that? I believe right now that within the 12 FCMs, and this is where I'm going to hand it over for accuracy to Mark, I believe a number of them are in that position, but you probably have a better idea of the pipeline of completion.
No, Lou's right. I think when you think about the pipeline, clients have traded already, right? They did their paperwork. They're just watching the volumes now. Paperwork's submitted, technology's kind of done. It's not just a nice-to-have pipeline. It's a real pipeline that clients, here's the paperwork. Our technology work is done. I'm watching volumes. I'm watching the OI develop, right? That's kind of the stage. And when Lou talks about those 15 accounts, many of them have put through that first trade already, right? They're just sitting back a little bit, waiting to see things develop and getting more and more encouraged every day. It's a strong pipeline. And I think sometimes that's hard to put up on the screen or during analyst calls, right, to really articulate that.
But that's from my perspective, and I know a lot of the team, that's what gives us comfort that this is real, that this is going to happen.
On the bank tech?
Pardon me?
Just on the bank technology and your confidence level that that will be ready to go to offer those cross-margining benefits.
I have comfortability that all the non-banks will be positioned, and the bank partners, I would say 70% of them will be ready to provide margining in the first quarter next year. The timing is fine for where we are and the institutional accounts coming on. Go ahead, Eli.
Can you talk about customer adoption in the different channels of buy-side firms? To what extent have the early adopters been hedge funds versus large asset manager clients, and how do you expect the cadence of that to change over the course of the next year?
Okay, thanks, great. Our success in Treasuries is predominantly with those hedge funds and people of that ilk. We think that is going to be the natural follow-on for futures. We need to remember that asset managers will come on, but their OMS requirements, whether it's Aladdin or whatever, puts them into a secondary position. We'll have to grow this over the course of the next, I would believe, 6 to 12 months and work with them on getting that connectivity done, which is an elongated timeline as well. I think that we'll continue to grow the hedge funds, et cetera, that do not require that, and then they'll be the next level of growth, and we'll see that growth towards the latter part of next year.
Got it. The strategic investors seem to have worked really, really well. The strategic equity stakes seem to have worked really well to get the FCMs and the market makers on board. Is there any appetite for using that same strategy as you start looking at the buy side? Is there an appetite for more strategic equity stakes to the likes of BlackRock or T. Rowe or firms like that?
You're talking about potential investors?
Correct, yeah. Signing up more of those strategic investors.
John's the prettiest guy in the room right now. They talk to him about that. Remember, BGC is 65% shared. Nobody wants to talk to me. I'm the execution guy.
Right. I'm talking about-
Not from an Italian perspective. I am the execution guy. See John, Sean, JP, those three, they are the hitters. They got their hands on the equity. He has a lot of interest. We have developed a large amount of interest with particularly the people you are referring to, and John loves it. He loves it because Sean is in London and JP is in Paris, so he becomes the guy everybody wants to take to lunch. Imagine a broker getting taken to lunch. That is him. Lot of interest. John can expand on that in maybe an earnings call or something when you ask that question. My job is to deliver the product for him to have the interest come, and I think John would agree, you have gotten some incoming calls. There you go.
Got it. I guess maybe to clarify, do you feel like you need more strategic investors in FMX in order to drive buy-side adoption, or is the 10 partners that you have today sufficient to hit your targets?
No.
Yeah.
The product and the competitive landscape drives the adoption. Moving significant amounts of volume as a client of our platform will happen. Moving a more significant amount of volume as a client and a partner is an obvious next step. We have people who are onboarded who would like to be able to get to that next level, but they have onboarded. They are taking our market data now, and they will be trading with us before this quarter is over.
Got it.
You agree with that?
I agree with everything he said.
God, if he said no, we would be screwed. Anything else? Okay. Well, thank you everybody. I got to stay here, right? Kevin McPartland is going to come up.
Yeah.
Who is going to You going to be the emcee here? Wow. All right. The next panel is going to be led by Kevin McPartland, and Eric Charles is going to come up from JPMorgan, and Jonah. Is it Jonah? Jonah is coming up from Citadel. And myself. More of me.
How you doing?
Hey, Eric.
Good. How are you?
Jonah.
Hi. Good to see you.
Good to see you. Come on in.
Yeah. Sit here.
Jonah, why don't you sit over there? Eric, you sit here. I'll sit on the end. Thank you.
Sorry.
All right. Well, thanks to FMX and BGC for having me, for having us. I remember going to the Fenics UST, I think it was the launch party in Boston at a conference. It's got to be almost 10 years ago. 2018 maybe?
Yeah, 2018.
It was like, "Wait, what are you going to do?
Exactly.
Here we are.
I said I wasn't sure.
Yeah. It's been incredible to watch, so congrats on the progress so far. Lou, you're probably talked out, but we have to just start with you. Did this go how you thought it would go? Really, what made you think this would work all those years ago?
As I said, the inspiration for wanting to get a position in this market was the inspiration and vision of Howard Lutnick. When you talk about changing in such a significant way, Eric will tell you, the conversations with the banks initially were interesting. I'll use that word, interesting. There was a multiple amount of conversations required to get the point across. If you ask me, did I expect that we would have the success in the cash platform at any point in time initially? I would say yes, because you never get a chance to sell something to the same bank three times, and we kept getting invited back to try to make it be understood. The growth of the platform and the inspiration to do this, you could look at it as a BGC thought process, but let's look at it as a marketplace thought.
The marketplace needs this. This marketplace is much better off with two solid competitors in every product than one, for a lot of reasons. Resiliency, comfortability in terms of you have an opportunity, so you have some type of leverage. Last year was the first year a lot of the trading floors saw my friend and competitor, Terry Duffy, on a trading floor. Rates futures has not been actually increased for a number of years going forward. I don't think because Terry became Santa Claus. I think it's because Terry has realized he's going to have a competitor in futures. Yes, we believed everything that we thought was going to happen would happen, but the challenges along the way are real, and I point to our technology CTO over there. His ability to listen to my sales guys.
