Disclosed FX venues could be next to demand code compliance

Electronic foreign exchange trading venues that operate disclosed liquidity platforms are facing pressure to only allow access to market-makers that have signed up to the FX Global Code of Conduct.

Last month, Cboe FX announced that, from April 3, it would require all liquidity providers (LPs) looking to make markets on its anonymous FX spot platform to have signed statements of commitment to the code. In August 2022, the venue was the first to make compliance mandatory for LPs trading on its Full Amount platform.

Other electronic communication networks (ECNs) have followed suit. These include 360T, which introduced a similar requirement for its anonymous FX trading platform in August of last year; and Euronext, which in January made code compliance compulsory for LPs on its anonymous spot FX liquidity pools unless clients stipulated otherwise.

Right now, these [code compliance-only requirements] are rules that have been solely adopted by anonymous venues, but I would be surprised if this trend doesn’t also extend to disclosed venues at some point

Stephane Malrait, ING

Venues that provide anonymous liquidity have so far taken the lead on introducing code-compliance rules. This is largely because practices such as “last look” – which gives LPs time to accept or reject a request trade at a quoted price – are more common on anonymous platforms than on disclosed ones.

However, venues that run disclosed trading platforms are now under pressure to introduce similar rules.

“These code compliance-only rules are a very good development and to some extent prove that the recipe of the code is a good one,” says Stephane Malrait, global head of market structure and innovation for financial markets at ING. “Right now, these are rules that have been solely adopted by anonymous venues, but I would be surprised if this trend doesn’t also extend to disclosed venues at some point.”

Look again

Disclosed venues are thought to pose fewer issues to market participants than anonymous ones, largely because the counterparties on disclosed venues know which LPs they are trading with. These counterparties can check whether LPs have signed the code and monitor the practices they are engaged in.

If a counterparty is trading on a venue that offers last look, its LP will conduct a price validity and credit check before accepting or rejecting the trade request. Such checks can take up to 50 milliseconds, with the LP typically rejecting the counterparty’s request if the price has gone stale during the time it takes to conduct the checks.

However, under last look, some LPs have historically placed additional hold times of as much as 300 milliseconds on top of these checks in order to monitor counterparty behaviour – such as whether the trade would lead to market movements against the LP. The Global Foreign Exchange Committee (GFXC) has stressed that such behaviour goes against the spirit of the code, and the UK’s Financial Conduct Authority has said any LP that continues to implement additional hold times could face regulatory investigation. Many LPs, including banks such as Societe Generale, have since removed their additional hold times.

Compulsory compliance on anonymous venues can reassure market participants that LPs are up to speed on the code’s guidance on last look. However, disclosed venues – such as State Street’s FX Connect and GlobalLink – also allow this type of liquidity.

Joost de Bakker, a trader at Dutch asset manager Cardano, believes it should not be difficult for disclosed venues to introduce code-compliance rules should they wish.

“I’m curious to see how sensitive the primary venues like EBS and Refinitiv are to this change from Cboe,” he says. “Those platforms still form an important part of the market, especially for benchmarking purposes, and so it’ll be interesting to see whether they adopt a similar policy. If they do, this will imply a further development on the nature of the code. From a reputational perspective, the fact that more platforms are introducing this requirement certainly puts more pressure on others to follow suit.”

EBS, one of the two primary markets for spot FX, could be among the major disclosed trading venues to make code compliance a prerequisite for making markets on its platforms. A spokesperson for the venue tells FX Markets that 96% of volumes on EBS Direct – which offers both disclosed and anonymous trading to clients – are from LPs that have signed up to the code.

“We applaud recent moves across the industry to support the shift to full compliance,” says the spokesperson. “EBS is currently engaging with clients on changes that we will announce shortly.”

Cracking the code

Cboe’s head of FX and US Treasuries, Jonathan Weinberg, believes the introduction of code compliance rules on anonymous platforms is partly responsible for a recent increase in the number of market participants that have signed the code.

“When we last applied this rule to our Full Amount platform, we saw a significant number of clients who had not previously signed the code do so,” he says. “In the last six to 12 months, we’ve definitely seen an increase in global code adherence.”

According to the GFXC’s website, 1,135 financial firms had signed the code in June 2022. Today the figure is closer to 1,167, around 88% of which are LPs.

With Cboe set to expand compliance to its anonymous platform, Weinberg says the code will be baked into the venue’s standards for market-makers: “[This will] ensure all LPs are on a level playing field and that there is no misunderstanding from liquidity consumers as to the type of liquidity they’ll be interacting with across Cboe.”

BGC’s Fenics FX is among the anonymous venues considering a similar move. It already operates a pool comprised exclusively of code-compliant LPs for any client that requests it, and says signatories to the code now account for 96% of its FX volume.

“We are currently considering whether to take formal action on LP exclusion, such as a blanket exclusion or moving to an opt-in process similar to other ECNs,” says Howard Silverman, global head of sales at Fenics.

Could do better?

However, some trading venues think code compliance is not enough when it comes to ensuring fairness in the market. A spokesperson for LMAX, which does not allow its LPs to offer clients last look liquidity, tells FX Markets that its own rule book sets higher standards than the current version of the code.

“Since our inception, the LMAX Group view on ‘last look’ hasn’t changed,” says the spokesperson. “We believe it should not exist on any public multilateral trading venue as a matter of fairness and transparency. As our clients and LPs by definition trade in accordance with rules of a higher standard than the code, we see no need to monitor FX Global Code compliance from our members.”

Cürex’s chairman and CEO, James Singleton, says his firm’s rule book also requires conduct from market participants that goes beyond what the code currently stipulates. Instead of offering last look, Cürex’s FX platforms offer live streaming and executable prices 24 hours a day.

“While Cürex has supported and signed on to the global code of conduct, we have voiced our concerns about certain [aspects] of its shortcomings,” says Singleton. “As such, we have not previously required our liquidity providers to affirm their support for the global code of conduct since their confirmation of the code would not change their behaviour or obligation to comply with our more stringent requirements.

“Perhaps the fact that other FX ECNs have taken the step to ask their liquidity providers to affirm the code of conduct may be driven by the reality that their ECNs are not operated under the same restrictions that Cürex requires of its market-makers.”

However, Cboe’s Weinberg stresses that the scope of the guidance in the code is far greater than issues pertaining to last look, and that it therefore encourages the FX community to take a more holistic view on how to maintain best practice within the market.

“Just focusing on last look is taking a quite narrow focus on the code,” he says. “That’s why our rules of engagement focus on the code as a whole, such that any market-maker on our platform will have to be code-compliant.”

Editing by Daniel Blackburn