Nasdaq (NDAQ.O) is poised to launch a platform for foreign exchange trading which it says would make the $5 trillion-a-day global market more transparent and would diversify its own business, a top executive from the stock market operator said.
Nasdaq Co-President Hans-Ole Jochumsen, one of two presidents who are both second in command of the tech-oriented stock market operator, told Reuters the FX trading platform is ready to be tested with banks although a launch was more likely in 2016.
Authorities in the United States and Europe have fined major banks more than $10 billion for failing to stop traders from trying to manipulate foreign exchange rates on the largely unregulated forex market.
"There are two main problems in retail FX markets. How can customers be sure they receive the correct price and secondly the counterparty risk," said Jochumsen, also the head of Nasdaq's transaction business.
"The criticism of banks and the fines show the market is not transparent and compliant and it speaks for it to be organized more like a stock market," Jochumsen told Reuters at the stock exchange in Copenhagen which is owned by Nasdaq.
Stock exchanges globally have been positioning themselves to take leading roles in foreign exchange as regulatory pressures force banks to move more trading onto exchanges, which tend to be more transparent than traditional phone-based trading between brokers.
The counterparty risk became real in January when losses from the surprise move by the Swiss National Bank (SNB) to end its currency cap against euro nearly crippled brokerage FXCM (FXCM.N) while online forex broker Alpari UK was forced into administration after suffering heavy losses on the Swiss franc.
Copenhagen-based foreign exchange brokerage Saxo Bank last week said the SNB's move cost it 700 million Danish crowns ($109 million) and booked a loss of 485 million crowns for the first six months in 2015 due to that cost.
Jochumsen declined to say when exactly Nasdaq will launch the FX platform but said it was likely to happen in 2016.
"We have a system ready that banks can test in their own systems but we don't want to launch it before we have enough banks committed to secure sufficient liquidity," he said.
He did not see why most currency pairs such as EUR/USD, GBP/USD and USD/CHF could not trade on a system similar to the stock market where banks add bid and ask prices every day.
Deutsche Boerse (DB1Gn.DE) in July beat out U.S. commodities and currency exchange operator CME Group (CME.O) in an auction to buy the Germany-based foreign exchange trading platform 360T for 725 million euros ($842.4 million).
And in March, BATS Global Markets, the No.2 U.S. stock exchange operator by volume and the largest pan-European stock market operator, closed its acquisition of FX trading platform Hotspot from KCG Holdings (KCG.N) for $365 million.
But while Nasdaq's aim is the same – to enter the lucrative world of FX trading – its plan differs by building its own platform rather than buying one.
Competing electronic forex trading platforms include EBS, owned by ICAP PLC (IAP.L), and FXall, owned by Thomson Reuters Corp (TRI.TO) (TRI.N), the parent of Reuters News.
Citigroup (C.N) is the leading foreign exchange trading bank with a market share of 16.1 percent, according to the Euromoney FX Survey 2015.
Deutsche Bank (DBKGn.DE) and Barclays (BARC.L) remained in second and third spots, but their market shares fell to 14.5 percent from 15.7 percent and to 8.1 percent from 10.9 percent, respectively.
In July, Nasdaq launched the "NFX" platform for trading energy derivatives such as oil, gas and power futures.
Nasdaq is heavily exposed to the level of activity on the stock market and Jochumsen said he hopes the decision to target energy futures market and the FX market will diversify Nasdaq's business more.