Nicholas Pratt

Exploring the next-generation technology and market models of FX ECNs

May 2022 in Special Reports

Electronic communications networks (ECNs) have become a staple of the FX market over the last few decades. Nicholas Pratt examines how they intend to remain relevant for the future

For many people, the traditional benefits of using FX ECNs still hold true. According to Euronext FX CTO & Head of Liquidity Management Grigoriy Zeleniy, these benefits are fourfold – the ability for traditional liquidity takers to participate directly in the FX market; easy access to additional liquidity; the connectivity of a prime broker model; and the anonymous trading that makes it easy for market makers to plug in without having to stream prices continually.

“Over the years, takers have become more savvy and realise that best execution involves more than simply trading with your main tier1 bank relationships,” says Zeleniy. “Although the primary ECNs have been in decline over the years, the more flexible ECNs that offer more than a central limit order book have been increasing their volumes and gaining market share.”

Euronext FX is the exchange’s ECN, formerly known as FastMatch before it was rebranded in 2019, two years after it was acquired by Euronext. In the first quarter of 2022, it experienced its second highest ever quarter in terms of ADV. It has also expanded its client base in that time, which Zeleniy ascribes to the effort made to improve the liquidity on offer, provide liquidity management services and to support multiple trading styles.


The arrival of new trading styles such as algorithmic trading have also played to the strengths of those ECNs with the flexibility to respond to and anticipate client demand, says Zeleniy. “Takers want the depth of liquidity to immediately transfer risk, but best execution also requires a competitive environment with tight spreads and low market impact. Furthermore, takers want the ability to earn spread by ‘making’ passively.”

“The future belongs to those ECNs with the best flexibility, technology, service level and investment appetite to answer to the clients’ increasingly sophisticated demands.”

Grigoriy Zeleniy

Euronext FX has sought to capitalise on this trend by providing the opportunity to further reduce trading costs by ‘earning spread’ via passive, yet dynamic order types and algos. “Traditionally Tier 1 banks give access to this type of execution either at a high fee and with a very restrictive MQL. Our pegged order types and algo strategies do not have price level limitations or time refresh restrictions. Flexibility allows our clients to engage at ‘making’ to all our clients or to a special pool of choice, while retaining the ability to go to market at will,” says Zeleniy.

New regulations such as the FX Global Code have also helped to give more assurance to firms about using ECNs, says Zeleniy. “Confidence is achieved through transparency. The aim of the FX Global Code is to ensure market participants have clear, easily accessible and understandable information on how their trades are handled, allowing them to make informed decisions about the other market participants with which they interact. We believe the key to trust is transparency,” says Zeleniy.

“We were the first ECN to publish our Disclosure cover sheets. We make them publicly available on our website. As a platform, we have always been very transparent and data driven. Before the latest code guidance, we were already helping our clients to detect and avoid market impact, possible pre-hedging, long RTTs and potential additional hold-times with the development of our FlexMatch application. We’ve always specialised in creating bespoke liquidity pools tailored to the takers’ and makers’ preferences and thresholds,” says Zeleniy.

Ultimately, the evolution of the FX market and how ECNs respond to it will determine their growth and success, says Zeleniy. “As FX market players become more savvy, they increasingly understand that one execution style does not fit all occasions. You need a market for immediate risk transfer, you need one for slow algos, you need one to earn spread. At various times, you want the flexibility to show your hand or trade stealthily.

“The future will only become more complex. The future belongs to those ECNs with the best flexibility, technology, service level and investment appetite to answer to the clients’ increasingly sophisticated demands,” adds Zeleniy. “You also need the vision to detect the shift in client demand and make the necessary investments to focus and deliver the next product and functionality. This can only be achieved with increased client engagement and communication.”

Strengthened value proposition

The traditional benefits of using an ECN are the access to credit and liquidity as well as the ability to be passive in an order book. These benefits remain true today and will continue to be the driving force behind the use of ECNs, says Jon Watras, Director FX & US Treasury Sales at Cboe FX.

“In the past, ECNs were probably treated as a gap filler; a counterparty would send their best flow to their direct LPs and then what they couldn’t get done would go to an ECN,” says Watras. “As ECNs have evolved, their value proposition has strengthened in several ways. ECNs that are able to better partition liquidity pools and manage liquidity have become sources for specific flow. When you add products like Full Amount Trading, you also help your LPs as the concept of sweeping becomes less of an issue and takers in turn are happy because they are dealing in larger sizes with reduced impact.”

“With the introduction of new order types and curated liquidity, counterparties are more willing to leave passive orders on an ECN.”

Jon Watras

Another enhanced value proposition of ECN’s is the work involved in maintaining a liquidity pool, storing and analysing the relevant data and having conversations with multiple LPs on a regular basis, says Watras. “ECNs remove that burden.”

Firm liquidity has been a growth story for Cboe FX, says Watras. “Over 40% of our flow is firm. This is largely down to a diverse pool of resting orders from other takers, including pegs. With the introduction of new order types and curated liquidity, counterparties are more willing to leave passive orders on an ECN. Factor in that the market maker standards apply to firm liquidity as well, and the client gets a better experience overall.”