We started with myself and six people, and those six people did a great job of understanding the client's needs, communicating to Bijoy, and Bijoy delivering what we needed the way the clients wanted, which is an important piece of this. Yes, we were excited about, I think all of the CEOs of BGC that are here were all part of the plan initially, and hopefully BGC's company is going to see the success of this growth.
That's great. Citadel and JPMorgan, I'm sure, get pitched on a lot of things a lot of the time for your own unique reasons. Eric, we'll start with you. What initially made the firm think this was the right place to focus and invest, and then again, how has that played out now and in your day to day?
Yeah. I think for us, we saw exactly what Lou said, a very fundamental misalignment between what we're doing day-to-day in liquidity provision across geographies and time zones and clients, and what that competitive landscape looks like versus the competitive landscape for the platforms and the venues and the exchanges that we deal on to provide that service. For us, we felt very important to have competition in the vendor space, the platform space, the exchange space. It's something that we fundamentally believe in. I think the biggest thing for us was the partnership with BGC, having proven it out in Treasuries multiple times, honestly, through history, as well as, I think for us, the strategic partnership on clearing with LCH gives sort of the real value proposition, the carrot that you need to onboard the end users.
It's one thing to get market makers trading with themselves. The reality is you need the end users there. That value proposition as clients have started to treat the U.S. ecosystem, whether it's Treasuries, FMX Futures, SOFR, swaps, all as sort of one, we could see the value case very clearly.
It was as much, we'll talk about it more later, but about the margining as it is about the trading.
I think it's both. It's the ability to execute on them. I think the technology that needs to be there to run a platform like this, you need a proven partner to be able to do that. So it was a good mix of good partners on the market-making side, plus a proven operator, plus a real business case on the margining.
Jonah, what caught your attention and what continues to keep your attention here?
Yeah, I'll start with the team here. You can have the best idea in the world, and if you don't have the team who can deliver, then it's worthless, right? The team here has demonstrated over many years that they're able to deliver results when it matters. You combine that with the consortium that was put in place, right? A very broad and diverse group of firms, very strong backing. I think we've seen that really play out now, where every incremental product extension builds on what's already been achieved and accomplished. The cash Treasuries use case is so powerful, and everything just builds on top of that.
Yeah, I want to take this down a cash path and a futures path quickly. So in the cash market, from an e-trading perspective, hypercompetitive. What do you see different here in what FMX has built on the cash side? Then on the futures side, the complete opposite in many ways, hyper-concentrated. Does that worry you? I assume the answer must be yes, given the investment. If you could maybe touch on both of those.
Yeah, I think in both cases, to draw parallels, it's really about the need for increased competition and innovation in the space. That's kind of the starting baseline, if you will. It's not only price competition. It's innovation in trading protocols. It's tick sizes that Lou referred to earlier. We're seeing benefits that are accruing for market participants across the market really due to the presence of FMX. We fully expect that to play out in the future space as it has and continues to in the cash space. I think it's really a matter of the client adoption piece continuing to increase overall volumes at this point.
Yeah, I would say exactly. On protocol, very simple things like changing tick size, changing protocol, you see the impacts it has and that the marketplace has a need, even if it doesn't realize it up front, sees the benefits of the product and has sort of been able to run with it. I think if you take a look at the future side specifically, there's been basically no change in most of that model for a generation. I think the things that you can do having the cash platform there with futures, with cross-margining on protocol around whether it's basis trading or spread trading, et cetera, there's definitely a need there. I think on the resiliency piece, the resiliency piece is super important. We have our ability to be there as a liquidity provider effectively, maybe not 24/7, not yet.
Maybe soon.
Maybe soon. To have that and have that liquidity provision be very much a single point of failure, that's a real red flag for us. There's a real reason to sort of support another platform.
How much as an investor, how much input do you have into how the product and the platform as a whole move forward?
Yeah, I think the way I kind of view our role is almost as an information conduit. We're in touch with every major investor client, whether it's on the hedging or the speculative or asset management side. And the room is a diverse room with different points of view around the entire market. It's not just a consortium of banks, it's not just a consortium of high-speed market makers or exchange. I think for us, it's really about using the information we have in conversations with clients to find out what the issues are that clients are having, what do clients want, and to sort of allow that to drive the conversation in terms of the development on the company.
What about you, Jonah? How involved are you in the strategic planning here?
Yeah, it's a strong partnership. I think everyone who is a member of the consortium brings something to the table. And everyone's pulling in the same direction, and it's great to see the results play out as you drew them up a couple of years ago, right? I think everyone is super excited about the future. It's all about, as Lou mentioned, it's all about the technology, it's all about the client adoption. And you can really see a step change in terms of volume once those critical pieces are in place.
Lou, this is a bit of a softball question, but how helpful is that input? That must be huge, right? Client-led products tend to be the ones that are the most successful, because you're sort of pivoting and listening to what your users want.
Some input is better than others. The team that I have spends an inordinate amount of time, and you'll hear this on the technology part of the conversation. I spent a lot of time talking to people on the board. I visit them. I think we share where we want to go, and they definitely believe in the path. My role is to push them as hard as I can push them to get all, as we discussed before, everything in place. The team spends an inordinate amount of time understanding, some refer to the service they get from us as white glove service. In other words, we're going to listen to you tell us how, to Eric's point and Jonah's point, to make our competitive capability more profound more quickly. So we have a duality of focus.
