Despite the results of recent industry surveys showing a decline in the volume of trades executed via ECNs, the value of the ECN proposition remains strong and compelling for many FX market participants, according to ECN providers. Semi-annual FX turnover reports from the both the US and UK FX Committees, published in October 2022 showed that ECNs’ overall share of execution volume dropped and was outperformed by voice brokers. So how have ECNs responded to this data?
“FX liquidity is still quite fragmented and all-to-all trading is getting more relevant with both buy-side and sell-side participants needing to maintain a balance between best execution and profitability,” says Devang Bhatia, chief commercial officer at SGX CurrencyNode, an anonymous Asian FX trading venue, operated by Singapore Exchange (SGX Group) and hosted in Singapore’s SG1 data centre.
“ECNs that can demonstrate unique liquidity especially in emerging market currencies have all gained substantial volume and market share,”
Devang Bhatia
“ECNs that can demonstrate unique liquidity especially in emerging market (EM) currencies like the Chinese renminbi (CNH), Indian rupee (INR), Indonesian rupiah (IDR), South Korean won (KRW), Taiwan dollar (TWD), Thai baht (THB), Philippine peso (PHP) and Singapore dollar (SGD), have all gained substantial volume and market share.
Anonymous trading
SGX CurrencyNode was set up in 2022 to target clients looking for anonymity, deep liquidity, cost efficiency, consolidated relationships and price discovery. “Our clients have found ECNs to be cost effective as a single source of connectivity, therefore leading to reduced analytical effort and cost versus grappling with analytics across many bilateral connections,” says Bhatia. Since obtaining its Regulatory Market Operator (RMO) licence from the Monetary Authority of Singapore (MAS) in September 2022, its business has been on a healthy trajectory, with over 400% increase in its average daily volume between Q4 2022 and Q1 2023.
“At SGX CurrencyNode we systematically and actively optimise flows to minimise market impact. Hence we are more adept at developing user-friendly algos that distribute orders in an aggregated liquidity environment than a client needing to balance between using conventional banks’ algos on their own,” adds Bhatia.
Another market trend impacting the use of ECNs is the growing demand for NDFs – for example, the increased volume in FX futures for NDF currencies has made electronic pricing more fungible between ECN and listed markets, thereby giving a boost to the growth of NDF trading on ECNs. “Managing credit effectively, having the ability to switch between OTC and Futures and having solutions that can reduce credit utilisation is important,” says Bhatia.
A case in point for fungibility is SGX FlexC futures which CurrencyNode offers customers who want to discover and match OTC pricing, but for credit optimisation, converts the OTC trade into an exchange cleared futures contract – making conventional OTC NDF fungible with FX Futures. Another key capability that SGX CurrencyNode has developed is synthetic NDS where customers are able to carry out the first leg with NDF/Spot and the second leg with futures by leveraging exchange-listed products’ synergies.
More work needs to be done though, to improve the ECN model when it comes to market data distribution and order routing transparency. “ECNs possess an immense wealth of data, however there is a lot of investment needed to store and distil, analyse, customise and present the data to be sufficiently rich for consumption by varied sets of participants,” says Bhatia. “This is one area where we see a lot of potential in creating new partnerships with specialists in data and analytics.”
ECNs are also looking to attract new clients by investing in new technology and catering towards more niche currencies supported by regional liquidity. “Sourcing regional EM liquidity and aggregating it usually requires highly bespoke technology that is able to cope with the numerous nuances for each country’s currency,” says Bhatia.
“The congruency of things such as terms trading, fixing dates, cut-off period, tenors and onshore pricing is often difficult to achieve without significant technology enhancement. On the back-end, settlement, credit and STP fluency also require new technology to facilitate the workflow across regional liquidity providers and global clients. These can all be managed seamlessly by an ECN that continually invests in technology,” says Bhatia.
Some ECNs are also benefitting from working with clients and market-makers to avoid liquidity abuse and to create custom liquidity pools to ensure positive yield for the LP and optimal fill rates for clients. “The CurrencyNode liquidity management team works very closely with LPs to complement the prices that get streamed to market participants, ensuring that there is no duplication of liquidity for the client nor is there any skew leakage for the LP,” says Bhatia. “With constant recalibrations, optimised liquidity is made available on the system for participants to consume.”
Diversification appeal
According to Clinton Norton, Global Head of Sales at Euronext FX, there are a number of reasons as to why the ECN model remains a compelling proposition for FX market participants. One of the primary reasons is the flexibility. “ECNs are able to provide an advanced level of sophistication in speed, technology and functionality. The flexibility in trading solutions and diversification is the appeal,” says Norton. “As opposed to open-to-all Central Limit Order Books (CLOBs), the ECN experience is completely customisable for clients. At Euronext FX, we curate anonymous pools of liquidity to meet client expectations for RTTs, fill rates, market impact and other factors and processes.”
