Following the announcement of EBS Market product enhancements last year, summarized in the article Strengthening EBS Market: Building a Healthy FX Marketplace, we are excited to achieve strong client adoption and note positive results as these are delivered through this year thus far.
The rollout of faster market data and lower MQLs (minimum quote life), along with granular price increments (starting with AUD/USD and EUR/USD) over the course of Q1 2024 have shown positive signs of improvement in liquidity and execution metrics.
Participants now benefit from enhanced price discovery, improved pricing flexibility when placing passive orders and reduced adverse selection risk. Collectively, this has resulted in materially tighter bid-offer spreads and reduced market impact from trades, empowering the marketplace to more effectively manage risk via the primary market's firm, central limit order book.
Key highlights observed in EUR/USD spot liquidity on EBS Market:
- Top of Book spreads witnessed a significant 30% reduction, Average Top of Book stands at 0.63 pips throughout the day.
- Average VWAP spread for 10m EUR/USD has seen a reduction of 25% based only on lit liquidity (e.g., excluding iceberg hidden inventory).
- Spread improvements held over market events demonstrating ability to support better liquidity even in more volatile periods. For example, EUR/USD median spreads were 17% lower over U.S. CPI data release.*
- Over 20% of EUR/USD volume is now being traded on quarter and three-quarter pip increments.
- Percentage of price points traded has seen significant increase to almost 90% from a prior average of ~60% pre-introduction of one-fourth pip increments.
Lower market impact with trading on EBS
Since the launch of quarter pips in EUR/USD, we have observed lower market impact on trades done on EBS Market in the pair as measured up to 30 seconds post transactions. The reduction in market impact becomes meaningful when coupled with the observed tightening of spreads, alongside the certainty of dealing that the EBS primary market brings to traders.
Market impact is undoubtedly a key parameter to the cost of trading, more pronounced for execution of risk done over a period of time, whether manually or algorithmically. Post the market structure enhancements on EBS, the liquidity has shown signs of greater resilience to absorb risk transfer as shown by improvement in these liquidity statistics. This seems to have been supported by the observed increase in total inventory, +22% increase in order volume available down to a depth of 2.5 pips in the order book.
Discreet matching within EBS CLOB to avoid signaling
The increased granularity of pricing further augments the effectiveness of price discretion functionality, providing the ability of users to place unlit interest at price points within the lit market and significantly reduce pre-trade signaling too.
For example, even with the observed lower Top of Book spreads now (0.63 pip average), if EUR/USD spot market Top of Book is trading at 0.5 pip or 0.75 pip, the price discretion feature can allow participants to place interest inside the market due to availability of 0.25 pip price point.
These features when combined makes for interesting dynamics for market makers to use EBS Market for hedging or distribution of their pricing to a global network of FX participants.
What’s coming next?
Product enhancements on EBS Market, well known as the primary market and source of price discovery for major spot FX and Asian one-month NDF pairs, are making it easier for market participants to price liquidity and hedge FX risk on the central limit order book.
Based on the feedback from clients, and further analyses of liquidity metrics, we look to evaluate granular price increments to other Spot and one-month NDF pairs in an effort to continue strengthening the FX primary markets across a wider spectrum of currencies.
Alongside the market structure advancements, CME Group FX is working with market participants to evaluate paths for easier and wider access to its FX central limit order books across FX Spot, futures, NDFs and options. As part of this effort, we plan to consolidate EBS Market NDFs into a single, unified liquidity pool operating under the EBS UK MTF (operated by BrokerTec Europe Limited) by the end of the year. Through delivering operational and regulatory efficiencies, our efforts remain focused on facilitating greater transparency, promoting simplicity and consolidating FX liquidity in the marketplace.
For any questions or feedback, please contact FXTeam@cmegroup.com.
*As measured over 5 minutes post data release, comparing April vs. March 2024.
All examples in this report are hypothetical interpretations of situations and are used for explanation purposes only. The views in this report reflect solely those of the author and not necessarily those of CME Group or its affiliated institutions. This report and the information herein should not be considered investment advice or the results of actual market experience.
