The institutional FX market has seen a number of P2P (peer-to-peer) initiatives fall by the wayside over the years. For example, in October 2019 Bloomberg reported that Vanguard was testing peer-to-peer FX via blockchain in an effort to enable asset managers to trade currencies more easily.

However, the latest update on this project (when State Street, Vanguard and Symbiont announced in December 2021 that they had jointly completed the margin calculation process for a live trade of a 30-day foreign exchange forward contract using Symbiont’s distributed ledger technology) made no mention of a peer-to-peer component.

The obvious advantages of executing FX trades directly between two parties rather than going to the market persuaded many venues to introduce P2P services over the last decade and more.

In the early days, one of the challenges was limited transparency at the corporate level around the fees and spreads applied to each transaction and reluctance to move away from bank providers. Once decision-makers started to realise the potential cost savings, the likes of CurrencyFair, TransferWise, FairFX, Kantox and Midpoint started to gain traction.

But, the realisation that even the largest banks were only matching a relatively small percentage of their trades – and perhaps more importantly, that customers were not overly concerned about how their trades were executed as long as they got a good price – persuaded established providers such as Kantox to pivot away from P2P.

Barriers to Entry to P2P FX Market

According to Jamie Singleton, the Chairman & CEO of Cürex (which launched its FX matching platform in August 2021), there are other structural and practical factors that have held back the peer-to-peer FX market in the past.

“The sheer size of the FX market makes curating a peer-to-peer matching system difficult,” he says. “The participants in a successful system cannot include HFTs, whose main interest would be to gain market intelligence. At the same time, the participant pool must be diverse – buy-side institutions such as asset managers are often moving in the same direction based on interest rate movements and international equity exposure.”

A successful P2P platform requires a fair and transparent mid-point price that can be used for matched executions, and a frictionless trading experience that does not involve changes to trading workflows and manages credit among the matching pool participants.

Then there is the time factor. Buy-side customers generally do not have the ability to wait for a prolonged period to find a match.

Despite all these barriers there is a new kid on the block in the shape of LoopFX, which aims to be the new liquidity venue for large spot FX trades by centralising peer-to-peer matching with bank interest, enabling traders to identify matches of trades in excess of $10 million with other buy-side institutions.

Matches will execute at an independent market mid-rate, a model LoopFX refers to as peer-to-peer-to-bank.

The venue claims to have developed a unique matching engine built as an open architecture technology that will integrate into current workflows on existing trading platforms with minimal changes to legal documentation.

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Minimising Market Impact

“Our mission is to provide the means for all large orders to find matches with zero market impact, which includes orders from banks and by default also from the customers of those banks,” says Blair Hawthorne, the Founder and CEO. “Doing this without changing asset manager workflows or legal agreements removes a common pitfall to wide scale adoption.”

Hawthorne was a senior trader at Abrdn prior to founding LoopFX, with the motivation for the new venue coming from frustration with the lack of real-time data available to help institutions decide where best to place their trades.

“LoopFX will deliver better execution outcomes and best execution processes,” says Hawthorne. “If a match is found, information leakage and execution costs are reduced. If no match is found, best execution processes are improved by allowing dealers to trade in full confidence that there was nobody available at that exact time who could have offset that trade.”

Hawthorne says he expects LoopFX to launch early in the second half of this year and estimates that it will go live with 20 buy- and sell-side institutions. Board member Ivan Ritossa has suggested that this is the first time a venue has developed a means of safely allowing market participants to tap the peer-to-peer market in FX without disenfranchising the sell-side.

“Previous peer-to-peer initiatives are often seen to be trying to compete with banks, and it is difficult for innovation to grow if it does not respect the wider ecosystem, so we spent a lot of time listening to both sides of the street and recognised that banks also have significant needs for new venues to manage large trades for their clients,” says Hawthorne.

Enhancing Algo Offerings

However, Singleton says Cürex has also developed its platform in cooperation with the sell-side. “Our peer-to-peer liquidity pool is integrated into the algo offering of leading sell-side algo providers as an additional liquidity source,” he explains. “Rather than disenfranchising the sell-side, our pool improves their algo offerings.”

Partnering banks allowing client access through their algo platforms is designed to be non-disruptive to trade workflows, deals with the credit exposure, and allows the customer to manage the wait time issue as they wish.

“Our mid-point price for matches is the FTSE Russell/Cürex benchmark rates which are based on transparent, fully executable prices, and our participant pool is exclusively buy-side, including corporates who more naturally represent opposite trading interests to our asset manager customers,” adds Singleton.

At the start of this decade, FX HedgePool entered the fray with a focus on the swaps market and more specifically, the monthly roll requirements of passive FX hedging programmes.

Is there a better way to access #liquidity in #FX markets? Our CEO and Co-Founder, Jay Moore, spoke to @TraderTeeVee’s Dan Barnes about how market structure innovation can open previously unavailable channels of liquidity to improve market performance. https://t.co/qdvOoNXCJG

— fxhedgepool (@fxhedgepool) September 30, 2022

Total volumes now exceed $4.5 trillion in matched trades, and the firm has expanded its product offering over the last 12 months, supporting numerous liquidity events each month for one-month and three-month tenor swaps, and positioning itself to roll out other instruments including spot matching capabilities explains Founder and CEO, Jay Moore.

“We have grown the buy- and sell-side community to include more than 30 of the largest asset managers, pension plans, overlay managers and banks,” he says. “We have also addressed the need for automated workflows by integrating with OMS and EMS providers.”

Making Sure the Sell-Side Is Onside

Keeping the sell-side onboard has been a challenge for peer-to-peer FX providers from the outset. Moore observes that FX HedgePool has signed up a dozen banks as credit sponsors, in part because it has separated liquidity from credit.

“Initially conceived as a necessary development to support the matching of swaps between buy-side firms, this market structure play allows liquidity and credit to flow freely without dependency on one another,” he explains. “It allows participating banks to lend credit to our members for the booking and settlement of trades in return for fixed charges to appropriately compensate for balance sheet usage.”

For the banks, this credit marketplace creates a new revenue stream where they can get paid for existing underutilised credit lines without bearing market risk or the inconsistency of competitively negotiated trades.

Even market participants acknowledge that P2P FX is a tough nut to crack. But, with Cürex and FX HedgePool committed to the concept and LoopFX looking to sign up additional buy- and sell-side institutions, it might just be an idea whose time has finally come.