And lastly, says Watras, the last few years have seen a growth in the use of dedicated skew feeds. “Using an anonymous ECN provides an efficient way for makers to get out of risk by showing a skewed price to a customised pool of skew-safe takers. This is obviously great for the takers as well, as it gives them access to unique pricing that they may not be able to get elsewhere, combined with very high fill rates and minimal market impact.”

Historically, ECNs were always thought of as ‘shark pools’

In order to widen the client mix on their platforms, ECNs have to change the narrative on how they have been viewed in the past, says Watras. “Historically, ECNs were always thought of as ‘shark pools’, where LPs could cherry-pick the best trade, fill rates weren’t enforced, and taker execution was just sweep to get done. At Cboe FX, we have put orders and procedures in place and continue to work with clients to fine tune those processes, to ensure that everyone connecting to our platform is aware of how our liquidity provisioning works.”

The arrival of new trading styles such as algorithmic trading and its focus on minimising market impact and providing trading analytics has played into the strengths of FX ECNs. “We have seen it on all fronts,” says Watras “Whether a bank wanting to partition out flow for its algo business or a client that is using algos and wants that separate from certain strategies, we are there to support.

We work with the client to better understand the purpose of the algo. If they are willing to give an overview of how and where it executes and the type of requirements it looks for in liquidity, we will then work to match that up as best we can. We are also having consistent dialogue if the flow does not match expectations. Then it is for the client to either look at their algo or to speak with their end customer to see if there are better ways to execute that algo.”

Building confidence

While it is hoped that regulatory initiatives such as the FX Global Code of Conduct will give firms more confidence to use ECNs, Emily Eimer, Head of Liquidity Management at Cboe FX, doesn’t think they have given that confidence yet. “Cboe FX has stated its commitment to the Code and backed it up with a constant review of its operating procedures and market maker standards, a platform enforced maximum hold time of 35 milliseconds, and we publish granular volume and liquidity statistics to our website, including a 30-day rolling firm volume percentage and our daily non-firm fill rate across the entire platform,” says Eimer.

“Clients need to take into consideration what platforms are doing to be Code compliant and whether or not they should still be trading on venues that have yet to make these changes of their own accord. We believe that by being transparent and sharing these kind of metrics, we enable clients to make more informed choices,” she adds. When it comes to next generation FX ECN market models, Eimer says that, “any new platforms that come into this space are going to have to offer more than what is out there currently. The venues that do exist today need to remain conscious of client needs and focus on finding better efficiencies, whether through simplifying work-flow issues like allocations or offering products beyond spot FX such as NDFs or in the digital asset space.” 
Five main issues will influence the future growth prospects of ECNs says Eimer. “Are they Global FX Code-compliant? Is their technology far exceeding customer expectations? Are they able to offer multiple sources of liquidity? Can they handle credit and what products do they offer in addition to FX?”

“Any new platforms that come into this space are going to have to offer more than what is out there currently.”

Emily Eimer

All-to-all trading

FX ECNs came into existence for all-to-all trading, which benefits both the buy and sell-side since their execution obligation as bilateral participants do not apply and can stay completely anonymous, under the ECN offering, says Devang Bhatia, Chief Commercial Officer for CurrencyNode, the ECN launched by the Singapore Stock Exchange (SGX). FX ECN providers have sought to expand their customer base and offer access to larger pools of diversified and bespoke liquidity, says Bhatia. “We see more clients demanding algorithmic order execution via traditional bilateral workflow and trading platforms. Coupled with central clearing and prime broking services, the participant mix has increased from traditional global banks to include regional, local banks, proprietary trading and buy-side participants. This provides the opportunity for ECN and bilateral platforms to integrate and collaborate to bring deeper liquidity and service a wider expanse of client types.”

“With the increased adoption of algorithmic trading and the availability of advanced analytical tools, market participants are moving their flow based on time of execution and currency pair to FX ECNs.”

Devang Bhatia

With the increased adoption of algorithmic trading and the availability of advanced analytical tools, market participants are moving their flow based on time of execution and currency pair to FX ECNs which differentiate their liquidity based on providers and depth, says Bhatia. “For example CurrencyNode Is a FX ECN focused on Asian currencies with liquidity providers who are typically local and regional banks, in order to provide deep liquidity In Asian currencies.”

ECNs have also been developing their technology to deliver more control for clients over the trading and execution process, says Bhatia. “A big reason for launching CurrencyNode was to service our growing buy-side franchise by leveraging MaxxTrader’s technology to give a curated liquidity clients need based on their execution style and at the time they are executing. Additionally, we are bringing our network of buy-side and sell-side clients into the Asian timezone for matching.”

The growth of ECNs have also been helped by the increased demand for trading instruments like non-deliverable forwards (NDFs) and currency derivatives, says Bhatia. “The recent trend of sell-side banks adding NDFs to their proprietary algo suites is a testimony to the growing demand for NDFs. Growing volume in FX futures for NDF currencies is making electronic pricing fungible between ECN and listed markets giving a big thrust to the growth in NDF trading on ECNs.”

