The FX Tape, What’s Different This Time Round?

The consolidated tape for FX launched by FastMatch today looks very different to the one initially proposed by its CEO, Dmitri Galinov. Galen Stops takes a look at what’s changed.

FastMatch has today announced plans to launch a consolidated tape for FX, something that its CEO, Dmitri Galinov, has been working towards for some time.

Profit & Loss previously reported on an earlier proposed iteration of this tape back in May 2016, but the one launched today looks significantly different.

For starters, the initial approach taken by FastMatch was to construct a consortium of market participants that would together underwrite the cost of having a third party technology vendor build the tape. Under this model, the consortium members would be joint owners of the tape, they would contribute data to it and then share the revenue, as well as having the option to sell their stake in the ownership later down the line. 

By contrast, FastMatch has decided to go it alone, building the tape itself and then enticing other market participants to contribute trade data to it by offering to share 50% of the net revenue generated by the venture. 

Speaking exclusively to Profit & Loss, Galinov explains why this shift in approach occurred.

“The consortium idea didn’t work for two reasons. The main reason is that many participants were not able to write a check to underwrite the initial build, either because they had to go through various investment committees or layers of approval or because they were preoccupied with other business issues, such as ensuring Mifid II compliance.

“The second reason is that the initial idea for the tape was that it would be distributed in real-time, not aggregated and delayed like the version that we’ve launched today. Because it was proposed as being trade-by-trade and real-time, there were a number of potential participants who were worried that it would reveal too much of their trading information. Because of both these factors, it was difficult to raise the money needed to build the tape and so FastMatch took on that commercial risk to create the product,” he says. 

A central reference point

The fact that the new tape is aggregated, anonymous and delayed are key differences compared to the previously proposed version, although there is an option to have volume attributed to a specific contributor should they want.

“The most important thing that I think this tape does is show the actual volume per units traded, this is more important than even the prices that it shows. In the world of algo trading, the volume per unit of time is an extremely important factor, and I think this tape will help with that,” says Galinov.

He adds: “Another important thing that this tape will do is provide a central reference point for the market. When you have an event like SNB, it’s better for all of the clients to be able to look at one central reference point to see the low of the day, rather than having to call every single ECN to figure it out. This is what we’re aiming to do with the tape, to be a standard reference point. I think that’s extremely valuable, not only from a trading perspective, but also from a compliance and an operational perspective.

“Even the fact that there will be more information about trades available in the market means that there will be less potential for any kind of manipulation and hence it will reduce the legal risk for market participants. This tape has a whole range of very positive usages in the market outside of purely trading ones,” he adds.

Obviously, building critical mass is essential to the tape’s future success, and Galinov himself predicts that only once it exceeds $100 billion in notional per day will it be big enough to have significant value to market participants and therefore start generating revenue. 

The pitch from Galinov to market participants that might be willing to contribute data to the tape is essentially that it represents an opportunity for them to monetize data that they are already sitting on.

“If you think about it, most of the data in the FX market is not held by the platforms. Even if you were to stitch together the market data offerings of the biggest platforms in the market, you’re probably only looking at something in the region of 15% of the market. Most of the data is sitting outside the platforms, in the banks, the non-banks and the buy side firms.

“So basically, this is a channel for all those firms to monetise their data, while also making the market more transparent. There’s a lot of firms just sitting on this data right now, but what we’ve done is create a big pipe of data with our technology that they can contribute to and then get paid for that data,” says Galinov.

Making new data available

This point subtly highlights another change from the initially proposed tape structure. Back in 2016, Galinov identified four different types of institutional FX market participants that he felt needed to be contributing to the tape in order for it to be successful. These were the banks, non-banks, ECNs and brokers – both institutional and retail for the brokers.

Now clearly the ECNs can, and in many cases are, already monetising their market data, and thus – unsurprisingly – no other ECN is involved in the tape this time around.

But Galinov no longer believes that it’s necessary to have their participation in the tape, pointing out that it is of limited value to the market to provide it with data that is already accessible.

