Last week the media was inundated with the very interesting news that EBS (part of ICAP), one of the leading global wholesale FX electronic platform, was starting a consultation with its clients to change its business model: it would potentially remove the “first in, first out” (remember that FIFO rule in accounting?), for entry order and put a system that batches together all orders that arrive in a given millisecond-based window so that there is no speed advantage for incoming orders, reflecting the industry trend to try to curb potentially damaging HFT flows.
This significant change of strategy, for an FX platform which opened direct access to funds ten years ago, follows its move last autumn away from “decimalization”, so that the fifth decimal point in a quote had to be a “5” or “0”, rather than increments of a 10th. Its aim is to keep having the buy side tap in their liquidity pools, but in a way that is safe for the dealers providing liquidity, as highlighted in our March 2013 report The Blurring of the IDB vs. D2C Models in Fixed Income and FX: Emergence of a Convergence?.
The randomization of trade entry can also be found on another Spot FX trading platform, ParFX, run by competitor IDB Tradition, with the backing of a consortium of 11 global banks. It has launched on April 18th 2013 and trading is already live.
ParFX not only randomizes the value of a trade entry so that it gets matched in an unknown order, but it is also designed as a fair trading venue with an anonymous Central Limit Order Book single matching engine offering executable prices (no second look), that actually even releases the name of the intermediated fund once execution is done to the other trade party, as opposed to the traditional Prime Broker (PB) model whereby the PB keeps anonymous the name of the client fund it has intermediated all the way to settlement. In ParFX the PB uses its name just for the settlement.
Another differentiating factor to try to promote fairness is the pricing: at ParFX a global bank like Barclays and local bank in Italy pay the same fee (2000 US$/month) to access ParFX’s standard FIX interface that provides the APIs to standard market data consumption, order entry FIX session and post-trade services - Drop-copy. They also pay the same brokerage fee (2US$ per US$ equivalent), no discounts for large sizes or levy for price makers. An All-to-All, level-playing-field platform.
Have we mentioned that TulletPrebon, another leading IDB, had also launched a competitor FX Spot platform called tpSPOTDEAL? And what about Thomson Reuters? Will they merge the FXAll multidealer-to-client activities they acquired with their wholesale platform in some way or another? Competition is fierce in the revolution of FX Spot trading. We will certainly keep watching this space…