Market holds breath on Nasdaq NFX

Nasdaq hopes to capture 10% of the energy market in the nexttwo years with its new energy exchange Nasdaq Futures (NFX) but is therespace in the market for a new player?

The exchange group will on Friday unveil its long-awaitedpush into the energy market, launching with 26 products as it goes up againstincumbents The Intercontinental Exchange and CME Group which dominate the US and European oil markets respectively.

The new designated contract market (DCM) will offer 26products across futures and options on key energy benchmarks, including oil,natural gas and US power.

Efforts at the exchange group have been ramping up withNasdaq confident in its hopes for the exchange.

FOW spoke to chief executive of NFX and head of UScommodities for the exchange group Magnus Haglind on Wednesday who said: "We are targeting a 10% market share in the first 18-24 months. I think this is achievable."

Market Appetite

Some have questioned, however, whether there is room for a new player in the global energy derivatives market.

A London-based business development head told FOW: “Is therespace for any new exchange that has ‘look-a-like’ products? Historicallaunches of Liffe US and NLX say no. However, if you have serious end users,such as banks supporting you, it ‘may’ work.”

Liffe US was the London-based exchange's bid to break into the US up against CME among others but it was rolled into existing US and European platforms after ICE bought Liffe.

NLX is Nasdaq's European interest rate futures exchange which reached some 10% of daily European volume in 2014 but has since seen trading activity dwindle.

A former senior director for interest rates and foreignexchange told FOW that, while the NFX launch is making ripples, “the market simply doesnot need another energy exchange.”

A business development head from one of Nasdaq’s partnersfor NFX said: “I think market participants will see some good exposure to themarket through NFX. We have high hopes, as we always do with new exchanges, butit will struggle, especially in Europe and London.

“It seems to have been spun that the main interest is fromthe US on this, especially on the oil side. In London there seems to be littleinterest in trading on the new exchange. At management level there’s a goodlevel of awareness, but this is yet to trickle down to trading,” he added.

Another source suggested that success of the new exchangewill have to be considered on a regional basis, due to the products beingoffered and the difference in geographical appetite for them, and suggests thatthis may have affected the group’s approach to development of NFX.

“I think that Europe, and London, are being seen assecondary markets – NFX isn’t looking to tap these markets first. However, oiltraders will trade as and when they wish, so with banks and traders on board,there could be a different story,” he said.

Head of research at Marex Spectron, Georgi Slavov, takes a pragmatic view: "Most of the energy markets , especially the one Nasdaq is targeting, are liquid enough to accommodate a new entrant... Ultimately the marketplace will choose which venue offers the best balance between execution speed, cost and other added value services."

A managing director in futures at a largeinvestment bank added, “There is definitely interest in NFX. The CME is not themost popular after what they did with market data. I think they may have underestimatedthe extent to which their clients want to give them a poke in the eye.”

In late 2013, the Merc announced plans to introduce marketdata fees in a phased programme that required data distributors to pay formarket data. 

The decision enraged prop traders, who argued that the fees couldadd more than $1,000 a month to their trading costs, adding that it could causefirms to stop using the CME, or quite trading all together.

Incentives

A contentious issue surrounding the new exchange is Nasdaq’scommitment not to charge trading fees for at least the first nine months of operations.

The cost of trading could play a crucial role in the futureof the fledgling platform, with the lack of fees expected by some to boost trading levels in the short term at least.

While seemingly a great marketing play for NFX, some marketplayers are not convinced that this will be enough to drive volumes, and questionwhat will happen at the end of the fee-free period.

A source told FOW: “London will only trade on NFX if thereis a robust market; if the pricing isn’t right then it won’t work – being freeis not enough.”

A London-based business head questioned the longevity of theexchange after the fee-free window: “Everyone wants cheaper prices, butcustomers will go with liquidity.”

Marex's Slavov said, "Execution costs are an important element when choosing a trading venue, but it is rarely the only one. It is important to strike the correct balance between cost, speed, reliability and industry expertise.

"The job for Nasdaq will be to translate the goodwill they have built into transactions," he added.

Launch fatigue?

The business head continued: “As we saw with NLX, you cangive something away for nothing, but it’s not enough,” warned another FOWsource.

Nasdaq’s multi-lateral trading facility, NLX, in 2013launched with an incentive scheme for market-makers and founding members. Thosefirms that joined the exchange, or were near completion of their connectivitybefore the end of June (after the May 31 launch), paid no fees during the monthand received a full rebate for all fees up until the end of the year.

“There is an element of fatigue after the buzz of NLX – atthe time there was a great degree of excitement in London – it was a UKproduct, a UK exchange that wasn’t Liffe. London seems a bit detached from thefanfare surrounding NFX,” said a London-based source.

Speaking at a media event in London in mid-July, SteffenKöhler, chief operating officer of The European Energy Exchange, said: “NFXwill face the same issues in bringing new contracts as the incumbents as theyare trying to tackle the same issues.”

“The launch is good for the market,” said the COO.

The players

Last week the exchange said that 16 brokers have been approved as members for the new US-based energy exchange, naming 14; ABN AMRO Group, ADMInvestor Services, Advantage Futures, Citigroup Global Markets, ED&F ManCapital Markets, Goldman Sachs, INTL FCStone, JP Morgan, Merrill Lynch, MizuhoSecurities USA, Phillip Capital, Rosenthal Collins Group, Societe Generale andWedbush Futures.

The group has been aggressively signing up partners overrecent months and has been forging ahead with testing after winning key backingfrom market-makers, banks and technology companies.

The exchange group’s energy offering will use connectivityfrom trading software firm, Trading Technologies, once it begins operations, as announced at the FIA Europe IDX conference in London last month.

Nasdaq also inked a deal with London-based Stellar Trading which saw the latter commit to provide access to the NFX platform once it goeslive.

The launch

Haglind told FOW in the days leading up to the launchthat he is encouraged by the fact that more than 40 firms have now registeredas brokers for the exchange. “We have a broad spectrum of participants,especially when it comes to key or specialist contracts, and I think that thiswill serve us well,” he added.

The exchange group has also been transparent about its plans to potentiallyexpand the remit of the platform after launching.

Speaking to FOW on Wednesday, Haglind said that expansion remains firmly on the horizon, and while a number ofassets are being considered, no decisions have been made yet. “We need to provethe concept first," he said

While it seems there is interest from the market, it remainsto be seen how much trading the new platform will see, especially fromEuropean and London-based market participants.

The approach to fees is contentious. Some see it as agimmick and expect claims over the success of thenew exchange will be skewed during the fee-free nine months. 

While it is difficult to predict the success of the newexchange, what is clear is that eyes will be firmly on the exchange group’slatest project on Friday.