e-FX Initiative Award – LSEG FX

Price Elision from LSEG FX potentially solves a very big problem for the firm’s flagship spot Matching platform, and offers the wider industry an opportunity to once again trade in a “pure” environment in which order data is not used by the dealers to make it harder for the original participant to get their order done.

The decline in activity on the two original primary FX venues is a well-worn story, and while it has largely been the result of the growth of internalisation at the major dealers, it has also been a story of data and market impact. There is little that can be done about the major dealers getting more efficient in how they manage flow, but something could be done about the market data issue – specifically how it was making life more difficult for dealers, especially those below the top-tier banks, to post interest without being “pipped” by the growing number of non-bank LPs.

A sub-theme over the past 15 or more years has been the growth of decimalisation, just about every single dealer platform has offered it, as have a large number of ECNs and multi-dealer platforms. It has also been offered on the primaries, with less-than-great results, largely because the aforementioned ‘pipping’ became even easier.

This meant a less-than-friendly environment on the CLOBs for those who wanted to post interest and deal at, let’s face it, best price. Things have changed a little, but the primaries are still very much a major source of market data, therefore if you deal on one if these venues, you’re probably dealing at the “true” market.

How then, to embrace decimalisation, without creating a toxic environment and minimising “pipping”, all the while not disillusioning (and maybe even disenfranchising) your core client group, the banks?

LSEG FX’ solution to this conundrum is both simple and brilliant – it allows participants to place orders at granular levels (depending upon the currency pair), but doesn’t publish the market data beyond pip level. Yes, some firms might want to “guess pip” the order book, but they can’t be sure, and if there is one thing that those firms that came out of the HFT world like, it is certainty.

So effectively, in the chosen currency pairs (and the programme has been expanded since launch – a sure sign of a warm reception) the market has all the features of an ECN, meaning the CLOB no longer competes with one arm tied behind its back, but the market data has an element of “dark” about it.

We are very unlikely to ever revisit the heyday of the CLOBs in terms of volume, internalisation will see to that, but they remain vitally important components of the FX market. This means it is important they offer a good trading environment, while still being in step with the modernisation of the industry.

Price Elision offers a simple solution to a fairly sizeable problem and is likely to ensure that the vital function of the CLOB can continue for years to come – and that is great news for the FX industry.