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Share Name | Share Symbol | Market | Type |
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CME Group Inc | NASDAQ:CME | NASDAQ | Common Stock |
Price Change | % Change | Share Price | Bid Price | Offer Price | High Price | Low Price | Open Price | Shares Traded | Last Trade | |
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0.17 | 0.08% | 207.65 | 207.00 | 208.00 | 207.92 | 202.775 | 205.86 | 2,065,363 | 23:29:58 |
Credit Suisse
KCG Holdings announced their intention to explore strategic options for their institutional spot foreign-exchange-trading business Hotspot.
What is Hotspot? Hotspot is KCG's (ticker: KCG) dealer-to-client foreign-exchange-trading (FX) business that comprised 13% of disclosed industry FX volumes during the third quarter, up from about 4% in second-quarter 2009. Launched in 2002 and acquired by Knight in 2007, Hotspot caters to hedge funds, commodity trading advisors (CTAs), corporate treasuries and institutional asset managers.
Why is the asset valuable? Institutional FX is moving rapidly away from voice execution to electronic venues such as Hotspot. In addition, liquidity is migrating to non-bank players. The rise of Hotspot, [Thomson Reuters ( TRI) unit] FXAll, FXCM ( FXCM) and Gain Capital's ( GCAP) institutional FX offerings and demise of EBS [a unit of ICAP, which is traded in London] are examples that highlight this shift in liquidity. As per the Bank for International Settlements (BIS) non-dealer financial institutions comprised 58% of spot volumes traded in 2013 up from 29% in 2001.
Bloomberg is reporting a price tag of $300 million for the business. Although there are no official financials we find this estimate reasonable for a business that we estimate generates about $15 million-$20 million in net income from trading and data thereby implying a 15 times-20 times multiple. First-round bids are due next month.
We see several potential suitors spanning market-structure firms, trust/custodial banks and exchanges. They include: 1) Nasdaq OMX Group ( NDAQ) -- recall the firm has been focused on growing their fixed income, currencies and commodities (FICC) business and bought U.S. treasury platform eSpeed in 2013 -- this acquisition would allow the firm to foray into spot FX; 2) FXCM -- the firm has been actively growing their institutional FX business purchasing a stake in FX market maker Lucid (2012), buying institutional FX research provider Faros (2014) and entering into a joint-venture to form FastMatch -- this acquisition would allow the firm to further solidify their institutional offering; 3) Northern Trust ( NTRS) -- all trust banks operate FX trading businesses to complement their core custodial offerings -- the firm has been actively trying to diversify further into third-party FX and Hotspot would allow them to significantly enhance existing capabilities; 4) State Street ( STT) and Bank of New York Mellon ( BK) both these banks have larger third-party FX offerings in place already (State Street purchased Currenex in 2007) and would be interested for scale reasons.
Other likely suitors include Thomson Reuters who purchased buy-side institutional-oriented FXall in 2012, Bloomberg and CME Group ( CME). With that said, buyers with pre-existing FX infrastructure such FXCM and the trust/custody banks stand to reap significant expense synergies (40%-plus) and may prove to be better owners of the asset.
-- Ashley N. Serrao
-- Christian Bolu
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