EBS, ICAP’s industry leading electronic FX business, is preparing to launch a new global liquidity platform, EBS Select, to complement the company’s existing multi-product offering.
EBS Market, the flagship platform, is a central limit order book with pre-screened bi-lateral credit limits and allows customers to match natural interest with other participants and leave resting orders in the market. EBS Direct, which launched in November 2013, is a fully disclosed and relationship-based platform that allows Liquidity Providers (LPs) to stream tailored prices direct to Liquidity Consumers (LCs).
With the introduction of EBS Select, customers will now have the option of trading in a non-disclosed environment. Using a multi Prime Broker model, provides the functionality of EBS Market Prime with the benefits of EBS Direct’s bilateral relationship model to achieve best execution. Trading takes place using segmented, permissioned liquidity.
“EBS Select has all the benefits of EBS Direct’s bilateral relationships but the primary difference is both parties trade under static identifiers and only see a Prime Banks name.” explains Andrew Cheesman, who is spearheading the rollout of EBS Select.
As Jeff Ward, Global Head of EBS Direct, further explains, EBS Select facilitates a customised trading experience without the need to have disclosure on a name-by-name basis.
“Like EBS Market, it leverages the EBS Prime Bank service, which has been in place for over a decade. The counterparties that a Liquidity Consumer can choose to trade with through EBS Select will be different to those they trade with on EBS Direct, thereby offering a different trading experience and a different execution experience,” says Ward.
For existing EBS customers, EBS Select can be easily accessed via their EBS API infrastructure on EBS Ai. After the beta stage it will be available via an EBS Workstation or EBS Global Access, the company’s browser-based internet solution.
Permissioned Liquidity
When trading on EBS Select utilising the credit lines of an EBS Prime Bank, customers will trade using a unique static identifier and the Liquidity Providers will have Global identifiers.
“We have six beta LPs for the initial phase of EBS Select and have at least an equal number of banks and non-banks who will join in the second phase when live with the product. We are using a global distribution model, just as we do for EBS Market and Direct. Our LPs will price from co-location centres, intra region from New York, London and Tokyo, out to local customers.”
“That makes us unique compared to some of our competitors, who price from one or maybe two global centres,” notes Cheesman.
On EBS Select, customers will be able to access permissioned liquidity from a number of providers where they, or their Prime Broker, already have established credit lines in place. Each trade is executed with the Prime Broker who then enters into a back-to-back trade with the Selected LP. This means that the traditional model of having to issue Designation Notices under a disclosed relationship, which can be time consuming, is avoided.
The result? EBS Select offers a more efficient credit intermediation process for the LC and LP while allowing the Prime bank to leverage the existing credit limit controls and STP of EBS Prime.
LP Aggregation
Another clear advantage to both the EBS Select and EBS Direct platforms is that it allows for free aggregation of LPs. Take a mid-sized macro hedge fund, they might be using anywhere up to 10 different LPs under a traditional Prime Brokerage ‘give-up’ relationship. Using the common adaptor (EBS Ai), rather than connecting to 10 LPs separately, all the customer has to do is write to the EBS API once and they can see an aggregate view of all available LPs; on EBS Direct there are, for example, over 20 LPs who are disclosed.
Being able to combine the best LPs feeds into a single aggregated stream by currency allows the manager to achieve best execution – a key consideration for any hedge fund.
“The idea here is that we are transitioning from a company with a single offering to one that can support multiple execution methods, multiple ways of trading, through a common distribution network. It’s another opportunity, with EBS Select, to facilitate a relationship between an LP and an LC and to do that with a common connection to EBS. The uniqueness is that we offer the exchange-like market with EBS Market, the ability to use disclosed relationship-based trading through EBS Direct and now, with EBS Select, the added ability to establish unique LP and LC relationships in a cost-efficient, non-disclosed way,” clarifies Ward.
When trading in a disclosed manner a Liquidity Consumer may be sensitive to their name being associated with activity in a particular currency, or they find they are trading a large amount with the same counterparty. In this situation they may choose to execute via the non-disclosed route on EBS Select.
“All three platforms are complementary,” states Cheesman. “A customer can leave resting orders on EBS Market. They may choose execute with a specific LP or group of LPs in a fully documented and disclosed fashion on EBS Direct. Or, they may be sensitive as to what their order may do to the market, wanting to reduce signalling and market impact by using EBS Select.”
