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What's behind the remarkable growth of DGCX?

10 June 2013

As the Dubai Gold and Commodities Exchange unveils another rise in volumes, Galen Stops looks at what is behind the exchange's recent success.

Read more: DGCX India Dubai gold emerging markets

2012 was a year that most derivatives exchanges would rather forget. But for the Dubai Gold and Commodities Exchange it was the best year ever as volumes grew 138%.

The Dubai Gold and Commodities Exchange was founded in 2005 and had been growing steadily, if not spectacularly, until the beginning of 2011. That year it more than doubled the 2010 volumes, but with 4m contracts traded for the year, it was still a small exchange.

In 2012 though, DGCX managed to replicate this growth, once again more than doubling its yearly volumes to over 9.5m contracts. This is a remarkable increase and volumes are continuing to grow in 2013. Q1 volumes were 112% higher this compared to last year while March volumes were up 95% and April volumes up 139% year-on-year. In May it posted a 73% rise in volumes for May to a record 1.4m contracts, valued at $48.5bn.

Tipping point

The driving force behind this surge in volume has been the Indian Rupee/Dollar future contract which traded 8.6m times in 2012, accounting for 90% of the exchange’s overall volume, according to FOWIntelligence data. DGCX appears to have reached a tipping point in terms of volumes, but this is largely due to broader, macro-economic, trends occurring in and around Dubai.

“I don’t think that there’s anything specific that led to the tipping point, which really began in 2011. It’s well known that volume begets volume and once an exchange reaches a critical mass of volume then you can see things really take off,” says John Lowrey, global head of electronic product and DMA services at Marex Spectron, which became a member of DGCX in January 2013.

“What we are also seeing is that the Indian economy is growing. International players who are interested in India and the Indian capital markets have noticed the volumes growing in that market and I think that this is very much related to what’s happening in Dubai,” he adds.

DGCX benefits from the increased interest from investors towards India but the wider growth of Dubai. Lowrey identifies three trends that are making it important for firms like Marex Spectron to have a presence there.

The first is the belief that in the long-term Dubai will serve as a major commodities trading centre. The second is that Dubai is becoming a locus for many Indian-based traders to run their international operations through. The third is that a number of trading firms are either relocating to Dubai or creating offices there as an extension of their business elsewhere.

New technology

In addition to these broader factors encouraging growth, DGCX has been implementing new technology to encourage potential members to join and boost trading from its current members.

In March 2013 DGCX implemented its new EOS platform. The exchange partnered with Cinnober in April 2012 and the platform is based on Cinnober’s Trade Express Platform.

Gary Anderson, CEO of DGCX, claims that the new platform brings a lot of benefits to market participants.

“Traders who wanted to trade HFT or algorithmic programmes on the exchange couldn’t do so historically because of the latency issues within our matching engine. Now we’re as fast as any exchange globally.

“The new platform has also given us additional functionality in terms of implied spreads which has been a real positive for us,” he says.

Lowrey claims that the ability to use algos more effectively isn’t the primarily benefit of the new platform. “Yes, it has more capacity but a lot of it has to do with the downstream and operational issues,” he says.

“One of the hindrances to DGCX was that it was a pre-funded market. So before you traded you had to launch your money and of course that retards a lot of trading because how do you know how much money you’re going to need on the day that you trade?

“The new trading platform means that you don’t need to be pre-funded to trade anymore and it allows them to operate on a T+1 basis like anyone else in the world, which is perhaps the more important thing,” he says.

In May, RTS Realtime Systems revealed plans to open a new data centre in Dubai that will offer ultra-low latency access to DGCX. The data centre will be located in the DGCX co-location facility that opened in February and it is expected to go live in mid-July.

New contracts

The exchange is also planning a raft of new contracts launches as it looks to diversify its product offering. DGCX has plans to launch into equities having acquired a license from the Bombay Stock Exchange (BSE) to list its Sensex contract.

“We have a natural membership base that has an interest in Indian-based products and we have a good liquidity pool here for the Sensex contract,” says Anderson.

“The advantage that we give the Bombay Stock Exchange is being able to extend the S&P BSE Sensex contract franchise beyond the Indian market -time zone. The onshore market closes at 5pm Indian time, but we will continue to trade through the European and the majority of the US time zone.”

DGCX has signed a deal with MSCI to launch a futures contract based on the MSCI India index, this is expected to go live in the next four to six months. This is part of the exchange’s “Indian strategy” to compliment the dollar rupee contracts it has and further establish itself as an offshore platform for trading emerging markets.

In September 2012 the DGCX signed an MOU with the Dalian Commodities Exchange in China to develop a new plastics contract. Anderson says that he’s expecting a Q3 launch for this contract. DGCX has also signed and MOU with the Shanghai Futures Exchange as the Chinese exchange is apparently interested in the copper contract on DGCX.

One of the big launches for DGCX this year is the gold spot contract that it is planning to launch in Q4 of this year. Anderson sees a lot of potential for growth in this asset class.

“The gold story is more of a Dubai story in that Dubai itself this past ten years has seen an immense amount of growth in the physical trade of gold. We’re now seeing approximately 20-25% of the world’s gold pass through Dubai. We have a gold ecosystem.

“We have a community that is naturally long gold whether it’s from a refining perspective or whether it’s from the need to turn that gold into jewellery. The need for them to mitigate that exposure and hedge increases with time,” he says.

Currently the exchange is still working to finalise the technical details and delivery of the contract.

An international hub?

The validity of Dubai’s claim to be an international hub is evidenced by the fact that 35-40% of the DGCX’s volumes come from overseas with Anderson predicting that this figure will have “definitely” increased to 50% by the end of 2013.

So is it the case that the DGCX is set to enjoy unmitigated volumes increases for the foreseeable future? Possibly, but there are speed bumps in the road ahead.

“The infrastructure is still quite expensive in Dubai and it will remain a barrier to entry for many firms and actually stunts some of the development in Dubai. Everything from the data centres costs to the cost of the telecoms and ethernet is very high relative to more competitive places,” says Lowrey.

The other potential concern for the DGCX is whether India will open up to foreign traders. Much of the success of the DGCX stems from the fact that firms cannot access the large and still growing Indian markets directly. If this barrier to entry were removed then it seems logical that firms would go there to trade directly.

“Clearly, if it were easier to trade in India it could create problems. Additionally, if the convertibility of the Indian rupee changed it could create problems. FT India also owns the SMX in Singapore and the BFX in Bahrain. The neighbouring BFX trades the Indian Rupee so there is a lot of competition out there,” says Lowrey.

Anderson, perhaps not unsurprisingly, takes the view that the liquidity pool DGCX has built up will ensure continued demand to trade there and suggests that if India were to open up then it could actually benefit the DGCX as more people would trade in the region.

Selling up?

Another interesting point to consider is the in ownership and structure of the DGCX. The exchange was established as an initiative between the Dubai Multi Commodities Centre, Financial Technologies India and the Multi Commodity Exchange of India.

The DMCC owns the majority stake of 53% of the DGCX. It was established by royal decree in 2002 and from a regulatory perspective it reports to the Central Bank of Abu Dhabi.

It has been reported in the press that FT India and the MCX are planning to sell their stake in the company and, although Anderson dismissed this rumour as hearsay, one source suggested that it was likely to be accurate.

As Dubai continues to grow and flourish as a financial centre and a commodities hub, expect to see volumes on the DGCX continue to go upwards. The exchange’s fortunes are inextricably linked to its geographical location and the macro-economic climate of the region and in this instance this is very beneficial to the exchange.


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