Originally a market driven by
voice execution, more than 60% of the $5 trillion a day
traded on the world’s foreign exchange market is
now moved electronically, up from around 30% a decade ago.
The first generation of electronic FX trading venues emerged
in the interbank market in the early 1990s, with the launch of
Reuters and EBS's platforms. Both have remained as a backbone
of the electronic FX market, supported by dealing banks that
rely on the two venues to manage their risk.
A second wave of multi-dealer FX platforms emerged in the
late 1990s to provide connectivity between banks and clients.
While many venues failed to gain traction, the survivors, such
as FXall, Currenex and Hotspot FX, remain big trading
There has been, however, a fresh wave of new FX venues
launched over the last couple of years. Venues such as Gain GTX
and LMAX Exchange came on stream in 2010-2011. Meanwhile over
the summer of 2012, Euromoney counted seven new FX trading
venues launched in six weeks, including Par FX, FXSpotStream,
FastMatch, and Molten Markets.
|Javier Paz, senior analyst, Aite
Javier Paz, senior analyst at the Aite Group consultancy,
says there are a number of reasons for the surge in new FX
venues into a competitive landscape that was fairly stable
First, he says, bank liquidity providers have become
increasingly dissatisfied with the current group of FX venues
because of what they perceive as practices that favour
automated trading firms, and a sense that the trading
infrastructure of existing platforms is outdated.
Both of these may lead to potential opportunities for new
venues, says Paz.
Furthermore, the emergence of FX as an asset class has been
a driving force behind a flood of new FX execution venues.
commodities and FX markets have benefitted from the lack of
steady, profitable returns from traditional asset classes such
as equities and fixed income.
This has driven fresh investor money into FX from market
participants that demand greater
execution speed and expect a greater degree of transparency
than previously on offer in the currency market. They also have
higher requirements for best execution.
Indeed, that can be seen in the increased uptake in
transaction cost analysis in the FX market.
New participants from non-FX markets have entered the space
looking for faster, more streamlined, transparent FX trading
venues similar to what they are used to in equities and futures
markets, says Paz.
The question is what the electronic trading venue of the
future will look like.
Paz says while many new FX venues have emerged over the last
few years – most of them touting increased
transparency and describing themselves as next-generation
trading platforms – only one, LMAX Exchange, has
taken the concept of transparency seriously enough to register
with the UK’s Financial Conduct Authority as a
multilateral trading facility.
MTF status gives LMAX characteristics similar to an
exchange, requiring pre-trade transparency with public
distribution of price information and without discrimination
against any market participants.
Indeed, LMAX Exchange has an open order book and does
not give liquidity providers a 'last look' at prices they
stream. This last look is common practice at some FX trading
venues; it allows liquidity providers to reject the prices they
quote, which can result in customers not executing deals at the
price they see on their trading screens, particularly in fast,
David Mercer, chief executive at LMAX, says the idea of last
look is an anathema to equities and futures traders.
They see prices on an exchange at which they can buy or sell,
he says. They can’t imagine a situation where a
price is rejected. Why would that happen in any product?
|David Mercer, chief executive,
That is not to say that there is still not discretionary
pricing and discretionary liquidity pools for different clients
at LMAX. It operates one venue in which liquidity providers
quote prices to money managers, retail brokers and proprietary
traders, and another venue where banks trade with each other in
As Mercer puts it, the firm has to maintain a pragmatic
approach – banks after all still want to know broadly
whom they are pricing.
But what we are trying to do is level the playing field as
much as we can within the existing ecosystem. It will keep
evolving, and you could end up with an open order book, like in
equities, for FX, he says.
If you are looking for Nirvana, if you want to know what I
really think, FX should be one open book for everyone from the
bureau de change to the guy trading $100 million, Mercer
In other words, FX could eventually be like equities where,
say, the price quoted for Vodafone shares on the London Stock
Exchange is the same for a hedge fund manager and a retail