Randomisation raised level of conversation, say Weisberg and Mandelzis

Former chiefs of EBS BrokerTec and Thomson Reuters FX praise contribution of Campbell Adams and former rival ParFX

Gil Mandelzis: "The impact of ParFX, and Campbell Adams in particular, on the market cannot be overstated"

The introduction of randomisation in foreign exchange markets has raised the level of conversation, and forced major trading venues to take a step back and evaluate how they want to position their offerings, the former chiefs of EBS and Thomson Reuters FX told delegates at the 14th annual FX Week USA conference.

“I think the impact was mostly political, but it was very important at the time and the impact of ParFX, and Campbell Adams in particular, on the market cannot be overstated. It was a very formative event in the history of the market because they really changed the market in a very profound way, and to me it was really about how the dialogue was conducted,” said Gil Mandelzis, an independent consultant who was chief executive of EBS BrokerTec until the summer of 2016.

The comments were made on a panel examining electronic-trading trends in FX since 2012. Campbell Adams, the founder and originator of the concept of randomised pauses to eliminate speed advantages, set out to create the ParFX platform in response to customer dissatisfaction with the perceived advantages enjoyed by high-frequency traders on EBS at the time.

Since the launch of ParFX in 2013, both EBS and Thomson Reuters have introduced randomised pauses, albeit in slightly different ways. Mandelzis became chief of the EBS platform in March 2012.

Randomisaton had some impact on the market structure, but more importantly, it changed the discourse in the industry in a much more grown-up, more responsible way
Gil Mandelzis

“Randomisation made us think about what the role of platforms is. It forced us to take a step back and we had to look at every aspect of the platform. Randomisation had some impact on the market structure, but more importantly, it changed the discourse in the industry in a much more grown-up, more responsible way,” added Mandelzis.

Phil Weisberg, an independent consultant who was global head of FX at Thomson Reuters until November 2016, also praised the impact of the measure.

“I think it made central-limit order-book (Clob) operators think about who their real clients were, and the distribution of the flow and people’s access – how fair that needed to be. When I say fair, I’m not saying there were unfair things happening, but it’s almost like a tax policy, where you have to think about what you need to do to have access to the top of the book – whether it should be democratic or if it should be engineered to benefit a large number of participants,” Weisberg said.

People became more thoughtful about what they wanted from the venue and how they wanted to position the platforms
Phil Weisberg

“I don’t think there is a right or wrong answer, but people became more thoughtful about what they wanted from the venue and how they wanted to position the platforms,” he added.

Mandelzis and Weisberg both noted that around 2012, banks were starting to find it increasingly difficult to make money in the low-volatility, lacklustre-growth environment. Added to these woes, alternative market participants, who at the time were called high-frequency traders, entered the market and benefitted from the lack of technological investment from banks until then.

Phil Weisberg

“Top-tier financial institutions that hadn’t already been investing until then, to be as rigorous with their technology as some of the alternative market-makers, really got their act together and realised spreads are low and it was probably not going to be back to how it used to be,” Weisberg said.

“After that, people made investments to up their game and the way we see this manifest itself today is that the collective P&L of the alternative market-making community has been reduced by 75%,” he added.

Having been challenged by technologically superior and nimble trading firms, banks were forced to figure out more efficient ways of managing flows and take a look at the market microstructure more closely.

At the same time, the largest and most successful alternative market-makers turned their attention towards developing distribution channels to rely less on the money left on the table by banks on anonymous all-to-all venues, and rather than relying on just speed and technology, they looked to become riskwarehousing entities.

“So the business models of banks and non-bank liquidity providers (NBLPs), by virtue of competition, got a little bit closer together,” Weisberg said.

“What we are seeing from a liquidity provision perspective is that today there are probably five very large banks and five to 10 very large NBLPs who are real market-makers. The number is smaller than it used to be, and the differentiation between banks and NBLPs is not as relevant as it used to be,” Mandelzis noted.

Rise of disclosed trading

Both panellists said the low growth environment forced major dealers to take a much closer look at their cost of trading, and shift from a market share maximising strategy to a profit-maximising mode as the market matured.

Finding the right distribution channels, internalising more and trying to avoid a big post-trade market impact have all been drivers of the growth in disclosed trading channels. Five years ago, corporates used FXall – Weisberg’s firm, which he sold to Thomson Reuters in 2012 – and 360T, while retail aggregators relied on Integral and Currenex to trade on a disclosed basis.

Following the acquisition of FXall, Thomson Reuters boasted an offering that gave customers a wider choice of trading styles than competitor EBS. When Mandelzis arrived at the then Icap-owned electronic broker, he set about building the EBS Direct platform to compete.

“The decision we made at EBS five years ago was to become a supermarket of FX offerings, and just offer whatever is out there so clients can decide which type of trading they would like to take, rather than trying to educate customers about the benefits of a certain trading style,” Mandelzis said.

There was a realisation that if you want less market impact, you need to move away from lit, all-to-all venues
Phil Weisberg

But the rise of NBLPs on anonymous venues has also contributed to the trend, as banks could no longer just exchange risk amongst themselves without creating a large market impact. “There was a realisation that if you want less market impact, you need to move away from lit, all-to-all venues,” Weisberg said.

“Also, with the exception of a few events, such as the Swiss National Bank event in January 2015, we have been in a very benign environment where volatility has been trending lower, so the sense of urgency that if a client doesn’t transact immediately they will see a 3–4% move just really isn’t there,” he added.

Looking ahead, Mandelzis and Weisberg highlighted growth in prime brokerage, the emergence of shared back-office systems and processes, and a bigger role for analytics as the main themes for the next five years.

“I think there will be two major themes in the next five years: there are brilliant execution mechanisms available today, but nobody knows how to use them properly,” Weisberg said. “So, on the execution side, analytics will drive the change. It won’t be a platform set up by two guys in a garage – it will be the study of analytics and the ecosystem, which will allow people to realise more trades can happen if market participants can match intelligently,” he added.

“The role of PBs has changed, but ultimately I do believe PB has a huge way to grow,” said Mandelzis. “The bulk of clients today don’t have access to PB, and asset managers and corporates will change their style of trading in the years to come, and there are indications that this is starting to happen. PBs know how to service clients, so I think there is a lot of room for growth there.”

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