“Many have tried, few have succeeded.” To many people in our industry, starting a successful exchange is the holy grail. Just as I was drafting this article, it was announced that Howard Lutnick, Chairman and CEO of Cantor Fitzgerald, will be launching FMX futures exchange through Cantor’s broker affiliate, the latest addition to an illustrious list of people who took on the behemoths in the business.
Why do so many people chase the dream of starting an exchange, knowing that the odds are against them?
The answer is quite simple. The potential financial rewards far outweigh the initial investment if the exchange succeeds. Some of you may have heard the story of how a group of partners who were in a struggling technology provider went on to cofound a hugely successful crypto exchange, turning into crypto moguls in a short span of time. In the exchange world, derivative exchanges are particularly attractive. The markets, unlike many trading platforms focused on securities, are unfragmented, quite resilient to economic conditions, and face less competition.
If we take a deeper look into the industry challengers in the past few decades and some of you may remember these acronyms, “JADE, SMX, HKMEX,” many struggled from day 1. If we include exchanges that struggled in launching contracts to compete with other incumbent exchanges, the list goes much longer. Many say these ventures were bound to fail and it is easy to comment with the benefit from hindsight. Nonetheless, it is important for us to learn from these experiences.
Open or Closed?
An open market allows participants to trade freely across exchanges, while a closed market limits trading to domestic exchanges. Singapore and Hong Kong will be examples of open markets, China will be an example of a closed market and there are also markets like Vietnam which can be considered a semi-closed market where access to global exchanges is allowed through restricted conditions and channels. Exchanges, when allowed by regulators to operate in closed markets, faced less of an uphill task than exchanges that are operating in open markets where competition is stiff. In open markets, market participants typically take a “wait and see” approach before they will trade a new product or trade on a new exchange. In closed markets, market participants do not have a choice to trade global markets and typically eagerly wait for the launch of new contracts and trade them once launched. The tricky part for operators of closed-market trading platforms comes when they try to engage global participants using the same strategies as they would locally, only to find that it is a completely different ball game.
Differentiation
Today, connectivity and access to global exchanges are highly advanced. It is highly likely that any market participant in an open market, be it institutional or retail, will be able to access global benchmarks and markets with a local broker. This also means that if a new exchange is going to offer a look alike product of a global benchmark that is already active on another exchange, it is unlikely to gain much traction. There is not much reason for any learned trader to want to trade the new product. Once again, this may seem obvious, but we keep witnessing new exchanges making the exact same mistakes. Some tweaked the size of the contract, some reduced their exchange fees, some waived their market data fees, none of these are attractive enough to convince traders to move from an already liquid market to a new market with the same underlying. There are exceptions but exceedingly rare.
On the contrary, listing lookalike products in closed markets is a different ball game and may garner success due to the lack of access to global products. In the past two decades, the successful new exchanges had been exchanges that operated in closed markets and the crypto exchanges. Product differentiation was what attracted traders to crypto exchanges and new exchanges in open markets need to learn that they can only be hugely successful if their product is different and something that the market needs.
Distribution
Building distribution networks for new trading platforms is one of the toughest tasks in the industry. An ex-colleague was sent to work in a new exchange set up by an exchange group and he had described the job as “breaking”. He once told me, “If you don’t like anyone working in the company, send him to go work in the new exchange.” Convincing software vendors, brokers to connect and become members of the exchange is an uphill task for new exchanges. Even though exchanges may pay for connectivity to the exchange, software vendors will still need to charge brokers for development work on their systems. It is always difficult to justify these costs and resources needed. Most brokers would rather spend their resources on marketing already liquid products. A new exchange is already stillborn when they cannot find enough distributors and even if they do find a few, it is hard to align the interests of the brokers with that of the exchange. Brokers must focus on what pays the bills. Going back to the example of the crypto exchanges, they not only differentiated their products, but they also showed that one need not stick to the traditional channel of distribution. Technology can help to bridge the market access gap between market participants and the exchange if regulations allow it.
Asia Commodity Marketplace, “ACM” cannot compare itself with what Howard Lutnick wants to achieve with FMX. Nonetheless, ACM has considered the numerous factors that were mentioned. We aim to occupy a niche market, providing differentiated products that meet specific needs. Headquartered in Indonesia and licensed by the Ministry of Trade and Industry, we intend to address the financing needs of commodity players in the region and democratize the commodity financing space through a world leading cleared commodity repurchase contract. Our distribution model will engage both traditional and non-traditional channels and ensure the alignment of our partners from a financial perspective.
Stay tuned for our next article to learn about the products in the pipeline and visit ACM Website for more information.
