FX ECNs: Inspiring the market with innovative new trading products and services
Increased market volatility and the adoption of new, algorithmically-driven, multi-asset trading strategies have both served to make the ECN model more attractive to FX market participants. The flexibility and less rigid protocols suit a more diverse client base which in turn has improved the depth of liquidity. In addition, ECNs have worked hard to improve the reliability of liquidity through the use of analytics and the introduction of trading rules.
But what are the ECN providers doing to ensure they remain competitive as new entrants emerge? How are they investing in their technology platforms? What more use can be made of data and how can the liquidity be made even more reliable?
Rich ecosystem
According to Matthew Whitaker, director of product for MarketFactory, part of the ION Markets (FX) product suite, the ECN value proposition remains strong because of a rich ecosystem where workflow supports a diversity of trading styles – from bilateral trading to mid-point matching. It also supports the regional and OTC nature of the FX business as do the other properties of the ECN model – the ability to access multiple counterparties through a single integration; curated liquidity through a liquidity manager to improve fill rates; anonymous trading to prevent information sharing; access to rich streaming orderbook market data.
In recent years, the range of pricing models and order management mechanisms offered by ECNs has expanded. For example, Refinitiv’s spot matching service allows for randomization of both passive and aggressive orders to promote fairness between participants and minimize the incentive for firms to invest in low latency infrastructure to improve their trading outcomes.
EBS has replaced three separate matching engines in London, New York, and Tokyo with a single location for trading any particular FX instrument. It has also recently introduced conditional price increments which it claims enhance liquidity and market data quality.
In addition, there has been an industry trend moving offerings towards finer grained time-slicing and/or unconflated market data. There is also the increasing popularity of algo strategies, native pegs, and iceberg orders, and multidealer platforms that offer both straight pass-through/bilateral and aggregated/basket trading models.
The arrival of new trading styles such as algorithmic trading and its focus on minimizing market impact and providing trading analytics has played into the strengths of FX ECNs, says Whitaker “Algo offerings typically from Tier 1 banks direct bilateral client orders to access ECN liquidity that would not otherwise be the case. Algos also make use of the advanced order types available on ECNs, while analytics tools such as TCA are used to review the performance of the algos. There is a broader and more balanced client base with ECNs.”
There has also been a wave of consolidation in the ECN market which is addressing the lack of reliable and deeper FX liquidity that was a major concern in past years for large numbers of buy-side firms, says Whitaker. For example, CME’s acquisition of EBS has allowed the planned launch of the new FX Spot+ platform to connect OTC and futures liquidity. Meanwhile, LSEG acquired both Refinitiv and FXAll while Deutsche Börse acquired 360T, so further similar initiatives are expected.
ECNs have also looked to work closer with clients and market makers to ensure less abuse of liquidity, says Whitaker. For example, there are various dark pools such as BGC MidFX as well as the aforementioned spot matching randomization offered by the likes of Refinitiv/LSEG. “The move away from last-look on ECNs has helped address the problem of liquidity mirages, while there has also been tighter spreads for flow that matches both maker and taker trading models,” says Whitaker.
The growing demand for NDFs is also impacting ECNs, says Whitaker. For example, SGX CurrencyNode is working to establish an Asian NDF ECN in SG1, the Singapore data center, and the LSEG has also introduced a new NDF matching platform there. In addition, USD/BRL pairs are more widely available now based on B3/BMF futures. “Electronification is a result of increased volumes and deeper available liquidity resulting in the need for further automation,” says Whitaker.
To date, the FX Swaps market has been largely excluded from this process. However ECNs such as 360T’s SUN swap-matching platform offer the automation, efficiency, and transparency needed, and it is expected that technology change will happen very quickly here.
There is still work to be done to the ECN model, especially when it comes to market data distribution and order routing transparency. Whitaker would like to see the broad adoption of microsecond market data timestamps across regions; consolidated market data platforms for multiple ECNs/LPs; and smarter credit management models – given the increasing participation rates on these platforms.
Customizable liquidity
According to Paul Clarke, head of FX Venues at LSEG, the ECN proposition is compelling because no other paradigm offers the level of flexibility that ECNs provide. “Compared to Primary Markets that have constraints to promote price and trade transparency, with ECNs you can provide firm or last look liquidity, you can use hidden order types to reduce signaling and you can choose counterparties,” he says.
“The ECN model gives every participant the customizable liquidity they want, with the ability to execute in different ways,” adds Jill Sigelbaum, head of strategic development & partnerships, FX, at LSEG.
