Shaking up the FX industry
FX-MM, November 2013 – CEO David Mercer speaks to FX-MM about the current challenges faced by traders in a rapidly changing FX landscape – and how LMAX Exchange brings something different to the table. Delivering a unique vision for global FX trading – a transparent, neutral, level playing field for all market participants, regardless of status, size or activity levels – with no ‘last look’ – LMAX Exchange certainly likes to break the mold. The same can most definitely be said of the company’s refreshingly straight talking and charismatic CEO, David Mercer.
Talking to FX-MM about the evolution of FX trading and the marketplace as a whole, Mercer explains that, thanks to seemingly insatiable customer demand, competition among FX venues has intensified and many new entrants are being enticed into the marketplace. What is more, developments in aspirational societies across Asia Pacific and Eastern Europe are facilitating far wider market access geographically. “There are also many different trading styles and an increasing number of traders from other asset classes, equities or fixed income, looking at this hugely liquid FX market,” he says.
In addition, the power struggle between non-bank and bank FX providers is evening out significantly. Several years ago, the non-bank providers nearly always came out ahead of financial institutions in the FX ecosystem – being more agile and flexible, with bigger budgets for smaller projects. But the best banks are now up there with the high frequency traders or even expert traders themselves, according to Mercer. “Right now, we’re not seeing much difference between non-banks and banks – they are either successful as price makers or they are not. There definitely was a historical technical advantage before but this has since been diminished.”
Combined, these trends are truly shaking up the traditional FX market as we know it. So what is LMAX Exchange doing to push the boundaries even further?
The price is right
“Transparent price discovery and reliable, consistent execution, which have existed for years in other asset classes, are now the emerging, transformative trends in FX trading – ones that we are most definitely encouraging,” Mercer explains. “Historically, the FX market has been very opaque, so you might be happily trading on one platform but actually the real market price is elsewhere. As an example, there’s a strange thing in FX called ‘last look’ which is the ability for liquidity providers to reject trades or re-quote, sometime in up to 200 or 400 milliseconds. As the first FCA regulated MTF for global FX, LMAX Exchange is driving change in the market by offering a truly exchange-style trading model that does not support ‘last look’, with order matching based on price/time priority and an anonymous, pre- and post- trade transparent environment. We’re the only venue that offers access to a wide range of clients with an open order book,”
What this means, says Mercer, is that “If you see an order in the book and you get there quick enough, it’s yours. What we’re saying to the customers is trade on firm liquidity. Trade on this level playing field and don’t accept ‘last look’ liquidity. Don’t accept discretionary pricing based on who you are, aim to access an open order book. LMAX Exchange brings something different to the table because we have full pre- and post-trade transparency and everyone can access the full depth of the book.”
The LMAX Exchange way
But surely this approach has its challenges at a time when competition among venues is at its highest? “Actually, it’s a huge benefit for clients, but has done nothing to hamper the ability of LMAX Exchange to pull in some of the top market makers,” he says. And with eight of the world’s top ten banks (18 banks in total) and most of the top non-bank market makers on the venue, it certainly seems that LMAX Exchange has enough appeal for both sides of the FX market.
“The reason we’ve attracted the big market makers – even with no ‘last look’ – is that we give them the ability to price accurately and precisely at all times. They can cancel and replace an order in less than a millisecond, so they can be sure that their order in the book is the right one at all times and there is no chance of them being hit on a stale price,” he says.
Through LMAX Exchange’s unique offering, Mercer also hopes to show these powerful market makers that good technology can aid their pricing and their profitability. So how does a market maker price so many different venues? “The reality is that now with good technology and APIs, they can do that relatively easily,” maintains Mercer.
“The big danger for market makers is that if the same price is in many different venues, they risk being hit twice on the same price. There’s no doubt that it’s a challenge that’s here to stay but although the smaller banks probably don’t have the tech resources to price all these venues, the bigger banks are definitely moving that way.”
Yet Mercer remains pragmatic about the future of this ‘busy’ landscape with the mindset that “after fragmentation, consolidation will follow. At some stage, the weakest venues will fail and some of the mid-level firms will merge with the bigger participants.”
Finger on the pulse
Speaking more in-depth about market trends and concerns, Mercer highlights a number of additional challenges and opportunities facing FX market participants today. The growth in high frequency trading and algorithmic execution is an understandably hot topic. “Venues are being hit more frequently on a price algorithmically. They now need to invest more heavily in their technology to ensure that their price isn’t the best price for a second or five seconds; it needs to be the right price per millisecond.”
