Roger Rutherford, Chief Operating Officer at ParFX, speaks to bobsguide about the tech (r)evolution in the FX market, the impact of bad trading behaviour, and why an equal and fair platform is good for all.
Tell us about your route into trading.
I started my career in London in 1986, moving to New York in 1989 where I spent nine years in the voice brokerage world.
From 1998 to 2010, I held a number of senior positions within the foreign exchange industry, including more than a decade at ICAP-owned EBS where I was Head of EMEA Sales and Senior Product Manager. During my time there I helped launch programme trading access, prime brokerage and market data products.
In 2008, I became Head of Product Management at CLS, the largest multi-currency cash settlement system. This was a unique time and a good learning experince as my work evloved from front office into back office settlement function.
I then became Global Head of FX Futures and Options Products at CME Group. After two years there, I received a phone call from Tradition, to help them design, build, and launch what is now known as ParFX.
We launched the ParFX platform in 2013 to reintroduce a fair, equal and transparent trading environment and we have just celebrated our fourth anniversary.
What would you say were the challenges going from voice to electronic trading for the industry?
It all began with Reuters, who had a massive network of news terminals which evolved into chat tools that banks used to have conversations. Reuters then realised they could incorporate pricing and order functions and create a market in a matching engine. That was really how the evolution began, from voices to chat tools, to matching engines and it continuted to accelerate from there.
The big banks got nervous because Reuters, a news company was getting into FX matching, and they could potentially capture significant market share. That’s when twelve banks collabrated to create EBS, creating competition for Reuters.
Electronic trading was the way forward. I saw that because my voice business in New York was starting to suffer as our customers were trading on EBS and Reuters. As technology improved, electronic trading got faster and processes got a lot more efficient and transparent; people had a lot more information about the market and this attracted more players. We introduced a prime brokerage product that allowed many of the hedge funds and proprietary shops on the “buy-side”, who had previously been trading equities, to enter the new market of foreign exchange. Prime brokerage underpinned the distribution of that network and trading volume grew significantly. All of this could not have happened without a solid foundation of technology.
What sort of technology is being used now in the FX market evolution?
As technology has improved, things have become faster. This is where the division between banks and high frequency traders (HFTs) came from. Banks took longer to react due to legacy infrastructure, while the HFTs, as new entrants, could invest quicker in advanced technology and fast market data. Over time HFTs gained a significant advantage over banks as they had quicker processing speeds, faster networks and could receive market data updates ahead of the market.
The trouble was, banks were losing trust in the FX market because of disruptive trading behaviour such as spoofing and front-running. These behaviours created an unfair and unequal market, and banks were at a disadvantage to HFTs.
ParFX introduced fairness, equality and transparency to the spot FX market with the aim of treating everyone fairly and equally; in effect, closing the gap on the inequality between banks and HFTs. That fairness and equality is very important in FX trading. Banks have to trade FX on behalf of their clients so in this regard, banks need to achieve the best price.
You mentioned spoofing and front-running, what other disruptive trading behaviours are causing the degree of inequality and unfairness we’ve been discussing?
Disruptive trading behaviours such as spoofing and front-running create what is commonly known as a ‘liquidity mirage’ giving an incorrect perception of where the market really is, where prices quickly appear and disappear before a trade can be executed. This results in a lack of confidence across the board, as market efficiency and price discovery deteriorates.
A more recent phenomenon is that of last look, where order requests are held for a short period of time before being accepted or rejected, created originally for banks and other financial institutions that lacked technical sophistication or needed additional time to conduct credit checks. However, this practice is now being exploited by some HFTs where they may pre hedge or take a position based upon the information gained whilst holding the counterparty’s order.
How is it possible to stamp out that kind of bad behaviour?
We have four pillars that help create a market of genuine interest: Randomisation, to combat distruptive trading behaviour; Full post-trade transparency; Market data – which means all particpants recieve the same data at the same time; Equal pricing - we charge everyone the same price.
Randomisation Spoofing and arbitrage strategies rely heavily on how quickly they can place an order, but more importantly, how quickly they can cancel an order. They’re out to make a quick buck, they only want to buy a currency when they know it’s going up and likewise with selling. If they run too much risk, then they need to cancel that order and get it out of the matching engine. Indeed, it’s the deterministic fashion of these high frequency trading strategies that we seek to disrupt. ParFX has the market’s only meaningful randomised pause that delays all order submissions, amendments and cancellations between 10-30 ms, ensuring market participants cannot predict the timing of orders or game the platform.
Post-trade transparency The names of traders from the buy-side don’t appear on other platforms - only the prime broker’s name appears so they can settle the trade. In what is a first for a major spot FX platform, on ParFX the names of the executing broker, prime bank and prime client are all given up post-trade. This means they can’t hide behind their prime broker and it increases market accountability.
Market data We distribute market data at no cost to all participants in parallel at a frequency of 10ms – all via a single connection point in London. On other platforms firms with deeper pockets can invest in the infrastructure to receive market data quicker than everyone else. We eliminate that advantage by sending market data at the same time to everyone.
Flat pricing We are transparent about our pricing and fees, which are the same for everyone. Brokerage fees on ParFX are flat for all participants – from dollar one, we charge USD 2 per million traded (notional).
What’s in store for the future?
Currently the market is quite ‘risk-on, risk-off’ as there’s an amount of uncertainty, be it Brexit or US politics, or the threat of nuclear war. This tends to reduce volatility into small pockets and therefore trading volumes reduce as people are concerned about the impact on banks and firms.
As we only trade spot FX we’re flying under the MiFID radar, and not subject to regulatory changes, however the recent FX Global Code of Conduct, which outlines a set of principles that the market needs to adhere to will have a positive impact on the market. Our ParFX principles are very much aligned with the Code.
Our short, mid and long term goal is all about distribution so we’re rolling out our prime-of-prime model and looking at different regions such as Africa and Scandinavia, as well as countries such as Singapore. We’ll continue to roll out more currency pairs and look at improving our customers' access to extract more value from the platform without charging them anymore.