One, my team and the trading and technology people at the whole marketplace, and specifically the investors. Then myself with the people on the board and the senior people, whether it's at Troy or JPMorgan, or Dennis at BAML, the people that were in those meetings with Howard and I and pushed hard to get us into the market as a competitor. So that's our focus. Our focus is we definitely get good input, and more importantly, we do get from them, what do I have to do to help you more? So it's a great partnership.
One thing I've learned over the years with consortiums is just because the bankers decide this is a good idea and an investment, it doesn't always mean that the traders say, "Sure, we'll use that thing that you just invested in." It needs to work for them. So Eric, maybe we'll start with you.
Sure.
That must be happening here, so I'd love to hear-
Yeah
how that connection works for you.
I argue that's why I'm here.
Exactly.
Yeah, I would say that's the biggest piece. These institutions are very big, right? And so agreed. Sometimes it's the bankers in the room are not the same people as the ones pushing the buttons, so to speak. Lou mentioned it in his comments earlier, the biggest thing for us is on the business side is driving the usage of the product, in a sense, in a way that's almost seamless. So like, it's not just connectivity. Connectivity is the very baseline. It's about connectivity with integration through all of the automated processes we're doing as part of our day-to-day business. So, is our smart order router sending things to FMX? Is everything on the FCM and F&O side there so that we can have a conversation with a client about, "Hey, you want to take a look at this product.
There's benefits for you so that within your own organization, you should prioritize the build-out, the onboarding, what have you. So I think it's really about just as a consortium member, finding and making sure that we're very aligned up and down the organization to actually deliver the benefit.
Yeah, there's no way you're going to encourage a client to do something if you don't really believe.
Correct.
Right? You don't want to risk that relationship.
Yeah. But you also have to make sure your capabilities are there so that you can. It's something we fundamentally believe in, so it's incumbent on us to sort of have the offering there for them.
Jonah, what about from a market-making perspective? Same question, really, right? Obviously, the firm invested, but the market makers must see value and be making some money there.
Yeah, for sure. Look, sometimes the most difficult thing to change is just human behavior and habits, right? Part of this is getting all of the relevant traders comfortable with a new platform, a new workflow, et cetera, right? So it's getting comfortable with the technology. It's increasing quoted size. It's understanding the different workflows or customizations that are necessary for particular strategies, right? Sometimes it's an iterative process where you're onboarding additional desks or what have you with different strategies, and you're understanding what they need for their particular focus. So, it's just super exciting to see that growth and adoption increase, and then as we look into the future, understand what additional areas of focus or products are going to result in even more excitement and use across the firm.
When we talk about term repo and we talk about other products that are on the horizon, there's a whole complex here that will benefit from what's being rolled out now.
Well, I'd imagine we have cash Treasury clearing coming, repo clearing coming, throw that in with the swaps and the futures.
Yep.
Right? It just makes the whole ecosystem even more interesting.
Exactly.
Yeah. Maybe we should talk about margin for just one more minute. We brought it up earlier. How big does that play in? It's such a Lou kind of mentioned it earlier, in some ways it's a little in the weeds, but on the other hand, I feel like for the rates market, it's driving so much activity because there's so much capital that has to be committed to manage all of these positions. If we can make that more efficient, but in a safe way, that benefits everybody. How much of a driver is that sort of in moving this effort forward?
I think from our perspective, I think it's a humongous part of it. I think it is the value proposition that you're bringing to the buy side to get them on the platform. I think that is, from our perspective, having that piece in place both for ourselves, but then an F&O FCM offering, having that in place so that you can have the conversation with clients and here's this solution. It's what's going to encourage the build-out that whatever needs to happen at some of these organizations, which you're always competing for scarce resources in these places. It's super important to us.
Yeah, I would just add, look, I spend a lot of time in the regulatory space. I can tell you that the, as you mentioned, the impending adoption of central clearing as required by SEC rules in both the cash Treasury and repo space is a key topic of focus for clients, right? The repo clearing mandate in particular is quite broad in terms of counterparty scope covered. It's really, I think, forcing folks across the industry to really hone in on these in-the-weed topics like margin in a way that perhaps hasn't happened in a number of years because everyone is now assessing the associated costs of transitioning to central clearing in a bigger way than they previously had in the cash and repo space.
Yeah. It's funny, I remember back in 2012 or so, as the swaps clearing mandate was coming into force, that you suddenly had traders that cared about collateral and margin. A little bit it almost feels like we're going through a similar renaissance, for lack of a better word. Yeah?
Yeah. If you look at every one of our accounts that operates in that rate space, the view, I think historically people thought this is this product, this product, this product, this product. The reality is they're all integrated and they're all the same thing. Your cash trader is trading Treasuries, repo, futures, swaps, and whether it's a relative value basis or the decision around how you're allocating risk, whether it's in your hedging decisions or as part of a speculative portfolio, the margin decision is really a big one that drives a huge chunk of it.
Yeah.
Yep.
CME's lead is obviously quite big on the future side, 800-lbs gorilla in the room. Everybody knows that. What is the Lou's looking at me, so I'll let him answer first.
I couldn't hear you, that's why. I'm sorry.
What is the next step forward? What is the logical progression here as you We have seen your open interest, your volume continues to grow. Is there some kind of inflection point or do you feel like this is just a sort of an organic growth path forward for the futures business?
Is that for me?
Yeah, for you. How do you see this? What do you see the next year, 3 years looking like and how is it going to get there?
I am impressed that we are already talking about growth and we just I must have impressed you with the presentation. I think the logical is what are we good at, okay? How do we try to introduce the protocols that have worked for us really well to allow us to have a capacity to leapfrog and grow in futures? We are exploring those issues right now, talking to the regulators, making sure they are comfortable with what we are proposing to do.
