FX market trends: Liquidity, execution, and the FX Global Code

Ali Curi: Markets Conversation is a new ION podcast where we discuss topics of importance to capital markets participants with product owners, subject matter experts, and industry leaders.

Eugene Markman: As the market becomes more electronic, API trading has become the standard, right? Every participant now provides or connects to somebody else’s API.

Beyond automation, data is the ultimate benefit, right? Like most other industries working towards AI models, FX will do the same. Maybe artificial intelligence isn’t the right word. I think maybe the right label to use is “artificial labor.” The ability to program machines to do more based on the human input and human programming.

This is how we will scale businesses even further, how to make them more efficient.

Ali Curi: Hi everyone. And welcome to Markets Conversation. I’m Ali Curi. On today’s episode, Eugene Markman from ION Markets will share with us how market volatility has become a defining feature of the foreign exchange landscape and how it has significantly altered how traders reliably access liquidity.

We’ll discuss not only how the FX market has undergone a transformative shift, but also Eugene will explain how market participants in response have diversified strategies, embraced innovative liquidity access methods, and adopted data driven solutions to refine provision and execution.
Let’s get started.
Eugene Markman. Welcome back to the podcast.

Eugene Markman: Thanks for having me again, Ali. It’s great to be back.

Ali Curi: Eugene, last time you were on the podcast, we learned a little bit about you and what you do at ION. But for our new listeners, can you briefly share with us your background and your role at ION?

Eugene Markman: Of course. So my background is I’ve worked 20 years in trading.
First 10 years of working at Credit Suisse, where I worked on interest rate products. I was the COO of the rates desk in New York and Zurich. And then in 2014, I went to pursue my interest in electronic trading by joining a small growing company called Market Factory. A company focused on Connectivity and FX markets.

We grew that company significantly to 2019, at which point we were acquired by ION. And now as part of ION, I’m the COO of the ION FX group. We’re working on building our next generation FX products.

Ali Curi: Eugene, since we’re going to discuss foreign exchange market trends, let’s start with an overview of the current FX market.
What major trends and shifts are you seeing?

Eugene Markman: The 2022 Triennial Survey by the BIS showed an overall trading volume in OTC FX market up from 6. 6 trillion to 7. 5 trillion, a 14 percent increase, right? And within that rise, if we look a little bit closer, we saw a large shift towards listed products such as FX futures,
mainly traded on the CME on their cloud, right? And I think that trend is set to continue in addition to that, we also see uptick in NDFs and FTF and FX swaps. They’ve also risen significantly over the last few years. NDFs are increasingly being used to take directional bets and executing arbitrage strategies.

FX swaps provide natural choice for dealers and small banks to meet their funding and hedging requirements. So overall growing volumes of these will push greater electronification and trading through streaming, and through the use of CLOBs, right? For such models. And in general, the other trend that we see is FX trading is moving away from multilateral platforms to more of a bilateral method, right?

So more single dealer platforms, client portals, direct trading through APIs. This is also a trend that we saw from the last EIS Triennial Survey.

Ali Curi: Let’s talk about the FX global code. First of all, what is it? And what role does it play in the FX market, and in particular, the relationship between liquidity providers and consumers?

Eugene Markman: The FX Global Code is a set of global principles and good practices for the foreign exchange market. It was developed to provide a common set of guidelines to promote integrity and effective functioning for the FX market. To make it a more logical, more efficient market. Now, it’s voluntary.

Participants have the ability to either opt out or sign up. What we’re seeing more and more of is that ECNs and LPs are adopting the code and the ECNs are requiring their LPs to be signed up to the code to participate. And we’ve seen recently in EBS, they going to have that requirement. Euronext, SIBO, 360T are some of the other ECNs that have made that choice.

Now, what does this result in? It’s enhanced data regarding the quality of liquidity, top execution times, which means more transparency from the LPs to their consumers. There’s things like lower hold times and lower last look times, and this will lead to better execution and better pricing for customers.

