As FX execution becomes increasingly fragmented with more and more trading taking place in dark environments,
price discovery is rapidly becoming one of the industry’s key challenges. But can the recent proliferation
of new market data offerings from the leading ECNs really help tackle this problem as claimed?
Nicola Tavendale writes.

The past year’s run of unprecedented market events has only served to highlight the growing demand for timely and reliable FX market data, yet innovation in this area has notably lagged behind the levels seen in other areas of the financial markets.

That said, EBS, Currenex and Thomson Reuters have all announced new market data products in recent months, although each has taken a radically different approach to how this information is generated and delivered.

According to Tim Cartledge, chief strategy officer at EBS BrokerTec, this run of new launches is driven not so much by competition as it is by a need to address the growing problem of price discovery in FX. “Our answer to this problem is EBS Live Ultra, where in order to get the very fastest data you have an obligation to create that data for the benefit of everyone,” Cartledge says.

Under the terms of this new product, market participants are required to create 40% of their volume on the central limit order book (CLOB) as a market maker before they can qualify for the fastest ultra-feed at 5 milliseconds. Cartledge argues that this provision can ultimately drag more activity out of the dark and into a lit environment. “With that all-to-all, non-last look feature you have very high quality data being brought into the light,” he adds.

The threshold was set at 40%, as setting it at 50% ran the risk of random market “noise” creating a lot of oscillation, with participants potentially meeting or not meeting the threshold each week. By opting for 40%, Cartledge believes this will achieve a stable environment without risking people accidentally missing the threshold because of “noise”.

Demand for Provision

In turn, Currenex also recently launched its first commercialised market data offering, Currenex Now, although it has provided market data in various other forms in the past. David Newns, senior managing director at State Street and global head of Currenex, explains that the key driver behind the creation of the new feed was customer demand for an alternative, and less expensive, choice to other incumbents’ FX market data offerings. Since launching the new feed, Currenex has also responded to client requests for historical market data to use in back testing.

“This has driven us to develop another data offering, Currenex Cache, which will launch next year,” says Newns. “In addition, third-party distributors of market data have approached us as they are interested in top of book bestbid, best-offer data from our flagship FX ECN, which we will offer in Currenex View – another market data product due to launch in 2017.”

Rather than handling these various demands as ad hoc, bespoke requests, Currenex instead opted to standardise and commercialise the feeds, making them available to all its customers.

“The outcome is a range of premium market data products that ensure a level playing field for all,” Newns claims.

Thomson Reuters (TR) also states customer demand as the main driver behind the launch of its Matching Binary Multicast Feed, due to launch in Q1 2017, which offers data updates on a more frequent basis. Paul Clarke, head of FX trading venues and market data at TR, explains that the ECN has been having ongoing discussions with its clients for years about how frequently it should ideally be publishing market data.

“Over the last few years, the client demand has been much stronger for it and is now nearly unanimous that we should be publishing data more frequently,” he adds.

Clarke believes this interest in real-time data is due in part to the growth of electronic trading and algo execution. “Matching is also recognised as the primary market for a lot of FX pairs, so our clients want to see more frequent market data for reference – and also to trade against,” he adds.

Structural Change

Despite all of these new feeds having been unveiled within the same three-month period, Newns believes this is mostly a reflection of change in market competition generally.

“As the market has become more and more fragmented and bifurcation has taken place between anonymous, disclosed and direct channels, clients can no longer rely on just one or two of what were previously considered ‘primary venues’ for their pricing,” he says.

It is no longer the case that there is a single venue that can be considered “the market” in a particular currency pair, Newns argues, and clients are also hopeful that access to more data will help drive down costs for everyone.

“This area has been ripe for innovation for some time and I would only expect to see more of this, rather than consolidation,” he adds.

Clarke agrees, saying that it is not so much a matter of competing market data feeds, but rather that market data is a key way of encouraging trading and liquidity on the platform.

“There’s been a number of new regulatory requirements and new conduct standards, which all point towards more transparency in the market,” he says. “We’ve also seen growth in electronic trading and execution algorithms, while we are also seeing many of our clients moving more to agency trading and away from principal trading.”

Ultimately, these changes are all combining to drive up demand for better transparency and price discovery, according to Clarke. As each venue tries to provide better liquidity and transparency to their trading participants, one result is the creation of these new market data products to help achieve that flow.

Benefit to All

The launch of EBS Ultra Live, for example, is expected to increase market making activity within the EBS environment.

“Even if you are not a subscriber to EBS Live Ultra, or even if you are not a subscriber at its fastest rate, then you are still going to get the benefit of additional orders in the market – which will increase liquidity, but also increase price discovery,” says Cartledge. “Those orders will create target pricing and more reference trades, which will benefit everyone in knowing where the real market is.”

According to Newns, when clients also have access to realtime, ungated market data with the additional analytics that Currenex provides, then they will be able to quote more efficiently on its platforms and elsewhere – for the benefit of the FX market as a whole.

