A cloud has hung over the FX Market since the fixing scandals began to erupt. A void was left in its wake with widespread mistrust in financial organisations. This gap needed to be filled, but the question was how? This is issue has become a focus for us as a business at Liquidity Pool (LPFX).
The challenge was to build something based on our fast, robust, proprietary technology. However, in the quest for transparency, there were hurdles to overcome. What rate to use for benchmarking? How can we be sure that it remains independent and not open to manipulation? We have all heard stories of the same people participating in rate generation as those taking prices, surely this is open to abuse?
The solution presented itself when we started speaking to New Change FX. The NCFX product provides live mid-rate reference prices, sourced independently. All of their rates are fully auditable, and their data cannot be manipulated or changed. After performing our own due diligence we realised that this should be the keystone to building a product that could help rebuild the lost trust.
Following an extensive period of market research, the LPFX team have developed a mid-rate matching venue with the principals of transparency, accessibility and the needs of the market at its core.
Powered by Liquidity Pool’s suite of proprietary matching and STP technology, the Mid-Book will initially be offered from the LD4 Slough Equinix facility only; but with the development of New Change’s New York mid under way our NY4 offering will follow in due course.
We felt that for this product inclusivity was a key component, and that for this to take place a bilateral model, which would exclude certain participants below a certain size, or credit standing, would be sub-optimal. A CCP model was favoured for its ability to overcome these concerns, it also had the added advantage of offering a degree of anonymity to hide the origination of participants with specific interests.
True Interest Based
In light of the fixing scandals which have been all to frequent in the news of late, we also saw conflicts with the “true-up” function offered by some of our peers. A situation in which participants within a venue could directly influence pricing, or manipulate the benchmark, was one we were keen to avoid. For this reason we will be launching without true-up functionality. Future functionality will be driven by continual market research however we believe strongly that any functionality introduced should be clear and fair to all participants.
“We will give users a degree of flexibility that they have not been able to get elsewhere.”
Designed purely to be a venue for exiting risk we have also decided to stop participants “fishing” or “flashing” by introducing controls and implementing a minimum order duration.
We also want to allow some degree of flexibility of matching. If an Institution is working a larger order you they want to restrict the minimum size they are matched against, in this example you would only trade in clips of a specified size.
We will give users a degree of flexibility that they have not been able to get elsewhere. No self-matching will be allowed. This has been used in the past to cancel orders before the minimum order duration has passed. We also plan to delay the fill mechanism by a random time interval to further protect participants.
Matching to be performed on a First in First Out basis.
STP is provided courtesy of “X-Confirm”. This has the ability to transform the trade messaging into the best format for consumers and is also integrated with Traiana, Logicscope/Markit and RTNS for post trade messaging. Direct STP can also be configured to suit client requirements which may help further reduce their costs.
Our mid-matching venue has a simple, transparent pricing structure at $2.50 per million notional. There will be no constraints on volume, or pricing tiers, making it accessible to all market participants.