In some ways, the ECN model resembles a Swiss Army Knife. But this means that users have to know which component to use for different trades and different strategies and objectives, placing more onus on them to manage the various aspects, from market data distribution to liquidity management.
“There have been problems with ECNs and liquidity management in the past because of behavioral factors such as asymmetric last look. ECNs have had the ability to combine the best LPs with the worst. What has changed is the level of disclosure and this allows clients the ability to level the playing field and ECNs to become a cleaner place in which to transact,” says Clarke.
The addition of full amount streams has also allowed participants to access deeper pools of liquidity. However, the ECN model puts an element of responsibility on participants to manage their underlying counterparties and their liquidity. “For market data distribution and transparency, it is really down to the end participant to manage that,” says Clarke. “The benefit of primary market pricing is the transparency but you don’t get the same with an ECN. Is it a firm order or a last look? So there is more onus on the consumer to curate that.”
However, this does not mean that ECNs cannot help. For example, if the client wants to see skewed interest from LPs, they will be reliant on the ECN to help broker that. “As an end consumer, you need trust,” says Clarke. “This is a key factor in the different success rates of the ECNs. As an end consumer, you need to trust the ECN and your liquidity managers as you will be reliant on them to help curate your liquidity. That explains the differentiation in the success of the different ECNs. If you are a trusted partner to your clients, volume will follow.”
To this end, FXAll provides a ‘white glove’ service to aid with liquidity management. “We provide feedback on who you’re interacting with and ensuring appropriate behavior in terms of liquidity provision and liquidity taking,” says Clarke.
“As we develop the ECN space, we see each client sector has its own objectives,” adds Sigelbaum. “For example, hedge funds have varying needs in the execution space, and asset managers need streamlined workflow. So we provide all of these services, allowing our clients to innovate. Analytics are also becoming much more important for pre-trade analytics and deciding the best way to execute – via algos or RFQ.”
In recent years there has been an emergence of new ECNs, some more focused on specific client segments but the challenge they face in adopting a more customized approach to liquidity is ensuring enough continuous trading activity to provide good and consistent liquidity.
This has led to some partnerships that combine the scale of well-established large ECNs with the more customized newcomers. “Network scale is super-important and the new ECNs struggle to get the same level of adoption because of that,” says Clarke. “They have interesting solutions but they come to us because they need the distribution ability and a regulated entity with deep liquidity.”
It is also more preferable for traders to have a single front end that can link to different venues as opposed to managing a multitude of screens. “It gives every participant the custom execution and liquidity that they want with the ability to trade in different ways. The aggregated compliance and reporting aspects can also give some comfort” says Clarke.
“While the trends of the last 10 years have been around customizing liquidity and streamlining workflow, there is now a focus on automation around the rest of FX infrastructure. One example is client onboarding, which can be a real inhibitor to trading, as it can take weeks to months for a new account to be set up to trade” says Sigelbaum. “At the other end of the transaction lifecycle, settlement has become more of a concern because of the ramifications of T+1 on the FX market. Do we need atomic settlement? Do we need pre-trade funding? What will be the impact on credit? A lot of that is still evolving.”
Transparency and anonymity
There are a number of reasons why ECNs remain a compelling proposition, says Vidura Seneviratne, head of spot strategy at 360T. “They provide access to a broad array of FX liquidity, can provide both transparency and anonymity to help reduce market impact, and allow firms to build customized liquidity pools so they are quick to market. And costly high-quality connectivity has already been done for the user. Another key selling point is that, with the right credit model in place, ECNs enable firms to trade with counterparties that they don’t have direct credit lines with. This increases the potential for improved FX execution and is a particularly powerful proposition for a platform like 360TGTX, which has a highly diversified and global user base.”
The depth and reliability of liquidity on ECNs have typically been considered a major buy-side concern in recent years but Seneviratne disagrees. “We would argue that Spot FX liquidity has not been a major concern for buy-side firms, especially in the more liquid currency pairs, Certainly, at 360TGTX liquidity has never been an issue due to our robust network of liquidity providers, our global reach, and ability to partner with local market making experts and the deep, long-lasting relationships we have established with major liquidity providers who provide highly competitive pricing on the platform,” says Seneviratne.