So overall, the goal is to create a more transparent and efficient market. And this is some of the first steps of how we’re going to get there.

Ali Curi: Now, over the last few years, market participants have been making some strategic shifts rather than relying solely on a single provider. Traders are embracing the diversity in their market access.

What kind of challenges and opportunities does this present for market participants?

Eugene Markman: For starters, I think it’s well known that accepted that best practice is to have multiple LP relationships. Ten years ago, we saw clients connecting to less than 5 LPs, but that number has now grown way above 10, as an example based on what we’ve seen.

In this market, relationships really matter, and having the right relationships in place is key to make sure that you have quality liquidity when you need it, right? This is during periods of high volatility, fast moving markets, thin liquidity in the market, but you also have to be able to keep your LPs accountable to make sure that you truly are getting best pricing from them and that the relationship is strong.

As I see it, one way to achieve that is through technology, right? So To me, at its core, it’s a technology problem. It’s scaling up your connectivity so you could always add liquidity as needed or change liquidity as needed, right? This is a problem that gets more difficult to size. It’s very easy to connect to one.

It becomes quite difficult to connect to many. Previously, this was done in house by most teams where they saw IP in it. IP is no longer seen in this, and this is really now seen as a commodity, which means that there’s now many solutions that are available off the shelf. Overall, this allows Firms to be flexible and add the liquidity they need, right?

And to build the relationships with the LPs, to make sure that the right LP mix for their business.

Ali Curi: Now, along those same lines, we’ve seen a continuing growing trend towards trading on electronic communications networks, ECNs. What’s driving that growth? How are market participants leveraging ECNs to curate their own liquidity pools?

Eugene Markman: Similar to the LPs, we see more and more people looking for additional ECNs as well. Previously, especially in the beginning of ECNs, EBS was the source for G10, Refinitiv was the source for Commonwealth currencies. And as new ECNs started to appear, consumers, liquidity consumers, started to trade on those ECNs as well.

We saw that market grow. Also recently with the EBS consolidation onto Globex, those who did not want to migrate now leverage the secondary ECNs for their liquidity needs. So again, another driver that’s pushing the use of ECNs. I guess also the question you ask was why, why trading ECNs?

So number of benefits that some of them all go through, there are many, right? And the first one I think is the most important one is the increased liquidity. So ECNs aggregate liquidity from multiple LPs, which includes bank, financial institutions, other market participants. So you have a very deep and diverse liquidity pool, right?

So provides traders with increased opportunities to execute, at better pricing, right? More liquidity should lead to better execution, right? Especially for large orders. And with that competition, with having more liquidity, you get tighter spreads, right? More participants competing for flow will result in generally, again, better execution quality at tighter spreads for the liquidity consumers.
ECNs also provide price transparencies. They provide real time prices, market depth, and strong market data. And market data enables traders to make more informed decisions about how and when they should be executing their trades, again, improving execution quality. Another benefit, of course, is the reduced market impact.

Traders working large orders in the market want to be anonymous and participating in anonymous pools allows them to do that. They’re able to execute without giving away who they are and why they’re trading. This reduces the market impact of that order. Also, you have fair and efficient order matching.

ECNs do provide rules to try to make the market more efficient and more fair. One example of that could be speed bumps, right? So eliminating one firm’s speed advantage that they might have by making everybody in an even playing field. Overall, a number of benefits to trading on ECNs. And this is why we see that shift.

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Ali Curi: Let’s move over to banks for a minute. In this evolving FX market landscape, what role do tier one banks play in maintaining liquidity? What impact does it have on the consistency of liquidity in the market?

Eugene Markman: As we talked about the migration of EBS to Globex and the new reliance on the ECNs, we’ve seen a similar trend with the tier ones. I think more banks, more customers are now going to their tier ones for that, for their liquidity needs, right?

