The Last Look…
Posted by Colin Lambert. Last updated: May 17, 2021
Many moons ago, I penned a column at Profit & Loss that was less than complimentary about EBS’ decision to reduce the minimum size on the platform to below one million. I saw it as messing with a primary market – not something to be done lightly – as well as a move that could diminish the quality of data coming from the platform. Refinitiv is stepping into the same ground, so is it different this time?
There are definite echoes of the EBS move in what Refinitiv is doing by adding small lots to Matching. Back in 2017, EBS targeted Cable for smaller amounts as an attempt to grab business from Matching and finally, after multiple attempts, become a venue with credible volumes in the four “majors”. It left its core markets alone, however.
Refinitiv, on the other hand, while it is trying to build credibility in EUR/USD and USD/JPY (again having tried and failed on multiple occasions previously), has included one of its core markets, Cable, in the roll out. This is an interesting move for the firm to make, because, as noted, changing how a primary venue operates does not come without risks.
The critical aspect of this rollout will be market data. It is hard to believe that, assuming it is a success (in Cable at least), the firm would not want to push that market data to the world as part of its feed. This can present challenges, however, not least, as was the fear in 2017 with EBS, does this open the door for tier-3 and 4 LPs, who frankly are hardly worthy of the name, to step in and dominate top of book? If that does happen, and these players are agile – as they usually are – then information leakage becomes a much bigger issue. Not necessarily in terms of the order being signalled, but more who it is signalled to. Smaller lots inevitably allow in players who do not have natural interest and who are looking to act upon the information they receive.
In these circumstances, players with genuine and sizeable business to transact, may turn away from the platform – market impact on the primaries is already an issue for many given how those platforms are so central to so many pricing and risk engines. Of course, it could be argued that the move away, as noted, is already happening, so will this make things any worse? It has become abundantly clear that being a primary source of pricing data is a poisoned chalice in the modern FX market – with so many digital eyes on those venues, getting anything done quietly is very difficult, even with Iceberg orders.
There is also the chance that having an extended liquidity pool dilutes what is already available. Refinitiv is clearly hoping that it will attract a lot more flow by opening up to smaller lots, it will be interesting to see how the new market interacts with the existing. Will there be a degree of cannibalisation as, for example, players stop aggregating smaller tickets and instead punch them straight out onto the new venue?
If this does happen, there is a danger that the change in hedging behaviour that has been discussed in this column in recent weeks, gets even more profound. On that note, incidentally, Refinitiv could be considering what seems to be a more popular role for futures with at least one major LP and thinking the small lots could be more convenient competition for that LP in that it can keep everything OTC and spot.
I think, however, that all things considered, the most telling impact from this change could be a change in Matching’s position in the FX market. It is a primary market thanks to the aforementioned market data and rules of engagement. The latter, however, are not unique to the platform – LMAX Exchange and, more recently, Cboe Central, offer an alternative for firm, no last look liquidity. Is this move by Refinitiv opening the door for those venues to gain more traction in market data?
The ADV is not where it is at Matching or EBS Market on these venues, but it is significant, so if LPs feel the market data they are getting from Matching is diluted due to so much white noise from smaller, higher frequency players, will they turn their eyes elsewhere? I am sure Cboe FX and LMAX are both looking at this as an opportunity for their own market data packages.
Ultimately, Matching and EBS Market have continued to stand out over the last few years because they were seen, rightly or wrongly, as the serious players’ venues. This was because they were firm venues with minimum quote sizes that meant, generally speaking, to be on the platform the participant had to offer a benefit to the market in some shape or form. Several of you will argue that has stopped being the case, and that’s fair, but overall, they are referred to as the primary venues because they are different. One result of this could become a competition based upon the quality of technology on offer – if that is the case then the door is wide open to newer, more nimble firms.
So an interesting move from Refinitiv in one of its core currencies, and it could be argued a crack has appeared in the wall that separated them from the competition. This type of change has happened before, however, and little changed, so it anything but clear that the other platforms – with the support of some major LPs – will widen it to a crevice.