Aggregation Putting ECNs on the Spot: Greenwich Survey

A new report from Greenwich Associates says that FX market participants are spurning anonymous trading on ECNs in favour of disclosed, bilateral trades executed through a variety of channels – as well as a growing share of business done through so-called “API aggregators” that could eventually emerge as a challenger to the market’s biggest execution venues.

The study, which was conducted through interviews with 97 market participants, shows that multi-dealer platforms (MDPs) and telephone voice trades remain by far the most popular means of executing FX trades, with 78% and 46% of study participants using each venue, respectively. At 30%, single-dealer platforms (SDPs) rank third. In terms of providers, Bloomberg, FXall and 360T dominate the multi-dealer platform category, with approximately a half-dozen dealers fighting it out for leadership among SDPs.

Surprisingly, Greenwich says, anonymous ECNs have been overtaken for the fourth spot by API aggregators, with 20% of market participants using aggregators and 11% only using ECNs. Asking why aren’t ECNs more popular? The paper notes that while some market participants say they shy away from ECNs due to fees and the need for a credit intermediary, by far the biggest reason for avoiding the platforms is the simple belief that market participants get better prices from disclosed counterparties.

“However, since less than half of market participants are conducting rigorous transaction cost analysis (TCA), some can’t know for certain if they are in fact getting a better price,” says Ken Monahan, Senior Analyst for Greenwich Associates Market Structure and Technology and author of API Aggregators and Anonymous ECNs: Will the Platforms on the Periphery Take the Centre?

Since SDPs, MDPs and ECNs all offer API access, API aggregators allow users to access multiple types of liquidity from the same point of contact, Greenwich says, adding that in theory, therefore, their advantage is even greater than that of MDPs over SDPs – at least from the depth perspective. There is also something of a regulatory arbitrage as, rather than effecting the transactions, the API aggregators are simply routing them, making their compliance costs lower as well.

“FX market participants like multidealer platforms because, by combining the dealer liquidity at a single source, these platforms both deepen the liquidity and reduce the operational complexity of FX trading,” says Monahan. “Going forward, MDPs could be threatened by the fact that API aggregators do essentially the same thing but in a manner that’s ‘infrastructure-light’.”

The vast majority of FX trades are cleared on a bilateral basis, however, approximately one quarter of study participants say they are contemplating using central clearing. The primary reason being concerns that the implementation of the Uncleared Margin Rules (UMR) will significantly raise the costs of bilateral clearing.

Colin Lambert

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