I would say if we do get to proceed with some of the protocols we have, which are not available to, I do not really want to call a competitor with 99 points on the board more than me, but our competitor, that is going to make a meaningful difference in terms of how quickly we can grow because the marketplace enjoys those protocols today and they work for them.
The second piece of this is because we've established, it's like everything else, what I talked about before, the ability to do basis trades, is going to afford us another significant position to grow. The third one is as we look at what we can do and we're not positioned to do right now, how do we introduce things like maybe invoice spreads into the market electronically, which is not done electronically now, which the clients of the banks really look because it clears up so much operational inefficiencies for them. It's really a really strong desired next step for FMX. If you just take those three items and say we bat 666, we get two thirds of those right, we're in great shape. I would think, and you have to worry sometimes, you get ahead of yourself.
We have to get what I was talking about before in place. We have to get the technology in place. We have to get the margin capability to the clients in place, and we have to onboard the institutional accounts. Next iteration after that, when we have that done, is introduce, hopefully what I've just talked about in the first or second quarter of next year. Then I think the chart that we had in Treasuries is achievable maybe at that pace, but it's the same direction we're going to take.
Yeah. I've heard in the past, and Eric, I guess I'll direct this at you talk to clients about a new product and they'll say, "Well, we'll do it when there's more liquidity.
Yeah.
But you need the clients to make the liquidity. Do you feel like is there a point, either some numerical point or just you know it when you see it point for clients where they're like, "Okay, now I feel comfortable. I'll get in"?
Yeah. It's hard to say numerically. I feel like futures people always talk to 5% ADV kind of targets. But the reality is you kind of see it in
You see it in the adoption. It ends up being slow, slow, and then you get exponential on the high part of the growth curve. I would say the thing really ends up being, is there a new protocol? The tack kind of takes a couple different points. Most clients have very institutionalized professional execution desks that are in the weeds on protocol. So, if you've done your job right on the protocol, you have the right connectivity there. Then others who are maybe directing risk, worried more about structure and margin, you have the carrot there with the margin efficiency. So it's really about, I think, targeting your message to the right people in the right organizations to kind of cut through.
What about from your perspective, Jonah? For market makers, does the trading follow the client entry into the marketplace where then more liquidity can be accessed or provided for that matter?
Look, you do have situations where you have very significant volume between inter-dealer type firms and liquidity providers. But you do want to broaden the ecosystem and you want a diverse ecosystem. So I think it all kind of happens together and builds upon itself, if you will. That's why ensuring that the liquidity pool as a whole is thoughtfully constructed, the trading protocols make sense for the client base that you're focused on, et cetera, all of that's critically important.
Yeah. Virtuous cycle. Last question, and this is to me the fun what's next question. Obviously, FMX still sort of continuing to build rates and make that bigger. But what else would you like to see them invest in? There's credit, commodities. I feel like a lot of the innovation in financial markets in the last couple of years has been in and around futures. So the prediction markets, perps, there's so many fun things. What do you think they should do next?
Look, I think the team's focused on the task at hand, but you're always looking out in terms of new opportunities, I'm sure. I'll tell you, there's a lot going on in the regulatory space, and you mentioned a few of those in terms of there's a lot of talk around perpetual futures now. There's a lot of talk about tokenization and the impact that could have on financial markets writ large. So, we'll see how things evolve. I think we're in the early stages of those. But what matters is the core markets are not going anywhere. And we're in an era of unprecedented political volatility which leads to market volatility, which leads to trading volume. We certainly don't see that changing anytime soon. Again, as I mentioned, I spend a lot of time in the regulatory space, and Congress is as dysfunctional as ever.
It's hard to see how that changes in the near term. You're going to continue to see the volatility that we've been seeing over recent months and years.
It's hard to say it's going to be this product or this product. Obviously, there's a lot of work to be done here. I would say that what it does is it generally provides, I think, the platform definitely provides optionality to pivot based on the demand. So I would view it more as it's an option on what the end users really want. You're talking about a U.S. ecosystem. Obviously, swaps comes into that, and that's another gorilla in the room, I guess, so to speak. But I'll let you speak to that.
I think that executing the strategies we have today is priority one, and priority two is listening to our shareholders who have been outspoken about the need for a competitor in the interest rate swap market, where they currently have two people providing that service, but maybe they're slightly concerned about the capability, and they would look for some competition in that, and we would listen to that, and we would weigh that as, is it a credible capability for us? And the board, they have pretty much the direction on beyond what we already have on the plate that they know about, working with BGC to decide the next path.
Yeah. That's a good final nugget. The swaps market.
I don't know if you want to give some questions to the audience.
Sure. Yeah. We've got just a couple of minutes to take some questions.
Jason's coming over to you, Eli. Running.
Thanks, guys. Eric, this is a question for you. You mentioned how there's a little bit of a stuck behavior for futures traders who are used to going to the CME. I guess, have you guys taken any steps operationally, internally to align incentives so the traders on your futures desk are pushed or nudged to give FMX a look before kind of reverting to old habit and going to the CME?
Yeah. I think in a weird way, you almost do it invisibly. Meaning, and I think that's the point that Lou was making earlier, is connectivity is one thing, but actually using smart order routing. If the trader is interfacing with an aggregator in-house, so they're not going to a specific venue, does that aggregator underneath the hood, is it routing orders to FMX? What is the incentive structure that you've put in there, and why? In a sense, it's almost invisible to the trading business, and lives under the hood as a technology solution. I think on top of that, then from a cultural perspective, that's where someone like myself comes in to make sure that the people who are running these businesses understand why is this a priority for us, why are we supporting it, what are the reasons?
The reality is most of it is automated, and it's under the hood.
