The Last Look…
Posted by Colin Lambert. Last updated: March 8, 2022
It shows how long I have been in the FX business that I can’t claim to have grown up with EBS, I preceded it by a good decade-plus, but there is no doubt that along with the Reuters Direct Dealer, EBS, in the 1990s and 2000’s had probably the most significant impact on the FX industry in my time. During that period, it went from bank-sponsored start-up to the point of reference for FX traders in the major markets.
Reuters Matching undoubtedly had an impact but the fact that it was largely active – Cable aside – in regional currencies, meant it wasn’t the headline act that EBS was. In times of strife, EBS became the place to go to trade, which makes, in my mind, last month a little surprising.
Here’s a few events from our relatively recent history. The September 2008 Lehman Brothers collapse; the May 2010 flash crash (and our old friends the Swiss National Bank starting to intervene to knock down EUR/CHF); the Autumn 2014 monetary policy upheaval (and conflict in Ukraine); the surprise election of Donald Trump as US President in November 2016; and the onset on the global pandemic in March 2020.
What do they have in common? They all led to a spike in trading volumes on EBS north of 35% from recent averages. So, what happened last month? Not only did EBS lag behind much of the competition on a monthly basis, it actually saw a decline in activity compared to February 2021, which was, to all intents and purposes, a normal month and not characterised by a spike in activity.
I must confess I was anticipating EBS volumes outpacing the other platforms for February given the “crisis” nature of the event driving market activity, but I was sorely disappointed. Most other platforms to report data had a month-on-month increase of 11-14%, EBS was up 7.5% at $66.8 billion – admittedly above the platform’s average of $61.3 billion in 2021, but not as big a spike in activity as the aforementioned events prompted.
I should observe that the real spike in activity came later in the month (in those months I cited earlier they started early-to-mid-month) so I am not necessarily expecting a 35-40% increase (it will be interesting to see full month data if, sadly, the conflict in Ukraine continues) but I did expect there to be the sort of boost that would push the platform above the others in terms of percentage growth. To counter that, however, I would also point out that even before the Ukraine conflict actually kicked off, markets were volatile and activity levels higher.
Is there a shifting demographic in the spot FX market which is, in turn, driving change in the venues of record?
I was talking through this the other day and my conversant asked the question, has EBS now lost the status as the “go-to” platform in crisis-driven markets? Probably one week’s worth of activity is inconclusive, but if the sustained spike in activity doesn’t, or isn’t occurring, then that is yet another challenge to be faced down by a platform already struggling to maintain its position in the industry.
It’s hard to say one way or another because in addition to the small dataset, the numbers are not just for EBS Market, the CLOB, so there has to be a degree of assumption involved that EBS Direct and other contributors were steady. Equally, from a market data perspective – which is rapidly becoming the key factor in EBS’ rebound or continued decline – volumes were probably higher, therefore the impact on clients’ ability to consume, and garner value from, its market data would be unaffected.
It’s just the optics though, that bother me. I looked at world events; at EUR/USD suddenly remembering it can move; and at Cboe FX’ firm volume data, which was up 11.7% from January and 21.9% year-on-year; and assumed this was all good news for EBS and the platform would reiterate its position as the venue of choice when the world turns to something nasty. That it didn’t, or at least doesn’t appear to have done should be a concern, because February was a busy month, and EBS should have been seeing more than its share of activity if history was to be repeated.
It is also interesting that behind FXSpotStream, which is an entirely different model and reports in all FX products not just spot, the venue (of those that have reported to date) to see the biggest month-on-month increase was CME’s FX futures and options, turnover in which rose 15.6%. This could reflect, perhaps, a shifting demographic in the spot FX market which is, in turn, driving change in the venues of record?
EBS has always been an “exhaust” venue, it just seems that the banks are getting better with their emissions
Anecdotally, while they are using CME data more, FX bankers tell me their activity on the Merc is not radically different in terms of percentage of volume, than it has been for some time. This suggests that the non-bank trading firms continue to play a big role in CME’s FX business, which would then beg the question, are these firms taking over from the banks?
The answer, to my mind at least, is no. What we are talking about here is a relatively small subset of the overall FX market and while a firm like XTX Markets has no doubt established itself as a major player in FX, the fact remains, for non-bank firms generally, their “home” ground is the platforms and, increasingly, aggregation venues. The majority of business, including the most lucrative in yield per million, takes place away from these venues. EBS has always been an “exhaust” venue, it just seems that the banks are getting better with their emissions, if I may use a “green” analogy.
So, what we could be seeing here is the banks getting even better at internalising and non-bank firms being an even bigger part of the “public” market. Under those circumstances EBS becomes something it never has been in the modern FX market, just another platform.
Another challenge, especially for EBS Market (and by association its peer Refinitiv Matching) is that it has no buy side heritage – it’s a dealer’s venue, always has been and, probably, always will be. Beyond those firms accessing via prime – and often they are not yield-friendly flows to the LPs – the banks in particular are not overly-disposed to support the venue because not only is it by reputation the hardest place to make money, but there is little or no relationship gain to be had.
This may be an outlier – equally it could be that hidden in the generic data is a sharp decline in EBS Direct and a commensurate increase in EBS Market – but to me it’s still eyebrow raising. A lot of firms rely upon EBS (and Refinitiv) for their market data, especially in times of strife. There can be few who would argue the current geopolitical situation is anything but worrying, and to that can be added the expected start of a prolonged and sharp Fed tightening cycle. In those circumstances, history shows that certain venues do better than others – and the venue that does better than the rest, has always been EBS. Is that still the case?