High frequency traders gaming the market and stuffing the order book is an additional challenge here. But as Mercer rightly explains, it is in large part the responsibility of the venue to protect the market against that sort of gaming. “We spend a lot of time doing that,” he says.
And while the speed of execution offered on LMAX Exchange is more challenging and apparently ‘risky’ for liquidity providers, Mercer says that the venue balances this with allowing price accuracy at all times, allowing participants to send 2,000 orders a second if required.
“The real risk is if you don’t actively police the clients you have on board. Algorithmic trading and high frequency trading is fine. What isn’t fine for any venue is cross platform arbitrage, latency arbitrage or news trading; that’s where the real risk comes from. It is our duty to ensure we don’t onboard that type of business.” Elsewhere, issues around latency floors and randomisation have also caused some controversy in the marketplace of late. “Some providers have introduced latency floors or ‘speed bumps’ on their platforms, ranging from 3 milliseconds to 70 milliseconds.
Our view is that there may be some validity in a latency floor but it’s probably too early. Furthermore, how can you establish the right level for this floor? Market data is still in 10s and 100s of milliseconds, so banks do need the time to react and adjust their price. As such, we believe that it should be in the single digit milli – seconds – not up to the 50 milliseconds and 70 milliseconds that some of the venues are talking about.” As for randomisation, Mercer believes that this proposed operational measure is “insane”. “I’ve never yet met anyone who wants their order to be filled randomly. I just don’t think that’s the right way forward,” he says.
An additional topic that cannot be avoided in any kind of FX conversation these days is clearing of trades. LMAX Exchange offers three clearing models: bilateral prime brokerage for spot FX; central clearing for non-FX; and central counterparty (CCP) for LMAX Interbank. Says Mercer: “We recently launched LMAX Interbank – a bank only venue with Rabobank (AAA-rated) as a CCP and where all the bank members accept the credit of the CCP. We’re relatively agile – no matter how the market goes, we can adapt to every eventuality.”
But he has some reservations about central clearing and the impact it has had on the volumes of NDFs, for example. “My own view is that a central clearing model doesn’t necessarily produce less risk than a quality bilateral prime broker model. Put simply, the market wasn’t ready for this model and it appears to have been rushed out by the regulators. We’re currently awaiting more guidance – there are still a lot of grey areas around other regulatory requirements and their cross border implementation.”
Despite the obvious industry changes and challenges, LMAX Exchange seems set for success – and the venue’s 80% compounded quarterly growth over the last two years is certainly testament to that. But, not content with resting on its laurels, the LMAX Exchange team is focused on further building global distribution capabilities with the aim to become a market leader in three to five years, says Mercer.
Currently LMAX Exchange operates three execution venues that represent distinct liquidity pools: LMAX Professional for broker dealers, money managers, funds and proprietary traders; LMAX Interbank for banks only; and LMAX Institutional, launched just few months ago, for high frequency sophisticated algorithmic trading. “LMAX Interbank is probably the biggest piece of the pie to aim at,” says Mercer. “It’s a bank to bank only matching platform and we’re really going after the behemoths. It is a clean and fair venue with a published rulebook – and all we’ve done is leverage the best technology out there.”
Further ahead, LMAX Exchange is also planning to add matching engines in New York and Asia as part of its global growth strategy. LMAX Exchange’s clients and the company’s expanding team certainly have much to look forward to.
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.
Financial technology awards:
2017 Best FX Trading Venue - (ECN/MTF) – Fund Technology and WSL Awards more
2016 Best Trading & Execution Technology – HFM US Technology Awards more
2013 Best Overall Testing Project – The European Software Testing Awards more
2011 Best Trading System – Financial Sector Technology Awards more
FX industry awards:
2017, 2016, 2015, 2014, 2013 Best FX Trading Venue - (ECN/MTF) – WSL Awards more
2017, 2016, 2015, 2014, 2013 Best Margin Sector Platform – Profit & Loss Readers' Choice Awards more
2017, 2013 Best Execution Venue – Forex Magnates Awards more
2014 Best Infrastructure/Technology Initiative – WSL Institutional Trading Awardsmore
Business growth awards:
2016, 2015 Winner – Deloitte UK Technology Fast 50 more
2016, 2015 Winner – Deloitte EMEA Technology Fast 500 more
2015, 2014, 2013 Fastest Growing Tech Company in the UK – The Sunday Times Tech Track 100 more
2015 Recognised as a Tech City Future Fifty company – Tech City UK Future Fiftymore
LMAX Exchange Group is the holding company of LMAX Limited and LMAX Broker Limited.
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).