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“What is important is that we make access convenient and integrate the business with the trader’s workflow” |
The history of EBS is like a truncated version of the story of regulated stock exchanges. Set up by market participants to facilitate their own trading needs, it performed exactly as planned for a time. However, as the market evolved, EBS, which went live as recently as 1993, found it hard to react. The reasons for this are complex but as a 2006 academic paper on equity markets shows, mutually owned trading venues do sometimes find it difficult to respond to competition that did not exist when they were created (Baris Serifsoy & Marcel Tyrell, Investment behaviour of stock exchanges and the rationale for demutualization – theory and empirical evidence, August 14 2006, Goethe University Frankfurt).
“Exchanges organized as mutuals are particularly ill-suited compared to trading venues owned by outside investors, when investments result in potential rents for only a few of their members,” the paper says. It adds: “Our model shows that a mutual exchange, facing competition from a for-profit, outsider-owned platform, can only survive by adopting a similar governance structure.”
The purchase of the EBS platform by Icap, in June 2006, has significantly changed the way it is run. “We have put a lot of effort into becoming more nimble and responding more quickly to changes in the marketplace, including making the required investments to improve our technology” says David Rutter, deputy chief executive of Icap Electronic Broking.
“As an electronic IDB [inter-dealer broker], Icap has so much experience in so many different asset classes and across so many geographic regions and we’ve leveraged this, along with our experience in creating distribution networks to grow the EBS business,” he adds.
Icap has altered some of EBS’s functionality; perhaps more important, it has systematically sped up the process of upgrading its technical infrastructure. Among these are changes to functionality that make the system default to more deals being done rather than interrupted, making the system more deterministic, providing greater order book transparency and the opening up of the platform’s API to select third-party vendors. All of these are designed to make the EBS platform more competitive with its peers.
Working with independent software vendors, who specialize in the provision of trading solutions, is another departure. “We’re now working with ISVs and customers to allow them to connect to us using their own software,” says Rutter. “Due to its extensive network and technological capability, EBS is like an OTC exchange. Our focus is on the matching process, not on how the customer chooses to engage with us. Trading styles and the motivation for dealing differ so much by customer and currency pair. I want to create a flexible dealing environment.”
This might increase the likelihood of EBS’s prices being aggregated but Rutter feels that if this is something clients want to do, it will happen anyway. “What is important is that we make access convenient and integrate the business with the trader’s workflow,” he says. “Doing that will give us more business. We have to build a super-fast and reliable system that provides customer satisfaction. Getting that right – and we’re moving in that direction – makes ownership of the desktop less important.”
Some market participants are uneasy about greater order book transparency but, as Rutter points out, this is not an issue in other liquid products, such as US treasuries. Rutter also argues that “masking” the order book has a side-effect of reducing the average size of deals done. This can, at times, push the market artificially away from where it should be and also results in more tickets for EBS’s users. “One of our goals is to increase liquidity and encourage larger orders on the platform,” he says. “It’s in the best interest of the market. Order book transparency over time improves the speed and probability of getting larger orders done.”
For Icap, there are other reasons to publish the order book. “If a bank accumulates a position that it wants to get out of, it would look at EBS, see a tight price but not know the depth of book. You can see liquidity on other platforms which have a stack system. So the bank would hit us for say €50 million, but do the balance elsewhere because they didn’t know that we had the liquidity. Instead of us getting the full order, I’ve given my competitor business and possibly cost my client a tick. That’s totally counterproductive,” he reasons.
Rutter says that the EBS technology has improved dramatically. “When I first looked at EBS I thought, ‘wow, this platform could be amazing.’ Our New York and London average deal times are now 7 milliseconds, which is as fast or even faster than our competitors. Our global average deal time is now under 80 milliseconds,” he says. “EBS is a global system and its distributed architecture reaches customers in more than 40 countries. If you extract speed of light limitations, our core technology is blazingly fast. Customers in Europe, Asia and North America reduce latency and deal times by transacting largely on the regional matching engine. Competitor systems run a single matching engine in one location.”
For a platform derided as being run on old technology, this is fighting talk. It throws down the gauntlet to EBS’s rivals, who have made much of, and in some cases built their business on the back of supposedly far superior technology. But Rutter believes that the pendulum has swung back towards EBS. “I go to advisory meetings [with clients] where there’s talk about what’s going on,” he says. “I hear about the changes in how our clients interact with their customers and what they need to build their businesses. But the main message I hear is that it’s about the basics. I’ve got to provide a deep, rich market which users want to use, where deals are done quickly, with surety, we’ve got to be up all the time so if you want to move size, we’re there. In the past, if people wanted to move a large block they may have gone elsewhere. Now we’ve made changes to ensure that continue to be the first look.”
