Price discovery and trading models in electronic FX have evolved over the last decade, and current market structure supports multiple formats.
- RFQ/RFS: The most primitive method of price discovery and trading is the RFQ, a model that was adopted by first-generation client-to-dealer platforms. While most FX venues have evolved and added requests for streaming as well as order book information, FX Connect continues to dominate this particular marketplace, driven by its large asset management client base and its ability to provide support for extensive post-trade service, including netting.
- Streaming quotes/order book: Most FX ECNs currently support some combination of streaming quotes and order-book-style price discovery and trading. Despite the emphasis on anonymous, transparent trading, most FX ECNs have hidden markups and provide only limited post-trade transparency in terms of the counterparty; the identity of the prime broker is only disclosed if the trade has been prime brokered.
- Exchange style: Currently, only LMAX Exchange has launched a truly exchange-style trading model that provides pre-trade anonymity but full post-trade transparency. LMAX also does not support last look. Both Molten Markets and ParFX are slated to have price discovery and trading methods similar to LMAX Exchange.
The evolutionary process within the global FX market is not a linear one. Old trading models have not disappeared; in fact, depending on the type of client and its needs, all trading models have been adopted and are thriving. Exchange-style trading, highlighted by increased transparency and no last look, is certainly a unique way to attract participation to the electronic FX market.
Source: Aite Group ‘Global FX Market Update 2013: Increased Market Transparency, More Competition’, June 2013
Video Transcript
Evolution towards transparency the new waves of FX venues
David Mercer, LMAX Exchange CEO, shares his thoughts on the evolution of FX over the last decade from voice broking to request for streams, to then request for streamed quotes (RFQs), and now firm liquidity being visible on exchange style venues. David Mercer comments, there is a natural shift in FX driven by client demand for pre and post trade transparency, similar to that of the equities and futures markets, stating that as the FX market matures it will evolve towards a transparent, open order book with open access to a whole range of clients.