One of the core market mechanisms launched
20 years ago this month. Colin Lambert takes a
look at the impact of EBS on FX markets – and,
more latterly, the impact of markets on EBS.
As EBS enters its third decade of operation, the platform
would appear to be facing one of its greatest challenges
since launch. At a headline level, volumes have fallen
dramatically from their peak in the 2007-08 period and the
platform faces more competition than ever from other
It would be wrong, however, to see this as a straight “EBS
versus the rest” contest, for just as EBS was boosted by, indeed
played a leading role in, the boosting of FX volumes by means
of the e-channel, today it faces its biggest challenge from
changes in the market’s infrastructure.
It is testament to the emotion that exists around EBS that this
anniversary is significant – it is often forgotten that EBS was not
actually the first spot ECN, that honour goes to Reuters
Matching, which launched a full 18 months earlier, but such is
the place EBS holds in the minds of the market. Partly this
emotion stems from several senior people in our industry being
there at the birth of what was a bank-owned and driven project,
and partly from the role it has undoubtedly had in changing the
dealing habits of a generation.
EBS’s journey from new kid on the block to the core market
venue is highlighted by how it was perceived over time. For its
first five years or so, it was universally known, somewhat
derogatively, as “The Toy”. Volumes were reasonable, thanks
mainly to the patronage of its owner banks and its very
visibility meant that more and more, prices quoted to
customers via the telephone were sourced from EBS and
It should not be forgotten that Matching has had similar
success to EBS; in fact, one of the perennial challenges faced
by succeeding EBS heads was how to extend its influence into
other currency pairs beyond its “core” strengths in DEM
(EUR), JPY and CHF. Partly this was because those same
banks that established EBS to ensure that Reuters did not have
the field to itself, wanted to ensure they did not over-rely upon
EBS. This could be paraphrased as “we want you to
succeed…but not too much”.
The first real boost to EBS’s volumes probably came with the
advent of the euro. Prior to that, EBS dominated USD/DEM
trading, the biggest market in the world at that time, but a lot of
the European crosses were on Matching. Once those crosses
disappeared into the euro, more trading went the way of EBS
and a reputation for being the deepest and most reliable liquidity
pool was born. That is not to say that it didn’t already have significant status in the market – it did – just that domination
really started then.
This domination grew and even the sale of the business to Icap
did not stop it growing, in spite of some predictions to the
contrary. Icap was able to spend the money and resources to
improve the technology infrastructure, as well as take out some of
the rivalries that inevitably permeate an ownership consortium.
There are two recurring themes in EBS’s development over the
years – firstly, its fortunes appear inextricably linked to its
relationship with those banks and secondly, at the very moment
EBS was at its peak, the seeds that were to undermine that
position were being sown.
It could be argued that EBS is collateral damage in a changing
market microstructure, if it is, the problem started internally.
In 2004, while EBS was still bank-owned, it unveiled a
service called EBS Prime. Originally intended to be a
mechanism for smaller banks to use the platform, pressure built
for it to be extended to the buy side – something that would
help provide a boost to what was then a flagging FX prime
brokerage industry. When EBS Prime was first extended, the
idea was to target hedge funds, firms with “real” business to do.
However, events were soon to overtake that and dominate the
market debate for years to come.
The growth of EBS Prime, allied to what was undoubtedly seen
as a “flight to quality” in difficult times, saw EBS thrive through
the crisis periods of August 2007 after the failure of Bear Stearns
and September/October 2008 following Lehman’s demise. In
August 2007, EBS saw an incredible $456 billion go through the
platform (single count, so close to a trillion gross), it followed that up with record average daily volumes for September 2008 at
$274.2 billion. Indeed, in 11 of 15 months between August 2007
and October 2008, EBS topped $200 billion ADV – and three
other months were in the $190 billions.
In the background to these events, however, something else was
taking place that was to create problems. In July 2007 EBS
enhanced its EBS Live data feed to reduce latency and help
algorithmic traders better process data from the platform, and in
early 2008 it upgraded its technology again to deliver faster round
trip speeds and even faster data delivery via EBS Live.
