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Capital Markets

Foreign exchange: EBS vows to remove unfair advantages

FX exchange to relaunch offering; Faces growing competition

A decision on what measures EBS, owned by the world-largest interdealer broker, Icap, will take to eradicate technology and latency arbitrage will be made by the end of July, says its new chief executive, Gil Mandelzis, as the FX trading platform seeks to recreate a fairer marketplace for all market participants and turn around its sagging trading volumes.

Four months into the job, Mandelzis says EBS is determined to strengthen the system after a prolonged period of criticism from some liquidity providers that its trading rules created an unfair advantage to certain counterparties when they are executed on the exchange.

Gil Mandelzis,  chief executive, EBS
Gil Mandelzis, chief executive, EBS

"We’re well under way in doing a thorough analysis and this is an exceptionally collaborative process," says Mandelzis, who up until March had been the chief executive of Icap’s post-trade services business, Traiana. "We have over 20 different participants, both on the buy side and the sell side, working enthusiastically with us in making sure we are coming up with the appropriate outcomes." Eliminating opportunities for some market participants to arbitrage prices on the exchange are at the core of the changes being made by EBS.

"We would like to close the opportunity for technology and latency arbitrage," says Mandelzis. "We want to encourage people to bring more genuine liquidity and we are going to ensure we continue to provide a robust platform." This would also entail the increased use of surveillance and enforcement to deter predatory trading behaviour.

Furthermore, other activities that have come under scrutiny by market participants have also ceased, as EBS attempts to regain the support of key market makers.

According to sources, EBS was selling so-called lifecycle data to a certain sector of its clients for annual fees of up to $1 million. This data gave them a blow-by-blow, message-by-message account of trading activity on the EBS server. Sources say this data was largely sold to high-frequency trading hedge funds. Some market makers say they were unaware that this practice was occurring.

EBS, while not denying it was selling the market data, says the banks were well aware of such a data offering, and that the fees earned from them was "not even close to six figures, let alone seven".

"The claim that we sold it only to hedge funds is absolutely wrong – a complete fallacy," says Mandelzis. However, he adds that certain data licences or certain data practices are no longer being sold and existing ones have been cancelled.

Other criticisms centred on the fact that the quality of execution was a function of the specific level of expenditure on EBS services, which also created an unfair advantage.

In reference to this, some traders refer to EBS AIs, or individual connections to the system. Some high-frequency funds had as many as 80 at one time, according to traders. They each cost $5,000 a month, whereas a bank might have just 10 AIs in three separate locations.

At the same time, according to sources, EBS was also supplying dual-market data feeds, which gave them an extra advantage.

Mandelzis plays down the issue of the EBS AIs. He says many of the issues were related to architecture, matching logic, data disbursement, trading rules, and surveillance and enforcement. "We’re looking at every aspect in collaboration with large banks and other serious players in the market – the issue of AIs is not in the top three of these."

Mandelzis has been a busy man since he took over the role in March, after replacing as CEO Dave Rutter, who abruptly left the firm.

"We are aligning ourselves clearly with the right, genuine liquidity-enhancing behaviours rather than certain types of players – sell side versus buy side. To that end some of these trades are no longer deployed by both buy side and banks."

There has been pressure to push through changes quickly to appease certain key clients, yet Mandelzis is reluctant to push the changes through without due care.

Whether or not this is enough to convince all leading market makers that EBS can effectively execute the changes and maintain the integrity of the platform over the longer term is yet to be seen.

This comes at a time when a slew of new rivals are entering the market. In late May, Tradition, the interdealer broker, announced that it was forming a new platform in collaboration with a group of leading FX banks called traFXpure, and said its goal was to provide market participants with a low-cost, convenient and equitable venue for sourcing FX liquidity, open to all users on a fair and equal basis. The platform is slated to go live at the end of the year. Credit Suisse and retail broker FXCM launched a new platform, called FastMatch, while the architects of FX Connect, a leading FX trading platform for real-money investors, launched Molten Markets, with a strategy similar to traFXpure. Market watchers say there are still more to come.

"When you’re EBS, and obviously we’re a dominant and significant player, there’s going to be a bunch of people who are going to look at us and will want to offer alternatives to some pieces," says Mandelzis. "At the same time, we’re going to break ground over the next 12 months on some very important initiatives." 

This story first appeared on euromoneyfxnews

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