A Step Forward for Peer-to-Peer as Siege FX Launches
Posted by Colin Lambert. Last updated: February 18, 2021
A lot of questions may be answered over the next year around whether peer-to-peer trading in spot FX markets is viable, after Siege FX, a provider of buy side peer-to-peer FX netting services, went live with its first members group.
The company says 30 financial institutions, including asset managers, pension funds, corporate treasuries and family offices are in the first group, who are accessing the service via FIX API, a user interface, certified execution management systems and FX trading platforms as well as partner bank FX algorithms across different distribution venues.
Under the mechanism, buy side firms are able to net offsetting orders with their peers before going to more public markets, trades are netted at the UK’s FCA-regulated New Change FX benchmark mid-rate and materialised on Deutsche Boerse’s 360TGTX platform.
“Siege brings together the buy-side through a peer-driven set of rules and in partnership with leading FX banks and infrastructure providers,” says Claude Goulet, CEO of Siege FX. “The success of any P2P environment is based on participation levels [and] having these firms take the first steps with Siege has been crucial and provides us with the foundation to expand the Siege membership community.”
Interestingly Siege uses the term “lit markets” in its release, highlighting the ‘dark’ nature of its matching model. A recent paper published the FCA in the UK found evidence that “investors can reduce their execution costs by selecting venues with less pre-trade transparency, such as dark pools or venues with similar characteristics”.
All matching on Siege FX is conducted under a surveillance and oversight function agreed by the community before launch and the technology has a continuous real-time process to identify netting opportunities.
Without doubt, pre-trade netting of flows such as provided here, reduces the market impact of orders, however it remains to be seen whether enough complementary flow can be attracted to the platform for there to be a discernibly positive impact. By matching in real-time Siege FX is offering efficiency to buy side participants, but on an uncertain foundation, specifically, will there be matching interest? It will be interesting to see if the firm extends its concept further to a window auction-type model where orders are collated, similar to a benchmark fix, for matching and execution.
The problem with buy side peer trading in spot at least remains the size of the “exhaust” flows, as highlighted by some of the movements occasionally seen in the 4pm WM Fix window, but, conversely, real time matching could actually result in the exhaust flow being itself broken down into much smaller parcels, thus making it harder to spot and, again, reduce its market impact. This will be helped by algo providers’ smart order routers including Siege FX in their channels.
Either way, the launch beings another mechanism to the FX market based upon trading at mid-market. The results of ventures in this space have been mixed so far with BGC’s MidFX dark pool believed to be handling good volumes, but other mechanisms on other platforms struggling to attract meaningful flow. It will be interesting to see how Siege FX, with the critical buy side support it has attracted, succeeds in what is further fragmentation of the FX market’s liquidity.