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LMAX Exchange blog - FX industry thought leadership

All the latest business and technology views and insights on the FX industry from LMAX Exchange management and staff

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Business and Technology

The launch of the first ever FX Global Code of conduct is now upon us and I sincerely hope the market adopts it wholeheartedly and strives to improve on it in the months and years ahead.

Specifically we expect that Principle 17 will be enhanced. It currently states trading activity in the last look window as ‘likely inconsistent’ with good market practice – we hope it will made inconsistent with good market practice in short order.

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Video commentary by David Mercer, LMAX Exchange CEO

Guy Debelle should be congratulated for overseeing the birth of the code over the past 2 years and now the industry needs to follow the path of transparency highlighted throughout the Code to rebuild trust in our great FX market.

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$48/m – price improvement – an advantage of trading on firm liquidity
$25/m the cost of last look hold time at 100ms;
$15/m the cost of hold time at only 10ms

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Video commentary by David Mercer, LMAX Exchange CEO

You want more numbers:
Hold time costs measured at up to $336/m
ZERO price improvement on ‘last look’ feeds
Fill rates increased by 7% at no net cost to the customer from 92% to 99% fills by trading improvement for fill rate

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Today we launched our new whitepaper: ‘TCA and fair execution: The metrics that the FX industry must use

The aim is simply to propose a blueprint for FX TCA metrics that can equip ALL clients, with an effective evaluation of their trading costs and quality of execution.

AND? of course, the data analysed, does highlight the differences between trading on firm and last look liquidity.

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Video commentary by David Mercer, LMAX Exchange CEO

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This year at LMAX Exchange we asked our world leading Liquidity Providers to create an even tighter top of the book stream for our brokerage clients.

Averaging 0.14 this month our spreads are the tightest they’ve ever been and arguably the most competitive on the street.

BUT – we also agree with those that say – Tight Spreads – so what?

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Video commentary by David Mercer, LMAX Exchange CEO

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One of the key metrics you need to consider in your choice of liquidity and transaction cost analysis, is market impact. Or put simply, the effect your trading has on the wider market post trade. Rather simplistically you are told that, if the market moves a lot in reaction to your trading, then that’s a bad thing and you pay wider spreads with a high cost of rejection and higher response times.

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Video commentary by David Mercer, LMAX Exchange CEO

But, if you trade on ‘last look’ prices, lower market impact would mean you benefit from tighter spreads and lower cost of rejections and hold times. Let’s take a deeper look at this. The easy one first.

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Previously on Jurassic FX we looked at ‘Prehedgeosaurus’. Now we are going to take a closer look at ‘Lastlookosaurus’.

And so on to our old pal Lastlookosaurus who makes his glorious last stand in Principle 17. A nirvanic world where ‘last look’ is transparent and clients have the use of ‘last look’ disclosed. Yes this is the same beast that cast its shadow over most of the scandals in the last few years. The same beast currently at the centre of a well publicised US case against a large bank and the same beast who’s abuse was highlighted in the latest CFTC fine.

Lastlookosaurus tells us in the code that Last Look may only be used as a risk control mechanism in order to verify validity and / or price. There is mention of consistency with the current market price but no mention of a timeframe for that consistency – in previous drafts a 100ms window was mentioned but that has disappeared from the latest draft of the Global Code. There is no detail around last look but merely the mention that any trading activity and hedging activity is “likely” inconsistent with good market practice. This is wooliness of mammoth proportions!

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Welcome to the world of Jurassic FX. In this ancient land the new ruler is the Global Code of Conduct where the last 2 great beasts of a dying breed seek to preserve their territory. These 2 beasts go by the name of:

  • Prehedgeosaurus – otherwise known as Principle 11
  • Lastlookosaurus – otherwise known as Principle 17

Let’s examine Prehedgeosurus first. He knows pre-hedging is it in itself a misnomer. But he must retain this legitimised front-running ability. Fast forward to Annex 1 with rose tinted examples of bygone days, when the hedge happens before the client trades and the client benefits. Not a cold hard 21st century example of the market becoming aware of an order before a trade is executed and hitting every bidder or offer in sight so that if the client has more to do he’s immediately off-side. Give me the full amount says Prehedgeosaurus – you’ll be ok…

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This week we’ve seen a lot in the process about the global code of conduct and a lot of the issues that we raise within that. Guy Debelle, who is the chair of the FX working group charged with issuing the code of conduct, welcomed concerns to be raised from the market. I met Guy 14 months ago, and our concerns are the same, it appears the global code will allow last look, and it appears that pre-trade hedging, will be permissible, as long as they’re disclosed to the client. Put simply, it’s impossible for any client to understand all the disclosures, from all the different market participants around this opaque practice, it is impossible.

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Today we’re going to talk about price improvements or positive slippage. We’re all very well aware of negative slippage, but too often as a client we’re not benefitting from price improvements. On LMAX Exchange, or indeed on any central limited order book, it’s natural if you fire in a market order, that occasionally you’re going to miss that price, and get negative slippage, and other cases you get positive slippage. On LMAX Exchange last year, about 93% of market orders were filled at the price the client aimed for, 4.5% suffered from negative slippage and 2.5% benefited from price improvement. That shows a natural market bias where, the trend is your friend and clients in the market are generally moving in one direction, so unfortunately, there is always a bias towards negative slippage.

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2017 is set to be an interesting year, first of all framed by the volatility we should expect given the new style of presidency in the US, given the known unknowns in Europe, with the Brexit situation and further afield, the upcoming elections in the Netherlands, Italy and France. That should be good for volatility traders, good for exchanges and hopefully good for our clients. And under that macro view we have something very important happening in the FX market, people are now questioning the existing market structure, and the status quo that has existed for some time. And, we have the global code of conduct coming in May.

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Any opinions, news, research, analyses, prices or other information ("information") contained on this Blog, constitutes marketing communication and it has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Further, the information contained within this Blog does not contain (and should not be construed as containing) investment advice or an investment recommendation, or an offer of, or solicitation for, a transaction in any financial instrument. LMAX Exchange has not verified the accuracy or basis-in-fact of any claim or statement made by any third parties as comments for every Blog entry.

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