FX in need of tighter regulation, says LMAX Exchange
20 October 2015 London
Image: Shutterstock
New regulation is required for the foreign exchange market to preserve liquidity, while modern technology should be adopted for more accurate analysis and more transparency, and international regulators should collaborate for consistency and efficiency, according to LMAX Exchange.
The exchange, a multilateral trading facility for foreign exchange (FX), surveyed 450 industry professionals, and found that 80 percent of respondents were concerned about a general lack of transparency in the market.
When asked about ‘last look’ pricing, or, the opportunity for liquidity providers to reject an order at the last minute, even if the order matches the quoted price.
Almost three quarters of respondents, 73 percent, said that it was their preference to trade without last look prices. Although 22 percent of respondents were not aware of the practice, of those that did, 85 percent identified this as the market practice most open to abuse.
When asked whether last look pricing should be abolished, 45 percent of respondents from banks agreed that it should be, compared to 85 percent of respondents from propriety trading firms.
LMAX Exchange operates an open order book without last look liquidity. It suggests that the take-up on this shows that liquidity providers are comfortable pricing without this facility, and that last look on multi-dealer platforms are out of date.
The report outlined three recommendations. Changes to FX regulation should be focused on preserving liquidity and maintaining a healthy FX environment, it said.
It suggested that technology should be utilised to ensure accurate measurement of market analytics, leading to greater transparency without affecting liquidity. Finally, it said that international regulators should collaborate to ensure consistency of reforms, and to maintain trust and efficiency in the market.
David Mercer, CEO of LMAX Exchange, said: “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.”
The exchange, a multilateral trading facility for foreign exchange (FX), surveyed 450 industry professionals, and found that 80 percent of respondents were concerned about a general lack of transparency in the market.
When asked about ‘last look’ pricing, or, the opportunity for liquidity providers to reject an order at the last minute, even if the order matches the quoted price.
Almost three quarters of respondents, 73 percent, said that it was their preference to trade without last look prices. Although 22 percent of respondents were not aware of the practice, of those that did, 85 percent identified this as the market practice most open to abuse.
When asked whether last look pricing should be abolished, 45 percent of respondents from banks agreed that it should be, compared to 85 percent of respondents from propriety trading firms.
LMAX Exchange operates an open order book without last look liquidity. It suggests that the take-up on this shows that liquidity providers are comfortable pricing without this facility, and that last look on multi-dealer platforms are out of date.
The report outlined three recommendations. Changes to FX regulation should be focused on preserving liquidity and maintaining a healthy FX environment, it said.
It suggested that technology should be utilised to ensure accurate measurement of market analytics, leading to greater transparency without affecting liquidity. Finally, it said that international regulators should collaborate to ensure consistency of reforms, and to maintain trust and efficiency in the market.
David Mercer, CEO of LMAX Exchange, said: “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.”
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