The Global Foreign Exchange Committee (GFXC) has released a report The Role of Disclosure and Transparency on Anonymous E-Trading Platforms alongside the results of its 2019 survey of attitudes towards the FX Global Code ahead of the impending three-year review.

The anonymous trading report maps out and describes the current e-trading platform landscape, with a particular focus on anonymous trading venues; summarises key challenges raised by the GFXC working group regarding engaging on e-trading platforms, including whether and how they are currently being overcome; and seeks to inform the GFXC’s upcoming work on anonymous trading and disclosures, by highlighting some of the main challenges that anonymous platforms present in the context of the disclosure expectations in the Code and the February 2019 report from the committee into disclosure and transparency.

The latest report highlights how the working group dedicated by the GFXC to the topic has mapped out the various levels of anonymity within the e-platform space, from the fully disclosed to the fully anonymous, as well as the various stages of engagement across the different models. In something of an understatement, it observes that, “Communications regarding expectations and transparency around counterparty behaviour are complicated by the anonymous nature of some e-trading platforms and the fact that market participants may not be able to readily identify their respective trading counterparty.”

The report also stresses the importance of market participants understanding what are acceptable trading practices on anonymous platforms in order to be able to evaluate the actual behaviour taking place on these venues. Accordingly, it observes, trading practices and disclosure policies should be communicated by the platform itself to the participants, for example via a rule book, operating procedures, or other materials. This could also include discussions with market participants directly.

Four key areas were identified as part of raising this understanding, the use of unique identifiers, or tags; order handling or last look; data sharing policies; and available liquidity. The GFXC says that feedback on tags highlighted that it would be “helpful” to understand at what point in the trade cycle the unique identifier is shared and whether or not clients can opt out of this practice. The feedback also noted it could be important to understand if and when this practice is clearly disclosed to users trading on the platform.

It was noted that some venues provide LC tags for LPs, but not LP tags for LCs, and the GFXC says it would therefore be helpful to understand whether the disclosure of tags is symmetric or not. It adds that market participants could observe and understand the behaviour of a counterparty by monitoring interactions with a specific tag and, if desired, could request to shut off liquidity from that tag to prevent future transactions. Members of the committee highlighted this activity as evidence that tags somewhat reduce the level of anonymity on such platforms. Finally, feedback noted that platform policies on refreshing unique identifiers/tags “should be appropriately transparent”, however it was also noted that the availability of pre-trade tags on some platforms were viewed by some as necessary to help better manage liquidity and order-handling, while others were concerned that participants could use such information as signals for counterparty intentions.

Inevitably perhaps, there was more feedback on order handling and last look, with the working group members stressing the importance of users understanding the policies and best practices around the use of rejected order information. As stated in the Code, LPs employing last look should be transparent regarding its use and provide appropriate disclosures to clients, the report says, however it adds this may be “challenging” given the anonymous nature of some platforms.

Feedback to the group noted that there could be more clarity around whether LPs on platforms are firm or not in their prices. The desire for additional clarity over how LCs distribute their orders was also discussed, such as whether it’s full amount or not.

The report lays out some questions and areas of focus related to this, they include;

  • How to know if last look is applied?
  • If last look is applied, is it hosted by the platform or by LPs?
  • If applied by the platform, does the LP define the acceptance/rejection parameters?
  • Does the platform impose any last look criteria on LPs, and if so, how is this disclosed?
  • What is the maximum allowed hold time or minimum fill rate criteria?
  • What are the policies regarding asymmetrical last look?

The latter has been highlighted by Profit & Loss as an area of concern previously, with some believing that operating different hold times for different clients is against the spirit of the Code.

On data sharing policies, for example platforms can offer users information around fill rates, rejections, market share and trade prints either in real-time or with a lag, the GFXC says feedback stressed the importance of understanding the potential use of this information in data feeds provided to other participants on the platform, whether they are real-time or delayed, and whether the client has the ability to opt out of such feeds. Working group members also be stated that it would helpful to understand what post-trade analytics platforms provide and if they are available to all participants or just LPs.

Finally of the key areas, the report notes it would be helpful to know whether users are always aware of which liquidity pools they are sending prices to or which liquidity pools they are receiving prices from when they are part of a curated, or bespoke, pool of liquidity. It adds that some working group members expressed interest in a mechanism on platforms for participants to communicate their commitment to the Code – Profit & Loss understands this is available on EBS’ platform but not on others.

The GFXC says that as part of the 2020 three-year Code review, the anonymous trading and disclosures working groups will consider the need for additional guidance on anonymous trading as well as ways to accelerate the adoption of more effective disclosures. In February 2019 the committee released an update on disclosures which listed eight characteristics that participants can use to develop and review FX disclosures, it says that each of these categories applies to the key topics within anonymous platforms, particularly with respect to counterparty identification, communication, and behaviour. “Where the GFXC believes supplementary material might be helpful this will be developed as part of the three year-review of the Code,” the committee states.

Whilst it stresses that the list is not exhaustive and other Principles may apply, the latest report also reiterates that Principles 9, 17, 26 and 34 explicitly apply to anonymous e-trading platforms, while Principles 19 and 20 could also apply as they relate to information that could be associated with the tag identifications.

Colin Lambert

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