Euronext FX to Default to Code-Only Liquidity Pools, Enhance Data
Posted by Colin Lambert. Last updated: October 4, 2022
With The Full FX View
Euronext FX has become the latest platform to unveil plans to transition its anonymous spot pools to FX Global Code signatories. The move, which will take place from 1 January 2023, will come into effect across all four centres in which the platform has matching engines, London, New York, Singapore and Tokyo.
Since the informal deadline for re-committing to the updated FX Global Code, the end of July 2022, one year after the updated Code was released, Cboe FX and 360TGTX have also announced plans to stream Code-only liquidity.
Previously, Euronext FX has offered Code-only liquidity pools at the request of the taker, now takers have to expressly request that non-Code signatories (who remain identifiable only by their tag) are added to their pool. The platform will continue to offer those LPs that request it, the ability to participate in pools populated by Code-only LPs.
Liquidity consumers may opt out of the default setting and accept non-Code signatory liquidity, analysis by Euronext FX finds that more than 80% of the spot volume executed in September was transacted with the Code-signatory liquidity providers on the platform. All new sessions created for takers will also default to Code-only liquidity, unless otherwise requested and all takers will automatically be provided with their LPs’ signatory status vis-à-vis the Code.
“We want to offer our clients as much flexibility as possible,” explains Clinton Norton, head of sales, Americas, at Euronext FX. “Not all clients are alike and they can have very different priorities when it comes to selecting an LP, so we wanted to provide data-driven choices rather than impose platform-wide restrictions.”
The Full FX View
Momentum from the FX platform world behind the FX Global Code continues to grow, which is a good thing of course, especially for someone – like myself – who believes some platforms continue in their failure to fulfil their duties of transparency.
Euronext FX is to be praised for adopting a very positive position in that the default status on the venue will be that liquidity consumers will have to explicitly ask for non-Code compliant LPs to be allowed onto their streams.
What is particularly pleasing is that it looks like an attempt to leapfrog the other two venues to announce similar moves earlier this year, Cboe FX, which went Code-only on its full amount streams; and 360TGTX which will be Code only on its full amount and sweepable streams. Euronext FX appears to have gone all-in, imposing the restriction across all its streams, which is, it can be argued, the next level.
The platform has also matched the level of transparency pioneered by Cboe FX in committing to making public its round-trip time and fill ratio data and at first glance – 8ms and 84% – they are similar, which allows liquidity consumers to make an informed choice. I understand that some other venues make this data available to their consumer on a monthly – and private – basis, but there is real transparency in making it public, not least that a consumer who is connected to only one platform will be able to monitor how well that venue is performing. Now, at least, we will have two venues providing this data publicly to allow a decent comparison for those on venues who choose not to make this data available more broadly.
I also like the idea that the platforms may be seeing Code-compliance and behavioural transparency as an area of differentiation – it should be, even if too many clients seem to care less about such things. With three so-called secondary ECNs promoting Code-only liquidity this means, with those platforms offering firm-only liquidity in EBS Market, LMAX and Refinitiv Matching, there is a growing core of venues actively promoting Code-adherence.
Of course, there are still areas for improvement in my mind, not least that the round-trip times could be granulated further to break out where the LPs are typically pricing from. It stands to reason that an LP pricing in NY4 from London is going to have longer trip times than a New York-based pricer, perhaps it would be useful for consumers to know this? I accept this is not the type of information to be made public, but it is hugely informative to consumers if they use it correctly. Equally, and this doesn’t really apply to some platforms, this trip data could be accompanied by a note as to whether or not the LP is co-located?
Something that is interesting to me is the snippet in the Euronext release that in “a number” of cases, non-Code signatories outperform adherers. My understanding is that this number is a reasonably significant minority – no doubt more will be revealed in the company’s planned white paper to clients later this year – which raises questions in itself, not least, how are these LPs outperforming?
I accept that there are certain circumstances in which an LP naturally matches a certain consumer’s flow and thus may win more of the business, but generally speaking most of the top LPs perform similarly in certain size buckets. Some are no doubt much better in the 1 million unit bucket and others in bigger size, but I will be fascinated to read (hopefully), how these non-adherers are out-performing, because to my mind the only way it is happening is through the LP playing games in some way with the flow. It could be an extended hold time, it could be trading in the last look window, but the cynic in me (and many others) believes there is something “non-Code” about it.
The good news is, for consumers on Euronext FX at least, that they can have no complaints about how the LPs are handling their flow, because unless they ask for the default position to be changed, they are going to be receiving Code-only liquidity. If they choose not to, or to mix their LPs, then they have no recourse if their business is “abused”. Equally, if the pricing quality from their Code-compliant LPs diminishes, that will be a direct result of them being put in competition on a skewed playing field – again that will be down to the consumer.
What I really like about this move from Euronext FX is that it shuts down another potential excuse for consumers to ignore the FX Global Code. The Euronext data indicates that the majority get better outcomes from Code-compliant LPs, therefore it is surely time for the consumers themselves to get behind best practice in the FX markets?
Norton adds that the Euronext Quant Research unit, which operates across all of the exchange group’s markets, has conducted a preliminary study of expected execution spreads, including the cost of trades and rejects across both Code and non-Code LPs on the platform and determined a “clear distinction” where Code LPs collectively yield a better cost of execution. That said, he also says the research, which will be completed and published to clients as a white paper later this year found that a number of cases, a sub-set of non-Code signatories outperformed Code-adherers for a particular taker.
Alongside the change in default settings, Euronext FX has also committed to enhancing the data available to takers when creating or managing their liquidity pools. Currently the platform offers data on fill ratios, round-trip-times (RTTs) and mark-outs, and in June it added a maximum hold time for LPs as a component in the FlexMatch service. The latter will become a fourth component in the matching prioritisation process.
The platform will further enhance this data by breaking down RTTs in a percentile format, for both fills and rejects, something that should enable takers to better understand the behaviour of an individual LP in a peer universe.
“Again, we wanted to reflect the diverse nature of our liquidity,” Norton observes. “By breaking this data down further, in conjunction with more transparency around RTTs, we allow our takers to make informed decisions. One LP may have a longer RTT than another, but they could, for example, be pricing from a different geography – therefore their behaviour becomes more explainable to the taker.
“Already we have seen improved LP RTTs – we had a median of eight milliseconds on September – and the platform fill ratio has improved to 84%,” he adds. “We are constantly working to further improve these and will commence publishing the data in the coming months.”
Ahead of the change in default settings, Euronext FX has committed to engaging with all clients to ensure they are fully-informed of the new regime, it adds it will continue to provide relevant data to help takers make an informed decision as to their pool composition.