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counterparty as this poses a conflict of interest. Pooling liquidity providers ensures trade execution at or near the requested price and naturally larger pools and faster trade execution times get them closer to the goal.”
Regulation can also be an inhibitor of progress but Van Cleve believes that a lot of the regulatory proposals (particularly those stressing the need for the greater use of central counterparties) would have fallen by the wayside if the ECN model had been more widely adopted earlier on. “I believe regulations were imposed due to some of the unscrupulous behaviour of the typical market maker, closed loop brokerage model that exists in the majority of brokerages today. While it’s doubtful that any of these regulations will be repealed by a market going to an ECN model, this is the route it must take if it is to survive. Te ECN model is a fair model and
provides incentive for sustainable trading.”
Differentiation in the Institutional space
Hotspot FX is an ECN for the institutional FX market and is
focused on buy-side participants that connect to the platform via a prime broker. Along with EBS, Reuters and Currenex, it is one of the main, multi-participant, electronic trading platforms in the institutional space.Whereas EBS and Reuters have their roots in the interbank space and are now recruiting more buyside users, Hotspot’s evolution is more the other way round, where it is now welcoming an increasing number of small and mid-sized banks to the platform, trading in the same way as the buy-side firms and larger banks that have traditionally utilized the ECN.
Historically, the biggest interest in the Hotspot FX platform though has come from hedge funds and high frequency traders, says Bill Goodbody, business manager at Hotspot FX. “We are seeing more interest from a wider range of market participants, including banks and other buy and sell side institutions who are increasing their presence in the FX space. Tey are
Bill Goodbody
“I think this makes it an exciting time to be in the ECN space – it is a dynamic environment and the push towards more regulation is part of the general trend we are seeing of the market’s acceptance of the ECN model,”
looking for platforms that are not just single book but multi-contributor and with transparent pricing. Tis is being somewhat driven by some of the regulatory developments that we are seeing and what might come out of Dodd-Frank in terms of Swap Execution Facilities or SEFs, and how those rules may impact the FX Market – even if not spot directly. And this is what an ECN provides – an anonymous platform with multiple pricing from a wide range of market participants, that is well positioned to meet any SEF requirement that may come forward.”
In addition to the type of market participants and the liquidity available on the platforms, another way for the ECNs in the institutional space to differentiate themselves is through pricing models and transaction fees.
“We have similar pricing structures for transaction fees as the other ECNs but we try to absorb as much of the other costs – such as connectivity charges,
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