UK’s fastest growing fintech company shows route forward for $5.3tn FX market

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LMAX Exchange, the leading Multilateral Trading Facility (MTF) for FX and the UK’s fastest growing fintech company has today launched a report, Restoring trust in the global FX markets. The report highlights a worrying lack of awareness among market participants about FX trading practices open to abuse, confirms the need for greater transparency in the industry and makes recommendations for change.
Central to the report is a survey of 450 FX institutional market participants undertaken in the light of the continuing debate about fairness and transparency in FX following the Fair and Effective Markets Review (FEMR) report from UK regulators.
The research found that while 85%, of those who were aware of it, identified ‘last look’ as the market practice most open to abuse, but that 22% of all the respondents were not aware of the practice.
This lack of awareness about the practice, identified as most open to abuse, as well as overall concern about the lack of transparency in the market (80% of respondents agreed) throw a sharp focus on the required progress of measures to increase transparency in order to maintain a sustainable and trusted FX market.
While there was consensus among the respondents about the preference to trade on no ‘last look’ prices (73% agreed), there was a striking contrast in views between banks (45%) vs non-banks (85% of proprietary trading firms) as to whether ‘last look’ should be abolished.
As an MTF, LMAX Exchange operates an open order book with no ‘last look’ liquidity supplied by the 30 largest global banks and world’s leading non-bank financial institutions.
In LMAX Exchange’s view, this demonstrates that liquidity providers are comfortable pricing with no ‘last look’ on multi-dealer platforms and that ‘last look’ is out of date and unnecessary.
In addition to the survey, the report points the way forward to an implementation phase and outlines industry changes that mitigate against vulnerabilities in FX and set new standards for good market practice both in the UK and globally.
The report has three key recommendations for the market as it embarks on the implementation phase of the debate:
Changes to FX market regulation must have preservation of liquidity at their heart to sustain a healthy FX eco-system
Adoption of modern technology for accurate measurement of market analytics will lead to greater transparency without impacting liquidity
International regulators must work in collaboration to drive consistency of reforms globally to maintain trust and efficiency in the FX market
David Mercer, CEO of LMAX Exchange, comments, “Liquidity is the beating heart of the global FX market, the world’s largest asset class. Greater demand for transparency and the need to increase trust are huge challenges for the future of our industry. There has been a lot of talk about structural change to address these challenges in the past two years but I think as a market we need to get on with it. ”
“While in the short term opaque trading practices can deliver greater profitability for market participants, in the long term the erosion of trust will permanently damage international capital flows – considering FX is the foundation upon which international trade is built, this could be catastrophic globally.”
“Our report shows that the FX industry needs to embrace greater transparency and fairer practices in order to restore trust and drive greater long-term profitability. As a result, the FICC Markets Standards Board (FMSB) presents a unique opportunity for the FX industry to come together and implement solutions that work for all market participants. If the market doesn’t get together to implement change and continue to be self-regulating then the regulators are going to impose rules that won’t work in FX. It stands for us to start making changes and forge a new global standard.”

LMAX Exchange Restoring trust in the global FX markets survey findings:

Need for increased transparency in FX
Respondents by Segment % Agreed
All 80%
Banks 51%
Non-banks 87%

FX practices open to abuse
FX Practices % Agreed
Use of ‘last look’ 85%
Inconsistent timestamping 83%
Relationship pricing 77%
Bi-lateral trading 69%

Level of market awareness of ‘last look’
Respondents by Segment % Aware
All 78%

Preference to trade on no ‘last look’ prices
Respondents by Segment % Prefer
All 73%
Proprietary traders 87%
Banks 78%
Funds 67%
Brokers 65%
Asset Managers 56%

‘Last look’ should be abolished
Respondents by Segment % Agreed
All 65%
Proprietary traders 85%
Financial Institutions 65%
Funds 62%
Asset managers 56%
Brokers 47%
Banks 45%

Note: not all the questions were answered by all the respondents, as a result the categories of listed respondents differ from question to question and the survey results for each question only reflect views of the participants who answered the specific question.