Got it. To what extent do you get. You are in a unique position where you obviously have the swaps and futures desk, but you also have JPMorgan Asset Management, who is a user of this. I guess when you go to them and say, "Hey, why are not you guys doing more business on FMX Futures?" I guess, what pushback do you hear? What do they need to see to, I guess, open the floodgates for the volume from that business?
Yeah. JPMorgan Asset Management, I cannot really speak to them given that I am in the CIB. The one thing I would say is they have, obviously, fiduciary duties. They probably have investor policy statements that have limits on what the volumes and the open interest in certain contracts need to look like to be able to use them in accounts. I would view them more as the end users. They will follow the volume as it comes. I think within the markets businesses, it is really about just on our end, using the product, using the protocols, trying to obviously improve them where we can, but then making sure that the F&O, the FCM offering, that we can have discussions around with clients to bring them on board is there and in place.
I think as you do that, you will see the JPM Asset Management or the GSAM or whoever the world being able to be interested and want to use the product.
Got it. Thank you.
All right. Probably can take one more.
I won't wait for the mic. Earlier this year,
It's webcast.
Thanks. Earlier this year, we saw a big shakeout in open interest on the FMX platform. Just curious what your views are on having a second venue given that shakeout. What did your traders learn from it? What did you learn from it?
Maybe I missed something on the shakeout.
Like the shakeout in open interest, did that have any impact on the appetite to put volume on FMX, given that you did have such a significant shakeout?
Oh, got it.
It has recovered.
Yeah. Not from our perspective. We haven't changed anything with respect to how we're operating and interacting with the platform.
All right. Great. All right. Thank you so much for your time. Great talking to you guys.
Thank you.
Thanks, Eric.
Thank you.
So we're going to take a quick break. If we could be back, I know we're running 5 minutes behind, but by 2:05 P.M. There should be coffee and refreshments outside this room, just off to the right. Hi folks, we're going to get started again here shortly. If you could make your way into the grand ballroom.
If you want to do it once more, we can pipe it into that other room as well.
Let's see. I think All right, folks, we're going to get started on our next panel. If everyone could take their seats.
Please.
Right in the middle?
You might get picked on more. All right, we're going to get started. All right. I love the title of this panel because market structure and technology just happens to be the name of my research business at Coalition Greenwich, so I guess hopefully I'm suited for this. But no, we're going to talk in a bit more detail about, yeah, about exactly that, technology and the market structure evolution around the FMX offering. Actually, we didn't do this the last time, but we should probably do this now given the size of the panel. Bijoy, maybe we'll start with you. Can everybody just do a quick intro and talk about what you're focused on?
Yeah. Can you hear me? Yeah. Bijoy, CTO of FMX.
I'm Ricky Stern. I work at DV Trading. I run a relative value trading group there to build our own technology and service any markets we can.
Hi, everyone. I'm Murtuza Bengali. I run rates product globally at Barclays. Before this, I was at Bank of America doing something similar, but more U.S. focused.
Hi, I'm Pranay. I represent one of the trading teams at Tower Research that has been very active with Fenics and FMX through all their offerings.
Ian Byer. I run our systematic trading across rates, FX, credit at Wells Fargo.
Thank you everybody. I remember I talked about remembering 10 years ago at the launch party, but I remember those initial conversation around Fenics, and it was very much about the technology, the speed of the matching engine.
I was told to click.
Oh, you got it. It is actually incredible how much technology in general has evolved in the last decade. Nobody can argue that. Bijoy, why don't we start with you? You can set the scene. Talk a little bit about what the thinking was then, how that's evolved, and how much of a role technology plays in growing the platform now.
We started off by asking, "Okay, what should we do different based on our experience at eSpeed?" We learned a lot from that. One of the things that we realized, that you need to give clients a very easy API. If it is like 35 pages and it takes them five hours to figure out how to write to your system, then nobody will do that. The interface had to be clean, had to be logical, had to be conceptually correct. I think we got that right first. It took us a couple of tries, but we got there. Now that you know, one amazing thing we did, and one of the really good things we did, is that we created two different interfaces. The fast one and not so fast one. That's how it worked in Treasuries.
And then most importantly, the things I learned from our participants. What would make the technology better, right? We kept adding more features to the platform. As you know, the counterparty blocking the Treasuries there, and the PCLOB, and many other features. Just listening to our customers and having these type of discussions.
It's great. We have a panel that's pretty well split between bank electronic and non-bank electronic. We'll go down those lines for now. Let's start with Ian and Murtuza, with you two. Can you talk a little bit about how that technology component played a role as you were getting started, and then again, what does that look like now? Ian, you're sitting next to me, so.
Yeah, sure. Really, I think if you go back in time a little bit to 2017, 2018, and just think about the state of the market at the time, I think Lou called it was stale. I think really thinking about trying to evolve market structure in a broader ecosystem was really tough at that time. I think what FMX understood was that that was a gap in the market, and their ability to think about what's going to make a matching engine very successful wasn't just bringing the typical matching engine to the market. I think it was really about how can we be competitive and listen to our clients, and actually engage with clients across the various spectrum of who is trading in that market, and trying to define the technology.
I think once they actually built the blueprint and the plan for that, then you add in the advanced technology to really bring it to life and empower it. To me, I think the way that they did that just brought us in very early from the bank side, and we had a voice into how to think about the market structure and build it, and then they built the technology around it to really bring it to life.
Murtuza, go.
Yeah, when FMX came together, it has been something that has changed the landscape. I was listening to Lou talk about during his speech, I think he mentioned technology nine times. I was counting. All kudos to even people like Bijoy. They really did change the landscape and got a different style of trading altogether with PCLOBs and having more curated liquidity, being able to figure out how do you reduce toxicity overall. All of that has led to a lot more of a rather efficient trading experience that can then be passed on to clients. So that has changed the landscape quite a lot, and we will continue to invest in that.
