EBS Live with Messaging Efficiency Programme
Posted by Colin Lambert. Last updated: February 9, 2022
EBS has officially rolled out its Messaging Efficiency Programme (MEP), first reported in The Full FX in December, the aim of the programme is reduce excess quoting at top of book through the imposition of a minimum median order life at top of book (ToB) or a minimum top of book quote-fill ratio, coupled with penalties for excess quoting.
The MEP went live at the start of the month, followed days after by the reduction of the minimum quote lifespan (MQL) on EBD Ai servers from 50 milliseconds to 20. The changes are in effect for the core pairs on EBS, EUR/USD, USD/JPY, USD/CNH and USD/CHF.
In a note to clients, EBS says the aim of the changes are to improve spreads by mitigating adverse selection – long a problem for market makers on the primary CLOBs; maintain taker fill rates; and encourage “quality” quoting to support the execution experience and market data.
“These complementary measures along with the Market Support Programs are the first phase of an ongoing strategy to enhance our customers’ execution and market data experience on EBS,” the client note states.
The MEP will be applied monthly and participants in breach by having both failed to achieve the minimum threshold of ToB quote fill ratio in percentage terms, and a median life at ToB above the threshold in millisecond terms, will be assigned an excess quoting surcharge per quote above the threshold.
The MEP is calculated by dividing the good to cancel deal volume by the ToB quote fill ratio, as well as what EBS says is an extra defined quote “allowance”, which is applied for all counterparties to help account for monthly fluctuations or counterparties with low quote activity.
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Although previously flagged, these changes represent the first concrete step by the primary CLOBs to rebuild their dominant position in the industry in 2002. Clearly EBS acknowledges there are challenges around top of book behaviour, but there are still questions as to whether the MEP will solve them.
The fact of the matter is, EBS Market and Refinitiv Matching are different to the other platforms out there, because there is little information asymmetry, in fact if it exists, unlike with many of the other venues in the FX industry, it is tilted towards the executing party. Put simply, different interest is executed on these venues, and, generally speaking, business is “informed” and directional – two things that make life difficult for a market maker.
Perhaps the most interesting aspect will be whether the “stick” is big enough in the MEP. EBS sources told The Full FX in December that the MEP is definitively not meant to be a source of revenue, but there needs, without doubt, to be a financial element to such a programme. The client note cites an example of a counterparty who breaches both MEP requirements and is 50,000 quotes above the maximum allowable quote threshold, thereby attracting an excess quoting surcharge for those quotes. This would be 50,000 X $0.10 meaning a penalty of $5,000.
Time will tell of course, and EBS does have to walk a fine line on this issue, but given the money to be made (and lost) in this business, being charged $5,000 for being 50% above the threshold may not be sufficiently punitive.
The settings (which EBS is subject to change at its discretion) provide a quote allowance of 100,000 and a median ToB order life of 500ms for EUR/USD, USD/JPY and USD/CHF; and 25,000 and 500ms for USD/CNH.
For Designated Market Makers (DMM) in these pairs the ToB fill ratio is 1%, for non-DMMs it is 1.5% (2% in USD/CNH) and the surcharge is $0.05. From July 2022, the quote fill ratio rises for non-DMMs to 2% in all four pairs and the surcharge to $0.10. DMMs will be charged according to the same schedule. A DMM is a two-way market maker on the platform.