Introduction

I’m a music fan – classic vinyl is my usual Sirius choice – so excuse my themed approach to this opinion piece. We have been extolling the benefits of best execution for years – if you read these ViewPoints, you certainly know where we stand. Whether it’s MiFID II’s broad mandate or the Global Code’s guidance, the buy side has been adequately warned about how to care for their customers’ underlying FX trading requirements. So it’s pretty amazing to us, having dedicated ourselves to building an execution environment and market analytics that deliver best execution outcomes, that certain market makers and execution platforms are trying to convince buy side customers that giving up anonymity is somehow good for them. In the words of tennis legend John McEnroe, “You cannot be serious!”

Deja Vu

Unfortunately, I’m old enough to admit that this Crosby, Stills, Nash & Young album was one of my first – it’s a classic. On March 30, 2015, eight foreign exchange committees around the world jointly released a document entitled, Global Preamble: Codes of Best Market Practice and Shared Global Principles. This document was the precursor for the FX Global Code of Conduct. That was not even five years ago. On the matter of confidentiality and market conduct, the document stated, “FX market participants should have appropriate measures in place to protect the anonymity of both the FX trading activity and identities of the FX trading counterparties.” It seems pretty clear that the central banks believed that everyone in the FX market should protect themselves from the exploitation by others of their trading information. This warning was somehow news in the FX market, but not to anyone who conducts their business in the equity marketplace or other exchange driven markets.

In a market as large and bilateral as the FX market, and one which trades on the basis of continuous small price movements, the advantage created by information leakage is enormous. The buy side typically trades directionally. A purchase or sale decision by a fund portfolio manager leads to an FX execution that must account for the full amount of the required funding to close the underlying trade. If market makers are aware of the trading intention, it is highly unlikely that the buy side customer will receive an optimal execution – and throw in the presence of last look on top of that just to make matters worse. But if that buy side institution executes its trade requirement anonymously, there cannot be any information leakage and therefore no negative market impact caused by said leakage. We’ve been talking about this basic principle for more than five years – the market’s memory cannot be that short.

Land of Confusion

With a bow to Genesis, sometimes we feel that the FX market is spinning quickly, and sometimes in a confusing manner, from one development to another without the buy sides’ adequate understanding of its choices. This confusion impedes their real need to adopt a systematic approach to best execution as prescribed in MiFID II. A good example is TCA. Every buy side institution determined that it needed a TCA provider a few years ago. That need was stimulated by the onset of MiFID II. But what were they actually buying and how is the TCA supposed to help them? It was almost fad-like. We would argue that TCA as it is typically done today is of little or no real value – just a check the box exercise. What a waste of money!

Pretzel Logic

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The next hot development was the push toward algorithmic trading – another rapidly evolving trend. Algorithmic execution is a good thing in our opinion, but does the majority of buy side institutions yet understand how to reap the benefits of all the various trading strategies. And then of course, there is TCA delivered with the algo trading function, and what can actually be learned from that and used to better the buy sides’ trading outcomes?

The latest fad is the opportunity for the buy side to manage its liquidity on a market maker by market maker basis. Some ECN’s are offering pools where the buy side can identify their counterparts – this seems to defeat the purpose of using an ECN and clearly pierces the veil of anonymity which is critical to best execution. And these pools include last look market makers. Is that just to make the buy side participant feel even worse about participating in this leaky pool? Anyone who seriously believes that information leakage does not exist in the FX market needs a reality check. Many platforms sell their clients’ trading data. So why is this latest fad a good idea again? Did we all forget about the Preamble, MiFID II and the fiduciary obligation to the buy sides’ underlying clients? “Can’t you see, this is a land of confusion?”

The Royal Scam

When the FX Global Code was published, we issued our own Ten Commandments to insure best execution outcomes (see ViewPoint v.17/3 A Buy Side Code of Conduct for Best Execution Outcomes: the Ten Commandments). The first commandment was to execute electronically. The second commandment was to execute anonymously. Regarding the second commandment, if someone tells you anything different, please refer them to another one of my favorite Steely Dan albums – The Royal Scam.

Following best execution protocols is straightforward and does not require fad-like innovation. Hedge fund traders and market makers are free to do whatever they want. But buy side institutions have a fiduciary responsibility to their underlying customers. The MiFID II standard is a mandate, not a best efforts approach. Our suggestion is that buy side FX traders should avoid the temptation to ignore that standard. Even now the European Securities and Markets Authority is making noise about folding FX Spot under their market abuse oversight. And at some point, the regulators will decide to single out a buy side institution for non-conformance to MiFID II’s best execution requirement. That distinction is probably an outcome that will rattle a lot of cages.

While You See a Chance

Cürex has been and remains the only FX ECN and data analytics platform built solely to improve the trading outcomes of the buy side. We accepted this challenge because we recognized that the buy side generally lacked the technology and broad market access to accomplish this on their own. We continually innovate, introducing new tools to help our customers level a playing field that is slanted against them. Don’t let best execution become an exercise in pretzel logic. Cürex is a one stop destination for best execution from pre-trade analytics to no last look, anonymous execution to post-trade analytics and benchmarking. Steve Winwood’s Arc of the Diver was another great album. While you see a chance, take it.

“View Point” provides Cürex’s insight on relevant topics to institutional users of foreign exchange. Its mission is institutional FX user benefit and information. Cürex’s goal is to provide fairness, transparency and unparalleled efficiency to the FX marketplace for the benefit of our partners and customers. Visit us often so we can share our View Points with you.

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