Technology, Operations and Market Risks

1. Blending of Equity and FX pricing methodology, ensuring a single Exchanged originated price at all times
2. Matching of orders with dual (constantly) fluctuating variables (Equity and FX), ensuring no naked FX contracts
3. Bandwidth considerations as every additional currency virtual quotation would double existing bandwidth
4. Limit Orders mathematics and optimisation, including legal liability considerations
5. Mismatch of equity transaction sizes and that of interbank FX pricing, need for FX deal aggregation module and VWAP computations for each FX Liquidity Provider Bank
6. Need for multi-dealer solution for G10 FX pricing to achieve quasi-exchange pricing but will give rise to multilateral technology integration challenges
7. May need to assist the Exchange’s preferred onshore FX Bank to ramp up its eFX capability (e.g. most local banks do not have its own institutional eFX platforms, and would take 5-10 years to evolve if done on their own, compared with the US/European banks who started in eFX prior to year 2000)
8. Need a solution which will not impact existing core systems, to avoid business continuity risks and cost of regression testings
9. Avoid the need for multiple order books and multiple (physical liquidity pools)

Business Issues

1. Collection of cross-discipline resources required (Foreign Exchange, Equities, Operations Research (Queuing Theory), Statistics, Inventory Modelling, Technology, Mathematics, Project Management)
2. Industry experience (front office, middle office, back office)
3. Key man risks in ensuring that the core team stays for the entire duration of the project and are available to support the future enhancements
4. Cost of mobilising the individuals (all gainfully employed in top tier institutions), including the need to pay a premium
5. Dealing with the Human Resource issues
6. Corporate bureaucracy may kill creativity and enthusiasm
7. Exchange may need its own business aligned FX markets consultant to ensure the best commercial negotiation with the selected panel of FX Liquidity Provider Banks (due to fundamental differences between OTC/Exchange instruments)

What is in it for the exchanges as a client/partner?

 

1. First mover advantage in an industry where the trading and clearing fees are on a "race towards zero" and where P/E, Regulatory Framework, Capital Market considerations have all been equalized from a choice of listings point of view.

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2. Attract secondary listings for companies listed in a different timezone e.g. NYSE/NASDAQ stocks in Asia Timezone, effectively providing investors double the trading window period.
   

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3. No risk of current core systems being affected under the M-DAQ model, avoiding expensive and long drawn regression testings.

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4. Share in a lucrative FX fee which does not exist today (to the Exchanges).

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5. No upfront development fees as all IP and costs incurred by M-DAQ are covered under the FX revenue share model.

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6. Provides the current market players (especially non institutional market) a 10-fold tighter spreads on the conversion.

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7. Allows the local regulators realtime Flow of Funds data in a central repository via M-DAQ. 

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8. Low credit risk of The Exchange and allowing a significant market share for each of the 4-5 Top FX provider banks, allows pure interbank FX rates to flow directly to the blended securities prices and benefit the investor.

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9. Increased in cross border trades will also benefit both the Exchange and its member firms (onshore brokers).

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10. Allows a speedy time-to-market of 12 months from start of development/implementation.

What is in it for our strategic investors (banks and exchanges)?

1. Full return on investment in 3-4 years based on the business case assumptions.

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2. Potential to participate in the eventual listing of the onshore M-DAQ operating entity.

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3. Participate in all the future growth of multiple onshore M-DAQ Local Operating Entity via M-DAQ's IP involvement as a core solution provider to national securities exchanges globally.

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4. Coming in at extremely conservative valuations before Series B (there may not be a need for Series B as the first exchange partnership will ensure an attractive revenue stream).
   

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5. Low operating cost base as most founder members are running at a 25-30% discount from their market price in exchange for equity participation.
   

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6. Low overheads when compared to operating a similar development team inhouse (within a bank or an exchange).

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7. Using M-DAQ as a neutral party for a quasi multi-dealer FX solution, yet retaining the direct FX settlements between the Exchange and the FX Banks. Exchanges have indicated that they want the solution but cannot work with a single bank provider on the FX - both for operational/credit/pricing redundancy as well as the need to prove best execution.

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8. As only 4-5 top tier FX provider banks are expected to contribute prices for each exchange, each bank will be assured of a 20-30% market share thus making it worthwhile to price at interbank spreads in exchange for large (aggregated) non-toxic flows.

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9. When M-DAQ Solution becomes a generally accepted core feature in all exchanges, these strategic investors will be able to participate in the enablement of the rest of the industry.