FTX failure can play to the advantage of the old guard

Sam Bankman-Fried and his FTX crypto exchange have overshadowed both of the Futures Industry Association’s major US gatherings this year.

In March, “SBF” stole the show at Boca Raton in sunny Florida as he chatted with baseball stars and promised to revolutionise not only cryptocurrencies but the entire plumbing that underpins global financial markets.

As the first snow of winter arrived at the FIA Expo in Chicago this month, FTX’s name was being hastily covered up on sponsor hoardings that had been printed before the group collapsed into bankruptcy.

The exchange’s rapid downfall is embarrassing for executives who were, as one futures broker put it, “infatuated” with the upstart. But in practical terms, its failure is likely to benefit many FIA members.

It is the latest in a run of positive news for more traditional exchanges and the brokers and tech groups that work with them, with some saying the industry is in its best position for decades.

Bankman-Fried’s plans threatened to make obsolete the brokers — known as “futures commission merchants” — who ensure investors have enough collateral to support trading positions and are core to the business models of exchanges such as CME and Cboe.

With the fallout from FTX, it will be harder for anyone else trying to disrupt this set-up. Gerry Corcoran, chief executive at RJ O’Brien, said “what happened is proof the proposals weren’t well thought out. The current model is so robust . . . for preventing contagion.”

As head of the largest independent FCM, Corcoran has an interest in criticising FTX’s plans, but comments by senior regulators at the conference suggest they would be inclined to agree.

Christy Goldsmith Romero of the Commodity Futures Trading Commission said she had “a lot of significant concerns” even before the collapse, and warned that “should other [disrupters] come in the future, I am not in favour of this bespoke regulation”.

Executives at established exchanges also believe calls for clearer crypto regulation will benefit companies like themselves that have more experience dealing with watchdogs than crypto-native start-ups do.

In the meantime, their existing trading businesses have been thriving as market volatility drives up volumes. Cboe, CME, Intercontinental Exchange and Nasdaq all beat analyst estimates in the third quarter.

The Securities and Exchange Commission is also seeking an overhaul of equities markets that would make it easier for the exchanges to compete with off-exchange trading groups such as Citadel Securities and Virtu Financial. The final details are subject to change but “the broad theme is pretty exchange-friendly”, said one senior executive.

That positivity is filtering down to FCMs and suppliers such as fintech group Trading Technologies. Keith Todd, Trading Technologies chief executive, says: “In more than 20 years in the industry, I don’t think we’ve ever been in a better position — market volatility, interest rates rising, all those dynamics mean our customers are all making lots of money . . . [and] bumper profits means increased investment.”

Still, enthusiastic executives should not get too carried away. The industry still faces challenges, and share price performance this year has been mixed at best. While Nasdaq and Cboe have fallen less than the wider market, CME and ICE are each down around 20 per cent.

The very fact that the SEC is trying to level the playing field against alternative venues highlights how exchanges have struggled to hold on to market share in recent years. Many have also diversified into new businesses that are more exposed to an economic downturn, such as ICE’s pivot into mortgage technology. And, although it has been largely beneficial so far, high volatility is good for trading until it isn’t. 

Russia’s invasion of Ukraine, for example, caused such a dramatic shock to commodity markets that exchanges repeatedly raised margin requirements. Analysts at Citi do not expect activity to recover quickly.

The energy crisis also raised questions about the balance between managing risk and losing business to other trading venues.

“Raising margins 17 times makes you ask if the levels were right in the first place,” said one FCM at a large bank. “If [exchanges] don’t take the trades, they will get done less transparently elsewhere . . . [but] what concerns me is a situation where people are competing through risk tolerance instead of pricing or product.”

To that end, after dominating the last few gatherings, FTX’s collapse may provide an extra benefit for the rest of the sector.

“Crypto is actually really minuscule within derivatives,” the FCM said. “I’m glad we can start talking about the industry again . . . Maybe at the next conference at least.”