Thank you. On the systematic, on the non-bank side, I think just same question, but to prompt it, and this is all sort of making me think is if we think back to 2017, 2018, the Treasury market traded $500 billion a day. Now on September 30th, it was the second busiest day ever. It was over $2 trillion in one day. So that is pretty incredible. I have to imagine that this technology has not caused that, but has allowed the market to handle that. Yeah, Pranay, why don't I let you jump in?
Yeah, no, I think as Murtuza also mentioned, and Ian also mentioned, there was a gap in the market in terms of how much inside liquidity was on offer, and how non-bank participants like us were able to participate and provide tighter markets. I think to Fenics's credit or to FMX's credit, they were always taking feedback from us and evolving the platform in a way that allowed us to participate and provide liquidity to all the end users, the uncorrelated flow that we care about and that we want to interact with. So I think, and the fact that they were able to take our feedback and quickly turn that around, and provide an overall efficiency to the market is, I think, the turning point, which allows for more transactions, more volume to actually happen and makes it a much more liquid marketplace.
Ricky, last but not least, is it all about speed, or have we gotten past that point, there is more to it than that?
Definitely not all about speed. I think what opened my eyes with this technology suite is when I was in a meeting, actually with one of the banks on this panel here about a year ago, and we were discussing all the products that we trade, whether it is swaps or futures or Treasuries, especially on the run Treasuries, and I asked, "How do I best interact with you?" And they said, "Fenics PCLOB." And we exchanged our IDs, and we have been matching on there ever since. And that kind of opened my eyes to the power of how you can directly connect with people you otherwise would not in an anonymous situation.
Yeah. I would add, it is not just the technology, it is the protocols. I think it is their willingness to innovate and listen to clients and drive new protocols that the technology can drive, can actually power underneath the hood. But actually having the new protocols there and listening, I think helps drive the volume growth as well.
A lot of people in this room probably do understand the nuances, but probably not everybody. Can you give us the 10-second primer on PCLOB and how that workflow works that you just mentioned?
Sure. I think most banks provide liquidity in on-the-run Treasuries, and they do it through a bunch of different mechanisms. It could be direct through an RFQ on Tradeweb or Bloomberg. It could be in a public central limit order book, like your competitive BrokerTec. What I think is unique about your PCLOB is that you can tailor the liquidity to the specific participants, and then furthermore, to the specific strategy that participant might have. So my desk, for example, runs six, seven, eight different strategies that use on-the-run Treasuries for either quoting or for hedging, and we can tailor that liquidity within the PCLOB per participant, and then per strategy. We found that to be really a unique way to interact with the market.
The benefits of an anonymous club, but with some customization, effectively.
Exactly.
Great. We can't escape talk of the basis trade these days. This is the right forum, I think, to talk about that. Operating liquid markets for both futures and cash seem like if you have those things, that's a great opportunity to provide products. Bijoy, it's probably again good to start with you on this one just to tell us what the current thinking is, and then I'd love to hear from the rest of the panel. Is that good? Is that bad? Is too much transparency not always a good thing? Let's dig into that a little bit.
Well, I'll start by saying we will have derivs and implieds. It's not just going to be a basis order book. You can submit a basis order, and the technology will work it in the cash and futures market. Initially, it will start up with fixed ratios, but it will actually work it like it's leaning into the liquidity wherever there is in the cash and futures, and give you the price that you want, okay? Without any price slippage. That's the number one differentiator I think we are bringing to the market. So it's a great tool for arb shops, like Ricky and others, and it's also a great tool for liquidity providers to find where the basis market is today. Because we will show you implied basis market, right? Okay. I think that could be pretty useful as well.
Pranay, maybe we'll take it over to you. Basis trade is massive. It's talked about all the time, whatever the number is for today. Does the market need new offerings here? Does that provide opportunity for you? Does it make it more transparent so there's less opportunity? What are your thoughts?
I think we believe that there's always room for more efficiency in the market. I think if FMX is able to provide this basis product, I think to the extent that it enables other people, basis traders to execute their trades more efficiently, that's a net positive for the market. And we would definitely be interested in participating in this offering as a liquidity provider, quoting the basis product directly and through our support of their futures and cash products. So I do think that there's a space for this. Now, whether how the rest of the basis traders look at the ratios, how can you standardize around one product, and whether the whole market can aggregate around that and concentrate liquidity, because I think that's a pretty key component of having a successful market. I think that's the holy grail.
I think that is probably a little bit harder to solve, but yeah.
In my experience, these things, you start it, then you look at the challenges. And we do the same thing we've done before, listen to clients and change it as we go along. That's the only way it's going to evolve.
I'll maybe just add that the main thing, the cornerstone for any basis trading is to avoid slippage. The fact that now we're co-locating both the cash and the future servers next to each other, obviously is a step in the right direction to give that sort of a market to participants. Everything just boils down to transaction cost at the end of the day. The benefit of having a basis-linked market has to outweigh things that traders today have the ability to create more esoteric structures. That transaction cost, if that can be minimized, eventually, yes, it will start to play a lot more bigger role. But the question still remains that is the linked basis market really, is that what attracts liquidity? Or does the liquidity really need to already be there to make this linked basis market really take to the next level?
Ian, what about from your side as you're thinking through your strategies as you're working with clients?
I feel like there's a way to think about the basis trade of, in a way, it's fungible in risk management terms. But it really hasn't really been fungible in the sense of how we build pricing and how we systematically market make. I think there's a latency and element currently in the futures versus cash market that can drive wider pricing, I guess, in theory. So I think there's some ways to think about how if there's more volume that builds on the linked product set that you can trade, I think it just naturally will drive tighter pricing overall.
