Introducing Best Practices to Aggregation an EBS Consultation

Transcription

1 Introducing Best Practices to Aggregation an EBS Consultation Gil Mandelzis, CEO June 2013 Copyright 2013 EBS Service Company Limited. All rights reserved. No part of this document may be reproduced or disclosed in any form or by any means (whether graphic, electronic, mechanical or otherwise including, without limitation, photocopying, recording, taping or information storage and retrieval systems) without the written consent of EBS Service Company Limited.

2 Executive Summary The FX market has gone through a dramatic transformation since Many new trading platforms have emerged, both independent and dealer-owned. As the number of liquidity sources has increased, so has the complexity of engineering to achieve best price and best execution, with further complications related to integration, information technology and hosting. On the back of this proliferation of trading platforms and liquidity pools a new service offering has emerged: the aggregation provider. As in other financial markets, aggregation providers aim to consolidate the many sources of liquidity and, through the use of algorithms, to optimise the execution quality and experience and ultimately the yield for the customer. There are many such providers in the industry today. To date, little attention has been given to the services being offered by this new breed of intermediary services that can add tremendous value to the customer. The FX industry needs to develop and adhere to generally accepted best practices around aggregation and ensure that this vital component is seen to operate with the greatest integrity, reinforcing the high standards of ethics and trust prevalent in the FX and Capital Markets. EBS 1

3 Background An aggregation provider aims to consolidate the liquidity streams from multiple venues to provide best price and execution to its customers, who then no longer need to deal through multiple screens or connections. Aggregation providers in essence create a private marketplace unique to each customer, with the promise of optimising and personalising execution quality and effectiveness. EBS believes that aggregation providers bring real value to the market. While there are many customers who choose to build and support their own aggregation solutions, these third party providers present a compelling value proposition to those who choose to outsource this service: They integrate any liquidity the customer needs. They provide traders with a variety of tools and workflows based on both the institution s and the trader s own individual preferences and policies. They provide algorithms (and accommodate the customer s own algorithms) to help the customer achieve best price or best execution. EBS would like to encourage aggregation providers to offer customers prices that are the best available to them, subject to the customer s preferences (such as giving preference to a liquidity provider or venue based on a broader relationship), and we believe that the market should take the opportunity to establish best practices around this increasingly complex area. EBS 2

4 Introducing Aggregation Best Practices The FX industry has an outstanding track record of proactively addressing structural issues at a grass-roots level to strengthen the robustness, scalability and integrity of the market. Such examples include the creation of CLS for settlement, Traiana Harmony for the scalability of FX prime brokerage confirmations, kill switches to address limit and technology risks and the Foreign Exchange Committee s Codes and Best Practice Guidelines. We believe that Aggregation provision should now be addressed with similar levels of attention and according to comparable best practices. EBS believes it is essential that aggregation providers adhere to the following best practices: 1. Aggregation providers should operate as agents, not as principals to the trade. This ensures that there is no conflict of interest or opportunity to take advantage of a customer s trust. 2. All sources of revenue generated by an aggregation provider with respect to a customer s trading must be fully disclosed to the customer. While the customer knows about the fees they pay directly to the aggregation provider, in reality this may represent only a limited portion of the commercial interest obtained by the provider from the trade. The following are examples of situations which should warrant further disclosure and greater transparency: If the aggregation provider receives a fee from the liquidity provider (as brokerage or part of the spread ( pipping )). If the aggregation provider benefits from the spread being paid by the customer. If the aggregation provider uses or sells the customer s data. 3. The prices a customer sees as best prices should, without exception, represent the best prices available to the customer. Prices/spreads available to the customer should not be affected by the aggregation provider s brokerage or other commercial arrangements with liquidity or credit providers for the aggregation provider s own commercial interests. Furthermore, if a liquidity provider has improved prices over the current spread visible to the customer, this new best price should be available and visible to the customer. Aggregation providers should not trade themselves (directly or through a third party) on a newly available and improved price while making available a lesser acceptable price to the customer. EBS 3

