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.
What’s already clear is that, a lot of players in the market have already started to focus on greater transparency, greater efficiency, and greater fairness in our treatment of clients. At LMAX Exchange, we have preached that for the last 6 years, so we welcome that deeper dive into the cost of trading and efficiency of markets from a client’s perspective.
Last Look liquidity and firm liquidity is a case of choice by the clients, but in order to make that choice, we have to educate the client so that they can make an informed choice. So, what should you consider when you look at your style of execution and the style of liquidity you hit? Broadly, there are five things; the spread, the cost of rejection if you trade on last look, price improvements, and market impact post trade. You have to calculate these things to make an informed choice as a client. A lot of the liquidity providers are starting to do that, and we will also publish that information on LMAX Exchange in the coming weeks and months, and I think we’ll be able to prove that in most cases, given a reasonable spread, the cost of trading is always lower on firm no last look prices. To give you a snapshot, I suspect the analysis will show that spread is always a bit wider on firm liquidity, but there is never any rejection, so therefore, the cost of rejection is zero, there’s no cost of hold time, price improvement is standard, if you’re not getting price improvements from your liquidity provider, you need to ask why. As an example, last year we paid at least $2 million dollars to our clients in price improvements, which comes as standard on any central limit order book and of course on LMAX Exchange. We estimate the cost of rejection and hold time to be 25-30 dollars/million on a 100ms basis. At least 2/3 of that cost happens in the first 10 ms, so when you add all those metrics together, you get to the true cost of trading, and only now in 2017 will you as a client be able to make a fair assessment. We will be covering these topics in depth in the coming weeks, stayed tuned!