Refinitiv Planning Small Lots Move on Matching

The Full FX understands that Refinitiv is planning new small lot instruments in three currency pairs, including Cable, one of its core markets.

According to a technical notice seen by The Full FX the new contracts, in EUR/USD, USD/JPY and Cable, will be available in tenth pip precision and support minimum trade sizes of 100,000 units. The new instruments will only be supported on later versions of the Refinitiv FX Trading (FXT) platform and have been given different RIC codes to differentiate them from the standard one million minimum size lot sizes on the platform.

Although trade information will be aggregated across the two RIC codes, for example GBS/USD (small lots) and GBP/USD (regular size) so that traders can see their net position and all executed trades in the two pairs, it is less clear how the new platform will handle order entry, for example if a client wants to buy GBP 1.7 million, will they have to enter a GBP 1 million bid in the senior market and another for seven lots in the small market?

Aside from yet another attempt by Refinitiv to grab market share in EUR and JPY from EBS (which, to date, has been as unsuccessful as EBS’s attempts to snare market share in Refinitiv’s core currencies), the inclusion of Cable in the new market could have a significant impact on the market.

Dealers spoken to are questioning whether, assuming the new initiative is successful, Refinitiv’s technology will be able to handle the pace of market updates that may result from a surge in small lot trading. This will be dealt with at some stage by the re-platforming of Matching (and FXall) to the LSEG technology stack, but that change is still a couple of years away at least.

Assuming the two related, but distinct, currency pairs are both going to be part of the market data service provided by Refinitiv, there may also be concerns about the impact an influx of small trades could have, especially if it further dilutes (albeit slightly) volumes in the senior book. As has been noted in the past by the BIS Markets Committee amongst others, liquidity providers in the FX market still rely heavily on data from Matching and EBS Market for their pricing engines, there are concerns in some quarters that reducing the minimum size increments could diminish market quality. One e-FX trader spoken to expressed concern that “games could be played” by smaller LPs, however another was more relaxed, noting data from this pool “could be ignored”, unless, of course, volumes surged to such a level where that could no longer be the case.

Either way this is an interesting move made by Refinitiv, and the firm will need to carefully watch for any impact on the quality of the market in Cable especially. Some dealers speculate that broken lot trading would have been better tested in regional currency pairs, supported by Matching, such as the South African rand, where small balances can have an impact on the bottom line.

Cable it is, however, and as such the firm will be hoping that it does not, as one dealer puts it, “attract too much junk to platform” to the degree that it overwhelms the core market. Good for brokerage that may be, but would it be good for market quality? And if the answer to the latter question is ‘no’, then the firm could be faced with a tricky and interesting choice – brokerage or market data fees?