Monday’s column – predicably I have to say – prompted no little chatter on my communication channels, it’s always that way when I write about the primary venues, and amongst the always interesting conversations was an idea or two about why the April and May data were so awful, and the suggestion of a scenario in which the situation could get a whole deal worse.

Without doubt there is an emotional attachment to EBS Market and Refinitiv Matching amongst manual traders and I am, as always, indebted to a friend who pointed out a factor I had not considered when looking at the recent volume data – the impact of working from home. My friend points out that manual traders like their dedicated keypads for these platforms but, and this is anecdotal evidence, logistical difficulties meant that often the keypads were not available either quick enough, or at all.

I asked a trading acquaintance about this and they told me their bank’s priority was on getting them access to their aggregator at home, which is mouse-driven, not keypad. By the time anything could be done about the keypads, they had got used to the mouse and, subsequently, plans were underway for a return to the office.

So there is a risk that the very generation of traders who grew up with, and demand, the keypad, are being weaned off it during the current crisis, which would be bad news for those two venues. On balance, however, I don’t buy that argument because I think it takes a lot more than a couple of months to rid someone of a habit they have formed over a decade or more, so this might be a short-term phenomenon rather than a step change in behaviour – we shall see.

A second issue raised by another correspondent was how those very same manual traders have, to a degree, been sidelined by the pandemic. Yes, initially more customers went to the phones to get their trades done, but as the algos proved their worth on the execution front, and pricing and on many channels remains sufficiently robust, more business was encouraged back online as the LPs found they could risk manage it in an automated fashion. The bottom line is monitoring behaviour is a lot easier when every interaction takes place online.

Manual traders still have a tremendous value, and several sources have told me they were the main source of revenue during the March mayhem for some FX businesses, but the fact is, those I have spoken to, especially during April and May, have been a lot quieter than usual. This is not only because markets have been quieter again. As one trader put it to me, it is quite difficult building conviction in isolation. Yes there are the online chats, this trader told me, but nothing beats being able to sit next to someone you have worked with for years and exchange ideas and read body language – there are too many opportunities to second guess oneself.

That interesting mental health issue aside, traders are also telling me they are as nervous as their institutions about what happens in a work from home environment. I was fortunate to be invited to address a bank’s private forum this week and one of the themes I addressed was the challenge of surveillance in a work from home environment. This is something faced by the institutions of course, but it has become clear to me that some traders are also concerned about how their actions are interpreted. As one told me, just as an innocent conversation on the chat in 2012 was easily misinterpreted three years later, sensitivity to what goes on is inevitably heightened when staff are working remotely. “I just don’t want to have to go through a massive investigation for a small slip or a trade than goes wrong,” this trader told me.

This is, also, a short-term phenomenon as far as the primary venues are concerned in my view, therefore not something they should necessarily worry themselves about too much…as long as there is a recovery. Because by far the most popular response to Monday’s column was from people asking for how long firms are going to be willing to pay for the data if the volume upon which it is largely based, does not show signs of recovery?

This is something I did touch upon on Monday, and several times previously in this column, so there’s no need to go over old ground, but it does highlight another potential threat, alongside internalisation, to these venues’ position – aggregation of data as well as liquidity. For this to happen, however, things have to change at the other platforms.

Once the initial period of dominance thanks to the efficiency of dealing for manual traders had passed, EBS and Matching maintained their importance because of the purity of their data – there was no last look involved. I have often argued that in a no last look world several platforms would find their volume simply disappears, for they exist on recycled liquidity only. That was a different world, however, to what we have now, because back then they were up against two behemoths with huge volume numbers.

Now, those two venues remain the largest but not by anywhere near as much as they used to, which makes me wonder what would happen if other venues went no last look? CboeFX operates at around 30-40% of volume executed on firm liquidity, which equates to the $10-15 billion mark. Take a conservative estimate of LMAX Exchange at $10-15 billion and all of a sudden you have an aggregated number that is closer than ever to one of the primary venues. Now imagine what that would look like if, for example, we added say $15 billion from 360GTX if that went no last look, and if Euronext’s $20 billion was also part of the equation?

At the moment the problem with data from a lot of aggregators is it is polluted (and I use that word deliberately of course!) by last look pricing. If there was aggregated data from four or five venues that added up to $50-60 billion per day, then the reliance upon the two main venues would diminish further. Throw in the balance of CboeFX’s volume and it’s even higher.

I stand by my assertion on Monday that internalisation has been the biggest thorn in the primary venues’ sides when it comes to volume, but it is interesting to me how we are now in a world in which the reluctance of some of their rivals to embrace firm liquidity is helping to dampen the threat to their data businesses.

That said, I don’t think such a move would dramatically shift the landscape of the broader FX market anyway, because I also stand behind a long-held opinion that the trend in trading is away from anonymous and towards disclosed channels. But if this move did happen, then the shift in the micro-landscape of the ECNs would be seismic.

Twitter @lamboPnL

Colin Lambert

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