How anonymity turned to acrimony

It seemed to start off well. Launching platforms using anonymous trading models a few years ago made sense at a time when banks themselves were touting FX prime brokerage capabilities. ECNs offering anonymous trading, such as LavaFX and Hotspot FX, provided access to the much sought-after hedge fund and CTA community. Banks seemed happy to offer liquidity – despite tight margins – as they tried to capture market share.

So tempting was the concept that other players, such as spot broker EBS, extended prime broking services to the professional trading community in March last year. Professional traders gained direct trading access on the interbank platform EBS Spot via credit relationships with EBS Prime banks.

But then the value proposition for banks was brought into question, chiefly as a result of predatory traders. For example, bank sources said some participants with access to EBS Prime were abusing the fact that they recognised that bank pricing on other platforms came from EBS. They then manipulated the price feeds on other platforms by manipulating the market on EBS.

This came to a head when EBS' technology flaws were exposed to a degree late last year, when the platform had to stop adding new customers. It said this was temporarily due to it upgrading its technology, but banks sources said it was because its execution capabilities were too slow to curb banks prices being picked off.

The implications for the wider market have been that some banks have changed tack when participating on anonymous platforms. "You don't make markets like you would to a client, you trade like you would if you were a prop trader," said one head of e-commerce in New York.

However if you are a prime broker, there may be more value in it for you. The ECN may be a client, in which case you're likely to be required to provide some liquidity. Also, the anonymous trader isn't anonymous to you. "There's still business in it for people," said a market source. "It's another part of your business through which you are getting more flow."

Perhaps this is why more anonymous trading platforms are rumoured to be under consideration. But whether there is room enough for all to survive remains to be seen.