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Foreign Exchange

Trading: It’s EBS, but not as we know it

Icap is determined to boost the position of its spot trading platform, but mutually owned venues are at a disadvantage.

David Rutter, Icap Electronic Broking

"What is important is that we make access convenient and integrate the business with the trader’s workflow"
David Rutter, Icap Electronic Broking

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."

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