Expanding into the fast growing market for derivatives, Nasdaq OMX is investing up to $7.5 million for a 20 percent stake in Agora-X, LLC, a new electronic communications network for institutional trading in over-the-counter (OTC) commodity contracts.
Agora-X is a subsidiary of FCStone, a commodities risk management firm in Kansas City that is developing the new electronic marketplace to automate the phone-based OTC market.
"Certainly agricultural derivatives and energy derivatives are the hot area," says Chris Concannon, EVP of Nasdaq OMX, the new global exchange and technology conglomerate formed by the combination of Nasdaq and the Swedish operator of stock and derivatives markets. The transaction closed on Wed., Feb. 27, a day before the Agora-X deal was announced.
"There is phenomenal liquidity in the OTC derivatives space and whenever you find that sort of liquidity, you can transition from the OTC to a central market function," says Concannon. In terms of creating synergies with its traditional customers, Nasdaq's large customers trade energy and agricultural contracts as agents or principal traders, but there's a broader customer base out there, says Concannon. Also some of Nasdaq's corporate issuers in those industries trade those products for hedging or speculative purposes.
Agora-X is going to be an electronic marketplace where buyers and sellers meet to match trades and pricing will be aggregated to provide a very transparent market in the given contracts, says Concannon.
Initially, the trading platform will handle option "look-alikes" in energy and agricultural commodities, as well as commodity swaps, with the scalability to add other OTC derivatives, according to the announcement.
While it qualifies as an OTC market because the contracts are not listed on an exchange, Concannon says, "It brings some of the pricing transparency and centralization of liquidity that any traditional market or exchange brings, says Concannon.
Nasdaq was introduced to Agora-X through its relationship with OMX, which approached OMX about licensing its technology. "It was only after further due diligence that we became interested in the strategic relationship," says Concannon. In January, Agora-X announced that OMX would provide a complete trading and hosting solution including licensing, customization, implementation and ongoing monitoring. The platform can do not only trading but clearing. The clearing can be done bilaterally (between two counterparties) or centrally. "We're exploring both," says Concannon, adding that Agora-X could use a centralized clearing entity to provide counterparty risk.
Since Nasdaq will own 20 percent of the ECN, Agora-X will continue to remain a standalone subsidiary of the commodities firm with separate financials.
The investment is occurring at a time when oil and wheat prices are soaring and publicly traded exchange companies are looking to purchase derivatives exchanges. For instance, the CME Group is negotiating a potential merger with NYMEX.
The deal is Nasdaq's first foray into OTC derivatives in the U.S. market, but it's not the combined entity's first foray into futures and derivatives, notes Concannon. Stockholm-based OMX operates stock and derivatives exchanges in the Nordic and Baltic region. In December, OMX acquired Nord Pool, a Norwegian derivatives exchange for about $411 million, along with it's clearing and consulting operations. The two companies plan to create an international energy and carbon exchange to be called Nord Pool International in Oslo.
Even though Nasdaq is in the midst of launching its own U.S. equity options exchange and is expected to close on its $652 million acquisition of the Philadelphia Stock Exchange by the second quarter of 2008, which owns the third largest options exchange and PBOT, a futures exchange, it's kept its eye on other opportunities. "We have certainly been looking at the entire derivatives space for some time, not just equity options or index options," says Concannon.
Ivy is Editor-at-Large for Advanced Trading and Wall Street & Technology. Ivy is responsible for writing in-depth feature articles, daily blogs and news articles with a focus on automated trading in the capital markets. As an industry expert, Ivy has reported on a myriad ... View Full Bio