Foreign-exchange investors would benefit from central pricing similar to what exists in the equity markets, according to Jamil Nazarali, head of Citadel LLC’s execution-services unit.
“It would facilitate the price-discovery process,” New York-based Nazarali, previously global head of electronic trading at Knight Capital Group Inc., said June 20 at a Shift Forex conference in New York. “That would make it a much more competitive market. So I think this would be good for real traders of FX.”
Citadel Execution Services is a unit of Citadel LLC, the hedge-fund firm run by billionaire Kenneth C. Griffin. It said last month in a statement that it’s expanding into currency market-making.
The $5.3 trillion-a-day market’s structure is under scrutiny internationally following allegations that dealers at some of the world’s biggest banks traded ahead of their clients or colluded to rig the benchmarks that pension funds and money managers use to pay for foreign exchange.
“Right now, when a customer is calling their bank and getting that bank feed and getting that internalized price, they really don’t know if it’s better than they could have got,” Nazarali said. “That makes it hard to put pressure on getting a little bit better rate.”
In the stock market, price data from multiple venues where U.S. stocks change hands are sent to a central place for processing before the information is publicized. Securities and Exchange Commission Regulation NMS mandates that an order must be sent to whatever market has the best price at a given moment.
That’s not the case in the currency market, where prices vary from one trading platform to the next. Also unlike the equity market, currencies are traded via prime brokerage agreements, said Robert Savage, chief executive officer of CCTrack Solutions. A central tape would be meaningless for many in the market because prices may be partly based on traders’ credit, he said.
“In foreign exchange, the price that you get is determined by your reputation with the banks and your ability to have credit with a larger pool,” Savage, a former executive at hedge fund FX Concepts LLC, said at the conference. “So who your prime broker is and that prime broker’s willingness to extend credit to a larger pool of aggregators is determining how that tape would look.”
“Transparency does not beget liquidity,” Savage said.