I first wrote about the use of client ‘tags’, especially pre-trade, in 2017; along with last look they comprised a solution that was ripe for abuse by the wrong sort of liquidity provider. You can imagine then, that I was pleased to see that Euronext FX has made the subtle switch of having liquidity consumers specifically opt in to having their ID disclosed pre-trade from how it was previously where they had to opt out – and you would be right, up to a point.
As I wrote in 2017, and as is the case with last look, the arguments against the practice were much more considered than those for, which pretty much evolve around “this is how we have always done it”. It’s a naïve view of the world that thinks the ability to tailor a stream to a client is seen as innocent. Yes, on occasions it is, but who in this world really gives away money? If you are confident the client will hit you at 20, and you have no real need to buy at that time, why would “tailor” your stream to bid 20.3 or 20.5? Does technology, which after all is increasingly dictating the logic behind the pricing, have emotion? Would it think, “this counterparty is a seller I shall give them my very best bid even though I don’t really want to buy at the moment?”
So well done to Euronext FX for ensuring all IDs are now given post-trade unless specified by the consumer – not only is this a fairer way of operating, it also indicates a degree of confidence on the part of the platform that it is in a position whereby it doesn’t need to dangle a carrot in front of LPs the way it, and several other platforms, did, when they were chasing pricing to make their platform look like the others.
Such a move should empower the “good” LPs, those who are confident enough in their price to need the barest help from last look (a credit check) and do not require the ID of the client. Anything that strengthens the hand of genuine LPs and weakens the parasitic recyclers is a good thing for the market. This does not mean, however, that as an industry, more could not be done.
As I argued last week, one reason why the primary venues hold their position is because they were, and to a degree still are, a ‘pure’ market. The advance of technology has meant that some players can game the market, but overall the primaries still reflect the netted down and genuine interest of the market. There is no need for pre-trade IDs thanks to the credit being pre-loaded and there is no need for last look.
Not giving up the ID pre-trade is a positive move, but for customers to really benefit, it needs to be associated with liquidity that is also no last look, or at the least in the case of the Euronext solution, linked to the “leak sweep protection” order type, which effectively outsources the last look function to the platform (LastMatch as a friend of mine wittily called it on release). It seems to an outsider to be a convoluted path to a cleaner market, the need to link different order types specifically, but the Euronext move does at least allow participants to operate in a better environment, effectively it pushes the platform closer in style to the primaries.
Obviously this has been a piece of work in the pipeline for some time, but for it to work properly the platform also has to fulfil one other obligation – it must be seen to be clear and decisive in how it manages the IDs. For yes, this will highlight the good LPs, but it will also, without proper policing, empower those on the edge of acceptability in how they execute – not for nothing is there a workstream on anonymous trading at the Global FX Committee. As I highlighted in the story about the change, Euronext does not allow the refreshing or changing of tags by clients, and it takes its responsibilities seriously when it comes to monitoring activity on its platform, but looking across the industry as a whole, just as the LPs’ claims of tailoring a price meet with a degree of scepticism, so too does any platform’s claim that they clamp down hard on miscreants. They do clamp down, of course, but it’s hard to know at what stage they step in and what punishment is meted out – this is where I think we need to see the evidence from all platforms.
It’s one thing publishing a rulebook, not all do, it’s quite another showing people how you enforce it, and we do need a greater determination to enforce the rules, as well as transparency over how they are enforced. In 2012, then Reuters Matching discovered that Lucid Markets had multiple tags on Matching, contrary to the rules. An investigation presumably followed and a ban from the platform was imposed, for one week. All well and good, however there was inevitable scepticism in the air when it was revealed the chosen week was the last of the year, in December when nothing was going on. So not so much a slap on the wrist, more a wag of the finger.
Given the amount of complaints I hear about certain participant behaviour on platforms (and even taking into account the natural propensity of all dealers to bemoan their lot), there is still some wrong activity going on and I feel the wider world should know about it, naming and shaming can be a pretty powerful tool in the social media era (justified or not, it has to be acknowledged).
There is one other reason why I think greater transparency over sanctions and rule books is needed along with the moves such as those made by Euronext, and its commercial. I am on thin ground when it comes to deciphering the decline in influence of Matching, because apart from the aforementioned breach one rarely hears anything bad about the environment on the platform. In the case of EBS, however, I feel we can trace the decline in activity back to the period when HFT firms were running amok on the platform, which, paradoxically, was when volumes were at the highest. Genuine LPs became fed up with the environment and not only opened up to other venues, but also backed one of their own in PureFX – and thus the rock started rolling downhill and has proven very difficult to stop.
EBS put its house in order of course, but the secret was already out – other venues were available and they gave the LP the protection of not only last look, but a look at the client’s “name” in a supposedly anonymous environment.
Time has moved on and I think we are at the stage where over-long last look windows and pre-trade IDs are unnecessary, as long as the venue polices behaviour properly and openly. The good LPs realise this and at a time during which they are looking into the number of connections they have to their pricing engines they should start to look at those venues that do the right thing. For something that is often overlooked in this market is that on a multi-participant platform, of course an LP is exposed to customer behaviour, but just as importantly, they are also vulnerable to other LPs’ actions.
Hopefully the Euronext move is the start of a new wave of transparency and monitoring of behaviour on the platforms – if it is not then I suspect the volumes through anonymous venues will continue to decline further.