Anonymity is one of the main advantages of electronic execution. A plethora of FX trading platforms today offer anonymity, helping firms to keep private and profitable.

The growth of the global foreign exchange market has been well-documented, as has been the rise of electronic trading. According to recent estimates, electronic FX trading currently accounts for over 60% of spot volume in the inter-dealer community, and 43% of spot volume in the dealer-client market. Celent predicts that by the end of 2007, e-trading adoption in the inter-dealer and dealer-client markets will increase to 90% and 60%, respectively, driven by greater standardization of technology through industry initiatives such as the Continuous Linked Settlement (CLS) and FIX. With execution having long-since become commoditized, firms are now turning to e-trading as a means to an operational end that is they are looking for technology with extensive settlement and allocation functionality, that can help firms deal with an increasingly challenging regulatory environment.

One of the key benefits to electronic execution: anonymity has been lost in the shuffle of operational efficiency and regulatory initiatives. The ability to remain anonymous to one degree or another has always been a key selling point for electronic trading across all asset classes. Today, almost all leading FX trading platforms provide some degree of anonymity, providing cover to firms who are reluctant to display liquidity, want to avoid market analysis and keep information leakage to a minimum, and can achieve cost savings via anonymous, sponsored access to inter-dealer platforms

One of the key benefits to electronic execution: anonymity has been lost in the shuffle of operational efficiency and regulatory initiatives.

Who trades anonymously?

Hedge funds are the largest and fastest-growing segment of the buy-side FX community. More than any other market participant, hedge funds are known for trading FX speculatively. According to a recent Greenwich Associates survey, 50 percent of hedge funds trade FX for alpha returns. Accessing large amounts of liquidity in the least disruptive way is a key component of their strategies.

Hedge funds have begun creeping into the inter-dealer market on a sponsored basis. EBS Prime Professional service allows hedge funds to access inter-dealer liquidity, while remaining anonymous to the market as a whole. Although dealer liquidity is the main attraction for hedge funds using EBS new service, the ability to trade anonymously is an enormous draw as well.

The inter-dealer market has always had a soft spot for anonymous execution, whether through the use of voice brokers or via electronic execution. For the most part, inter-dealer electronic execution operates on the anonymous execution/ disclosed settlement model, a service offered by both Reuters and EBS.

However, dealer banks have little, if any, incentive to trade on systems such as eSpeeds FXSpot, which offers not only full anonymity but the advantage of a centralized counterparty BGC (the voice brokerage formally known as Cantor Fitzerald voice broking). Why? Dealers maintain strong trading relationships, and their credit is universally strong, so there is no advantage from a pricing standpoint to trade on a platform that offers standardized pricing to all participants. And while post-trade anonymity is certainly an advantage to all participants, it is not enough to dislodge established dealer banks from either EBS or Reuters.

The inter-dealer market, has always had a soft spot for anonymous execution, whether through the use of voice brokers or via electronic execution.

Traditional buy-side firms are least interested in anonymous trading. With FX investment strategies designed primarily around multi-portfolio hedging, asset managers generally do not trade FX for alpha. As such, the ability to trade anonymously is generally of little concern to traditional buy-side firms.

Anonymity and E-Trading Platforms the Inter-dealer Market

Reuters. Reuters Dealing 3000 relies on an RFQ model, with message broadcasting of up to 32 participants. For anonymous execution, Reuters also offers a spot and forward matching platform, which sits atop Dealing 3000. The platform is a centralized order book and counterparty information is given up post-trade.

EBS. EBS, launched by a partnership of the worlds largest FX market-making banks and a major presence in the inter-bank spot maker, is the largest inter-dealer FX trading platform in the world. EBS main product is EBS Spot, an anonymous inter-dealer execution platform. As with Reuters, counterparty information is given up post-trade.

E-Trading Platforms the Multi-dealer Market

FXAll. FXAll, owned by 17 banks, has a varied customer base, composed of corporations, asset managers, banks, and hedge funds. Until November 2004, FXAll did not offer anonymous trading. At that time, FXAll released Altair, a new version of its trading platform with 20 new features. The QuickFill feature of Altair provides anonymous trading, although FXAll claims that few customers use this function; this is most likely due to the relatively low number of hedge funds using the platform.

FX Connect. State Street-owned FX Connect uses a pricing mechanism that is strictly RFQ, with no anonymous trading. State Street asserts that its intended customer base does not wish to be anonymous because it receives better prices when banks know with whom they are trading.

As a result, FX Connect has not focused its attention on the hedge fund community. However, FX Connect does offer a feature called Quick FX, launched in 2001, that provides directional anonymity for customers wishing to transact single or block trades with up to four banks in competition.

Currenex. Like FX Connect, Currenex does not offer anonymous trading. The firm relies primarily on both disclosed RFQ and executable streaming price trading models.

As the inflow of capital into the hedge fund community continues, more and more firms will explore the use of trading platforms that offer anonymous execution.

Hotspot FXi. Hotspot FXi offers the best environment for institutional firms and banks by bringing liquidity in two forms: banks stream executable prices into the system, and buy-side clients submit market and limit orders. All quotes and orders are displayed anonymously in a central order book. Counterparty information is given up to the prime broker after execution. Hotspot FXi is perhaps most attractive to the hedge fund community, who are comfortable trading in a central order book environment.

New Entrants

LavaFX. Citigroup-owned LavaFX seeks basically the same customer base as Hotspot, focusing on hedge funds and CTAs. LavaFX supports 24 currency pairs and offers the same degree of anonymity as Hotspot, with counterparty identity being disclosed to prime brokers after execution.

eSpeed. While almost all electronic forex trading platforms offer some degree of anonymity, eSpeeds FXSpot is the most comprehensive in this regard. BGC (the entity formally known as Cantor Fitzgerald voice brokerage) is the counterparty to every trade. eSpeed refers to this as principal-to-principal trading the buyer and seller never know each o