Multibank platform providers need to broaden the range of
liquidity options that they offer clients in order to thrive in the diverse FX
market ecosystem, said panelists at Profit & Loss’ Forex Network New York conference.
There has been much discussion in the industry about whether
more FX trading will occur through central limit order book (CLOB) venues, or
whether clients will ultimately prefer a bilateral, disclosed model.
“Disclosed trading is a big part of our business and it’s
growing right now because of customer demand,” noted Paul Ainsworth, global
head of sales at FastMatch.
Similarly, Hugh Whelan, head of liquidity management at EBS
Direct, said that the reason why EBS BrokerTec set up the EBS Direct platform
was in response to client demand, but also because the firm felt that it would
complement its existing CLOB platform, EBS Market.
“You have to provide multiple liquidity options to your end
client,” he said. “If the market decides that it wants bilateral disclosed
trading, then we’re providing that. In times of need, the market turns to CLOB
trading, but in normal, benign liquidity conditions they go back to
relationship trading where they can secure preferential rates and
relationship-based pricing from their liquidity providers.”
Matt O’Hara, CEO of 360T Americas, argued that the diversity
of market participants that trade FX means that there is a need for a variety
of trading venues that offer a range of different trading paradigms.
For example, he pointed out that while some end-user clients
might prefer transacting on a disclosed bilateral basis, its rare to find a
tier one bank trading on a disclosed basis with another tier one bank. Instead,
they typically trade on an anonymous basis in a CLOB.
“But whether it’s disclosed bilateral or anonymous CLOB,
firm liquidity or last look liquidity, futures or OTC settlement and clearing,
there are places for all of those different mechanisms and trading styles. This
is because this market, which generates five trillion dollars of trading every
day, is composed of very diverse clients that have very diverse needs,” he
Rather than one model replacing the other, O’Hara claimed
that they complement one another. This is a view that John Miesner, global head
of sales at GTX, appeared to agree with when questioned whether a move towards
bilateral disclosed trading could represent a challenge to the ECN business
“I don’t think that an ECN is limited to doing one thing, such
as a central limit order book,” he said. “For example, there are more and more
tier two and three banks that do not want to hold risk, either for regulatory
and compliance reasons or due to the pervasive risk-off mentality these banks
are adopting. So these firms are coming to an ECN because they want to use our
RFQ or RFS functionality to get a block amount done and don’t want to hold any
Although stressing that the ECN remains GTX’s flagship
product, Miesner said that the firm has worked to diversify it’s offering, also
running a registered swap dealer, a prime services business and a registered
Swap Execution Facility (Sef), which support trading in any FX product. He
claimed that this benefits clients by providing a wider range of platforms and
trade execution services in one place.
“So I don’t think that there’s a threat to the ECN model,
but it’s up to each venue to adapt and change along with the market to provide
the services that clients are looking for,” added Miesner.
Discussing the changing risk appetite of the banks, the
conversation soon turned to the role of non-bank market makers as liquidity providers
for multibank platforms, with each of the speakers broadly agreeing that again,
it is about providing clients with a broader array of liquidity options.
“If a customer wants to interact with a non-bank market
maker on our platform, then that’s something that we can facilitate. In fact,
we’re seeing more and more demand for this. We get requests from a broad
spectrum of client types including banks who want to access non-bank liquidity
via FastMatch and we see this trend continuing,” said Ainsworth.
O’Hara pointed out that FX liquidity is constantly evolving,
having changed from voice trading to electronic interbank brokering platforms,
to single dealer platforms and multibank ECNs. He also noted that, because of
current credit challenges, some of the forwards market has lately gravitated
back towards voice trading.
“Liquidity shifts – it doesn’t shift quickly, but when it
does there’s a reason for it. The reason why it’s shifted recently is because
there’s been a change in the risk appetite of the banks and so other market
participants have stepped in to effectively fill the gap that they’ve left,” he
O’Hara claimed that having non-bank market markers on 360T’s
platform has “enriched” the liquidity available on the venue and stressed that
there is real client demand to connect with alternative liquidity providers.
Whelan pointed out that when there are liquidity gaps in the
market, firms will inevitably look to fill those gaps and said that firms
should be judged on how effectively they provide liquidity rather than who is
“With any market maker, the true test is whether clients are
trading on their prices and whether they can sustain those prices whilst also
meeting the requirements of a market maker on any given platform.
“If market makers can do this, then they will stay and
provide liquidity alongside the banks, so it’s more important to look at the
qualities of the market maker rather than whether it is a bank or a non-bank,”
If one of the problems facing the FX market right now is
that liquidity is thin, then the panellists concluded that one solution to this
problem is ultimately to provide access to more liquidity that can be accessed
in different ways and comes in different shapes and flavours.