Is the “Trading Perimeter” Needle Moving?

Both the UK and EU have sought to clarify the ‘trading perimeter’ in financial markets, bringing ‘platforms’ and ‘technology providers’ closer together. Eva Szalay takes a look and asks, ‘is it having any effect?’

Blurred lines can lead to all sorts of trouble for everyone, but in the case of well-defined regulation ignoring the rules can actually be a benefit.

April 9 will be six months since the FCA’s  “perimeter closing” guidance about trading platforms came into effect, intended to put an end to the ambiguity surrounding the rather basic but highly technical question: where does a technology company end and a trading platform begin?

This seemingly innocent question hides a lot of business interests. The rapid proliferation of liquidity and price aggregators and other technology-driven systems for matching buyers and sellers has crowded out platforms from a slice of business they’d previously had – all the while pushing costs lower.

Or as the FCA put it in July last year: “The evolution of the definition of a multilateral system and technological developments have made it more challenging to distinguish certain types of arrangements and systems from trading venues,” before adding that it’s important to separate the two because a trading venue has to comply with a higher standard.

The UK regulator’s concerns about the issue mirrors the misgivings of their European peers in that both authorities are trying to draw lines in the sand to stop a number of companies operating as something altogether more than just aggregators of prices and liquidity. The new rules and definitions came into effect in the UK on 9 October, a date ahead of which the FCA heartily encouraged market participants to assess their status and take action if changes are necessary.

Looking around the foreign exchange market, however, one can’t help but wonder if this process has actually happened. Spot FX is out of scope of the guidance, but as an indicator, non-spot volumes reported by the Bank for International Settlements rose by almost $2 trillion per day from April 2016 to April 2022. No platform has reported anything close to that sort of growth, individually or collectively.

The FCA was indisposed to answering questions about whether it is going to police and punish those who are not in compliance with the rules by press time, however sources suggest there may be room for improvement, arguing that some FX venues continue to operate “illegally”, pointing to the lack of registrations.

The Full FX has contacted a number of companies in the market but came up short when trying to find a technology vendor to explain their position. It is understood, however, that a number of technology providers are making early plans, in case of a harder line from the regulators. Unsurprisingly, some of the reluctance from these companies to discuss the issue might be down to money.

Everyone who remembers the incident with Footnote 88 knows that the costs associated with operating a trading platform can be sky-high and it can also kill the business. There is also more responsibility, higher standards of accountability and more scrutiny from regulators for those that choose to identify as a trading venue.

In the FCA’s words “a trading venue engages significant market integrity and investor protection requirements, such as the application of the market abuse regime and the obligation to maintain orderly markets.”

Six months on in the UK, and more than a year in the EU, the industry is exactly where it started

There is also the cost of complying with these requirements acting as a barrier to entry, and putting these words into stark dollar figures makes the issue more intuitively understandable. Running a registered trading platform equates to about $1 million of costs a year, according to a well-placed source at an MTF. Hiring staff for the registered entity, including a CEO, compliance officers and technical staff, costs a lot – and that’s before all the resources required for surveillance, regular reviews of the rules, and audits are taken into account.

So, what do registered trading platforms get for their money? A warm glow of knowing that when someone checks they’ll be fine and pass the test. Other than that, not much at the moment. It turns out clients don’t care that much about higher standards as long as the prices they get suits them.

For technology companies, the risk reward of potentially not complying doesn’t appear to be terribly bad. Regulators are hardly going around shutting down unregistered trading platforms, in fact, there are hardly any known cases of that happening unless something else is also at play.

This leaves us, six months on in the UK and more than a year in the EU, exactly where we started. Neither regulator nor platform has tested the line in the sand, which means a playing field that many believe was tilted, remains exactly that – with no rebalancing in sight.