Sure.
I think that's something for us to think about.
And it's funny, this conversation goes back to Flash Boys a long time ago, but right, having both matching engines in New York versus one in New York and one in Chicago. Bijoy, maybe you're the one for that, but that's an interesting part of the conversation as well, right?
Well, I think that's what makes it possible, right? I mean, the proximity is important because you want to make sure that you can trade cash and futures without any price slippage, right? It's the only way, technology, we can pull it off.
While we're on, I guess, technology, the next question, we didn't really talk about this much in the previous panel, is tokenization. I'm not a believer of tokenizing everything in the world, but I have definitely come around to the values of tokenizing liquid cash collateral, which obviously Treasuries are very much at the center of that. There's a lot of benefits there. Of course, moving money around on the weekend, of course, but even more than that. What does that look like for you as market makers, for you as providers of liquidity? What are the pros and the cons? I don't know, whoever wants to start first.
I'll maybe take a stab at it. Tokenization, can it be done? Theoretically, at this point, I think the question has been answered that, yes, it can be, with the few bunch of POCs that has been done in the industry. But as far as moving the needle on liquidity, again, I might be a little skeptical on this. I don't think tokenization is what really drives the needle with more liquidity. I don't think today anyone wakes up and says, "I wish U.S. Treasuries were tokenized," and that's what will really drive liquidity. I'm sure it plays a lot more of a bigger role in the post-trade side of world, which is things like settlement, collateral mobility, and those kind of things definitely start to have trickle-down impacts on where traders value to move trades to.
But other than that, right now, I don't think the liquidity question gets answered because of tokenization.
It's a good question. How much does trading matter or is it really all a post-trade conversation? If it's tokenized, whatever, you still just want to trade it on FMX's PCLOB, and then it'll just have different settlement instructions? I mean, what's the right end game there?
I personally feel that it might open up other venues. It's going to be driven by collateral mobility and financing. I think the more that starts to build, you have a tokenized treasury, well, then can you use technologies that have been built on-chain for on-chain AMMs in ways I think about the evolution of market structure that could happen there, as well as just standard CLOB markets. I think from an FMX perspective, I think it's important for them to think about evolving that market structure altogether. I don't think you want this market structure to evolve and go this way and this one to go that way. I think it needs to move in lockstep. I do think there's really interesting opportunities if those markets start to evolve.
Yeah, I guess the other big question is, somebody might get, is this a solution in search of a problem? Which I think at first it felt that way, but maybe not now.
Yeah, I think, again, reiterating some of the thoughts that have already been said, but the repo costs, they are not a material part of the equation for us, at least at Tower as of now. The collateral mobility or the financing efficiency that it brings about, I do not think that is what is going to take this to the next level. But yeah, if there is other solutions that are built on top of this, which I have not envisioned, but it is possible that there are others that are building this that could help turn the corner on this.
I just want to be able to move money between bank accounts and not have it take two days.
Yeah, exactly.
Maybe we should start there. We should talk a little bit about portfolio margining. Ricky, I think this is something that you think about a lot, which is maybe unique from a non-bank market maker. Can you just talk a little bit about how that comes into your thinking?
Sure. I keep thinking about the slide Lou put up there where it had $260 billion of margin tied up in LCH. I think a big chunk of that is probably hedged with something on CME, which is creating an even larger margin requirement for those two positions. In comes FMX offering a meaningful savings for a user to take advantage of that. That's great for that user who is swapping their CME for the LCH or for the FMX, I should say. That has to trickle down to the market maker as well that's servicing that business. For market makers who have the ability to trade swaps in LCH, FMX as well, it provides them with the leverage to be able to give that end user who makes the decision to stop using CME and to use FMX instead, that leverage.
It has to reach both levels. My group specifically, we encounter this problem in every new product, I think that's been launched in exchange the last 20 years. Some of them have the ability to offer that offset to both levels, both the end user and the market maker, and some of them don't. We just find that just so critically important to give both the end user and the market maker those offsets so the market makers can operate with the best capital efficiency.
From the bank side, is that a consistent client conversation as you're building out the product?
Yeah. I mean, listen, margin and collateral management, et cetera, is a constant conversation with clients. We need to find more efficient ways to move clients and unlock margin, so that you can reduce the balance sheet stress that banks also face. All of these kind of changes in the market structure will have all of these impacts, I feel, longer term. With LCH's partnership that FMX has, I know there is some work to be done there, but I do foresee a very big positive impact down the line.
Wow. Bijoy, we've already heard some of the benefits the users see of PCLOB and cash. Excuse me. Is there opportunity, or what are you thinking about from a protocol perspective on the futures market, which traditionally is in some ways, it's just a CLOB is a CLOB, but what are you thinking there?
Futures is governed by, as we know, certain core principles, by CFTC. I think what we are going to do, and we have started working on this already, that we are going to take the protocols we have built in Treasuries and adopt them to the new core principles, and then make a case, right, to apply them in the futures market. We actually had a great meeting last week with CFTC. We have a proposal in front of them, and actually the meeting went really well. We are hopeful that we will be able to bring a form of that protocol set into the futures market.
Is that something that you've thought about from a market-making perspective?
Yeah, I think so. I think, of course, I can't speak to the regulatory aspect of it.
Sure.
But I think as an innovation in the market space, I think it will definitely allow for more efficient trading in futures. And it will enhance our ability to provide tighter markets on FMX.
Right. If you have a better idea of where that liquidity is going, then that can help you think about pricing.
Yeah, I think for us, it's all about trying to transact with uncorrelated flow and trying to interact more with people who have different horizons on trading than us. And I think this would sort of provide a great way to increase our interactions with that.
