Since April, EBS has been working with some 30 of the leading market makers from the banking community and buy-side professionals to redraft the platform’s trading rules. These were published earlier this month, and now the firm is working intensively with the same group to redesign what are called system and policies, which set standards of behaviour on the EBS platform for all users.
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| “I believe this industry can benefit from the leadership of a vendor that is independent, not controlled or owned by the industry." Gil Mandelzis, CEO of EBS |
“By early September we will assemble that, and announce the system and policy changes, and we intend to implement many of these within this calendar year,” Mandelzis says. Although Mandelzis didn’t disclose the specifics of the changes, market makers tell EuromoneyFXNews that they will include the reversal of decimalization, whereby EURUSD, USDJPY, EURJPY and USDCHF will be priced in half pips, GBP will move to one-pip pricing while EURCHF will remain in 10ths of a pip.
Quote fill and hit fill ratios will be doubled to 40%, to ensure that market makers trade on the prices they submit into the platform rather than manipulate trading patterns, and to prevent the “firing into the dark” whereby some market makers attempt to trade on rates that haven’t appeared in the EBS “book”, which has in the past given an unfair advantage to those with ultra-fast connections.
There is also discussion about changing the IOC function, a unique feature in the EBS system where prices are submitted to the system, and then immediately cancelled if they are not matched. For instance, if a 35 bid and a 33 offer are submitted at the same time, they won’t match. Dealers also say there are discussions on adding a holding time of 50 milliseconds which would mean that those two prices would meet because there would be enough time to look through the price.
There are also proposed changes to “out of hours trading”. For instance, as exists currently, if a trader in New York submits a price in Asian trading hours, the time it takes to travel there, and then for the price to return, is longer than the minimum quote life (MQL). So if a trader submits a price, and then submits a cancel, it results in a higher percentage of trade rejections in Asian trading hours.
By policing this process more aggressively, EBS should be able to create a better trading experience in Asia, where liquidity has less depth than in Europe or the US.
For Mandelzis, just four months into turning around the fortunes of EBS, the emphasis is on close collaboration with the leading participants in the FX market.
This “open and collaborative extensive dialogue with the entire market, both sell side and the buy side, is not being done by any other platform,” he says.”It is thanks to our unique position and our focus on the professional market that we can play this leadership role.”
The end result of this, believes Mandelzis, will that EBS will again become the most trusted partner of the electronic platforms in the FX market. He adds that already several of the major market makers have said they will support EBS on the back of these proposed changes, and he hopes to have majority support by the end of the year.
This market-wide support however, effectively comes down to one simple truth: trust. And the future of EBS hinges on it. Does the market believe that EBS will stick to these new principles and rules over the medium to longer term?
“Doubts may be diminishing, but the market has a long memory,” says the head of e-trading at one of the leading FX firms.
It’s a perception Mandelzis is fully cognizant of, given that when he stepped into the business, while not in free fall, it had experienced a steady decline in volumes as market makers’ continued grievances about the integrity of the platform went unaddressed.
By the time Icap CEO Michael Spencer had fired David Rutta in March and replaced him with Mandelzis, who ran run Icap’s post-trade services business, Traiana, the development of alternative trading exchanges was well under way. This came to a head in recent months, when as many as eight platforms were launched in eight weeks.
And so the stakes were immediately raised. He has faced a monumental task in convincing the market that he would make good his plan to return EBS to being the primary FX market of choice.
Surveillance and enforcement
To prove that he is serious about creating a fair and just marketplace, Mandelzis is also ramping up resources for monitoring the behaviour of market makers on the platform, by increasing surveillance and enforcement whereby continued disruptive behaviour could lead to closing of access to certain order functions, or complete ejection from the platform itself.
“Certain disruptive behaviours will be subject to warnings and there will be specific escalations that will take away the ability to trade in this way,” he says. “We take our market position very seriously.”
The surveillance team will be increased, including a head of surveillance and enforcement, which Mandelzis is in the process of recruiting. The use of real-time surveillance will be phased in next year.
That might sound good in theory but some large liquidity providers who spoke to EuromoneyFXNews say that, in practice, real-time surveillance can be confusing.
“The market does want to undertake surveillance, but you have to know what you’re looking for,” says another e-commerce specialist at a leading FX bank. “What is bad behaviour, what are people doing to mess around with the prices? It takes a while and a decent amount of data to track systematic attempts to disrupt the market.”
Implementation
In the final analysis, EBS will need, post implementation, to prove that it has re-created a fair marketplace for all, whether that is for banks or buy-side professionals. Furthermore, with the entry of alternatives, such as TraFXpure, which is being supported by three leading market makers, Deutsche Bank, UBS and Barclays, there will now be a more like-for-like comparison on which it will be measured.
“There’s a belief that they’re trying to do the right thing and that everyone is engaging honestly,” says a global head of FX at another top-five bank. “No doubt it will be a better platform after the changes, but whether it will achieve fairness is an open question.”
This comes down to the underlying nature of EBS’s architecture. Because no matter how hard it tries, is it possible to turn the venue, as it stands, into one that suits the today’s best practice requirements in a high-frequency product that normalises a range of technological capabilities to create a fair market place?
This is an unknown, and although Mandelzis wouldn’t be drawn on whether there might be a need to re-engineer the whole platform should the new rules and policy changes not achieve their objective, he said the firm will be able to respond.
“I don’t see any constraint in our ability to affect our architecture with our spend, which is well above the industry average,” he says. “I am very comfortable we can do whatever we need to do in terms of technology.”
These have been a busy few months in electronic FX marketplace, and as Tradition’s TraFXpure plans to go live at around the same time as Mandelzis targets final implementation, and FastMatch, a venture between Credit Suisse and FXCM, gets a five-month head start, participants may well also ponder the issue of independence.
Will market makers support platforms that are backed by specific banks, or will they prefer to trade on independent platforms? It’s a card EBS has up its sleeve.
“I believe this industry can benefit from the leadership of a vendor that is independent, not controlled or owned by the industry, and who is the only player working with both the banks and the major buy-side professionals,” Mandelzis sums up. “We believe we’re the only pure facility for that.”