FX data: How disruptive are the disruptors?

A number of FX market data initiatives have emerged over the last 12 months. September 2017 saw the launch of CLS Data and the introduction of the FastMatch FX tape service.

CLS declined to comment when contacted by Euromoney for this article and FastMatch CEO, Kevin Wolf, was unwilling to divulge user numbers for his firm’s FX tape service, merely stating that it was gathering increased interest from market participants, including buy-side and sell-side firms, central banks and other regulatory bodies.

“We have always been the most transparent platform as evidenced by our website, with real-time order book and volume info across currency pairs,” says Wolf. When asked if firms are making the most of the data generated internally from their own trades, or using publicly available market data efficiently, Wolf refers to the trend toward more robust transaction cost analysis (TCA) and the subsequent requirement for third-party data that is representative of the broader market.

In April 2018, Exegy launched Trade Port FX, which delivers market data to major FX venues. The firm’s product manager, Karl Dundon, says the CLS service has the potential to open up FX market data channels and improve overall transparency. He is also complimentary about the objectives of the FastMatch FX tape service.

“However, it is also important to note that given the complex, distributed nature of the FX market, the proliferation of custom pricing tiers (amongst numerous other idiosyncrasies) makes it difficult to create an off-the-shelf, accurately synced historical FX market data product,” he continues.

Market data packages are often unbundled and sold separately to improve profit margins, further increasing costs for trading institutions, says ParFX CEO, Dan Marcus. “There is a realization that institutions are paying vastly different amounts for the data they receive. Large institutions are negotiating better prices and cutting special deals based on how much they agree to trade on a particular venue, which means smaller institutions with lower trading volumes and less bargaining power are struggling to get value for money.”

In the past, you typically had to be an active trading client of multiple venues in order to get meaningful historical data, says Dundon. “More recently, some of the FX ECNs [electronic communications networks] have started to offer historical market data via their websites, perhaps driven in part by the listed exchanges that have acquired them. In addition, the increasing adoption of TCA in FX is likely generating a positive effect on transparency. However, it can be expensive and there are still some FX venues that are not quite as transparent.”

Given that exchanges and vendors have known for many years that market data is a commodity that provides an incremental revenue stream, it is hardly a surprise that they are not incentivized to cheapen their products despite broader technology cost reductions, suggests Interactive Brokers’ chief market analyst, Andrew Wilkinson.

Matt Hodgson, CEO and founder of Mosaic Smart Data, notes that exchange revenue from ‘information services revenues’ — which includes market data — rose by 9.1% last year, according to the Exchange Global Share & Segment Sizing 2018 report.

“Addressing this must be one of the key technology focuses for the FX market and to do so participants should look at more fully utilising the data they have already generated through their own trading activity,” he says.

“Banks and large buy-side firms are sitting on mountains of (generally unused) data. However, electronic and voice trade data is spread across desks in different databases and held in different formats — if it was aggregated into one secure and normalised format, it could reduce the cost of buying in market data.”

Dundon observes that over the last decade some large firms have invested significantly in building, integrating, iterating and maintaining market data and order entry platforms, in addition to their proprietary pricing algos.

This has paid off for those with the resources to maintain this level of investment, he adds. “However, firms with scarce IT resources who are looking to upgrade and optimize their market data and trading infrastructure need to start capturing and utilising their FX market data feeds immediately.”

But when asked whether firms are making the most of the data generated internally from their own trades, or using publicly available market data efficiently, both ParFX’s Marcus and Vikas Srivastava, managing director for investor FX at Integral, suggest that data generated from a firm’s trades alone would not in most cases represent sufficient breadth and depth to enable deep insights.

Firms need to access data that is unaffected by their own trading in order to properly benchmark their performance, concludes Srivastava. “We have found that transparency is not just defined by the presence or absence of market data, but also by the relevance and application of that data.”