The Last Look…
Posted by Colin Lambert. Last updated: April 26, 2021
One of the areas in which I have always felt certain regulators have been misguided is in their drive for transparency of flow, not action. It’s why I am such a strong supporter of the FX Global Code – many firms may not think it is relevant to them (it is by the way), but everyone benefits from actions being transparent.
Some regulators seem to struggle with the concept that making every trade visible to the world actually diminishes execution quality for the executing firm, or more likely their client, and actually increases the opportunities for other firms to behave poorly. After all, if a market maker can sniff out an order for 100 million units by buying or selling just one or two, they are going to do so. Some will argue that is real liquidity provision and I would not argue (too much), but by forcing firms to execute in such a public fashion the effect is to reduce market depth and increase what could euphemistically be called “information-based trading”.
The best practice approach to managing markets does have a weakness in the lack of “teeth”, however as more regulators use the FX Global Code, to give one example, as their template for acceptable behaviour, that argument weakens significantly.
There is one area, however, where I feel regulators have got it right – their demand for some sort of consistency across service providers. I don’t agree it needs to be delivered by regulation, but a degree of homogeneity in how information is revealed can only be a good thing for the market.
This is why I support the proposed use of templates by the GFXC, especially in that trickiest of areas, anonymous trading. I have long argued that we need public rulebooks and, to a degree, the FX industry provides that; but only to a degree.
I thought I would do a quick test before writing this column and gave myself three minutes on the websites of eight major anonymous trading platform providers to see if I could find the rulebook. In alphabetical order, I could find the rulebooks within this window for CboeFX (the anonymous CLOB Central and the Full Amount venue have a section in the overall disclosures, while Cboe Swiss has its own), EBS, Euronext FX, Integral’s OCX and LMAX Exchange. Some were more detailed than others, but all were easily available.
I failed to find a rulebook for the Currenex and FXall anonymous venues, Refinitiv Matching and 360TGTX. That is not to say they don’t have them – I happen to have read the Matching rulebook in the recent past so I know it exists, for example – rather that if they exist, they are not easily available.
This is an example of a lack of conformity in the industry – I understand that different venues exist within an umbrella organisation, but when it comes to anonymous trading and matching venues, I don’t understand why the rules cannot be generally available.
I also don’t understand the resistance from one or two quarters (as expressed to me) towards disclosure templates. They bring uniformity one step closer and should be welcomed by a platform with nothing to hide – after all, few of us have the luxury of time, so a participant looking to join or add a venue would benefit from the ability to contrast and compare apples with apples. They might also, if I am being mischievous, prefer to do an element of due diligence without having to go through the sales function and all it entails.
I also sense the GFXC wants to increase the use of templates across the industry, which is also a very good idea. The drive to bring uniformity in how platform operators provide information such as tag management and the use of data is welcomed, however I would go further and suggest uniform disclosures around matching rules and what happens if there is a breach of the rulebook. I also think venues could be a little clearer as to how they judge behaviour on their platform – just what is considered the abuse of liquidity on a platform and, if no last look exists, what is a ‘good’ hit ratio for a market maker?
The FX market needs the ability to look across venues to decide where to trade and it shouldn’t be an onerous task – it may not be the three minutes I set myself earlier today, but it shouldn’t take days or even weeks to sift through all the disclosures and rulebooks of the providers. If we look across the broader platform industry, and there are so many anonymous venues out there, questions are still being asked about the health of a trading environment on certain venues. These include accusations of LP advantages built into the matching logic, multiple tags and the asymmetric distribution of data.
The anonymous venues need more uniformity because the fact is their model is under pressure. The danger may not be existential, but it is certainly potentially harmful to the business, because larger tickets are, anecdotally, increasingly going elsewhere.
Not all of these accusations are straightforward, for example should a participant with different trading models or books, be allowed multiple tags? Should the industry accept different data packages? Surely a business has the right to preference those customers who provide the most flow (I am less sure if volume of prices should be a criteria)? Those who agree or disagree with such practices will, given uniformity, be able to pick and choose where they wish to trade much more easily.
I also think the anonymous venues need more uniformity because the fact is their model is under pressure. The danger may not be existential, but it is certainly potentially harmful to the business, because larger tickets are, anecdotally, increasingly going elsewhere.
I have argued for more than 15 years that the biggest threat to these platforms are the single dealer venues. Liquidity is simply better at a decent internaliser and always has been, save for the odd highly volatile day when internalisation breaks down. This shift is exacerbated by the relentless lowering of the threshold for judging what a ‘big’ ticket is. It used to be measured in the tens and hundreds of millions, depending upon the pair, now it is in the millions or, perhaps tens of millions – best execution has seen to that.
The volume data from the platform operators indicate the struggles of anonymous venues, between April 2016 and April 2019, the aggregate daily volume across the five venues to report data went down by around $15 billion per day. At the same time, the BIS reported spot FX volumes rising by $335 billion per day. Even taking into account the redistribution of volume from EBS Market and Refinitiv Matching to other venues, the picture painted is not a happy one, because since 2018 most venues that saw the benefit of that shift (that started well before 2016 of course) have seen the pace of growth slow, or even reverse. No anonymous venue is showing FX spot volume growth to speak of – success can be measured in stability (and if you’re at a venue that doesn’t publish monthly data and want to argue with me, please come armed with hard data you are happy to have made public!)
So, the push for more uniformity by the GFXC should be welcomed by anonymous venues. They are in competition with the bigger banks, and by introducing more uniformity and by being more transparent, they can put the pressure on the banks to deliver that same level of transparency. Any institution that provides client-to-client matching and also has that pool interact with its own liquidity – which makes sense – should have public and explicit rulebooks available.
The bad news is it won’t be a big ask for many banks, but it would be a step forward for transparency of action in the FX industry more generally. More importantly, from my perspective, the ability to compare venues directly would weed out those who support poor practice.
The time has come for the anonymous trading segment in this industry to be judged on fairness as well as technology. There are some really good platforms out there trying to do the right thing – for me the GFXC proposals allow them to cement that reputation and, hopefully, benefit. If nothing else, we should be able to look at those who do not embrace these recommendations and ask, very loudly, ‘why?’