Euronext is latest venue to demand FX code compliance from LPs

Euronext FX is set to automatically transition all anonymous spot liquidity across the trading venue to pools that consist solely of FX Global Code signatories – in a move designed to promote greater adherence to market best practices.

From January 1, 2023, the electronic communications network (ECN) will remove any liquidity provider (LP) that has not signed the code of conduct from clients’ liquidity pools, unless requested not to do so by a client. The transition will affect all Euronext’s anonymous spot liquidity pools across its trading hubs in London, New York, Singapore and Tokyo.

The move echoes those of rival platforms Cboe and 360t, both of which have made code compliance a prerequisite for LPs looking to make markets in certain liquidity pools. However, Euronext will give liquidity takers the choice of opting out of the change if they still want to trade with LPs that have not yet signed the code.

“We believe defaulting to Code-signatory only pools is in line with Euronext FX’s early support of the Global FX Code and in line with the preferences of our clients,” says Clinton Norton, head of sales, Americas at Euronext FX.

“All anonymous spot liquidity pools will automatically default to Code signatory-only pools unless liquidity takers specifically ask to opt out of that default setting to continue interacting with LPs that have not signed the Code. That is a decision that is entirely theirs to make. It will be informed by the detailed analytical data reports we provide to clients on their LPs.”

A significant portion of liquidity providers and takers across Euronext FX include systematic buy-side and non-bank firms, some of which have not yet signed up to the FX Global Code.

From the beginning of next year, Euronext will automatically provide all liquidity takers across the ECN with enhanced data regarding the execution quality of LPs, including round-trip times – the total amount of time it takes for an LP to respond to a client’s request to trade with a fill or a reject – and fill ratios.

In June, Euronext FX added a max hold time component to its FlexMatch matching algorithm. Clinton says as a result, this helped reduce the median RTT on Euronext FX to 8 milliseconds, as well as improve the average fill ratio to 84%. Norton stresses that such improvements are largely due to LPs following the Code’s updated guidance on additional hold times.

“We’re allowing liquidity takers to make their own decisions based on data,” says Norton. “We feel we are taking a more flexible approach than other ECNs, whereby liquidity takers are encouraged to make their own informed decision as to who they want to interact with in their pools, based on data that is relevant to them.

“This additional transparency supports takers in understanding LP behaviour as it relates to hold times, and concurrently allows makers to promote their own good practices.”

We’re allowing liquidity takers to make their own decisions

Clinton Norton, Euronext FX

A recent study conducted by Euronext’s quant research team evaluated the costs stemming from round-trip times and rejected trades for LPs that either had or hadn’t signed the code. The results showed that a sub-section of liquidity takers achieved equally good – if not better – execution with non-code signatories than with code-compliant LPs. However, code-compliant LPs were on average shown to provide better overall quality and cost of execution to clients.

“While the Code absolutely promotes good behaviour and better execution for liquidity takers overall, that’s not to say that LPs who haven’t yet signed the Code necessarily exhibit bad behaviour, which is something we’re able to show in our quant research study which we hope to release later this year,” continues Norton.

In order for an LP to be verified as code compliant by Euronext, they must have a statement of commitment currently available on the GFXC’s public register. The approach mirrors Cboe’s but differs from 360t, which stresses that LPs must have signed the most recent version of the Code – aka the July 2021 version, which was published following a three-year review of the original Code.

According to data from Euronext, it saw FX spot revenues of €7.3 million ($7.16 million) in the second quarter of this year – a 27.6% increase in revenue from Q1 2021. Euronext has offered code-only pools of liquidity via specific client request for the past 18 months, with more than 80% of the spot volume transacted on the ECN in September having been executed with code-compliant LPs. As such, Norton stresses that it isn’t too far away from having achieved code-only liquidity already.

The FX Global Code was introduced four years ago as part of an industry-wide effort to establish standards and stamp out conduct problems in the FX market. Last July, an updated version of the code was published containing greater guidance on trading practices such as anonymous trading, last look and pre-hedging, following a scheduled review of the code by the GFXC.