Bank-backed foreign-exchange spot trading platform ParFX is gaining increased momentum and credibility as it nears the end of the first phase of on-boarding clients and develops the technology to open up to the buy side.
Originally conceived in 2010 by a group of top-tier banks that had become frustrated with the effect high-frequency traders were having on their ability to transact business on primary trading platforms, ParFX finally launched in April 2013 with the support of 11 founder banks.
The platform was backed from the start by a small group of FX powerhouses including Deutsche Bank, Barclays and UBS, but the addition of Société Générale in late 2013, and Citi and JPMorgan earlier this month, brings the number of bank members to 14.
Meanwhile, Bank of America Merrill Lynch started trading on the platform as a non-founder in November, and other banks are expected to take similar steps in the coming months.
According to Roger Rutherford, chief operating officer of ParFX at interdealer broker Tradition which was selected in 2012 to deliver the platforms infrastructure and technology the first phase of the platforms launch has been about connecting to the top 20 banks and that goal is now nearing completion. It will then move on to focus on second-tier banks and buy-side firms.
The fact that two big global banks like Citi and JPMorgan have decided to join ParFX validates our model and ethos, and it gives it the momentum it deserves, says Rutherford.
Our focus since launch has been on participation rather than volume. If we can get global participation in an environment that traders like, volume will naturally come.
ParFX has focused on key features to deliver a level playing field in which users can realize cost savings over other platforms and are not penalized for not having the fastest trading technology.
They include a randomized pause of 20 to 80 milliseconds applied to all order elements, low-cost connectivity and brokerage fees, and at-cost market data.
While the platform has at times been seen as a consortium of large banks that sought to create their own private trading club, Tradition is keen to dispel that image, pointing to the inclusion of smaller banks such as SEB, BNP Paribas, Nomura, Royal Bank of Canada and Bank of Tokyo-Mitsubishi UFJ.
Our founders are an eclectic mix and they all bring something different to the table, says Rutherford. The FX industry is very good at getting together to confront issues and drive innovation.
ParFX is an example of that the industry has clearly come together to work out how to create something relevant and differentiated in todays market. It is a validation of the credibility of the industry, not just the platform itself.
ParFX has not yet published details of its daily trading volume, although it is understood that turnover has risen substantially since launch last year.
A senior official at one of the banks backing ParFX says: There is a threshold in average daily volume that, once crossed, means we have a responsibility to our customers to join up and get access to meaningful liquidity, because it will help us to manage risk and execute on their behalf.
That remains the case regardless of who owns the platform or what the protocols are.
A key milestone in the further development of the platform will be when it opens up participation of buy-side firms, which will access the platform through prime brokers.
Citi and JPMorgan have large FX prime-brokerage businesses and work is ongoing to facilitate connectivity with prime brokers, says Traditions Rutherford. The platform had originally planned to open to the buy side by the end of 2013, but that deadline has now slipped to mid-2014.
Were right in the throes of developing this and if all goes well, we will soon be interacting on a more formal basis with prime customers, says Rutherford.
But buy-side take-up of ParFX is not necessarily inevitable. Since the platform was first unveiled two years ago, incumbent rival EBS has undertaken a series of system and rule changes to put itself on a more equal footing. It even introduced a similar measure to ParFXs randomized pause last year, known as the latency floor, which is being extended to its main currency pairs.
If and when ParFX becomes available to the buy side, we will consider it, as we do with any other venue, but I am not yet sure what the value proposition is to the member banks or any future non-bank participants, says one buy-side trader.