NEW YORK, Dec 12 (Reuters) - Integral Development Corp, a technology provider for the foreign exchange market, plans a January launch of a second-by-second FX benchmark for major currency pairs, at a time when allegations of rate manipulation have tarnished the reputation of widely used currency benchmarks.
Integral, based in Palo Alto, California, and Stanford University have collaborated to develop once-a-second benchmark rates called Integral FX Benchmark (FXB). The rates are based on data from Integral’s liquidity aggregation and over-the-counter FX trading network.
The company runs the cloud-based, “FX Grid” network, a multi-sided trading network used by hundreds of FX over-the-counter global exchanges.
“By publishing this benchmark on a second-by-second basis, you might consider it a continuous fixing,” Harpal Sandhu, Integral’s president said in an interview.
“The difference between having a fixing which everybody knows is going to take place at a certain time, versus something that is happening continuously is a sea change in transparency for the true users of foreign exchange which is the buy-side community.”
The most commonly used benchmarks are calculated by WM/Reuters, a joint venture of The WM Co and Thomson Reuters Corp. However, financial regulators in several countries, including the United States, Switzerland and UK have been investigating rate-rigging allegations in forex markets.
Foreign exchange currently has no source of reference rates that allow investors and traders to benchmark their executions on a continuous basis. The existing fixing rates are calculated infrequently and are not universally available.
The popular WM/Reuters fixes include those at 4 p.m. or 8 p.m. London, times that trading operations are transferred from one global region to another. About $4 trillion in assets are tied to the fix, which is used to value portfolios.
Sandhu said Integral’s benchmark can ultimately replace the WM Fix, but it can also be used for other purposes such as transaction cost analysis. Prices are evaluated to determine whether the trades were executed at favorable prices - low prices for purchases and high prices for sales.
“Implementing a transaction cost model in FX has always been challenging due to a lack of intra-daily benchmark rates,” said Michael Melvin, managing director and senior research adviser at BlackRock in San Francisco.
“Even if one had a historical data set to allow model estimation, the challenge has been to have a proper continuous exchange rate series that supports trade evaluation on an ongoing basis.”
Integral FX Benchmark Rates will be available for download each day after the close of trading in New York free of charge, initially for AUD/USD, EUR/USD, GBP/USD, NZD/USD, USD/CAD, USD/CHF and USD/JPY. The service will commence on Jan. 15, 2014.