There has been a bit of moaning and groaning going on about EBS’ plans to introduce greater order book transparency. I got a call last week from one old sell-side mucker asking me if I’d seen it. And I have – it was on full display in Icap’s lobby in London when I paid the broker a visit a couple of weeks back.
Almost a decade ago, I used to spend most of my day staring at Eurex’s Bund futures. I was struck almost immediately by the similarity of futures and what was then USD/DEM and is now EUR/USD. What I particularly noticed was that the depth of orders was seldom an indicator of which way the market would move next. The contract was and still is so liquid that natural interest could materialise at any moment.
There still seems an old-fashioned view that greater order book transparency will take out some of the skill of FX trading. It will certainly make some execution easier, but even if there are protests from its users, EBS really has little choice. If it does not change, the brave new world of algo trading – which is totally dependant on order book transparency – will see it lose volumes to those platforms that are more transparent.
“It’s difficult to say how the market will react to this,” says the chief dealer at one very large user of EBS. “EBS/Icap does plan to release the depth of book before the year end… I think this was inevitable. EBS is trying to maintain the market share they feel they have lost to the newer platforms that already show the market depth. Its plan is to make the user more comfortable with executing larger transactions on their platform, rather than elsewhere. At present the market will transact their larger business elsewhere in order to get a fill… because by hitting EBS the market could well move against them.”
EBS publishes a guideline of what it terms its regular amounts. For EUR/USD it is currently €35 million. Often, prices will be good for more than this amount, but users currently have no way of telling. “I think for market makers to customers it is probably a good move… We would then be able to hopefully transact deals with better execution… I think this change was always going to happen. I feel that EBS could well maintain their turnover and indeed increase it, but the market movement could well be less. So, higher turnover in a smaller range,” the chief dealer concludes. And if you want to see how it works in another market, take a look at Bund futures.
