Coming to a Screen (or API) Near You: NetFix
Posted by Colin Lambert. Last updated: September 4, 2022
With The Full FX View
As highlighted by the monthly analysis published by The Full FX, price action around major benchmark fixings continues to be highly volatile, with the associated significant moves and market impact. Siege FX has now unveiled NetFix, an anonymous mechanism, designed to match offsetting orders ahead of the benchmark calculation window.
Such a mechanism exists, of course, in the form of EBS e-Fix, however Siege, while stressing it sees itself as a complementary, or additional, service to the market, believes it has a differentiator. “Our intent, based upon our working group and existing client base for our Midpool service, is to introduce more direct buy side flow to the process,” explains Claude Goulet, CEO of Siege FX. “Currently, fixing flows are sent to banks – who sometimes send them on to other banks – for execution, however there are some big buyside firms who manage their own execution. Our mechanism will provide a safe environment for B2B, B2C and C2C netting.
“We are also trying to promote new behaviours, not least incentivising participants to submit their orders as early as possible,” he continues. “We operate a strict FIFO [first in first out] model, which means matches are available from long before the window actually opens. This can reduce congestion in the market around the actual calculation window.”
A further benefit, according to Goulet, is that the service fits in well with the existing workflows of market participants. “It’s fully-automated, transparent and in some ways similar to these firms’ workflow in equities – but it has that extra layer of anonymity,” he says.
Siege says the service supports all currency pairs, and offers a series of cascading matching rounds for each fixing, operating at set times. The first trades were completed in late July around the London 4pm WM Fix, which typically attracts the majority of benchmark flow, and participants remain anonymous thanks to the presence of a “top tier prime broker” that acts as a central counterparty to every trade.
The Full FX View
As some who has (polite cough) taken an interest in events around FX fixings, the top line here is that anything that reduces the flow executed at the actual fixing window is a good thing. The fact that workflow reflects, according to Siege, that in the equities space is probably a very good thing as managers not currently using the Fix will have a familiarity in how things work and not have to incorporate too many additional tasks.
If more flow is netted then the level of doubt for the speculators that are so active around the window is increased – although we have a way to go before we get anywhere near levels of uncertainty that they stop trading.
There remain, however, some doubts.
Given how so much of the flow goes through a relative few number of names, exactly how much extra netting is available? EBS’ e-Fix is also anonymous until the Fix is published, the window for the service is also open for several hours before the actual fixing window, and while that service has grown, the sense is that, until more banks attract more counter flow to the Fix, future growth will be limited. It won’t go down, but it may not go up, so how much of the Fix pie is available to other players?
If Siege is right about attracting the big buy side firms that trade for themselves, then this service will offer a real differentiator, but are there a relatively small number of firms in the sweet spot? If the buy side firm is an active FX hedger, they will be well aware of the Fix and steer clear of it. After all, if their flow is with the Fix they will know about the market impact cost of pre-hedging (and even at $100 per million it is sizeable, let alone the $1,000+ we occasionally see), and if it is not, then they can earn extra points through delaying their execution slightly throughout the window.
A CCP is a sensible way to start, although I am not 100% convinced of the cost/benefit of total anonymity. Yes, it provides extra information security, but it also adds complexity and cost, (as noted, Siege is prepared to add other credit models), and I am unsure if there is a problem with the counterparty, named post-trade, being a bank execution agent compared to a CCP.
My, frankly inevitable, doubts aside, and to return to the key aspect of this, anything that reduces flows at the Fix is a good thing until that mechanism is reformed. The Siege model is agnostic to the length of the window so can change with the times (if they ever change), and it has a core of participants that appear not to be interacting with the Fix at this time. If nothing else, these firms can do so on an anonymous basis (a tick for the CCP model!) and see if it improves their hedging outcomes. If it does, great; if it doesn’t, then little has been lost – the key will be how much extra work these firms have to do to adopt the service in the first place.
Although this is a natural progression for Siege FX, the launch of the new netting service also reinforces the issues around the Fix itself. After all, if the mechanism wasn’t causing so much market impact, then why would a firm see the need, and opportunity, to launch a service in the first place?
Looking ahead, Goulet says the first priority is to build NetFix through the existing client base, but he expects the service to evolve. “We are talking to additional participants outside our existing group and the conversations are positive,” he observes. “We are also open to the credit aspect of NetFix evolving, as well as additional fixes. In emerging markets, for example, the ability to come in early and match dynamically through the day, is a very valuable proposition.
“Driven by the needs of our Working Group of banks and buy-side firms, we have launched a service which improves fixing workflows for all parties, cuts transaction costs and delivers high rates of automation using our robust and secure core matching engine and low latency messaging infrastructure,” concludes Goulet. “Our first service, Siege MidPool is already connected to more than 50 buy- and sell-side firms, and most of the major FX trading platforms, so we expect participants to onboard to NetFix quickly.”