These moves, very much aimed at ensuring EBS offered its
clients reliable and timely data, allied to the fact that EBS had
proven itself the most liquid electronic venue in the already liquid
FX world, attracted even more interest from high frequency
trading firms. These firms, struggling with liquidity issues in
most other asset classes, were desperately seeking a playing field
for their strategies and while CME offered a reasonable outlet,
these firms wanted other venues and besides, at the time CME
was doing less than half the daily volume of EBS.
This movement of HFTs into the EBS arena, via EBS Prime,
was seen in many quarters as a good thing for everyone – more
liquidity, more business for the prime brokers and more brokerage
for EBS. A side effect however, was that EBS faced a growing
dilemma of how to maintain the support of algo traders
demanding more speed and human traders demanding less. The
fact that its three matching host models helped some of the HFTs
“game” the platform only added to the problem.
Around 2009, EBS hit probably the worst possible scenario in
this delicate balancing act when its users were split 50-50
between human and algo. Volumes were down on previous years,
but that was to be expected given overall market volumes had
dropped, but in 2010 volumes recovered previous levels generally,
but EBS didn’t. Why? Well, other platforms had come on the
scene about a decade before and were now achieving success in
grabbing volume and a relatively new concept called aggregation
was also starting to make itself felt. The real hit to EBS at this
time was, however, internalisation. Banks, learning the lessons of
the global financial crisis, sought to keep as much risk as possible
internally to retain as much spread as they could from customer
business and into the bargain reduce their reliance on each other –
no small matter post-Lehman.
The problem for EBS was that internalisation works best in
liquid markets – and EBS was at the time the biggest venue in
those markets. Equally, internalisation is a market share game,
wherein to help it work better the banks seek to see as much
business as possible. Whilst there has been no overt move, the
popularity of market share and internalisation within bank FX
business models has seen several bank single-dealer platforms
effectively move into competition with EBS.
Another problem that had been bubbling under the surface
since 2007-08 also played a role and highlights what had become
an air of distrust between the banks and EBS, which eventually
led to a direct competitor being created. The issue arose over the
use and distribution of EBS Live and included, most seriously,
the belief among senior FX bankers that some high frequency
firms were getting a different quality of data.
This was seen, according to bankers who spoke to Profit &
Loss at the time, as the last straw and led some banks to, as one
put it at the time, “put their money where their mouth is” and
back a competitive venue.
It is hard to say at this relatively early stage what the real
impact of the “Pure” project has been on EBS. By backing Pure
and ultimately handing the project over to Tradition to rebrand as
ParFX, the banks showed EBS they meant business (by flexing
their muscles – a tactic of the modern era that started with the
launch of EBS itself) and Icap heard the message loud and clear.
From a business that looked to many outsiders like it was
happy to get into, and stay in bed with HFT, a new approach was
outlined under new management that brought the platform closer
to the banks again.
Volumes since the change have just about matched the quarter
prior to that change in March/April 2012, so it is easy to argue
that the jury is still out as to how successful that decision was.
Overall market volume has risen, however, and the latest data
from the world’s FX committees shows a surge in yen volume
which was not reflected on EBS (see story this issue).
Undoubtedly, aggregation is playing an increased role in the industry and this represents the latest challenge to EBS.
It is easy to look at EBS and make gloomy predictions; however, it is not all bad news there. Firstly, there are high hopes
for the platform’s own aggregation project EBS Direct which is
receiving accolades from the market and is likely to be vitally
important for the business going forward.
Equally, EBS should be looked at through the prism of the
modern market. It is very easy to look at the numbers and see
nothing but decline – and the facts talk for themselves, numbers
are down significantly – however this ignores changes that are
taking place at the firm. When the platform was handling $250
billion a day everything was great and money could be spent.
Now it is handling something like $110-120 billion per day and it
has cut its cloth accordingly.
In 2009, the editor of this publication argued that a new
democratic landscape was evolving the industry in the form of
multiple venues holding roughly equal shares of the business. Part
of this evolution has been the decline in influence of EBS. That
does not mean, however, that it does not remain a significant
influence – it does – rather it means that EBS now has to react to
or align itself with industry developments, rather than lead them.
More to the point, the FX market, for all the benefits and
success of aggregation and internalisation, still needs venues
upon which it can clear residue risk. The challenge for EBS (and
other ECNs) is in coping with an industry that has become more
efficient at managing risk.