“The objective here isn’t to bring the information that’s already available on the ECNs to the market, firms can already get this data, but rather to bring data that isn’t currently available on these platforms to the market,” he says. 

It’s also worth noting that this latest version of the tape will accept FX market data from both retail and institutional sources, whereas the original plan was to focus purely on the latter.

“We will put both wholesale and retail data on. We’ll put an ATM transaction that was converted on, that’s a trade that someone did. Data is data, and if someone transacted FX, then we think it’s important that the market should see that,” comments Galinov. 

Although the changes that have been made to the previously proposed version of the tape all seem more likely to improve its chances of success, there remains some grounds for skepticism.

For starters, the way that the tape is structured means that firms could be incentivised to contribute a larger volume of trades in very liquid currency pairs, while withholding any large tickets or trades in less liquid currency pairs. Couldn’t this lead, for example, to lots of firms simply pushing small-sized EUR/USD trades towards the tape, while keeping the more valuable trading data in-house?

“It does encourage the behaviour of putting smaller, more liquid trades on while holding off on larger, less liquid trades,” concedes Galinov. “But even showing this EUR/USD data adds value to the market because right now there is not good, consistent last trade information in the market and as a result, some clients can struggle to find good execution.”

Galinov continues: “Yes, the tape might not initially have larger, less liquid trades on it. And yes, it would be more valuable if it included these trades. However, we’re fine with that at this early stage of the tape and we still think it’s extremely valuable. At this point, we just want clients to have a good experience, we definitely don’t want to encourage someone to put a trade on the tape that then creates market impact.”

Remaining in the dark

Despite Galinov’s avowed aim to bring new data and information to the market, this may potentially prove hard to do in practice. This is because there is nothing to stop large trading firms just sending all the trades that they do on other lit venues to the tape. If this approach were to become prevalent, then the tape could simply become a partial aggregate of ECN trading activity – not that this would be without value, but to the point highlighted by Galinov previously, this data is already accessible by market participants. 

Another potential criticism of the consolidated tape as a concept in FX is that it is essentially shining a light on trading activity that firms would prefer to remain in the dark. There is a reason, after all, why market participants have become increasingly concerned about the market impact caused by trading on lit venues.

“I think that there’s a very big difference between pre-trade transparency and post-trade transparency,” is the response from Galinov. “I think that when you’re talking about dark trading, you’re talking about pre-trade transparency, but once the trade is consummated, then I don’t think that there’s any harm – except, as previously discussed for big or less liquid orders – in having transparency post-trade.”

He adds: “If you look at equities, there are many dark pools and clients can enjoy trading in the dark on the pre-trade side, but once the order is done, it’s reported to the tape within 30 seconds.”

Any FX tape also has to contend with the fact that many buy side firms strongly support the idea of more transparency in the FX market, while simultaneously being strongly reluctant to actually contribute their own data in order to achieve this. 

“I agree, but that is true of every trader – they want to know information about others, but they don’t want anyone to have information about them! That’s a classic approach to the market, but in general, many buy side firms that we discussed the tape with have been extremely supportive and they would not mind sharing information within certain parameters,” he says.

Whether or not the tape becomes a success remains to be seen, and a lot will depend upon how quickly FastMatch can build the critical mass needed to generate value. If it reaches such a critical mass that it is generating significant revenue, then it creates a virtuous circle from a business perspective, encouraging more participation and further growth in revenues.

Regardless of its eventual success though, the concept of a consolidated tape for FX clearly offers potentially significant benefits for the market.

When Colin Lambert selected Galinov as his FX Person of the Year in January, he noted the importance of innovation in the FX market and stated: “This award is not about whom I agree with all of the time, however (that would be a very short list), but about who I think tries to make the industry a better place.”

So while the technical merits of the tape might be up for debate, it’s hard to argue against the attempt itself to innovate and try to improve the FX market.

Galen Stops

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