Source: Financial Times, Philip Stafford, 4 Feb 2018
Derivative Exchanges
Trading venues buzzing on strong start to year
Busiest January on global markets in years lifts hope of trading revenue rebound.
The busiest January on global markets in many years is raising hopes among exchanges and market venues that 2018 will spark a long-awaited rebound in trading revenues.
Volatility on foreign exchange markets has spiked after comments from the US Treasury secretary about the weakness of the US dollar sent the greenback tumbling and volumes rising.
Investors have also seen the 10-year Treasury yield, which sets the cost of money for the world, rise its most in more than a year on fears that inflation may be returning. Stock markets have dipped recently after rising on data showing strong growth in many of the world’s biggest economies.
Those signals have driven a sharp pick-up in volumes after several weak years across equities, futures, currencies and fixed income markets. Low interest rates and steady economic growth after the financial crisis had left many markets becalmed.
CME Group, the world’s largest futures exchange, last week reported an average daily volume of 19m contracts, up 18 per cent year on year and its second-highest monthly average daily volume ever.
Deutsche Börse said the 34 per cent year-on-year increase in turnover on its cash markets was its highest January number since 2008. MarketAxess, the US corporate bond trading venue, reported record average daily volume for the month, up 22 per cent year on year.
“I think its an ‘early great indicator’,” said Richard Repetto, analyst at Sandler O’Neill in New York. “Not only have volumes in January showed strength, but more importantly, most volatility measures have increased as well. Barring a severe, prolonged pullback in the markets, which eventually would weigh on transaction activity, the volume outlook looks good right now.”
Yet many executives remain cautious after several lean years. Terry Duffy, CME chief executive, last week described 2017 as “certainly an unusual year. Virtually every asset class experienced reduced volatility”.
The UK’s Nex Group reported double-digit growth for January in repo markets, which act as critical sources of short-term funding and collateral for financial institutions. It also runs one of the world’s biggest foreign exchange trading venues.
“It’s still too early to assume with any confidence that the prolonged and subdued conditions have come to an end — but I do keep hoping,” said Michael Spencer, chief executive of Nex. “I’m hopeful the FX markets are more generous to us this year than they have been in past years.”
Traders have also noted that despite the sharp increase in January trading activity, closely watched indicators measuring volatility in US equity and Treasury markets were still below long-term trends.
The Vix index, a benchmark measure of implied volatility on equity markets, has been trading below its long-term average for most of the past two years.
However the Vix jumped nearly 30 per cent on Friday to its highest level since November 2016. Cboe Global Markets, owner of the Vix indices, said Vix options volumes hit an all-time high of 4.3m contracts on Friday, surpassing the previous record by 39 per cent.