Fears about the reliability and speed of EBS, the FX market's dominant interbank broker, have surfaced since the platform suffered a major outage on August 12. The issue is considered sufficiently serious to have been discussed at a meeting of the Federal Reserve Bank of New York's FX committee on September 8.
Many market participants believe the performance of EBS, which is owned primarily by a consortium of active FX-trading banks, has deteriorated as a result of increased access to the platform by non-bank users and black box systems.
Some feel that the system is struggling to cope with extra demand and data traffic, with the result that there are now even mutterings of the almost unthinkable – EBS is no longer automatically considered as the benchmark reference for major spot rates such as euro/dollar and dollar/yen.
Although admitting that the platform has suffered some technological failures, EBS chief executive Jack Jeffery says the broker's recent travails are one-offs rather than a systemic problem.
"The reliability and robustness of the system is our number one priority," he says. "We've had a few specific issues. The problem on August 12 was related to a specific component we'd introduced, which had functioned normally in long-term comprehensive testing to ensure it could handle volume. It started to demonstrate some faults on Friday morning [August 12] and then failed at around the time of the release of the US trade numbers."
Dealers experienced various degrees of latency. "Basically, there was five minutes of uncertainty when the system slowed down. There was some confusion but we coped okay, as we tend to warehouse positions and we have other sources of liquidity if we need them," says Frank Rawlins, head of FX trading at JPMorgan in London.
"If it turns out to be a one-off, it won't prove an issue in the long term. But if it starts to happen regularly, it will become a worry. EBS is pretty much regarded as the hub of the market in the major currencies. If it cannot be relied on, the market will have to address the way it is trading," he adds
Some market participants believe that EBS might have been left behind by more modern platforms. "EBS technology is old and it's not as up-to-date as it could be," says Octavio Marenzi, chief executive of Celent Communications. He adds, though: "I'm not sure this as much of a disadvantage as people suggest; many of the exchanges are also using old technology."
But he adds that one characteristic of algorithmic trading, which is growing on EBS, is that it leads to a vast increase in data flow. "EBS wasn't designed to handle huge transaction flow. There are thousands of orders being input into markets as a result of algorithms, which don't have a chance of getting filled," says Marenzi. Jeffery says that EBS has already taken major steps to update its technology. "We have made a significant investment, including upgrading our core network because we believed FX volumes would grow and that APIs would play a bigger role."
Algorithmic trading
The company is currently migrating its clients on to Brokernet, its new technological platform. So far, 80% of its customer base has been switched. But EBS is taking steps to limit the number of unviable orders that are coming on to the platform as a result of algorithmic trading. Jeffery adds that this is something many regulated exchanges have also been forced to do. "People might speculate that recent problems are the result of EBS AI (the company's relatively new algorithmic trading tool) and API trading, but the system is designed to handle exceptionally high volumes. It is constantly upgraded and our target is always to be able to handle three times our highest level of volume," says Jeffery.
He points out that EBS's record day came just a few weeks earlier than the August 12 outage. On July 21, volume reached $211 billion and a total of 107,000 transactions were processed. "That's our new benchmark," says Jeffery.
EBS is clearly facing a competitive challenge it has not encountered before. But liquidity is notoriously hard to shift. EBS is one of the few entities that have managed to enter a market and fundamentally alter its structure. It was able to do this because at the time of its inception in the early 1990s it offered a technological advantage over the traditional voice brokers. The company is acutely aware that there are now viable alternatives challenging its dominance.
"We take technological issues very seriously. The market is getting quicker, but we have the capacity to cope. If clients do report problems, we will take every step to resolve them," concludes Jeffery.