Because they decided not to migrate, general trend, but I think the tier one banks have become really the wholesale market and the FX liquidity. And because of the scope that they’ve managed to achieve, they’re able to internalize so much of their flow that they’re able to price their customers no matter how volatile the market is, and having a relationship with somebody that can provide you liquidity at all times is extremely important. There’s two ways. One reason, the more liquidity, the more customers they have, the more they grow, but the more the customers go to them is the Amazon model.

Ali Curi: Now, earlier you touched on NDFs and the market has seen a significant shift towards derivative products like NDFs, swaps, and options.

Share with us how has this shift impacted trading volumes and what challenges and opportunities does it present for market participants, especially in terms of adapting to evolving preferences?

Eugene Markman: So we talked earlier how the BIS Triennial Survey showed a 14 percent growth. If we go spot versus non spot, we see that pre, in 2019, the spot market was 30 percent of total FX volume.

It’s now dropped off. It is now only 28, while non-spot went from 70 to 72, and there’s clear evidence that the majority of the growth is being driven by the non spot market. To support this trading we really need the electronification for non spot products as we’re moving to a more electronified market.

And in reaction to that, banks are streaming NDFs, SDS, now even options. And we have new ECN and new liquidity pools coming up to support non-spot trading. Of course, this leads to more fragmentation, right? As these products will have new APIs and new workflows that need to be included, in trading execution software, to manage this complexity, right?

But in general, the FX universe is becoming more complex, but so is the software, right? The software is also becoming more complex and more sophisticated. The opportunity for market participants, of course, is other ways to make money, right? New ways to generate P&L, new products to trade, right? And the challenge is keeping up with the needs of those products, through a technology point of view.

Ali Curi: You talked about technology and software. You and I had a previous conversation on the impact of APIs on data sharing, among other topics. What’s new and what expanded role do APIs have in this new FX market? What opportunities do you see for LPs in adapting new APIs to the process?

Eugene Markman: As the market becomes more electronic, API trading has become the standard, right? Every participant now provides or connects to somebody else’s API, right? I think beyond automation, data is the ultimate benefit, right? What we do with that benefit is the real question, right? Like most other industries working towards AI models.

I expect that FX will do the same, right? And maybe artificial intelligence isn’t the right word. I think maybe the right label to use is artificial labor. I don’t know if we’re there at the intelligence point, but the ability to program machines to do more based on the human input and human programming.

so this is how we will scale businesses even further, how to make them more efficient. Based on the technology, right? At this point, to answer your question, LPs have already all adopted APIs to their process. The interesting question is, how do they change their process to leverage the APIs that exist in this?

How do they leverage the data that they currently have?

Ali Curi: Eugene. What is the one big thing? What is the big takeaway that you hope listeners will take away from this episode?

Eugene Markman: The biggest takeaway, as I see it, is that the FX market just continues to evolve and it continues to fragment. Technology needs to move at the same pace.

What is true today might not always be true tomorrow. So we have to be on top of those changes. So we have to be ready to see where the market moves and how we have to adopt with that moving market on the move from spot to non spot is one example. The use of more data is another, but technology just needs to grow to keep up with this market.

Ali Curi: Now, you and I have done a variation of these questions before, so I’m going to keep these short. What is some advice that you wish you had heard earlier in your career?

Eugene Markman: I think that’s very similar to the takeaway, right? That being flexible and the ability to evolve is the most important thing. We know the technology evolves, we know that the market evolves, the actors and participants in that market have to evolve as well.

We see this with voice dealers who there are much less of, and EFX traders have taken over. That is the evolution, right? So for anybody in their career, early in their career, they always have to be forward looking and thinking about, which way the market is going, which way the wind is blowing and right and how to stay ahead of that curve.

Ali Curi: Well, Eugene Markman, always a pleasure. Thank you for visiting us again. I hope to see you again soon.

Eugene Markman: Thank you so much, Ali.

Ali Curi: And that’s our episode for today. You can follow ION Markets on Twitter and LinkedIn. Thank you for joining us. I’m Ali Curi. Until next time.