“What is more significant for buy-side firms is the flexibility that ECNs offer with regards to accessing and interacting with FX liquidity. We support disclosed, anonymous, streaming, and RFS, as well as support Algo businesses at both the execution and hosting levels. However, we are continually innovating to enhance 360TGTX and with our new HyperSonic technology have been able to blend disclosed and undisclosed liquidity pools to enhance matching opportunities across our venue. We also work with FX market participants to help them build, optimize, and maintain bespoke pools of liquidity and have integrated these with advanced matching technology to help improve order fulfillment. Finally, ensuring all liquidity providers on anonymous platforms are FX Global Code compliant also fosters a more transparent and reliable trading environment,” says Seneviratne.
There is still work to be done though, says Seneviratne. “It’s essential for ECN platforms to continue offering FX market participants advanced data analytics and reporting tools. Providing detailed insights into trading activities and market dynamics helps to improve transparency, provide better insights into order execution paths, and enables traders to make more informed decisions.”
360T also prides itself on the efforts made to avoid liquidity abuse and to create custom liquidity pools to ensure positive yield for the LP and optimal fill rates for clients. “As one of the first ECNs to require Market Makers to adhere to the code, an ethical ecosystem is central to our philosophy. 360TGTX has developed customized liquidity pools that cater to the specific needs of various market participants, ensuring optimal trading conditions and reducing the likelihood of liquidity abuse. These pools are managed by a dedicated liquidity team who continuously work to align the pools with client needs, enhancing the overall trading experience,” says Seneviratne.
FX remains a highly competitive marketplace and it is therefore important for firms to make continuous enhancements to their technology offerings, says Seneviratne. “In recent years we have invested heavily in implementing high-performant technology for 360TGTX to ensure that we can offer ultra-low-latency trading and market data distribution. While we think we are now close to being the fastest, we are certainly the most deterministic, which is incredibly important for ensuring the consistent execution of trading strategies.”
Volatility and uncertainty
For Jayesh Patel, head of product for Euronext FX, the flexibility of the ECN model has been the main driver of secondary growth over the last five years. This flexibility can be seen in terms of execution styles, price discovery, and managing counterparties. Added to this has been the development of client-driven liquidity pools and efforts to please both market makers and liquidity takers.
“Makers can leverage ECNs with strong governance around skew safety in order to trade with skew safe takers to exist their risk in an efficient manner that is additive to their core franchise business,” says Patel. “For takers, the increase in algo-driven execution fits well into the anonymous ECN world, where bespoke liquidity pools can be created to match the client’s requirements.”
Another factor has been the rise in volatility, says Patel. “2024 thus far has been marked by increased levels of FX volatility marked by uncertainty with central banks and heightened inflation. During these periods, clients especially look towards ECNs to help facilitate their distribution and to support additional price discovery, price construction, and their execution needs. For Euronext FX, this is particularly true in Metals where have seen our volumes double since the start of the year.”
Recent years have also seen more development around pricing models and order management processes. “When we look back 10 years ago, most clients utilizing ECNs were sweeping order books and trading in a relatively inefficient manner. As clients shifted their focus to overall execution quality, demand for new order types and liquidity pools increased,” says Patel.
“ECNs now offer numerous order management mechanisms for clients to engage with to improve fill rates and reduce impact. Full Amount, Skew Safe, Collapse to Mid, Pegs, and Dark Orders are just a few of the many functionalities designed to improve the quality of service and execution for our clients. Clients will usually combine several of these to create a setup that best suits their specific flows.”
There has also been more focus on reducing phantom quotes through stricter fill rate/RTT and timeout requirements, says Patel. “This ensures that books are tradeable and are a clear representation of where the market is currently at. Growth in Full Amount liquidity pools have also helped provide clients with deeper FX liquidity ensuring they are fully dealt while minimizing their information leakage. We have also noted the increased demand by LPs for higher quality data around their pricing competitiveness. Euronext FX has spent the early part of 2024 investing capital and rebuilding our data infrastructure to deliver on these demands. Part of our focus in this rebuild is to produce new metrics to further encourage additional competition at top of book and the available depth for takers.”
“As ECNs warehouse a tremendous amount of data, we continue to see strong demand for more unique and derived data sources as clients want to diversify from traditional sources for modeling and price construction,” says Patel. “To meet these needs, Euronext FX recently launched Spread Matrix which provides consensus around where institutional spreads are in near real time. On the execution side, clients can still route orders in an inefficient way to ECNs. In many cases, differing flows still remain comingled creating inefficient liquidity sourcing. The benefits of flow segmentation have been realized by clients who have been able to isolate specific flows for spread compression and reduced impact. We see this benefits algo desks the most as algo offerings have become more complex and liquidity demands can shift drastically between different strategies.”