“Currenex represents a genuinely heterogeneous ecology resulting from the combination of our anonymous and our disclosed liquidity pools and extensive white label franchise,” Newns adds.

As a result, in addition to the standard best bids and offers and depth of book, Currenex also offers a weighted-average mid-rate based on its own proprietary formula. “Along with the mid values, we provide clients with information around the distribution of bids and offers, thereby helping them establish a real-time and granular confidence interval for the market,” says Newns.

Clarke adds that TR also invests time and resources into actively improving access and efficiency in a market that is currently challenged. Providing more transparency of what is in the order book will give clients more opportunity to trade on venue and help their own price discovery, according to Clarke.

Level Playing Field

“In terms of liquidity, the view is if we are getting more trading because there are more opportunities for people to get a price, then there will be more people willing to provide a price,” Calrke says. “Another thing we do to help liquidity is set the granularity of our instruments right as well. We made a number of changes to the granularity on our instruments over the last 18 months.”

In addition to improved price discovery, Cartledge believes that EBS’s new market data product can also help contribute to fairer markets as it is not charging any more for EBS Live Ultra than it did for EBS Live.

“We could. We know that people would pay more for it rather than have to market make more on the platform,” he says. “They have private data that they don’t want to share with the world.”

Cartledge adds that EBS is “acutely aware” of the demand for value for money from market data. But by having participation criteria based on maker-taker ratios, he argues that this allows participants to change their behaviour – making the feed easily accessible to anyone on the platform.

In contrast, Currenex deliberately did not opt to impose qualification criteria or conditions.

“Basically if you pay for it, you get it,” says Newns. “We don’t believe that differential access to market data is the direction that the market should be going in.”

He argues that Currenex customers are looking for data that would give them insights into how they can price their clients more competitively and that to ensure fairness and transparency, all customers should have access to – and can consume – the same market data.

“This helps give a clear and accurate sense of, among other things, where the market-mid is on Currenex,” adds Newns. “To ensure confidence, the customers have insight into order book density in terms of the distribution of bids and offers surrounding the Currenex mid-rate, which enables them to price their clients more competitively.”

In addition, TR took into consideration the growth of algorithmic trading when developing its offering. It ultimately opted to be selective in which pairs it increased the frequency of data feeds.

“We also maintain market qualifying leads (MQL) on our platform, so if you place an order you have to hold in the market for a certain amount of time, which discourages certain behaviours,” he adds.

In addition, TR implemented a randomisation mechanism in the summer that effectively creates a slight delay in the processing of orders. “The intent behind this is to remove speed as the primary factor in the client’s trading success,” says Clarke, adding that the ECN would not have launched the new feed until the randomisation was in place.

“The combination of this and the MQL answers the needs of our clients. By providing more visibility of the CLOB, by giving more frequent feeds, there is more visibility of prices, which is providing more transparency.”

Turbulent Times

But while the new data feeds all attempt to improve price discovery and transparency in the FX market, recent events have demonstrated that in extreme cases of volatility this is not always achieved. When there is a large amount of activity that is derivative of the lit market, Cartledge explains, then you will inevitably get cases where everything looks orderly until all the capacity of the liquidity providers is consumed.

“You then start to have a weight of volume that is directed into lit environments which causes a dramatic move,” he adds. “That doesn’t mean markets wouldn’t have got to the same point anyway. It’s how smoothly they would move – you get more jumps now.”

A market data feed that offers precision pricing, additional analytics and behaves deterministically, becomes even more critical in times of market volatility, agrees Newns.

“The FX market has experienced spikes of volatility followed by moments of calm in 2016 – and 2017 is looking like it will be a similar story,” he adds. “Having the confidence that you can price consistently in these challenging conditions is more important than ever – Currenex Now is a product that can give you that confidence.”

Clarke agrees that effective market data is key for participants in understanding where they can trade and helps to determine an accurate price when a market moves.

“In some of these events we’ve seen large volumes on our platforms and they have held up well,” he says. “And there is more we want to do going forward to provide more enriched market data – this is effectively our first step in providing better market data.”

Ultimately, efficient, lit markets are a price discovery mechanism for reflecting activity across the wider markets, explains Cartledge. “There is a price discovery issue in our markets now which we are trying to resolve,” he adds.

For Newns, Currenex’s first step into this space has also raised the bar in terms of what you can expect from a market data product i.e., real-time data, rather than gated updates, and precision pricing, rather than any sort of half or full-pip rounding.

“Achieving this level of performance in a market data product is very hard to provide if your underlying technology has constraints around its ability to deliver real-time market data consistently (i.e., regardless of market activity),” he adds. “So we are very pleased that our customers will again be able to leverage the investment we have made in the Currenex platform, but this time in utilising a rich and cost effective market data product.”

While Matching market data is also a key part of its proposition, according to Clarke, it additionally distributes FX market data to clients globally over its desktops and APIs.

He adds: “One of the key things we are trying to achieve is improving liquidity access and market efficiency in an environment where we know liquidity is challenged.” 

Galen Stops

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