Part One: LSEG’s plan to redraw the vast foreign exchange market

The FX market, a long-standing leader in terms of electronification, needs a technical overhaul and the LSE Group (LSEG) plans to put itself at the vanguard of that market structure change.

LSEG created a behemoth after the British group sealed its $27 billion (£21bn) takeover of data and tech firm Refinitiv from Thomson Reuters in early 2021. The move launched LSEG into a position as the largest exchange by market share last year, with 18% of total exchange industry revenue, according to figures from consultancy Burton Taylor. Behind the headline noise around the landmark deal was a challenge for the group – how to bring together disparate but market leading elements of its FX business into one compelling solution for clients.

With the acquisition, LSEG had two leading FX trade venues - FXall, a pre-eminent electronic aggregator, and Refinitiv Matching - designated by the Bank for International Settlements as one of only two “primary venues” running central limit order books for the FX market (the other is CME Group’s EBS). LSEG’s LCH, the clearing house bought in 2013, also has a dedicated FX clearing division called ForexClear. Those elements are now being aggregated to reflect trends in the market, according to Neill Penney, group head of FX at LSEG.

“Our vision is to have one FX platform that serves not just all current our venues but all types of execution paradigms in the FX market - from Central Limit Order Book (CLOB), to secondary Electronic Communication Networks (ECNs), to streaming liquidity and to Request For Quote (RFQ) protocol trading,” Penney (pictured) told Global Investor. “We want to build that platform on a state-of-the-art technology stack, with a common set of services, including credit management, regulatory reporting and straight-through processing analytics. That's the way our customers will get the best experience; they connect once into our full set of venues and everything is then available for them in a consistent way.”

The technical work alone has been quite an undertaking. After the acquisition, the firm announced plans to migrate FXall, the leading primary ECN for dealer-to-client activity, and FX Matching, its interdealer market, to the Millennium technology LSEG uses for equity trading. The upgrade and revamp for Matching is expected to make the platform 10 times faster, according to LSEG chief executive David Schwimmer in April.

“Coming into LSEG has been transformational for our FX business,” Penney said. “LSEG has extensive experience of running key market infrastructures on standardised technology. On the FX side, we've embarked on a multi-year project to move everything onto that single platform. This will enable us to create a unique and integrated offering in the FX space. We started the work shortly after the acquisition closed, and the first customer rollout will be the launch of our NDF matching platform in Singapore later this year.”

The non-deliverable forward (NDF) Matching venue in Singapore, the group’s first Asia hub which was announced in May last year, is set to launch in the middle of the fourth quarter of this year.

For Penney, a key differentiator is the relationship between the trading venues and the LSE clearing house. FXall already has a link with LCH’s ForexClear, which has carved out a niche with NDF clearing over the last decade. ForexClear’s most cleared currencies are all emerging market pairs, with an emphasis on Asia.

“We believe we already have the largest network of professional bank users in the FX market,” Penney said. “40% of those are based in Asia. That's particularly relevant for our NDF platform with Asia being the main hub for NDF trading, and more generally for the future as FX markets expand Eastward.

“We’re launching a venue close to where our customers are, and building a capability that works well for both automated and manual trading. Support for manual trading is especially important. In this day and age, when somebody puts an order into a system manually, it’s an important order. It creates valuable order flow that in turn will attract more orders onto the venue.”

That is important as FX market behaviour has changed. The latest BIS Triennial figures showed an increase in the share of FX trading using swaps versus a declining spot market, and a shift toward parity between inter-dealer and the traditionally larger dealer to customer liquidity pools.

The figures reflected a highly volatile market environment last year, and the BIS also noted that more trading is taking place bilaterally.

LSEG can play a role in reversing that trend, and the NDF platform will be followed by the addition of spot and forward matching from the middle of next year. In that sense, the first launch will be a technical use case that allows customers to engage with the functionality.

“The second thing the launch of NDF Matching will do is showcase the increased ability we have to innovate as we migrate to newer technology,” Penney said. “Building clearing deeply into the heart of the NDF matching engine is a true innovation, and we’ll be doing this on a platform where latency, capacity and performance is an order of magnitude better than anything we have now.

“The release will also act as a proving ground for users before we move the main Spot and Forward matching engines across to the new technology. Migrations are a lot of work for clients – and involve operational risk – therefore the opportunity to approach the migration of these key venues via the launch of a new venue provides an incremental route that has been welcomed by them.”

Instead of getting tied up in delivery dates, LSEG is looking to prepare the market for the additional functionality. That will also be informed by its deep experience in the space. For example, FXall will have another tilt at creating a secondary ECN within its platform.

“In setting the timeline for the Spot and Forwards Matching migration, our priority is to make sure the FX industry is ready for the move, rather than to hit a pre-set date,” Penney adds. “Beyond these initial phases, our next step is to leverage some of the agility we believe the new platform will provide. Initially, we’ll do that by launching a secondary ECN. It will provide customers with a valuable supplement to our Primary Market offering. It’s something we’re excited to reintroduce as the technology in the old FXall Order Book is no longer able to keep up with market requirements. The final piece of this very ambitious initiative is to move the FXall RFQ engine, likely in 2025.”

To be continued on August 3