Rigorous policing methodologies ensure clients receive a high quality of service, but all vary in their implementation, says Patel. “Euronext FX has a client-focused approach where we encode client requirements like fill rates into our opportunity reports for LPs to consume and adhere to. Automated processes then flag and disable any LPs in violation of these predefined requirements ensuring the ECN is consistent over time in the quality of service provided reducing the need for time-consuming micromanagement from clients.”
ECNs are always innovating to maintain their edge in a tight and competitive landscape and to preserve their value proposition to their clients, says Patel. This means greater investment in in-house technology to ensure the lowest latency and the best chance of price discovery. “By investing in our matching engine, we are able to stay nimble and to quickly develop new and unique features to match our clients’ growing needs. The success of our innovations including FlexMatch, Collapse to Mid, and our recently launched Spread Matrix data product, have proven that client demand for flexible ECNs is still strong,” says Patel.
“Looking ahead, we plan to roll out a feature called Enhanced Skew Protection that focuses on minimizing leakage for quotes and orders this summer. We also plan to drive our ECN growth through our data infrastructure investment. We will offer our clients additional automation from tag recommendations to P&L management as ECN microstructure can be complex and clients continue to have less time to navigate every facet.”
NDF trading surge
The growing demand for NDFs is also reshaping the landscape for ECNs in the FX market, says Vinay Trivedi, COO, Sell Side Solutions, SGX FX. “This surge in NDF trading activity is attracting a broader array of market makers and liquidity providers helping ECNs to expand the liquidity pool available for NDF transactions. This increased liquidity not only enhances price discovery (for a rather illiquid market) but also improves execution efficiency for traders engaging in NDF trading.”
The growing volume in FX futures, such as INR Futures volume at SGX Group, is driving a convergence of OTC ECNs and listed markets, says Trivedi. “This alignment ensures consistent and interchangeable electronic pricing across platforms, enabling traders to access competitive rates regardless of venue. This fosters arbitrage opportunities, fuelling activity on ECNs. At SGX Group, we are also working on an OTC to Listed Basis Product to further deepen the connection between both venues. This product would allow for price discovery in more liquid OTC markets while settling the trade in a more capital-efficient listed market.”
Growth in NDF trading activity on ECNs is bolstering market efficiency by enhancing price transparency, tightening spreads, and refining order execution, says Trivedi. “This efficiency not only benefits traders and market makers seeking to optimize their NDF trading and market making strategies but also provides a more robust and resilient trading environment for NDF products. There is a strong trend of more and more ECNs launching NDF products.”
To optimize market data distribution and order routing transparency, ECNs must focus on enhancing the quality and timeliness of market data while increasing the depth of market information. Improvements in data aggregation, normalization, and latency reduction can contribute to better decision-making and price discovery, says Trivedi.
“Providing traders with comprehensive depth of market information, including detailed views of buy and sell orders, empowers them to make informed trading decisions and improves order execution quality. Additionally, ECNs should prioritize transparent order routing policies and fair access to liquidity. Clearly outlining order routing practices, execution policies, and ensuring equal opportunities for order matching fosters confidence among traders and maintains a level playing field,” says Trivedi.
Moreover, streamlined trade reporting mechanisms, optimized routing algorithms, and robust regulatory compliance efforts further strengthen the integrity of ECNs, promoting market stability and reinforcing trust in the ECN model, says Trivedi. “At SGX CurrencyNode, under the regulatory guidance of MAS, we have designed fair rules of engagement for market data dissemination and order matching. We also publish detailed reports to market participants analyzing the trading activity for parameters such as fill ratio, market impact, profitability decay and so on.”
ECNs are also benefitting from a more collaborative approach with clients and market makers, says Trivedi. “It enables the mitigation of liquidity abuse through proactive controls and monitoring mechanisms, fostering a secure and trustworthy trading environment. Customized liquidity solutions tailored to the specific needs and preferences of participants enhance trading efficiency and flexibility. By optimizing fill rates through fine-tuned order matching algorithms and execution processes, ECNs can improve execution quality and reduce slippage for clients,” he says.
“Additionally, collaborative efforts lead to positive outcomes for liquidity providers, ensuring competitive pricing, volume incentives, and access to diverse trading opportunities. This fosters sustainable and profitable partnerships while enhancing market depth on ECNs. Joint initiatives in risk management and compliance uphold market integrity, promoting fair trading practices and regulatory adherence.”
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