My thanks for all the kind comments regarding the midweek effort for my birthday and the birthday wishes – special thanks to the correspondent who advised me to stop writing the usual [expletive deleted] about stuff I know nothing about and do more songs! Sorry to disappoint you but…
We’re back on the industry again and some observations on what is currently the holy grail of certain players – a bank-only platform. Although the Pure project is gathering dust, I am repeatedly assured it is not finished. Whether it is or not, only time will tell, but as I alluded last week in this column, moves appear to be underway elsewhere to satisfy the demands of the banks.
I have been asking the question for two or three weeks now in private conversations – what was the last bank-only platform? (answer at the bottom of this column). A follow up question could be, do we actually need such a platform?
I have been accused over the past couple of months of being anti-bank and in favour of the HFT space, mainly due to what was perceived as my opposition to the Pure project. Surprising as this may seem to those of you who have been following this column, I actually do see value in a “pure” venue and I have done for several years. I do not, however, believe it should be bank-only.
In 2004 I first argued the case for a mechanism wherein banks could offload larger risk. First suggestions are never the final solution, of course, especially when they are made by half wits such as myself, but at the time the biggest argument I heard against the idea was that the banks did not trust each other enough to be able to operate in such an environment. My solution to that was a dark mechanism, which was also shot down, which is fair enough.
Shift forward six years and the banks suddenly find they do trust each other (to a degree) because they have bonded due to a common “problem” called the high frequency community. My argument against the Pure project boils down to my perception that it is taking a blunt instrument to a surgical problem, in that the real problem, as it is perceived by certain banks, was HFT.
The Pure solution seems detrimental to every client of the top banks, not just high frequency firms. I also think that spending valuable technology dollars at a time when FX revenues appear to be under pressure is the wrong move.
What is needed is a venue where participants with natural interest can meet. In the past the banks had that in EBS and Reuters Matching, but hedge funds in particular (as well as some corporates and real money accounts) wanted access. So what is needed now is a venue where hedge funds, real money funds and even corporates if they desire, can interact with banks on an interest-only basis.
The Pure project is a decent idea but it is too limited in its purview and ignored the realities of the modern market. It is no longer about just the banks, there are too many other players that use the FX market to clear risk – and they may want, may indeed be required in certain jurisdictions, to trade in a public environment. I understand the banks want these clients trading on an RFS-basis, but many of them want to put interest into the market, rather than cross the spread.
So what happens to HFT? Not a lot really. I think the segment is important to our industry. It has been a big part of the volume growth that we have seen in recent years. Equally, however, we do need to protect the integrity of the core pricing mechanisms we have. Both can live side-by-side – it is being proved by JP Morgan and Citi who both have HFT firms providing liquidity to their client bases on their ring-fenced Match engines (some HFT firms are complaining about certain clients picking them off, it appears. I am sure I am not the only person to find this mildly ironic).
If the HFT firms can provide better pricing (crucially in the size required), then the natural interest will drift towards venues on which they operate. If they do not fulfil the “liquidity provider of last resort” function, the interest will stay where it is.
This is an important time for our industry and there appears to be a desire for a re-engineering of sorts. That is fine, it is called evolution (or to shoot down my own column of a few weeks ago, innovation). But we should seek to get the re-engineering right so that all participants that execute in a similar fashion are able to meet on one platform, not just banks.
For those that are not necessarily in FX to execute their natural interest but more for financial purposes, well they can execute on a different mechanism – unless, crucially, they meet the rules of the re-engineered platform (which could look like Lava’s interbank offering – the last dedicated interbank platform in the industry).
There is room in the FX market for everybody, it is meant to be a democratic mechanism after all….