“Full Amount” Feature
A new feature that has been released on EBS Direct, and which will also be supported on EBS Select, is the “Full Amount” feature.
This is very useful for anyone wishing to execute a large order, as they will have the ability see the best aggregated streaming price in the amount they wish to trade. Only the LP providing the dealt price would be aware of the trade reducing any market signal. The LP is then able to off-set the position or internalise it against their own liquidity flow.
The “full amount” feature offers customers a discrete way of trading larger volumes.
Cheesman expands on the point as follows:
“If someone is executing orders of $5m, $10m, or $50m at a time, they may choose to do that with one or more disclosed LPs on EBS Direct, or they could choose to do that in a non-disclosed manner against a different selection of LPs on EBS Select further reducing signalling by not passing their name.”
“Many hedge funds are sensitive to market impact and signalling. By providing platforms like EBS Direct and EBS Select, we are simply providing them with the tools to decide how best to execute in the market. Also, with EBS Market, we now offer iceberg orders. This has been very successful; it’s another way for a customer to use our platforms. They might choose to leave iceberg orders on EBS Market, trade disclosed on EBS Direct, or use EBS Select and remain non-disclosed.”
Profiles not Names
Anyone that uses EBS Select will be able to profile either their LPs or LCs. Each counterparty is assigned a unique static identifier. So a Liquidity Consumer in the UK might be set up as number 201Z, whilst an LC in the US might be set up as number 101Z and so on. The LP can build a profile on the unique identifier but does not know the underlying customer name.
An LP will only see the name of the LCs Prime Broker, or their own Prime Broker if the LP is a non-bank. The LP could steadily build a profile of how 101Z consumes liquidity and decide whether they want to interact with them and which of their price streams is appropriate for that style of business; the same is true for LCs as they seek out the best LPs by currency to execute with.
“As a price taker, you will be trading with a number of LPs who will all have a unique static identifier. These identifiers will be passed in the execution report at time of trade. You will only see your Prime Broker’s name as a counterparty but will be able to profile LPs and EBS will provide reports to show how your Select business is spread across the non-disclosed providers. In this way you can build a detailed profile of who likes and is supporting your execution flow by currency and region.
“You will be able to see LP1 is winning a large percentage of your Australian dollar business during Asian trading hours, profile the fill rates and market impact when trading with that LP. Similarly, if LP2 is not quoting competitively and not winning any flow you may ask to try a different LP who has a similar profile to LP1,” explains Cheesman.
Normally, using the above example, if a trader was looking for better Australian dollar pricing they would go to their Prime Broker and ask them for a Designation Notice to trade with a well know AUD provider but with EBS Select, that burden is removed. EBS will work with the LC and LP, where the Prime Bank has existing limits, the customer can be permissioned to see the liquidity straight away. If a LP likes a particular LCs flow then they can begin to profile and make tight spreads or in greater size. If they don’t like a particular LC, they can choose to widen the spread or work with us to try and manage the flow.
Additional LP opportunities
What is encouraging is that EBS Select offers the opportunity for alternative LPs who wouldn’t always get the chance to provide liquidity to large hedge funds. Traditionally, a large manager may have only interacted with the top 10 bank LPs and have a dedicated credit line carved out with each.
Now, with EBS Select, both LPs and LCs have the chance to trade with each other in a non-disclosed environment using segmented liquidity that should support even better price discovery and execution. That’s good news, both for the LPs who fall outside the Top 10 in terms of size and ranking, and for hedge funds who want to interact with a wider range of LPs.
“We’re offering the toolset on a permission basis, if someone doesn’t want to see non-disclosed liquidity they won’t subscribe, it’s completely segmented from EBS Direct.
EBS will help a customer identify and select LPs that meet their currency requirements and regional profile. If appropriate a LP can be removed by the LC and replaced.”
“We have seen a good uptake for the Select beta from customers looking to use the platform and have a pipeline of interested parties wishing to join throughout the rest of this year. There is strong global interest, especially following the success we’ve had with EBS Direct,” concludes Cheesman.
EBS Select is due to have its beta release at the end of March.
