It used to be that FX price discovery happened over the phone at what must seem, to a self-aware computer, an excruciatingly slow pace.
These days it happens much faster, as the latest report from the BIS on market microstructure shows. The report doesn’t talk about self-aware trading algorithms, but it does contain some graphic detail on how the structure and demography of FX has changed.
For a start, the participants on some venues are now mostly machines. Algorithmic trading accounts for 70% of volume on EBS. But an even more dramatic change has been the decline in market share of what were once the pre-eminent and dominant FX venues. According to the report, Reuters and EBS between them now account for about 10% of market volume. Wow. And these guys used to be the market.
Which brings up an interesting anomaly. We frequently see market participants, including central banks, estimate the going market mid-rate from the prices they see on Reuters, EBS or Bloomberg. This strikes me as something akin to the captain of the Titanic fully confident that he can avoid icebergs based on visual observation of the ice sticking up out of the surface of the water. Ninety percent of FX activity now takes place away from the venues that once were the FX market.
Non-bank liquidity providers can, and do, increase the efficiency of the market by providing low latency technology to re-aggregate a fragmented liquidity landscape. But this isn’t the only conclusion to draw. If a prime market venue represents less than 10% of the market, how representative is it? In order to measure the market effectively, market participants need access to a sufficiently granular data set but, more importantly still, market participants need access to re-aggregated data from many venues, not just one or two.
Maybe independence also means that we break away from old ways of framing the market, like monitoring FX on single source data?
New Change FX continually measure the global FX markets to record a live, independent FX midrate.
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