Technology is another factor. “Access to technology in the FX market has become mainstream and client sophistication has grown. An increasing number of players are active in the electronic ECN space,” says Norton. “There is also a rise in demand for meaningful data in the FX market. Data derived from an ECN’s ecosystem is extremely valuable and often indicative of larger market trends. It can also be used to offer clients granular data to support their decision making and pool curation,” he states.
New trading styles such as algorithmic trading where minimising market impact and providing trading analytics are key components have also played into the strengths of FX ECNs, says Norton. “Market impact has become increasingly important for clients assessing the overall cost of execution. Price and spreads are no longer the only measure of execution quality. For algos specifically, market impact is just one factor of intelligent execution. For many algos, undetected trading is key to not only avoid market impact, but also avoid price recycling. The customizable nature of ECNs allows these algos to execute in highly vetted environments.”
Another driver has been the growth of the NDF market. “As NDF trading becomes more mainstream gaps in liquidity are closing, spreads are improving and NDFs are traded more strategically as simply another product and not merely for hedging purposes. NDF trading has followed the path blazed by Spot FX trading with increasing electronification. This allows for faster, more dynamic execution of orders and has the potential to reduce costs compared to traditional futures trading,” says Norton.
“ECNs are able to provide an advanced level of sophistication in speed, technology and functionality. The flexibility in trading solutions and diversification is the appeal,”
Clinton Norton
Technology and flexibility
To maintain a competitive edge and to attract new clients, ECNs must evolve in technology and flexibility, says Norton. “Speed and technology are at the core of Euronext FX. Our development team allocates time and resources to ensure the ECN operates at peak performance. We are proud of our platform latency with order-to-ack and quote-to-feed latencies sub 25 milliseconds. This is particularly important in times of volatility where price discovery tends to occur on our ECN first,” says Norton.
With so many execution venues available, ECNs need to be nimble and flexible in what they offer new and existing clients, says Norton. This means a greater focus on customisation – something that Norton believes Euronext has demonstrated with two of its most recently developed offerings – 1. P&L Control which provides real-time P&L monitoring and subsequent interaction management for liquidity providers and 2. Full Amount Lock-In which routes back to back trades to the same liquidity provider for a set period of time to allow time for hedging time and avoid impact.
A global footprint also attracts new clients, says Norton. “Euronext FX, together with Euronext Markets Singapore, operates matching engines in New York, London, Tokyo and Singapore, each managed by local experts. Pricing in each matching engine is different and for niche currencies, pricing is ameliorated by local makers with natural interest.”
Liquidity management has also become a source of benefit for ECNs in terms of avoiding liquidity abuse and creating custom liquidity pools. “Optimal fill rates and positive liquidity provider yield vary from client to client,” says Norton. “Even for a single client, these thresholds can be different for specific sessions, depending on their strategic P&L outlook.”
Euronext FX’s liquidity management team works with takers and makers to curate custom pools where counterparty performance matches client expectations, says Norton. “Our liquidity managers meet with clients regularly to manage trading interactions and new opportunities. To support clients in their own pool curation, we deliver granular data per tag per currency pair.” Euronext FX also has in place several safeguards against liquidity abuse, says Norton.
“These include speedbumps for consecutive rejections, and automated protections around fill rates where we halt trading from LPs when they breach the required fill rate of the end client. We recently rolled out Full Amount Lock-In to avoid rapid fire and sweeping, and P&L control for makers to automatically limit intraday losses per client,” he adds.
In contrast to the data from US and UK FX Committees showing a decline in execution volume for ECNs, Euronext FX has seen its activity increase. In 2022, its average daily volume (ADV) grew by 17% year-on-year while ECN ADV is up by 4% from the period between Q4 2022 and Q1 2023. Norton attributes this to a combination of new clients and special attention to growth areas such as firm, full amount, and SkewSafe trading.
Expanding product range
However, more can be done to make the ECN model more attractive by developing new technology, enhancing liquidity, expanding the product range and aligning with the FX Global Code, says Norton.
“At the start of 2023, our new FX Global Code policy came into effect whereby all taker sessions were defaulted to Code-only liquidity unless a taker specifically opts out. We allowed the taker to make their own liquidity choice based on enhanced data we provided. As a result, by the end of Q1, +90% of platform volumes were generated by Code-signatory LPs compared to 78% in Q3 2022,” says Norton.
“While Euronext FX has no immediate plans to go beyond FX, we have expanded our product offering with NDFs, first launched in Singapore, and now available in London,” says Norton. “Through Euronext Markets Singapore, clients can interact with local and global liquidity in Asian NDF pairs. We have also recently expanded into the quantitative data space with the launch of our FX Market Flow, which offers subscribers daily metrics that reflect market trends. metrics are designed to be used by quant funds to assist in the implementation of overnight trading strategies.”