How FX markets can overcome the data obstacle

By Eugene Markman, Chief Operations Officer, ION Markets (FX) and Chief Executive Officer, MarketFactory

The foreign exchange (FX) market is the largest financial market in the world – even larger than the stock market, with its total value reaching $2.409 quadrillion in 2021 – and is entangled with challenges of its own. One of its biggest roadblocks is getting a universal stream of data, something certain asset classes have solved while others struggle with to a lesser degree.

Soaring FX trading volumes, the unpredictable global economic climate of the past two years and the steady shift to electronic trading have sharply exposed the obstacles arising from a lack of uniform data – including prices and volatility surfaces. While other asset classes with a narrower range of trading activities could navigate these conditions, the fragmented nature of data attached to this market – created by the sheer number of trading intentions and avenues available – has left many traders in a trickier situation.

With an increasing number of new entrants into this market, coupled with a lack of standardization and regulation, and an unwillingness to share collected information, the forex market is at a crossroads. This data is vital as it provides insight into what is changing the market (both trends and risks); which is why market participants prefer to keep possession of their own data to compete successfully. However, has the time come for the foreign exchange market to consolidate data and become more transparent?

Crowded market

An increase in trading volumes as well as electronification of non-spot products across foreign exchange markets over recent years has brought in a range of new FX platforms, meaning traders now have a wider choice of liquidity and data providers as well as execution methods. Although this has indeed increased the efficiency of the execution process, the presence of so many players means that the market is flooded with a mass of individual data sets, each determined by each trader’s specific credit profile. Not only has this made the data highly fragmented and harder to analyze, but it also means that it is likely that what one trader may be seeing on their platform is not indicative of the entire market.

The FX trading environment is therefore much harder to navigate than other asset classes such as equities, which have access to standardized, uniform data sets, where all traders have access to, and can therefore analyze, the same prices. The result: a more efficient experience for the entire market.

Complexities and operational challenges  

The sheer size and the global nature of the market has made it increasingly difficult for regulators to standardize the forex market. There are at least 150 different currencies across the world, and depending on which region or country these belong to, these currencies are subject to regulations introduced within that jurisdiction. This means that data received by forex exchanges varies and is different for everyone; in turn making data analysis a much more time-consuming and costly process, with the efficiency of the market suffering as a result.

Reluctant to share

While FX traders realize the need for unmatched and reliable data, market participants remain hesitant to part with the data they have collected. Given the volatile and competitive nature of this market, firms are sharply focused on finding ways to remain ahead of their competitors, and one way to achieve this is by retaining the informational advantage participants currently have. However, this has had repercussions for entire market, with FX traders spending unnecessary amounts of time sourcing and analyzing data, rather than focusing on executing trades for their clients.

Recognizing the problem, trading platforms have made attempts to consolidate data with the market information available to them, with limited success though. For instance, in 2017, global foreign exchange trading platform, Euronext FX, and FastMatch (now part of Euronext) attempted to consolidate the market. But due to the reluctance to share information, the platform lacked sufficient participants to provide the critical mass required to form a universal string of data. Failed attempts such as this simply reinforce the culture of informational secrecy within this market, and the challenges this approach creates.

We therefore have an overly complex market characterized by disconnected data sets, making the jobs of both those already active in the market, as well as new players, more challenging than necessary. On one hand, for existing participants, the issue comes back to ‘limited access to data’. On the other hand, new entrants need to separately purchase data from each ECN, and then manually normalize it to align with other platforms. Since the time and schemer models of this data invariably don’t match, the process of analyzing such data becomes more complicated and costly, reducing the efficiency and accuracy with which firms can execute trades.

The solution: innovation vs. standardization

As individual attempts by platforms to encourage data sharing and alleviate the subsequent challenges have failed, there have been calls to introduce a universal “red tape” which would force the industry to share data and standardize the market in one swift move. Not only would this increase the efficiency of analysis and boost the accuracy of decision-making, but by improving market transparency, traders would be able to better track and predict trends, identify any potential pain points, and therefore ensure they are insulated from potential risk.

It is unlikely that the market will change its stance on this matter. However, due to the current barriers, traders are now working with technology providers to create their own datasets which consolidate all market information into one singular structure. However, these solutions must have modern infrastructures capable of high data throughput to keep up with volatility which regularly characterizes the FX market – the transition to which is both costly and time-consuming.

Ultimately, the FX market is focused on pricing, hedging and managing risk. Although the process of creating these tailored datasets is still in its nascent stage, it is what will help new entrants analyze the market and make better – as well as timely – decisions. Overcoming the data obstacle is perhaps the only way of generating alpha.

Eugene Markman, Chief Operations Officer, ION Markets (FX) and Chief Executive Officer, MarketFactory

Eugene Markman is chief executive officer of MarketFactory and chief operations officer of ION Markets (FX). Eugene joined MarketFactory in 2014 and served as chief operating officer and vice president of finance before being appointed CEO. He played an instrumental role in the company’s growth, resulting in ION acquiring MarketFactory in 2019. Prior to MarketFactory, Eugene was chief operating officer of the US interest rates product desk at Credit Suisse in New York and Switzerland. He earned a bachelor’s degree in financial economics from Binghamton University and a master’s degree from the NYU Stern School of Business.