LONDON (Reuters) - Tradition, the inter-dealer broker, plans to build a foreign exchange trading platform with five major banks to prepare for new rules designed to make the $4 trillion a day forex markets more transparent.
Tradition, part of Swiss group Compagnie Financiere Tradition, said on Wednesday it would launch traFXpure as a “low cost, convenient and equitable venue” for dealing foreign exchange at the end of this year.
The broker said the service is backed by Barclays, BNP Paribas, Deutsche Bank, Royal Bank of Canada and UBS, and it expects to add other banks to the list “over the next few weeks”.
“This initiative is designed to be easily accessible to all market participants with transparency a core benefit of the traFXpure platform,” said Mike Bagguley, head of forex and commodities at Barclays.
Tradition’s project marks the latest move by inter-dealer brokers to prepare for proposed regulatory reforms that could hit their profitability.
Policy-makers are keen to shake-up the vast over-the-counter markets in currencies, bonds and derivatives where these brokers operate by forcing them on to electronic platforms as early as this year.
This will likely hurt the brokers because they can charge higher fees for trades conducted over the telephone. Analysts see their rush to invest in electronic systems as an attempt to offset any losses they may incur as a result of the new rules.
In March last year, Tradition launched Trad-X, its electronic platform for euro interest rate swaps, while rivals ICAP launched i-Swap in September 2010 and Tullett Prebon rolled out its platform, tpSwapdeal, late last year.
Banks use brokers, like Tradition, ICAP, Tullett and BGC Partners, to find them the most attractive prices for trading large blocks of currency in the financial markets.
Regulators are keen to force more of these murky OTC markets to use electronic, exchange-based systems to make them more transparent and easier to regulate.
Historically this business was conducted on the telephone, which allowed banks to disguise their largest, most sensitive trades from the wider market, ensuring they got the most favorable terms.
In the forex markets, trading has already shifted slowly to more public electronic trading platforms over the past few years as banks have designed trading algorithms to hide large trades.
The growth of these platforms, like ICAP’s market-leading EBS, has brought down the cost of trading currency for banks but it has also attracted predatory hedge funds known as high-frequency traders.
These firms use ultra-fast computers to generate millions of trades in fractions of a second.
This doesn’t break any rules, but the banks complain these traders simply skim off profits from the trading they do on behalf of clients as well as contributing to volatility at times of market stress.
The banks’ support of Tradition’s new project is partly a response to growing frustration among banks with the levels of HFT activity in the existing platforms.
Tradition’s traFXpure is designed to tackle this.
“The platform is open to all but it deploys innovative matching logic that effectively levels the playing field so every participant enjoys equal access,” said Daniel Marcus, managing director, strategy and business development at Tradition.
Editing by Jane Merriman