Euronext FX is changing the distribution methodology of anonymous counterparty identifiers – tags – on its platform. Unless the client (taker) specifically elects to have their identity shared, pre-trade tags will not be provided to liquidity providers after August 1.
The use of pre-trade IDs is a sensitive subject in FX markets, with proponents saying it allows the LPs to curate the liquidity they provide in a smarter fashion (and also help protect the LP from predatory trading accounts) while opponents argue it allows the LP to skew their pricing based upon the market intelligence they have amassed regarding that ID.
From July 1, Euronext FX will provide a facility for tag data to be delivered simultaneously to both parties, immediately the trade is complete. Previously, takers received the tags immediately following the trade, but taker tags were available to LPs pre-trade. Takers were able to request their tag data were not shared pre-trade, however from August 1, all taker tags will be generic unless the client has opted in. As has always been the case on the platform, takers will still not be allowed to refresh or change their tags.
Clients will have two options to receive post-trade tags – a FIX DropCopy session in which tags are delivered immediately, or an email delivery, where tag data is delivered as a file at the end of a trading session.
“This is a subtle but important change,” explains Grigoriy Zeleniy, head of liquidity management at Euronext FX. “We have offered this functionality previously but the client had to opt out of having their tag made available pre-trade, now they have to opt in. We think this is a step towards a fairer market place.
“Last year, after consultation with clients, we removed paids and givens from our market data feed because clients agreed that there was too much information being provided,” he adds. “This is another move towards a transparent ecosystem – takers are able to monitor rejects in real time and adjust how they trade accordingly. Equally, if a taker is rejected by multiple LPs they will know about that, but we will also investigate to see what caused such a high reject rate – it could, for example, be a function of the taker’s flow.”
The desire to achieving a balance is clear in this move, as it was when the then-Fastmatch FX introduced its Leak Sweep Protection order, which effectively outsourced the last look function to the platform, making the entire process cleaner for both LPs and takers and providing last look protection to LPs without the information leakage for takers. Zeleniy says the latest will also highlight stronger LPs. “We are trying to be as symmetric as possible,” he explains. “In association with our FlexMatch functionality in the matching logic, this will reward those LPs will lower reject rates, faster response times and minimal market impact.”
Under the FlexMatch logic, Euronext FX monitors LPs’ fill rates, response times and market impact, effectively the internalisation rate of the LP, and ranks them accordingly. Then, when multiple LPs are showing the same price, it prioritises them according to their rank, thus rewarding good behaviour. While this may see flow migrate to a slightly smaller set of LPs, there is also the factor that the liquidity on offer will likely be of a higher quality if certain LPs with less than robust models struggle to compete.
“This reinforces our commitment to transparency and anonymity,” says Zeleniy. “We offer lots of order types and take our duty to police behaviour around all them seriously and will continue to work in conjunction with our clients to deliver a better, fairer, market place.”