The multi-dealer space just gets messier and messier, not in terms of the quality of product out there, but in terms of disentangling who is doing what. No longer can platforms be categorised, especially in the wake of EBS’s announcement of disclosed liquidity.
In many ways this is a natural progression for EBS, especially if it is determined, as it seems, to step away from some of the worst excesses of the HFT community and to promote a better operating environment. After all, look at Thomson Reuters. Not only has disclosed liquidity provided a nice boost to the firm’s FX numbers, but it saw fit to buy another major disclosed liquidity venue in FXall.
Like it or not, we are in a phase in the FX market in which disclosed liquidity is the popular method, in no small way due to the assertion of power on the part of the major banks. As the FX market puts the squeeze on some HFTs, we have seen the rise of the relationship venue, therefore it makes sense for EBS to tap into this.
Effectively, EBS is offering another favourite of the current era – an aggregation venue. More importantly for the platform, it should have few problems, assuming the concept takes off, of adding FX swaps and other products to the disclosed venue.
Of course, this is not EBS’s first foray into disclosed trading. About a decade ago it tried EBS Trader, a conversational dealing tool, but as it found out then, even a link up with Bloomberg could not penetrate Reuters’ market. The world is different now, though, and EBS Direct is a much different proposition to EBS Trader. Technology means firms can offer a broader range of services without impacting the cost equation too far, although some things do not change – and I confidently predict that the biggest challenge EBS will face is in changing people’s habits!
Whispers from within EBS say that much more is to come in the way of products and services as part of the regeneration of the business, which is a good thing, because what we are currently seeing in the multi-dealer space is firms congregating around a similar model. This model was probably first pioneered by Currenex in that it offers an ECN alongside disclosed trading – indeed more than one person familiar with EBS pays a discrete compliment to Currenex and FXall for their success in building such successful businesses. Imitation is the sincerest form of flattery.
I am hopeful that the model will continue to evolve, for if the market coalesces towards one model, then innovation will inevitably be stifled. The FX market has dodged a “standardisation bullet” through the Treasury exemption; it would be a shame if every OTC venue offered 50 shades of grey (and yes, I know there are dozens of one liners to follow that!)
Although it is early days for the new product at EBS, I have also been thinking about the potential impact on its rivals’ business. It seems accepted that the overall market “pie” is not growing (in fact shrinking), so if this is to be successful – in the short term at least – then business has to be attracted from elsewhere.
Although the new service is more or less a direct challenge to the Currenex, FXall, RTFX models, I don’t necessarily see these businesses struggling, mainly because they have an embedded and loyal customer base that will be hard to dislodge. As I noted earlier, changing customers’ habits is a long and laborious process.
Where this service could succeed is by adding another string to the EBS bow. If one accepts the argument that one ECN is very much like another – it’s all about how much liquidity is on the platform – in this case one screen, it follows that if one offers another liquidity stream, on the same screen, that could prove attractive to liquidity takers especially.
I am not sure whether EBS’s venture will be successful or not but either way this seems to be another step away from the model towards which the FX market seemed to be heading just a year or two ago.
The relationship is definitely back and new entrants to the market know that they have to adhere to a certain set of rules if they are to interact on the major platforms. I know some people like to refer (wrongly) to FX as the Wild West. If so, the citizens are starting to assert their rights and impose law and order. Hopefully a better market will be the result.