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Foreign Exchange

EBS revenues drop as central banks stem FX activity

Revenues at EBS, Icap’s electronic FX broking platform, have fallen as central bank action stemmed volatility in currency markets.

The broker says market conditions were difficult throughout the year ending March 2013 as FX volumes in spot, forwards and options all declined largely due to reduced exchange rate volatility, primarily as a result of central bank intervention.

In addition, the company adds, the low interest rate environment resulted in less carry trade activity, further depressing volumes, while the scaling back of proprietary trading also reduced volumes.

Revenues at EBS dropped 11% to £137 million, reflecting a decline in transaction revenue, with average daily trading volumes falling 24% to $116 billion.

EBS has previously blamed central bank intervention from the Bank of Japan and the Swiss National Bank for reducing volatility and volumes in the yen and the Swiss franc respectively. However, the broker said a change in Japanese monetary policy in early 2013 provided a short-term boost to yen volumes in January and February.

Although EBS has lost its place as overall market leader in electronic FX broking to Thomson Reuters, the firm says it has maintained its market-leading position in some of the world’s most actively traded currency pairs, including EURUSD and USDJPY.

The period coincided with an overhaul of EBS and its senior management team after the appointment of Gil Mandelzis as chief executive in March 2012.

Faced with criticism that EBS’s anonymous trading platform was biased towards the needs of high-frequency traders, the firm launched a consultation with its customers which resulted in new dealing rules and platform changes.

Those included a move away from decimalization to half and full pips in certain currency pairs – which reduce the effectiveness of high-frequency trading strategies – and revised quote and hit fill ratio targets.

EBS says the changes have been positively received by its customers, although it has not stopped leading banks from teaming up with interdealer Tradition to launch ParFX, a platform designed to deliver a level playing field for bank liquidity providers with high-speed funds.

The period also saw Icap launch EBS Direct in November. Unlike EBS’s anonymous main trading platform, EBS Direct offers relationship-based disclosed liquidity, which means liquidity providers can connect directly with a customer that is known to it before a trade occurs.

A step change from EBS’s traditional model of an anonymous platform used primarily by large banks, the broker says it will widen its currency base, putting it in competition with the likes of FXall – the multi-dealer acquired last year by Thomson Reuters - Hotspot FX, Currenex and 360T.

The broker announced this week that EBS Direct is now live with its beta programme, and four liquidity providers – Commerzbank, Goldman Sachs, JPMorgan and Morgan Stanley – have all conducted initial trades on the platform.

It says it has signed up more than 200 customers in 44 countries to EBS Direct and has commitment from more than 20 banks to provide liquidity. EBS Direct is expected to go live in the second half of the year.

Meanwhile, group revenues as a whole across Icap, the world’s largest interdealer broker, decreased by 12% to £1.472 billion.

Michael Spencer, chief executive officer at Icap, says it has been “an extraordinarily tough year” in the wholesale financial markets.

“Trading activity across all asset classes was negatively affected by a combination of cyclical and structural factors including the depressed global, a low interest rate environment and lack of clarity around some aspects of regulatory reform,” he says.

“Icap’s financial performance reflects these extremely challenging conditions.”

Icap says the new financial year has started encouragingly with an upturn in trading activity seen in April. It warns, however, that market conditions remain fragile and unpredictable.

In the short term, Icap says, that situation is unlikely to change until greater confidence in the markets is re-established and there is more clarity around regulatory reform.

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