Market News
September 6, 2012 @ 3:14 am

Are Spread Increases Coming Our Way? EBS Goes Back to the Past With 0.5 and 1 Pip Pricing


Electronic Broking Services (EBS), one of the 2 major wholesale electronic trading platforms for institutional trading tries to turn back time and just stated in a press release that it will go back to 0.5 and full pip pricing on September 17. Naturally the big institutions and market makers are fully getting behind this move as it will mean lot more money into their pockets.

The pairs that will trade in 0.5 pip increments will be : EUR/USD, AUD/USD, EUR/AUD, USD/JPY, GBP/USD, EUR/CAD, EUR/JPY, EUR/GBP, NZD/USD, USD/CHF, USD/CAD.

The pairs that will trade in 1 full pip increments will be: GBP/CAD, GBP/JPY, CHF/JPY, GBP/NZD, AUD/JPY, GBP/AUD, NZD/CAD, EUR/NZD, GBP/CHF, AUD/NZD, CAD/JPY, NZD/JPY. Out of the above, GBP/CAD, GBP/JPY, GBP/NZD AND EUR/NZD are already trading in1 full pip increments on EBS.

The reasons stated for the decision are: “The aim is to help thicken top of book price points, increase the cost of top of book price discovery and improve matching execution in terms of percentage fill amounts”. The actual reasons are probably lot more “sinister”.

EBS has been under pressure by its market making members to do something about so called “toxic flow” which is just using words to slander increased competition in the market making field, in my opinion anyway. The banks claim that certain trading flows move in and out too quickly for them, so it has to be stopped. But, and again this is just my opinion, if you get into the market making business you got to take the good with the bad, you can’t just throw up your arms in the air and cry “its not fair” if someone beats you to the game.

The move back to 0.5 and 1 pips pricing will mean lot more revenues in the market makers pockets, no question about that. On the retail side, when the barrier to 1 pip pricing was breached few years ago and pricing was changed to move in 0.1 pip increments, we saw spreads come down significantly below 1 pip. The spread in EUR/USD on some retail ECN’s is now trading at 0.1-0.2 pips during the busy hours of the day. If this change were to be implemented on the retail side and price can only move in 0.5 pip increments it is to be expected that spreads will increase significantly from their current 0.1-0.2 level to around 0.5 pip. But again keep in mind EBS is an institutional platform so it is not clear how big of an impact will these changes have on the retail side.

Needless to say the market makers and big institutions are loving this move. I will quote a few of their responses below, the quotes list naturally includes a lot of institutions that couldn’t compete in banking either so they ran to the their governments for bailouts back in 2008/2009.

Bob de Groot, Global Head of Spot Trading, BNP Paribas had this to say: “The changes now being implemented will further strengthen trust and confidence in the platform.”

Jeff Feig, Global Head of G10 currencies, Citi: “By taking the time to listen to the market and learn from other asset classes EBS has proved its commitment to remaining the market’s partner, leader and trusted source of liquidity.”

Zar Amrolia, Global Head of FX & Head of Fixed Income etrading, Deutsche Bank: “EBS has led a collaborative process, bringing together FX market participants in an open and transparent manner. We welcome this approach and are supportive of the direction EBS has taken.”

The list goes on to include positive comments from HSBC, J.P. Morgan, RBS, UBS and other big financial institutions. It is actually hard to find an institution that has not taken a bailout in the list of quotes provided with the EBS press release.

Other 3 major changes announced in their press release include: revised quote and hit fill ratio targets to be set on a pair by pair basis, new approach for enforcement of fill ratio policies, including cancellation of financial surcharges for non-compliance and new quoting guidelines for Asia trading hours. But after seeing the announced changes for going back to 0.5 and 1 pips pricing, tinkering with any of that by EBS doesn’t seem a good idea as it will probably favor the market makers again. But as I lack the expertise I can’t comment more on these changes.

The changes are set to come into force on September 17, so watch out for that. Although EBS is a provider of institutional services only, not retail forex, it seems logical that the increased trading spreads will find its way down the trading chain somehow. If a retail broker or his trading network uses EBS for trading/hedging purposes, it is to be expected that some of the new costs borne by them will get passed on to retail traders. So if the increased costs of trading start getting passed on to the retail side and you start to see you spreads increase after September 17, you will know where to complain. Do keep in mind that even if this subtracts from their bottom line, retail brokers will probably not pass on the costs right away on day 1, so leave a period of few months to fully see the effect of this move.

It is also important to note that EBS has a competitor on the institutional side in Reuters FX. In fact Reuters in July of 2012 successfully overtook EBS as the largest FX platform. The average daily volume traded in July was $130 billion and in the same month EBS reported $106.7 billion. But EBS is the primary trading venue for EUR/USD, USD/JPY, EUR/JPY, USD/CHF and EUR/CHF while Reuters is the primary trading venue for all other interbank currency pairs. So if you’re trading EUR/USD like the vast majority of retail traders, this new development is definitely something to keep an eye out for in the next few months.

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About Fx_Livermore

Fx_Livermore has over seven years experience in forex trading. He uses a mix of technical and fundamental analysis in his trading. His posts should not be taken as trading advice/recommendation to buy/sell any currency/security.

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2 Responses to “Are Spread Increases Coming Our Way? EBS Goes Back to the Past With 0.5 and 1 Pip Pricing”


  1. dns Says:

    Great news for us retail traders.

    With costs now up 5 times for eur/usd, and 10 times for 1 pips increment pairs we can be safe for a while untill HFT algos learn to work under worse conditions.

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