06.17.2013
By Terry Flanagan

FX Aggregation Policy Launched

As the FX market goes increasingly electronic, the same need for liquidity aggregation has arisen as it has for other asset classes. To that end, EBX, the electronic FX business of interdealer broker Icap, is recommending best practices to aggregation for the FX market coupled with its certified aggregation partner program.

Aggregators are an increasingly prevalent service offering for customers which have emerged to consolidate the many sources of liquidity available, and EBS believes that aggregation providers can enhance and add great value to a customer’s trading experience.

As part of the process of market evolution, EBS is proposing the adoption of best practices in the way that these services interact with the rest of the market and its infrastructure and how those interactions are defined and disclosed to market users.

“The FX market has gone through a dramatic transformation since 2000,” said EBS CEO Gil Mandelzis, in a report.” Many new trading platforms have emerged, both independent and dealer-owned. As the number of liquidity sources has increased, so has the complexity of engineering to achieve best price and best execution, with further complications related to integration, information technology and hosting.”

On the back of this proliferation of trading platforms and liquidity pools a new service offering has emerged: the aggregation provider.

“As in other financial markets, aggregation providers aim to consolidate the many sources of liquidity and, through the use of algorithms, to optimize the execution quality and experience and ultimately the yield for the customer,” Mandelzis said.

The FX industry needs to develop and adhere to generally accepted best practices around aggregation and ensure that this vital component is seen to operate with the greatest integrity, reinforcing the high standards of ethics and trust prevalent in the FX and capital markets.

“This topic of aggregators has not been widely discussed and looked at by the market as a whole and it is certainly an important one to address,” said Chris Purves, global head of FX e-Trading at UBS. “We are pleased to see EBS taking an industry leading position on this important topic and look forward to supporting this initiative.”

Aggregation providers should operate as agents, rather than principals to the trade, to reduce the opportunities for potential conflicts of interest, according to EBS. All sources of revenue earned by aggregation providers with respect to a customer’s trading must be fully disclosed to the customer. The prices a customer sees as ‘best prices’ should be based on the best prices available to the customer.

Aggregation providers should purely provide aggregation services rather than trading themselves (directly or through a third party) on a newly available and improved price while making available a lesser ‘acceptable’ price to the customer.

EBS has moved to address customer concerns over high-frequency trading by releasing a set of trading rules, including widening the spreads on a selection of core pairs on its platform—with full-pip and half-pip pricing on major currency pairs instead of decimalized pricing, revised quote and hit fill ratio targets and new quoting guidelines for Asian trading hours to discourage arbitrage opportunities.

High-frequency traders typically operate in markets with high liquidity and FX is the world’s largest and most liquid financial market. The rise of HFT into an increasingly automated forex market, with EBS, in particular, becoming a hotbed of HFT activity, has made it more difficult for the manual trading segment to compete effectively.

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  2. Global Foreign Exchange Committee has made recommendations on Last Look.

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  5. FX Global Code sets out good practice for last look and provides illustrative examples.