Restoring trust in global FX markets

To enjoy the benefits of transparent price discovery and firm liquidity, customers must meet the costs of the service provided. Fair execution must come at a fair price, and transparency cannot come at the cost of destroying liquidity provision. Over the past 10 years, much has changed in favour of the customer: market access has improved remarkably and, with electronic trading and algo execution increasingly the norm, spreads have compressed and commission has fallen. Thanks to the advent of technology, one could easily argue that there has never been a better time to be a customer. By contrast, traditional LPs have had to invest heavily in hardware and software to cover their extending global client base. At the same time they have faced ever more sophisticated buy-side customers and smaller, more naturally agile competitors in the realm of liquidity provision. As this report highlights, there is much that LPs can learn from these new entrants, including elements of exchange-style trading that create a fairer trading environment. The challenge faced by the LPs cannot be ignored, and proposals currently being considered to enhance transparency in the FX market risk disadvantaging them further. Many still argue that trading practices such as ‘last look’ – where an LP may withdraw their quote after the client order has been received – are necessary to preserve general liquidity. The arguments against ‘last look’, elaborated in this report, are familiar: that modern technology has made it increasingly obsolete; and that such one-way price optionality is open to abuse, harming trust even if such abuse is perceived rather than real. The market would surely benefit from firm liquidity, priced accordingly, with customers assured of fair execution. Yet to achieve this, there must be a compensating factor for LPs, de-risking their provision of liquidity and ensuring the market continues to function smoothly. Just as traditional market makers are having to adapt to changing circumstances, so too must customers: accepting that wider spreads, or increased commission fees, is the price that must be paid for firm liquidity and transparent price discovery. Transparency for transparency’s sake is not a sustainable path, and the very real concerns of market makers regarding liquidity in a more open market deserve both to be recognised and addressed. If transparency is to be the common objective of the market in the years ahead – and it undoubtedly should be – then the market as a whole must accept responsibility for delivering it, and shouldering the costs it entails. That means customers must shift their expectations just as market makers adapt their trading practices. Only then can the full benefit of technology be realised to deliver transparency, and fundamentally restore trust, in what is the world’s key marketplace for global trade.

Read the full report about Price Transparency by LMAX here: restoring-trust-report

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