Euronext FX to Default to Code-Only Liquidity Pools, Enhance Data

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?