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Fairness and Transparency in the Global FX Market

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The e-FX market has evolved rapidly to meet the changing needs of an ever more diverse group of market participants.

The trend in the FX market as with other asset classes has been towards independent platforms that offer a level playing field with increased transparency to market participants who are becoming ever more sophisticated, and as a result increasingly discriminating.

Today’s e-FX users want to participate in a market with natural interest distributed across a diverse group of participants where they can be confident that everyone is playing by the same rules. As a result, it is important that there is transparency not only in terms of market data, but in terms of the practices and policies guiding the operation of the trading venue. If the underlying principle is to provide a fair market to all market participants, then it follows that there should not be special rules that only apply to certain users. Price/time priority – the principle that the order entered earliest gets executed first – is a core attribute of fair trading systems. For the trader, it is important to know that this principle is verifiable, preferably through the full disclosure of all order and completed trade activity on the platform.

Provision of full order book data and any activity transacted on the platform, including the time of trade, size of deal and price also gives the trader an indication of the true supply and demand for a currency which can help improve their strategy. Relationship-based trading systems including those operated by single dealers have stringent policies regarding the use of trade data from their systems and are appropriate for a wide variety of strategies, where the market participant feels at ease with sharing their information with the operator in exchange for a commitment of additional liquidity, credit or better service. Usage of these systems will grow even as the number of alternatives increases.

In those cases where sharing information is not desirable, there is a natural and growing tendency for market participants to require equal treatment with other participants for the successful execution of their trading strategies. Regardless of their employment at banks, funds, or market-making specialists, traders will gravitate to venues where conflicts do not need to be managed because the venue operators never act as principal and have the capacity to demonstrate fairness.While venues offering their own marketplaces as alternatives to independent ECNs are emerging from banks, they face challenges to meet these needs.

Professional market participant’s value the predictability that comes from a single set of rules consistently applied to all counterparties. Market practices that privilege some participants at the expense of others undermine the fundamental principles of equal opportunity and access. A neutral platform must deliver on these principles in order to be successful. The market for FX ECNs is evolving rapidly and in the long term it is likely to be the platform with the most diverse sources of liquidity combined with independence and transparency that will see the most adoption.

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