Games of tag need to end

When we published an in-depth look at last look disclosures from the top 15 spot foreign exchange liquidity providers (LPs) in 2018, there were mixed reactions from the subjects.

Some were a bit miffed that people were poking around in their disclosures and refused to co-operate.

Others saw sunlight as the best disinfectant and hoped the article would encourage firms to disclose more information publicly. Overall, the information we were able to publish was solid, but a little patchy in parts.

A year later, we repeated the exercise and expanded it out to 50 LPs. A year of close scrutiny from the Global FX Committee (GFXC) on transparency of disclosures meant that, at least among the top 15 LPs, disclosures were a lot stronger.

During the research for those two articles, many people mentioned we should also take a look at disclosures from the trading platforms and electronic communications networks and compare them side-by-side. Dealers had made strides in disclosing their trading practices, the argument went, but platforms had work to do.

With the GFXC also scrutinising tagging practices on semi-anonymous platforms this year, we felt it was time to take a closer look at how the different venues stack up. The results raise some concern.

On the face of it, tagging is an innocent enough idea – on an otherwise anonymous platform, it allows counterparties to assign tags to one another and track the profitability of their respective trades.

But their use isn’t uniform across venues. Sources muttered about asymmetric platforms where only LPs can track consumers, and not vice versa. Some are said to allow participants to shed their tag and generate a new one, meaning LPs could kick out a user from a pool for creating too much market impact and creating losses, only for them to re-enter with the same strategy in a wig and fake glasses.

Some also warned darkly about platforms where tags can be viewed before a trade is executed, potentially opening the door to abuse – in theory, an LP could front-run the trade.

Some platforms were willing to speak for the article – they defended their practices and explained their reasoning. Others declined to comment, even on background, and refused to provide any information about their tagging practices or how they police their use.

Given the growing transparency from LPs on their own trading practices, it seems strange that some platforms are ignoring the direction of travel on disclosures. The way venues deal with tagging is important, and they should be willing to explain – and justify – their approach.

With the GFXC probing the topic, and some LPs using client service standards as a metric when deciding whether to continue supporting a platform, silence on tagging practices may not be a defensible position for long.