FX platforms divided on management of costs and speed

Changing dynamics in FX trading

Management of costs, speed, pricing practices and trading behaviour are some of the most challenging and divisive issues facing foreign exchange trading platforms, according to participants in a live webinar hosted by FX Week yesterday.

During an hour-long panel, senior officials at EBS, Currenex and LMAX Exchange debated the impact of changing trading behaviour, depressed volatility and the launch of new platforms on their businesses. Addressing the fixed costs charged to market participants, David Mercer, London-based chief executive of LMAX Exchange, warned some platforms are charging too much for market data.

"What is apparent in the rest of the marketplace is the charge for market data can create unfairness and can be too high. The cost of market data is nowhere near as high as some people pay, and you can look at the larger futures exchanges to see what the real cost of market data is. I'm not looking for market data to be a source of revenue generation for us going forward," said Mercer.

Banks have been calling for changes to cost structures on major platforms for some time, with many participants arguing the fixed costs are too high and there is insufficient transparency around brokerage fees and volume discounts. Jeff Ward, global head of EBS Direct in London, confirmed EBS is reviewing its cost structure.

"The fixed costs for EBS have traditionally been an area of revenue," he said. "We are very much looking at what pricing does from a strategy perspective. It's possible we will change – we are very heavily involved in this process. It's not always easy and there are different business models. We will have to gauge what that study concludes."

Meanwhile, David Newns, chief operating officer for trading and clearing at State Street Global Exchange, agreed with Mercer that charging large amounts for market data doesn't make sense. "We do charge people in different ways for different things, but the basic real-time fixed market data feed that we provide is essentially free, as long as you're doing some trading. From that perspective, that's significantly lower than the historical costs of accessing market data."

Another area of debate was the use of a randomised pause applied to orders to prevent latency arbitrage – a measure that, in slightly varying forms, is central to start-up platform ParFX and has also been recently applied to AUD/USD and USD/CHF on EBS, with plans to roll it out to other pairs. While relatively simple in technology terms, the measure has drawn fierce criticism from some platforms.

"It's an extra level of complexity in what is already a relatively complex marketplace. I'd agree you don't want to get into nanoseconds, but I think it's too early for latency floors. In all of our venues, no-one has yet asked for randomisation. When banks want to get done, they don't want to be randomised, they want to hit the price as quickly as possible," said Mercer.

EBS's Ward responded that it is too early to draw definitive conclusions but the latency floor is working as intended. "Latency and certainty of execution are extremely important – there is no doubt about it – but not at the expense of a healthy ecology on the platform. It has certainly not been a trivial change from a decision-making perspective," he said.

To watch the webinar again, click here.

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