Another week, another move by a player in the FX CLOB space, this time from a primary venue in EBS. Albeit the actual changeover is still 18 months away, but what are we to make of the new matching model at what remains one of the platforms of record in spot FX?
Probably the biggest question is whether this is a move to enhance the trading environment on EBS Market with the intention of building volumes, or a defensive manoeuvre aimed at preserving what it has at the moment. Personally I think there are elements of both involved. On one hand the changes do seem aimed at encouraging real interest to be posted to the CLOB, but as well as building volumes that would probably enhance the quality of the market data being offered and, hopefully as far as EBS is concerned, fend off competition from other platforms.
I remember talking to Gil Mandelzis during his tenure in charge of EBS and he recalled one of things that surprised him most when he first took the reins was the passion in the industry around EBS. This is probably because it was the mechanism, along with Matching, that most traders grew up with, but also I think there were, are, plenty of senior people around the industry who were heavily involved in, if not its establishment, then its management during the bank-ownership era.
There is also the fact that, as I have noted several times, in spite of dropping volumes, the quality of the market data has remained high, and as more and more players have come to rely upon algorithms for their pricing services, this is no small issue. Certainly if it ever goes wrong, as we have occasionally seen with both primary venues, there is a knock-on effect throughout the market.
I will confess to being a little parochial when I first heard about the focus on London and New York for the matching engines and wondering what this meant for Asian traders? They are, rightly or wrongly, widely considered the poor relations in the global FX family and making their round-trip times longer can only be a bad thing surely? There will inevitably be a fraction more latency in the process for this region, but I absolutely buy the line from EBS that there will be more certainty around the trading process as a whole. For Asian traders, unless they are predicated upon speed, the differences should be minimal.
Where I am less certain is in the move attracting more natural interest. Yes, absolutely the increased certainty around trading supports this type of business, and equally important, the obstacles to ultra-high speed traders in MQLs and latency buffers, remains, which means they are less likely to be ‘pipped’, but I think there is a fundamental challenge in attracting this business to any CLOB.
As always, I could be wrong, and indeed if we look at what is probably the biggest of those obstacles, signalling risk, talking to traders generally my sense is they believe that Matching hold more natural interest down the book that EBS. That is as may be, but if one primary CLOB can do it, then so can another. I think Matching has an advantage in this area because of the “specialist” currencies on the platform, but that is not to say that EBS cannot attract more natural interest down the book.
If it is to do that then probably it has to overcome an obstacle that is in place only because of the areas in which EBS dominates. I will argue until I am blue in the face that in spite of some venues’ ridiculous marketing, there are probably a dozen decent market makers in the entire G10 spectrum. There are specialists of course in certain pairs that will boost that numbers, but when it comes to being a high-quality market maker in all of G10, that number diminishes quickly.
The problem for EBS is that EUR/USD and USD/JPY – its mainstays – are probably the easiest to make a market in. This muddies the picture because depth of book is so fluid thanks to transient interest from wannabe market makers who in reality price on this venue outside top of book and on others with the protection of last look. There could be plenty of interest in the book, but not only is it swamped by these ‘pretend’ LPs, but when interest does show, those same players suddenly get very brave and bid or offer just in front of the order. Whether they do that outside of the top two markets is not clear – my guess is they rarely do.
The paradox with EBS, indeed with most CLOBs, is that a surfeit of high frequency, high turnover traders means potentially more brokerage, but it also impairs market quality in the eyes of many. There is also, I believe, something of an obsession with the number of LPs and prices being made, when in reality what actually matters is the number of trades being done – and by association the number of liquidity consumers. Several of us in the industry looked at the growth in the number of market makers out of the HFT space, for example, and saw them eating themselves. It was one of the in-jokes of the HFT era that one of those players wanted to see as much business as they could – unless it was from another HFT! I am not sure it is that different with all these so-called ‘market makers’ today. They only want to be in the market when there is an immediate ‘out’, they have no order book to support them and as such are quick to pull the pin if things go wrong.
And it is here that I think the changes intended by EBS will work, because they are aimed at what could be termed the ‘high value’ rather than high volume business. It is a recognition – and neither EBS nor any other CLOB would admit this publicly, this is my own sense – that the liquidity pool was getting murky because too much activity was merely people playing games or churning and burning business.
This is not the first time that EBS has tried to do something about conditions on its primary market, however I do think this time the circumstances are different. No matter what anyone will tell you, I cannot be convinced that EBS changed its direction in 2011-12 in response to anything other than the PureFX project. The latter, as ParFX, has not been a success in terms of establishing a prominent position in the FX market, but it did have one huge impact and that was “making EBS better” as one senior e-trader told me some years ago.
This time, the sense is EBS is being a little more proactive and is going back to its roots by becoming a very simple mechanism again that does the basics very well and allows the market to show its true interest. I managed a quick and unscientific straw poll of traders since hearing the news and it is clear that there is support for the move, as there should be because unlike some other recent moves by platforms, the consultation appears to be have been extensive.
So, on balance, this looks a solid move by what remains an important venue in the spot FX market and the latest in a series of moves whose intention is to promote more natural interest. It is probably wise to point out that by doing this, EBS’ volumes may not go any higher, but the quality of data and interest on the platform should. Of course, it may turn out that the new model becomes an even better playground for people who own microwave towers, but as long as the other protections remain in place I doubt that will happen. What I think we have here is a sensible, rational move on the back of a recognition that in some FX businesses, headline volumes are not the only key performance indicator.