Tuesday, December 1, 2015

Futures ecosystem - the extinction of the FCM species?

The consolidation of FCM's in the futures industry will continue and some may ask the question why FCM are needed at all given a greater portion of the fees from trading goes to the exchange. One third of all FCM's holding customer funds have disappeared in the last decade. It is unlikely that we will see another 30 disappear, but it is not clear how profitable this business can be for firms. The top ten FCM's are all associated with banks and not stand alone entities.

The chart from the FIA tell the story. If you are a small fund or small hedger or if you do not have the right credit, you will not have a place to trade. The system will not work for you, and CME's ads about the marketplace for hedging risk will be just a dream. Of course, costs will go up and there will be point where brokerage and clearing will be profitable, but it will be at the expense of the small trader. Perhaps I am exaggerating, but which one of the top ten clearing firms will want to service smaller firms?

We have written about the decline in FCMs and how the futures industry is in upheaval in our past posts, The futures industry ecosystem is broken, Basel II and futures clearing, and Futures industry changing structureThis problem will not go away and may in fact get worse at the point where more will need financial hedging services, and industry leaders do not seem to really care.

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