FastMatch, the FX ECN, is working with other platforms and market makers to create a consolidated tape for FX, called Foreign Exchange Consolidated Tape (FXCT).
The intention is to set up FXCT as a for-profit consortium of ECNs, banks and other financial institutions engaged in the FX market, to provide a last-sale data feed with price, size and timestamps.
FastMatch is negotiating with other institutions that trade regularly on the FX market to secure financing.
The project has been inspired in part by the central tape for US equities, the Consolidated Tape Association. The plan is to create something similar for the FX markets, managed by an independent company with its own board.
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Dmitri Galinov, |
Dmitri Galinov, CEO at FastMatch, says: “ECNs have price data, but if you combine everything that is available you only get around 15% of the market. That means 85% of the FX market is dark.”
FXCT would aim to bathe the market in light, increasing transparency and helping traders to find the best prices when trading.
FastMatch has led negotiations with other FX market practitioners and has settled on a set of rules for FXCT, and a structure for the company, though it is yet to finalize details of exactly what information will be provided on the tape.
If financing for the project is secured, it hopes to appoint a CEO for the FXCT in coming weeks, and is working towards the company being operational by the end of the year.
Participation will be voluntary, with FXCT offering commercial incentives to encourage ECNs to contribute data. Trades will be anonymous by default, but there will be an option to identify certain details, such as the name of the ECN on which the trade was conducted.
Certain trades, for example large ones, will not be disseminated until end of day. An historical data product will include real-time and end-of-day reported trades.
FXCT will enable traders to better value their assets, and thereby make better decisions, says FastMatch. It will also provide post-trade transparency for spot FX, something regulators have been keen to promote in recent years in response to a number of scandals resulting from the opacity of the market.
Traders are themselves pushing for increased standardization in data to simplify their transaction cost analysis, says FastMatch.
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Jamil Nazarali, |
Jamil Nazarali, head of execution services at Citadel Securities, says: “This is an important and positive step for the FX market, given how greater price transparency has benefited end-users in other asset classes.”
However, others question FastMatch’s assertion that the FX market is dark. ECNs already provide market data, and EBS and Thomson Reuters – two of the biggest platforms for FX – already provide consolidated market data on Eikon, the latter’s market data platform.
David Clark, chairman of the Wholesale Markets Brokers’ Association (WMBA), says this consolidated data covers more than 90% of the FX market, “which is probably enough to achieve the objectives needed from the data”.
Yet Galinov says the price of market data from the large platforms is prohibitive, adding: “Few can afford the high prices some ECNs currently charge for market data. We plan to provide more data at less cost, which will bring it into line with what is available for other asset classes such as equities and futures.”
While the equities market is one that does have a central tape, few other asset classes have one, and some are sceptical about whether the FX market will benefit from such a service.
'Unintended consequences'
Alex McDonald, CEO of the WMBA, says: “If there is a business case for this, such as systemic risk, conduct of business or a general underlying client need, it’s not immediately apparent.
“Rather, the formation of a consolidated tape would be the result of the technological push factor – due to the ability of technology to deliver it effectively and to fit into the evolving business models of a disintermediated set of client demands.”
On the contrary, he warns there is a substantial risk from unintended consequences.
“A central tape has usually meant markets divert away from volume discovery towards latency arbitrage, giving more opportunities for high-frequency traders,” says McDonald.
“If this were the model for FX, it could end up effectively introducing a form of transaction tax on ordinary trades and encouraging more wholesale trading into dark pools, which would fragment the current single liquidity pool.”
This is not the first time market participants have looked at the idea of a central tape for FX. Previous attempts have foundered due to the decentralized and international nature of the FX markets, and the lack of a single regulatory authority sitting above it.
Most recently, FastMatch attempted to provide this same service on its own. Galinov says: “FastMatch tried distributing the data we had for free, but it didn’t get much traction. The perception was that it wasn’t neutral because other ECNs weren’t involved.”
However, as regulators have increased the attention on the market, and as technology has simplified the dissemination of data, FastMatch believes the time is now right for FXCT.