At face value the impending closure of the Bloomberg
Tradebook FX venue could be seen as evidence of the growing need for
consolidation amongst FX trading venues, but while I tend to agree there is
simply not enough sustained volume to go round for all those venues claiming to
be institutional FX platforms, I think this closure more represents evidence of
Actually I use the word “trend” but in reality agency
execution in FX has never really got off the ground. Banks’ algo execution
teams are still failing to achieve serious growth in volumes handled (and there
remains one dominant player in this field in Credit Suisse) and as for third
party providers? Many have tried and just as many have failed to succeed to
Regular readers will know that I have long been a sceptic of
the agency model story growth in FX. Not only were there likely to be pressures
in that the very same liquidity providers an agent relies upon are also its
competitors, but there is also the fact that agents cannot exploit the benefits
of internalisation and, although they have the best intentions, if an execution
goes wrong – for example during a flash move – their data will still show they
achieved “best execution”, even though slippage was 300 points!
If nothing else events in the FX market, indeed all markets,
over the past few years have shown what a precious commodity liquidity is. My
instinct is that consumers have always known this, even during the halcyon days
of choice pricing on aggregators in decent size, but I am just as certain that
the liquidity providers didn’t get it.
Perhaps they were caught up in the competition to have the
largest market share (upon which note I hear that a perennial, and über-competitive,
challenger for awards in a major industry survey has finally decided this year
it does not want to chase the dream), or perhaps they bought the illusion that
liquidity is ever-present. Either way, the major liquidity providers are now
much more careful than they were just three years ago.
Obviously the SNB catastrophe played a role in dampening the
amount of liquidity available for agency execution brokers, but I suspect, as I
argued in this
column in August 2014 that this segment’s star was already burning out.
So part of the increasingly complicated pattern of liquidity
in FX markets has been the major LPs diluting the flow to potential competitors
in the form of agency brokers. The fact that some pretty large banks have
ploughed the agency path only makes the decision easier for the major LPs in my
view – because this has seen some pretty important clients pushed down the
agency route, sometimes against their will. A dissatisfied customer represents
an opportunity for competitors and those providers with a risk appetite have,
as I have argued in recent weeks, a distinct advantage.
Part of the problem has been, I believe, a misreading of
regulators’ intentions. Too many people read a call for transparency as
targeting every aspect of the market, including execution, whereas I see it
very differently. The regulatory push, especially around conduct and order
handling has been about transparency of action, not of order.
As the industry has come to better understand what actually
constitutes best execution so how it is measured has changed (albeit slowly in
some quarters). I fundamentally believe that execution quality needs to be
monitored closely and that independent verification is the way forward. This
does not mean, however, that the execution has to be independent – I would
actually argue it needs to be nothing of the sort.
To achieve best execution means minimising slippage, which
is driven by signalling risk, or transparency of order – as the CIA puts it, “a
secret shared is a secret squared”, in other words the more people know about
your order the greater the likely slippage.
Don’t be fooled into believing the hype that a totally
transparent market attracts liquidity and you can match off more – the evidence
from the exchanges and OTC platforms publishing volumes tells the opposite
story. The exchange and ECN model remains vital for traders to assume and
offload risk, but generally speaking the more transparent a venue the more
vanilla the average trade – bigger tickets, as in equities, stay as dark as
possible and in FX terms, they need access to an internalisation engine.
So while there are some who see Bloomberg’s move as further
evidence of what is perceived in some quarters as that firm’s rather fluid
relationship with the FX market; and others as evidence that a period of
consolidation is upon us; I tend to see it differently. It reflects the death
of the agency dream.