By: Jim Downs
As we touched on in a recent piece, technology has made it easier than ever for new exchanges to form, and we’ve worked with many entrepreneurs who want to bring exchange technology to new markets. These startups often come to us with big visions for products that could revolutionize their marketplaces. Having that vision is a good thing, and we want to help them get there, but we believe that “Job #1” for a new exchange is getting to the first trade.
Why is getting to that first trade so vital? The first trade proves your business premise, serving as a necessary step to get to that end vision. And more than that, you will learn a great deal about your product, its viability, and its audience after you have seen initial trading. Importantly, it is a cost-effective way to offer proof of concept to spark interest among potential users and attract funding from potential investors.
We use the analogy of building a church. Many people envision their product as a grand cathedral — beautiful, for sure, but also expensive and time-consuming to build. And since you won’t start out with an established audience, most of your pews are going to sit empty. To us, it makes more sense to begin with a small chapel for private reflection — a building that you can construct without bankrupting yourself, where you can bring in your “true believers” and learn from them.
This learning aspect is crucial. When building your product, you certainly need to start with a roadmap of where you want to end up, but that roadmap will be less and less clear the further you go from the first trade. That’s because it’s no longer just about your vision: it’s about aligning your vision with the wants and needs of your users. Once you are executing trades, you’ll gain insight into how your product does or doesn’t meet the needs of the marketplace, and you can respond accordingly.
Over the years, we’ve seen numerous examples of the benefits of this philosophy. Eris Futures is a good case in point. Eris, a futures exchange focused on interest rate swap futures, began as a posting website, displaying details on executed trades. Based on the level of interest generated by this initial offering, Eris moved forward with the buildout for a fully regulated futures exchange. Today, Eris interest rate swap futures trade over 100,000 contracts per day.
We’ve also worked directly with clients like American Financial Exchange (AFX), a bilateral market where small and mid-sized regional banks can borrow and lend funds. The founders spent nearly two years traveling the country talking to bankers and determined that there was a high level of demand for such a marketplace. Only then did they engage Connamara to build the first release of the platform, allowing only a handful of banks to trade. When the first trade went up on the platform, the users immediately had ideas to enhance and expand the service. Today, AFX has more than 150 members operating in all 50 U.S. states and one U.S. territory, with more than 1,000 additional participants through its correspondent bank members.
On the flip side, we’ve also had clients who have failed because they didn’t appreciate the value of getting to the first trade. One such client focused on a “fully featured” platform and directed its attention to the look and feel of the user interface, customer on-boarding tools, and middle- and back-office features. In hindsight, the company should have focused on finding two counterparties that would have put a trade up, and then make tweaks from there. After all, you can fill a platform with as many features as you’d like, but if you don’t have any customers interested in trading on your platform, you’re just wasting valuable time and scarce resources.
Starting a new exchange is not easy, and it’s hard enough to even conceptualize an endpoint, much less get there. But by setting a target of that first trade, you’ll create a natural, achievable milestone and that will give you the necessary insights to make it the rest of the way to a successful endpoint.