Analytics are also key to ECNs success

The ECN market has also passed two important tests in the last two years. Firstly, the leading ECNs proved to be largely resilient during the Covid-19 crisis. Secondly, the majority of leading ECNs signed up to the FX Global Code of Conduct and are promoting the benefits of more transparency.

“Traditional voice broking used for initial price discovery, especially for NDFs, was impacted due to the COVID-19 disruption,” says Bhatia. “During this time pricing was available on FX ECN which led to migration of volumes from traditional voice to ECNs. Overall, there is a general trend towards electronification. “We see this from the strong growth on our platform,” he states.

“CurrencyNode has also adopted the FX Global Code of Conduct and encourages its market markers to have no additional hold-time. As a consequence, the average hold time for CurrencyNode since going live in 2021 is under 10 milliseconds. At CurrencyNode we are very focused toward giving our clients what they need – the ease of accessing liquidity from OTC and/or FX Futures under one venue. We think this model to get access to different liquidity pools under a single venue will attract lot more participants,” says Bhatia.

“There are huge opportunities for those ECNs prepared to reap the rewards. Lack of market data and order routing logic transparency are key issues at the moment.”

Michael Siwek

“Under the Uncleared Margin Rule regulations, the sixth phase will affect many buy-side and regional participants in Asia this year. SGX as a leading market infrastructure provider will be well positioned to offer our clients who trade OTC FX derivatives on CurrencyNode to convert their positions into the listed FX via the FlexC solution SGX currently offers,” says Bhatia.
Recycling of liquidity has been a challenge for ECNs in past. Bhatia says that CurrencyNode curates the liquidity for each client very carefully its liquidity management team recalibrates liquidity to ensure there is no liquidity mirage or duplication of liquidity. “With electronification and the globalisation of Asian currencies, the need for liquidity is growing rapidly. Clients trading across timezones will be looking to seek and match liquidity on Asian venues for Asian pairs,” says Bhatia.

Innovation is required

Most ECNs still lack critical innovation, says Michael Siwek, founding partner and global head of eFX at DMALINK. “There are distinct advantages to the traditional ECN model of aggregating quotes across LPs, which drive price efficiency and transparency, especially when coupled with an independent mid for benchmarking. Utilising a Prime Broker or Central Counterparty to manage credit cost-efficiently is also a distinct ECN advantage.”

Looking beyond this, however, says Siwek, there is a clear requirement to overhaul the ECN model when it comes to market data distribution and order routing transparency. “A recent example where such overhaul would be of benefit is the alleged Currenex ECN fiasco. Further the current model of double-charging brokerage across clients and liquidity providers is not in line with market expectations and therefore not sustainable.”

The arrival of new trading styles such as algorithmic trading has played into the strengths of FX ECNs

“Traditional ECNs must also bridge the gap into digital assets with a fiat on and off ramp component embedded into the transaction workflow taking into consideration clearing and settlement standards,” says Siwek. “The DMALINK FX ECN and DeFinity digital assets ECN cater towards a new order of expectations and evolution in line with current and future developments.”

Some ECNs are struggling to attract new clients across spot FX and average daily volume is in decline across many established platforms, says Siwek. “The key is to cater towards niche currencies supported by regional liquidity. The ability to match non-directional flow with suitable market makers is key in a market where there is a clear race to the bottom. Fees generated by venues are contracting year on year. We have gone to pips to fractions of pips across G10 currencies.”

To drive shareholder value from an ECN perspective, the key is diversification of products across foreign exchange such as NDFs options, swaps and forwards, coupled with access to digital assets including stable coins, says Siwek.

Analytics are also key to ECNs success, says Siwek. “Pre-trade and post trade market impact analysis can be especially helpful in combination with a trading style that adheres to best execution practices. For example, full amount trades should be directed to market makers that can handle such orders and have sufficient warehousing appetite. ECNs have the opportunity to work with its clients and market makers to avoid liquidity abuse and to create custom liquidity pools to ensure positive yield for the LP, optimal fill rates for clients, resulting in ADV for the ECN.”

The use of technology and open communication with all stakeholders makes ECNs an important and critical part of the FX trade life cycle, says Siwek. “Certain trading relationships thrive on bilateral setups, the key for an ECN is to know its clients and market makers, resulting in optimal performance for buyers and sellers of currencies. Technological innovation is key to stay ahead of the curve. This is why we are investing heavily in proprietary algos and anomaly detection signals, available to all platform participants across spot foreign exchange and digital assets.”

The future

The future model for ECNs is one that avoids double-charging brokerage across its makers and takers, says Siwek. “ECNs must adopt a fully transparent approach to market data and order distribution. Future ECNs must provide for a range of currencies and embrace digital assets, with spot, futures, swaps NDFs deeply embedded across its ecosystem, taking into account the clearing and settlement process. As with any industry, innovation is key, says Siwek. “There are huge opportunities for those ECNs prepared to reap the rewards. Lack of market data and order routing logic transparency are key issues at the moment. ECNs must provide add-on value to clients and market makers. The current ECN model worked well when it was first introduced decades ago. Product diversity underpinned by cutting edge technology in co-operation with suitable partners will ensure an influx of client demand for the 2020’s and 30’s.”