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August 1, 2012

ECNs Hot

New Platforms For Foreign Exchange Keep Popping Up

By James Armstrong

Equity-style technology is looking to make inroads in foreign exchange. In recent months, the number of new FX platforms has exploded, and traders are gaining access to faster and more transparent transactions. But can the market sustain all the new venues available?

FastMatch and TraFXPure are two of the more prominent electronic communication networks to launch in recent months. Others include JFX.com, Molten Markets, LiquidityFX and FXSpotStream. In addition, successful platforms for FX are attracting potential buyers.

The shift in FX might be exemplified by a pending combination of two familiar FX trading providers: Thomson Reuters recently announced it plans to acquire FXall for $625 million. FXall has both a multi-dealer platform and an ECN.

Dan Marcus

Howard Tai, a senior analyst with Aite Group, said retail volume for FX has grown over the last 10 years, but the increase has become even more pronounced recently. Also, institutional buysiders are turning to FX as an asset class to generate alpha, given that the stock market has been floundering.

With the growth of the FX market, ECNs are trying to replicate exchange-like liquidity, but with so many of them around now, the market is fragmented, Tai observed.

"There's no such thing as one FX ECN talking to another FX ECN," Tai said. "They're all fighting each other very hard for market share."

The electronic side of FX has expecially increased in the wake of lawsuits by buyside firms alleging brokers gave poor execution. That's creating not just competition, but also innovation, said Rebecca Healey, a senior analyst at Tabb Group.

"I think this is going to lead to huge leaps and bounds," Healey said. "In the past, it might have seemed more like a halfhearted attempt within the FX space. But the tools and technologies are becoming much more advanced now."

For instance, the notoriously opaque FX industry is now offering traders the ability to measure execution performance. The buyside is wising up, Healey said, and letting the world know they will not be taking their FX executions lying down.

It was a desire for fairness that led interdealer broker Tradition to launch TraFXPure in partnership with a number of major banks, including Barclays, BNP Paribas, Deutsche Bank, Royal Bank of Canada and UBS.

Dan Marcus, managing director for strategy and business development at Tradition, said the vision behind the ECN was to take away technological advantages and make all traders compete on a level playing field.

"If you have an environment that is designed to create complete fairness and you avoid any gaming, then you have firm liquidity on the platform," Marcus said. "And if you have firm liquidity on the platform, that benefits people who need to trade."