Geoff Jones
Rob Lane
Price discovery can be challenging due to the large number of trading venues, private trading and overall lack of transparency in the foreign exchange market. With nanosecond timestamping, Refinitiv’s next generation FX historical tick data supports price discovery efforts by providing clients with increased pricing confidence.
- Foreign exchange has less price transparency because of its market structure, making it more challenging for buy-side firms, in particular, to engage in FX price discovery.
- New FX Matching data in Tick History – PCAP delivers a microscopic view of FX historical tick data, creating more confidence in buy-side FX price discovery.
- More FX venues are to be added to Tick History – PCAP over time, building substantial additional transparency in the foreign exchange markets pricing.
Although foreign exchange is by far the largest market by trading volume in the world, it also lacks robust transparency due to market fragmentation. Multiple trading venues and private trading mean price discovery can be challenging. New FX Matching data in Tick History – PCAP is next generation FX historical tick data from Refinitiv.
With GPS nanosecond timestamping, it provides pricing confidence particularly for buy-side firms who rely on data to support price discovery. Sell-side customers are demanding lossless and pristine data to meet their requirement for detailed and deep analysis in areas such as algo strategy tuning, back-testing, micro-market structure analysis and TCA. These firms are using it extensively to optimise and test low-latency strategies and systematic trading, system testing and parametrisation and conformance testing.
With more buy-side firms trading foreign exchange – either as an asset class or to manage currency risk in their portfolios – than ever before, market data issues are becoming particularly acute. Price discovery and transaction cost analysis remain challenging for the buy-side, impacting the ways in which these firms engage with FX. However, next generation historical tick data for foreign exchange offers advantages to both the buy-side and the sell-side, greatly improving price construction.
FX lack of transparency
The foreign exchange market is enormous – some $7.5 trillion is traded each day, according to the Bank for International Settlements (BIS). Yet, the highly fragmented – and less transparent – nature of FX makes price construction more challenging for financial firms than other asset classes. Firms wishing to trade FX have more than 75 trading venues at their disposal, as well as the possibility of internalisation of trades for sell-side firms.
For FX, internalised trades will not be included in market data – meaning FX is much less transparent than equities. Other elements of equity trading that are available – for example, a best bid – are not available for FX. This means that buy-side firms intending to trade FX may need to seek data from up to 10 sources to feel comfortable with a price – that the price data truly reflects the market at a point-in-time. Having the highest quality and most accurate data possible is the best way to counteract the lack of transparency due to internalised trades.
Historically, sell-side firms have had an advantage in FX price construction, because they usually have a strong over-the-counter (OTC) network built from their clients, from whom they can derive private information as counterparties to their trades. Academic research shows that for sell-side firms, order flows contribute roughly one-third of price discovery. However, buy-side firms do not have access to this order flow information and so must rely on market data.
In fact, a recent report “HFTs and Dealer Banks: Liquidity and Price Discovery in FX Trading” suggested that as a result of this asymmetry, sell-side and high frequency traders – from both sell-side and buy-side firms – contribute to price discovery in distinct ways. On price discovery, the paper said that high frequency traders contribute the majority share, because of their top-of-book quote updates. Consistent with this, the research says that high frequency traders’ quotes are more informative than their trades while the paper found the opposite was true for dealers.
Revolutionising FX data
For buy-side firms trading foreign exchange, next generation historical tick data for FX can help improve their price discovery processes. Tick History – PCAP now delivers packet capture (PCAP) data for FX Matching, LSEG FX’s spot and forwards trade matching engine. FX Matching provides spot and forwards prices with a high certainty of execution, with over 4000 users connected across 600 client sites. For this activity in FX Matching, Tick History – PCAP offers nanosecond timestamped data in the cloud.
This data is truly transformational for the foreign exchange market – FX Matching is the only venue contributing PCAP data for price construction today. PCAP data shows the latency that is attached to the update, creating greater certainty about the reliability of the pricing data. Firms can be certain they are basing their price construction on high quality information – and the most accurate data – to build strategies and to conduct trading.
Quality FX historical price data
Launched in 1992, FX Matching was the first electronic central limit order book (CLOB) for spot FX – bringing some transparency to an opaque market. Today, FX Matching’s role as a trusted primary venue spans Asian, Scandinavian, Eastern European, emerging market, and major currency pairs – more than 70 currency pairs in total.
All orders in Spot Matching are firm. When two orders are matched, then as long as both parties to the transaction have available bilateral credit in the system, a trade will be completed. Also, there is no last look in FX Matching, which encourages genuine interest to trade and builds client confidence that they can get trades completed. As well as this, there is a single order book in FX Matching. All participants are able to create the same aggregated view of the book and an anonymised feed of traded prices – creating a transparent and fair market for all participants. Clients can trust processes and behaviour on the venues thanks to strong and thorough rule books and market surveillance. FX Matching data has been used recently by the UK Financial Conduct Authority in its important research on “HFTs and Dealer Banks: Liquidity and Price Discovery in FX Trading”.
Historical tick data in the cloud
Tick History – PCAP is a cloud-based, 20+ petabyte repository of ultra-high quality global market data, captured directly in the exchange data centres. It enables firms to access complete sets of lossless, top-of-book and full-depth data (Levels 1, 2 and 3) in their choice of format. The nanosecond timestamping delivers full confidence in the timeliness of the data. A content set within our Tick History solution, Tick History – PCAP provides the raw network packets sent and received by trading systems, providing greater granularity and detailed insight. It can be used with our Tick History – Venue, Tick History – Instrument and Tick History – Query solutions, which provide data about asset price changes, including price, volume and a timestamp. Combined, these two data sets provide the most comprehensive view of the markets, delivering both breadth and depth to the firm’s analysis and strategy testing.
Tick History – PCAP is supported by Tick History Workbench – a cloud-based ready-to-use analytics environment that also executes Tick History – PCAP queries for analysis and extraction to any environment. Users can bring other data from Refinitiv or their own data together with Tick History – PCAP FX data in the cloud and run analytics, build reports and create dashboards.
Building more pricing transparency
Delivering FX Matching data in Tick History – PCAP is only the beginning. Over time, there are plans for other FX trading venues to contribute PCAP data, greatly increasing transparency for both the buy-side and the sell-side – leading to more accurate algorithmic trading models and overall price discovery. Also, over time, more transparency in the FX markets will help to support the development of FX as an asset class, and confidence in the pricing of FX overall.
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