5 A customer is likely to have different brokerage or fee arrangements with different liquidity providers and as a result can instruct aggregation providers to skew the algorithm one way or other ( If two liquidity providers have the same price, I would prefer to deal with X ) but this should be the customer s choice based on the customer s commercial interests and policies. A liquidity provider, credit provider or trading party in the market should not be able to buy an advantage in relation to customer flow, particularly if this goes against the customer s commercial interest, and any arrangements with the customer s intermediary should be disclosed to the customer. 4. The sources of liquidity and credit provided and any potential conflict of interest should be fully disclosed to the customer. Any liquidity in which the aggregation provider has a commercial interest should be disclosed in full to the customer, as should: any rebates an aggregation provider might receive from liquidity or credit providers; any spreads that might be retained; or any other considerations that would affect the customer s execution. With these best practices in mind, EBS has devised an Aggregation Provider FAQ to help customers understand their aggregation provider s offering and make an informed decision about any potential benefits. EBS 4

6 Aggregation Provider FAQ 1. What are all your sources of revenue on the back of my flow? 2. In addition to the brokerage I am paying, is there additional brokerage collected from the liquidity provider? 3. Do you obtain any further direct or indirect financial benefits from or through a liquidity provider or credit provider on the back of my flow? 4. If a central counterparty or prime broker is involved, is any of the spread retained there? 5. Do I see the original prices from the liquidity providers? 6. Do you mark up my prices? If you do mark up the prices available to me, is it instead of or in addition to my brokerage? 7. Do you mark up prices from all liquidity providers equally? If not, how is the decision made? 8. If any liquidity provider would have provided me choice or inverted prices (zero spread), could you guarantee that I would receive the benefit of these prices? If not, why not? 9. Does your algorithm favour or discriminate against any particular name or type of liquidity? If so, what are the considerations used? 10. Do you benefit commercially, strategically or otherwise from my flow going into one or more liquidity providers? 11. When sending passive interest to an anonymous market (EBS, Reuters or others), does it rest on your aggregation engine or go directly to the market in question? 12. Do you treat anonymous liquidity differently from disclosed liquidity? If so, how? EBS 5

7 The EBS Certified Aggregation Partner Programme Through the introduction of the EBS Certified Aggregation Partner Programme, EBS will certify that all participating Aggregation Partners follow these best practices. EBS liquidity will not be allowed to be included in aggregators who do not follow these best practices. Conversely, EBS will provide support, training and look to collaborate with aggregation providers who do follow these best practices. For more details on the EBS Certified Aggregation Partner Programme or the certification process, please contact EBS 6

8 Consultation Process We are currently at the start of our consultation process and invite all our customers and partners to participate proactively in helping us shape this document and define best practices in the provision of aggregation services in the FX Market. In four weeks we will consolidate all comments on our proposed Aggregation Best Practices and roll out the EBS Certified Aggregation Partner Programme, giving three months for potential partners to comply and be certified. We are very excited about the prospect of these new standards within the FX market. We welcome any comments or suggested enhancements both to the proposed best practices and to the EBS Certified Aggregation Partner Programme from any market participant or regulator. We are confident that an iterative, open and transparent collaboration will assist in further improving the strength and reputation of the FX market. For any comments relating to the proposed best practices, please contact My colleagues and I would like to thank you for your continued partnership with EBS. Sincerely, Gil Mandelzis CEO EBS 7

9 About EBS ICAP s award-winning EBS business is at the heart of electronic spot FX trading and remains the core source of genuine, executable spot FX liquidity and independent benchmark pricing for professional trading counterparties in all market conditions. EBS s platforms deliver reliable, efficient and effective access to spot FX, precious metals and NDF traders globally, in both established and emerging markets, offering optimal price discovery and execution, and support a wide range of FX trading strategies, as well as API and manual trading. For more information, go to About ICAP ICAP is a leading markets operator and provider of post trade risk mitigation and information services. The Group matches buyers and sellers in the wholesale markets in interest rates, credit, commodities, FX, emerging markets and equity derivatives through voice and electronic networks. Through its post trade risk mitigation and information services ICAP helps customers manage and mitigate risks in their portfolios. For more information, go to Disclaimer Copyright June 2013 EBS Service Company Limited. All rights reserved. No part of this document may be reproduced or disclosed in any form or by any means (whether graphic, electronic or mechanical or otherwise, including, without limitation, photocopying, recording, taping or information storage and retrieval systems) without the written consent of EBS Service Company Limited. EBS 8