FX: an exchange-traded future?
Euromoney, June 2013 – The development of FX trading venues has been idiosyncratic, but can it follow other asset classes toward an exchange-traded future?
Originally a market driven by voice execution, more than 60% of the $5 trillion a day traded on the world’s foreign exchange market is now moved electronically, up from around 30% a decade ago.
The first generation of electronic FX trading venues emerged in the interbank market in the early 1990s, with the launch of Reuters and EBS’s platforms. Both have remained as a backbone of the electronic FX market, supported by dealing banks that rely on the two venues to manage their risk.
A second wave of multi-dealer FX platforms emerged in the late 1990s to provide connectivity between banks and clients. While many venues failed to gain traction, the survivors, such as FXall, Currenex and Hotspot FX, remain big trading venues.
There has been, however, a fresh wave of new FX venues launched over the last couple of years. Indeed, over the summer of 2012, Euromoney counted seven new FX trading venues launched in six weeks. Those new entrants include Par FX, FXSpotSream, FastMatch, Molten Markets, Gain GTX and LMAX Exchange to name just a few.
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| Javier Paz, senior analyst, Aite Group |
Javier Paz, senior analyst at the Aite Group consultancy, says there are a number of reasons for the surge in new FX venues into a competitive landscape that was fairly stable until recently.
First, he says, bank liquidity providers have become increasingly dissatisfied with the current group of FX venues because of what they perceive as practices that favour automated trading firms, and a sense that the trading infrastructure of existing platforms is outdated.
“Both of these may lead to potential opportunities for new venues,” says Paz.
Furthermore, the emergence of FX as an asset class has been a driving force behind a flood of new FX execution venues.
Both commodities and FX markets have benefitted from the lack of steady, profitable returns from traditional asset classes such as equities and fixed income.
This has driven fresh investor money into FX from market participants that demand greater execution speed and expect a greater degree of transparency than previously on offer in the currency market. They also have higher requirements for best execution.
Indeed, that can be seen in the increased uptake in transaction cost analysis in the FX market.
“New participants from non-FX markets have entered the space looking for faster, more streamlined, transparent FX trading venues similar to what they are used to in equities and futures markets,” says Paz.
The question is what the electronic trading venue of the future will look like.
Paz says while many new FX venues have emerged over the last few years – most of them touting increased transparency and describing themselves as next-generation trading platforms – only one, LMAX Exchange, has taken the concept of transparency seriously enough to register with the UK’s Financial Conduct Authority as a multilateral trading facility.
MTF status gives LMAX Exchange characteristics similar to an exchange, requiring pre-trade transparency with public distribution of price information and without discrimination against any market participants.
Indeed, LMAX Exchange has an open order book and does not give liquidity providers a ‘last look’ at prices they stream. This last look is common practice at some FX trading venues; it allows liquidity providers to reject the prices they quote, which can result in customers not executing deals at the price they see on their trading screens, particularly in fast, volatile markets.
David Mercer, chief executive at LMAX Exchange, says the idea of last look is an anathema to equities and futures traders.
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| David Mercer, chief executive, LMAX Exchange |
“They see prices on an exchange at which they can buy or sell,” he says. “They can’t imagine a situation where a price is rejected. Why would that happen in any product?”
That is not to say that there is still not discretionary pricing and discretionary liquidity pools for different clients at LMAX Exchange. It operates one venue in which liquidity providers quote prices to money managers, retail brokers and proprietary traders, and another venue where banks trade with each other in larger amounts.
As Mercer puts it, the firm has to maintain a pragmatic approach – banks after all still want to know broadly whom they are pricing.
“But what we are trying to do is level the playing field as much as we can within the existing ecosystem. It will keep evolving, and you could end up with an open order book, like in equities, for FX,” he says.
“If you are looking for Nirvana, if you want to know what I really think, FX should be one open book for everyone from the bureau de change to the guy trading $100 million,” Mercer adds. In other words, FX could eventually be like equities where, say, the price quoted for Vodafone shares on the London Stock Exchange is the same for a hedge fund manager and a retail client. Of course that is not to say that LMAX Exchange, or any of the other recent entrants into the FX trading venue sector, necessarily have a magic formula.
As Paz explains, just because new venues are built does not guarantee their success. He notes the history of electronic trading is, after all, littered with failed initiatives. FX is no exception.
“The evolutionary process within the global FX market is not a linear one,” says Paz.
Still, he adds: “Exchange-style trading, highlighted by increased transparency and no last look, is certainly a unique way to attract participation to the electronic FX market.”
Of course, the concept may not be universally welcomed, and might face initial scepticism from liquidity providers, but FX need only look to the equity market for proof of its viability.
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Media Contacts
For further information please contact:
LMAX Exchange (London):
Barbara Pozdorovkina T: +44 20 3192 2510 E: [email protected]
About LMAX Exchange
LMAX Exchange Group is a dynamic, visionary and award-winning financial technology company. Recognised as one of the UK’s fastest growing technology firms, LMAX Exchange is leading the transformation of the global FX industry to transparent, fair, precise and consistent execution. Operating one global marketplace for trading FX, metals, indices and commodities, LMAX Exchange delivers open access, transparency and a level playing field to all market participants.
LMAX Exchange Group offers all clients the ability to trade on LMAX Exchange central limit order book, driven by streaming no ‘last look’ limit-order liquidity from top tier banks and non-bank financial institutions. Servicing funds, banks, brokerages, asset managers and proprietary trading firms, LMAX Exchange offers an anonymous, regulated, rules-based trading environment, order execution in strict price/time priority, and access to real-time streaming market and trade data, enabling all market participants to control execution quality and total trading costs.
Offering a comprehensive range of instruments and ultra-low latency execution, LMAX Exchange operates a global FX exchange infrastructure with matching engines in London, New York and Tokyo.
LMAX Exchange - a unique vision for global FX.
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LMAX Exchange is a trading name of LMAX Limited, which operates a multilateral trading facility, authorised and regulated by the Financial Conduct Authority (firm reference number 509778) and is a company registered in England and Wales (number 6505809).
LMAX Global is a trading name of LMAX Broker Limited which is authorised and regulated by the Financial Conduct Authority (firm reference number 783200) and is a company registered in England and Wales (number 10819525).