The Last Look…

It is, obviously, very hard to predict how long the current volatile environment in FX markets will last (when is the next US election?), but increasingly I talk to people who are unnerved (or stimulated) by the current environment and who are questioning how they are using the market, and whether they should change.

This has been happening for a while now, but what was quite new last week was the ultimate sleeping dog – EUR/USD – actually moved, and moved quickly. This is – and this is sometimes forgotten when discussing FX – the world’s largest market by far, which makes it a big deal. Equally, this is probably the first such volatility in the pair for quite a while, which meant, naturally, that the platforms did well. What was interesting to hear, however, was how some firms turned to their disclosed, often aggregation channels, while others went to the CLOBs and ECNs.

I have spoken to some consumers who saw good, robust, liquidity on their aggregated channels, while others speak of wider pricing and higher rejects. I suspect that comes down to the trading style of the consumers concerned and how they actually approach aggregation. While there was plenty of empirical evidence published several years ago, by Roel Oomen et al especially, that suggested smart aggregation was the way forward, specifically aggregating fewer LPs and sources, that lesson may have been forgotten by some. Initially this was adopted, but over the past couple of years, consumers have casually added to their liquidity sources again and are currently facing familiar issues to those with more than 10 years’ experience.

Speaking with one player who has trodden this path, they believe this almost happened by accident – an LP or channel dipped in performance, leading to a competitor being added, but then the original source improved again and was back in the game. It’s the FX version of hoarding, and “I’ll keep that, it might be useful one day”.

This player saw a deterioration in conditions over the last week and was quite honest about the reason why – they had let their relationships drift through additional liquidity sources – and the LPs were less keen to accommodate them. I find this interesting because it is the first (semi) solid evidence that LPs are actually starting to act on all those analytics they collate, and are prioritising “good” customers. It is not about wanting the whole wallet share – one LP I spoke with suggested they were very happy with being aggregated with their peers, but were less enamoured with having a few multi-dealer channels thrown in – something that very much reflects attitudes 10 or more years ago.

We could, therefore, be going full circle in terms of aggregation, only this time the LPs are being more proactive and are seeking to, if not punish, then signal their displeasure through wider pricing.

There is another aspect to last week’s activity that I found interesting – we have become used to the CLOBs and ECNs doing well through increased activity, largely in Asian pairs thanks to Don II utterings, but last week, as noted, was more about EUR/USD. Volume data published by Cboe FX, Euronext FX and 360T show a couple of nice spikes in activity last week, significantly above recent averages, but actual currency pair data is not known. Obviously one of the calling cards of EBS is that it has always been seen as the platform of record for EUR/USD, but in recent years we have only really had data when JPY or CNH has kicked off – we simply didn’t know how the platform would be viewed when – if – the euro every really got going.

The good news for CME is that EBS appeared to do rather well, as did the wider product suite. Across the entire franchise in spot, futures and NDFs, CME Group traded over $300 billion, of which $137 billion was in EUR/USD. EBS saw $50 billion on both Market and Direct.

In February – a good month for the platforms generally – CME’s total FX ADV was $157 billion, which means the peak on 5 March was almost double. For comparison, Cboe FX and Euronext FX, on their peak days last week, were around 55-60% higher than their February average. This tells me that EUR/USD is still important to CME, and EBS in particular, which should be heartening for the firm.

It is impossible to know if the increase was partly driven by consumers moving away from aggregation channels – but the fact is when the smelly stuff hits the fan, firm liquidity is often more popular. What will be interesting to see is if – and it’s not necessarily a big ‘if’ – this random volatility continues, whether or not players will revisit the concept of smarter aggregation.

It seems a no-brainer, but that has not always meant change happens. Surely, however, intelligent players will now start factoring these conditions into their planning more and more? I have written recently about how I sense 2025 could see market structure change due to various factors, random vol and a moving EUR/USD are likely to be one more factor.

colin@thefullfx.com