Ian, I imagine that's got to be somewhat similar for you?
Yeah. I would say that what we probably learned from the cash market is it's not like a one-size-fits-all type of marketplace, and I think taking these protocol advancements and thinking about it, obviously with the regulatory kind of elements that you have to take care of, but there are some advantages. I think some of those advantages are, as an LP, you probably have more confidence in the amount of depth and quote that you're actually putting out there. I think that naturally is going to drive more confidence and depth in the market. To me, I think that's really interesting.
Yeah, I guess that's been a theme across fixed income markets broadly over the last decade, right, is the growth of electronic trading broadly, but new products really has been about protocol innovation, right? Finding smarter ways for folks to interact and find the other side. It sounds like we're going to see some more of that here in futures.
Very optimistic. It will happen.
I'm curious to hear what you all think. We asked the last panel this question about what would you like to see next from FMX specifically, obviously rates and FX, as Lou showed us all in the beginning. What are the opportunities here, both either asset classes that might be interesting for the firm to get into or futures types? I talked about perps and prediction markets, which have been the talk of the town recently. Would love to hear everybody's thoughts on what should they do next. What advice would you give the management that's all in the room?
I'll start. I think they can expand in breadth and depth. I think from a depth perspective, I think they have a really good rates complex that they showed earlier, between the on-the-runs, off-the-runs, the inflation. There's an opportunity, I think, to better interconnect those markets because they have a really good presence in all those markets. I think bringing on things like sweeps and other protocols and really just different ways of risk management and thinking about how do I manage risk and how do I do it more systematically for a bank or a LP? Then I think from a breadth perspective, there's also credit, there's also munis, and there's other products that are starting to go more E and evolve, and I think some of the infrastructure they've built would be very interesting to apply in those markets.
Yeah, from our perspective, we obviously trade a breadth of products, both the ones that are on FMX and that are on other exchanges. From our perspective, FMX really just needs to listen to the end user and see where the demand is and what the end users want and we are happy to partner with them and support them in this process. Because you can launch a gazillion new products, but if there's no end user, then there's no value being created. I think for the rates, the LCH margin efficiency was a great problem that was being solved, or on the Fenics UST side, the counterparty blocking, this was a problem being solved.
Some of these problems we may not be aware of, but whatever the end users really have a demand for, we are happy to partner with FMX on that.
Not just a copycat, but something truly new and in demand.
Yep.
From a new product standpoint, I mean, listen, the one that is really going to start adding a lot more value is going to be listed swaps. I would think that's the next frontier for electronification. I was talking to Adam Peralta earlier on how there's an initiative happening on the D2C side, but even bringing something on the D2D, electronification of that market I think is the next frontier. The fact that you can also unlock a lot more margin with swaps being created along with Treasuries and futures, you suddenly have invoice spreads and you've got T spreads that can also be traded now as packages and whatnot. That I think I would personally be a lot more excited about. Then obviously there are things like futures options and things in credit futures and whatnot that can be also listed down the line.
Yeah, the swaps market has seen, right, some new entrants in the last few years, which we hadn't seen since Dodd-Frank and some new innovations. Really interesting.
Yeah, just to add on what you said, I was going to suggest a swap futures because that will further drive margin efficiency.
Sure, yeah. Another product that's seen some growth. It probably took about a decade, but seems like it's starting to catch on.
Which is because of the same things that we're talking about here, which is it's incredibly more margin efficient than the OTC version.
Bijoy, what do you want to build next?
Whatever the clients want. From my point of view, my goal is to make the products seamlessly executed on the single API, similar protocols, and same platform. As long as I can keep that formula going, then yes, I can bring in new products. I can make it seamless for the clients. They have a one-stop shop. That's really my goal from a technology perspective.
Great. Do I have time for a question? One or two? Yeah. Okay. Patrick, Eli, questions?
Thanks. You talked a little bit about counterparty blocking potentially coming over into the futures space. I guess, Pranay, when you think about the market structure in futures, is your instinct that the value add from being able to segment that flow will be as helpful in the futures space as it clearly has been in cash Treasuries?
Yeah, I think on first glance, I think there's no reason for there to be not as much of a value add in futures as there was in cash Treasuries. I think the main thing that it sort of facilitates is that if you think from a market maker perspective, the spreads that you're being able to quote or how tight you're being able to quote is very much a function of who you are interacting against and what kind of liquidity you're facing. If you're able to segment out certain types of flow which you are not as keen to interact with, then I think it allows you to quote tighter or to make your spreads tighter. I think that same logic, that same rationale applies to futures equally.
Got it. Helpful. The other innovation you guys mentioned was inter-dealer electronic swaps trading. Just to push back a little bit, I know that's something that's been tried before, I think several times before, and every time these inter-dealer swap platforms end up ghost towns. I guess what gives you confidence that if FMX rolled out electronic inter-dealer swap trading, that this time would be different, that the market is ready for it?
You want me to take it? Yeah. Okay, so I think one of the things that we bring unique to the marketplace is our tiered liquidity structure. So that allows liquidity providers to carefully manage risk. Okay? Tailor the risk to their particular consumer flow. I think that applies even more in swaps, because at the end of today, swaps is not that liquid. So it is a little bit less liquid. I think what I found that in less liquid products, that type of tiered market structure is even more important. So we have that under our belt. Plus, we also have this facility where you can trade futures, you can trade cash all in one platform. Adding swaps on top of that as another product tier simply, again, makes the entire marketplace easy for access.
I think those three things combined probably give us, or hopefully will give us a better edge in making that happen.
Very helpful. Thank you.
Right. Any last quick questions? All right. Great. Thank you all. Great conversation. Appreciate it.
Thank you.