NEX Markets has released a new report, which it says demonstrates greater transparency and improved behaviour in the FX market since the FX Global Code came into effect in May 2017.

The report, entitled The FX Global Code: Changing Transparency and Behaviour, uses data from NEX Quant Analytics and highlights how the firm has witnessed a significant reduction in hold times, reject rates and a tightening of spreads on the bilateral EBS Direct platform. “This suggests an industry-wide move for greater transparency and improved market behaviour,” the firm says.

Of the top 10 liquidity providers on EBS Direct, average hold times have reduced 61% from 93 milliseconds 18 months ago compared with 37 milliseconds today. Driven by Principle 17 of the Code, which deals with last look, the firm suggests that this fall in hold times indicates that fewer FX counterparties are now using the much debated practice to execute trades. “In turn, this reduces the possibility of exploitation, contributing to improved counterparty relationships and a healthier market ecology,” it adds.

Similarly, over the same period reject rates across the top 10 LPs have fallen 41%, from an average of 5.3% to 3.15%, as more trades are now being executed on the price originally quoted. As well as an increase in market liquidity, this suggests that the Code has acted as a catalyst for more efficient trading, NEX argues. 

“The symmetry between a reduction in hold times and reject rates over the past 18 months demonstrates that the Code is creating a greater openness and a sea change in behaviour for the better,” says Seth Johnson, CEO of NEX Markets. “With increased attestation to the principles, combined with the proliferation of data and analytics in the industry, we expect to see a continued improvement in execution quality, better behaviour and greater market transparency.”

The report does, however, also observe that in spite of over 500 institutions committing to the Code since it came into effect, there are still thousands of smaller and midsized participants in the FX wholesale market yet to sign up. “It is critical that all market participants get behind the Code,” says Tim Cartledge, global head of FX and head of product, NEX Markets. “Central banks have played a crucial role in promoting and ensuring its adoption; now it’s time for liquidity consumers to follow suit. If the FX industry does not take this opportunity, it is highly likely that we will end up with regulation, which will be lengthy and expensive to implement. Only with full adherence can we create a fairer and healthier FX trading environment for all.”

The report observes that while the main focus on Code adoptions has been on the LPs, liquidity consumers (LCs) also have a role to play. It notes that LPs committed to the Code are encouraged to provide competitive pricing and more efficient execution to their clients, while managing their own prices and risks. Yet when faced with uncertainty around the behaviour of a client, the easiest way for an LP to manage the risk is to widen their pricing. “The more information the LP has about the LC’s transaction profile the more accurate the price they can provide,” the report states. “If both the LP and the LC take responsibility for disclosing all relevant information and aggregation venues add flags to their static reporting suite to clearly identify to the end user which LPs and LCs attest to the Code, the marketplace will be more efficient and mutually beneficial for all.” 


As well as highlighting the role that liquidity consumers can play in helping to improve trading conditions, the report also stresses the help that platform providers can offer. It notes that if multi-dealer platforms are able to provide their clients with enhanced data, the insight gained from increased transparency and the resulting actions of market participants will encourage better behaviour within the FX markets and achieve the overarching goals of the Code.

“When looking at how to comply with the Code, much of the market has focused on the relationship between the LP and the LC,” the report states. “Yet trading venues have an important role to play in supporting price discovery and encouraging adherence to the core principles of the Code. For example, by adapting matching logic and execution workflow, trading venues are able to provide clients with deep analysis of their orders and market data which ultimately results in positive market behaviour.” 

The report also finds improved transparency around transaction cost analysis (TCA), which, although it has been actively used in the institutional investor space for many years, with the arrival of the Code, the active trading community is beginning to see the value in providing and benefiting from greater transparency. “Led by multi-dealer bilateral venues, enhanced analytics allow market participants to compare their trading performance relative to community averages, thereby preserving the integrity
of participants’ data,” the report states. 

The report highlights several metrics that can help measure execution quality in spot FX, but it warns that these are merely a start. “The next steps are to standardise the methodology across the sector and ensure like-for-like comparison of behaviour,” it states. “This should drive best practice and in turn encourage behavioural change and ensure a more robust, fair and transparent marketplace.” 

While noting that the Code “has achieved a lot in its first year, particularly when taking into consideration it is a principles-based initiative, rather than being a mandatory directive, the report stresses that the FX industry is responsible for getting behind the Code and encouraging greater adoption to create a healthier market environment for all. 

Looking ahead, NEX Markets predicts several “industry defining moments”, including increased attestation to registers, which will improve at a steady pace as 

more strive to conform thanks to peer pressure. The report also suggests that adding flags that clearly identify to the end user which LPs and LCs have attested to the code could incentivise greater sign up.

The report also predicts a proliferation of data and analytics in the industry that will serve to increase transparency and result in an increase in best execution; improved behaviour; a reduction in the use of last look; and an increase of trust amongst all participants.

“Coupled with developments in data science and machine learning, market participants will be able to monitor performance more effectively and encourage an improvement in trading behaviour, such as requesting tighter pricing or changing counterparties,” it adds. “A move away from static reporting towards analytics via API feeds will allow clients to receive near real-time analytics in a raw format to supplement their own proprietary analytics.” 

The report closes by reiterating Cartledge’s point that it is critical that market participants get behind the Code in 2018, the second year of its existence. “If the wholesale FX industry does not take this opportunity to sign up to a common set of principles written by those respected in our industry, it is highly likely that we will end up with regulations which will be lengthy and expensive to implement,” it stresses. “The Code has already encouraged greater transparency and a change of behaviours for the better. With full adherence, we can create a fairer, healthier trading environment for all.”

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Twitter @Profit_and_Loss

Colin Lambert

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