There is an interesting article in the November 2009 issue of Euromoney titled ‘Have Reuters and EBS lost control of FX?’ It’s a good read that tries to assess the punch that the two interdealer brokers still carry with respect to overall price discovery in foreign exchange. Euromoney then attempts to answer the question where the market is going to be tomorrow, now that it obviously is no longer with Reuters and EBS. I think this is the wrong question to ask.
Where is the Internet?
Asking where the FX market is by means of identifying the largest trading venues is like asking where the Internet is by identifying the websites with the most traffic. What you end up with is an indication of concentration but by no means an accurate picture of either network. We at Integral have propagated for years that the foreign exchange market will develop into a number of independent but connected trading venues. While others might have embraced one particular business model for FX trading over any other, we were always pointing out that the success of any particular model ebbs and flows with market demand, market structure and advancements in technology. Trading styles and counterparties will constantly change and evolve. To truly stand the test of time, the challenge is to find a way to support them all.
The end of the one-size-fits-all approach
The fact that EBS and Reuters are losing on importance is more of an indication that one-style-type solutions are on the way out, than it speaks to the two trading venues in question.
Euromoney points to the increasing influence of technology and rightly so. As in many other markets before, technology will level the playing field, lower the barrier of entry and make many different — at times experimental — approaches to FX trading feasible. The evolution of algorithmic trading is a good example for this trend.
In my view, the question is not which trading venues will dominate the future, but who will be able to support the many different trading venues and business models, market participants have chosen to trade with.
Organizing a market by normalizing trading flow
We believe that a key success factor for any FX facility will be its ability to accept output from all these various trading venues, support the different trading styles, correctly read all the various pieces of information that are associated with it, and normalize it. Integral has spent hundreds of millions of dollars and several years building FX Grid to do just that. Among other things, we added multiple price discovery aggregation mechanisms, credit line management, netting, STP, verification of execution with QOS, and most importantly monitoring services. FX Grid as a provider of DMA managed services, monitors and reports on what is happening, what happened already and what is expected to happen in the near future for trade executions. We do all of that as on “on demand” business service. Add to all of this a set of user-controlled algorithms for blending, splitting and spreading liquidity for internal and external users. As an added benefit, aggregating liquidity, on demand, from all possible sources dramatically reduces the danger of a system outage.
Designing FX Grid as a multi-sided trading network was the right choice because it doesn’t favor a particular trading style or venue. We don’t pick ‘the best’ venue or execution style and force our customers to follow suit. We leave the decision to what is ‘the best anything’ to the actual stakeholders or the participants of the trades, while supporting them all the way.