Global Forex Trading Ecosystem

In 2020, we were contacted by the Central Bank of Guinea. The African bank had been working closely with the International Monetary Fund (IMF) to accelerate economic reforms, and, as part of the requirements for funding, improve the transparency of its foreign exchange (FX) markets. Until then, most of its foreign exchange deals were being conducted manually and mostly offline leading to opacity around trades being done and uncertainty around pricing of those trades.

With one of the world’s leading digital FX trading ecosystems, LSEG not only runs electronic trading venues connecting buyers and sellers globally, but also offers a range of software that covers everything from news analysis and pre-trade analytics to post-trade regulatory reporting and tracking of deals.

The Central Bank of Guinea needed electronification of their foreign exchange trading process – to trade electronically and with more transparency. Electronification not only digitises real-life workflows, but also makes them faster, more efficient and transparent. Electronified FX markets enable traders to deal in thousands of tickets a day online, augmented by automated workflows, using algorithms that ensure they are compliant with regulations at every step of the trade.

Further driven by the COVID-19 pandemic that struck in March 2020 and the subsequent acceleration to the online environment, the need for electronification has never been greater. For the Central Bank of Guinea, we deployed their FX Trading platform giving the local market access to more liquidity and a range of automated trade reporting tools, as well as Auctions, a software that gives users a real-time view of bid submissions. This was an invaluable collaboration that has enabled the Central Bank of Guinea to meet IMF’s reforms and requirements for funding, not to mention build more resilience, efficiency and transparency into their FX processes across the workflow.

Today, our electronic venues process about US$460 billion in trades every day, connecting more than 2400 customers including major global companies across all industries to over 200 global banks, operating in 130 countries around the world. This makes it the world’s leading ecosystem of FX trading platforms in the world.

In May 2021, following the acquisition of Refinitiv by LSEG, one of the first investments made involved initiating a migration of the group’s FX trading venues, Matching and FXall, onto the Millennium Exchange electronic trading software, which powers the London Stock Exchange trading facilities. This migration will, for instance, accelerate the processing of electronic orders to sub-millisecond latencies. It will also enable traders to use advanced data analytics dashboards and new workflow tools that incorporate more sophisticated trading strategies, such as creating a rule-based algorithm where trades can be executed automatically at certain prices, or split orders into different providers and execution methods.

For LSEG, this emphasis on workflows is a crucial part of its FX ecosystem and, in combination with deep access to venues and liquidity, is crucial in helping traders work with venues like FXall and Matching. “We can connect a client with any bank across the globe because we have access to that liquidity. But if you have access to that liquidity and you don’t have the workflow, you’re not creating the efficiency the client is looking for,” says Joris. “That’s our speciality, that’s what we do really well. It’s what we call electronification of the workflow.”

In the equation of FX markets, there’s a third element in addition to trading venues and workflow tools: regulation. “In the aftermath of the 2008 global financial crisis, the relationships between banks and the public sector was at an all-time low,” Penney says. “We had to introduce more structure and safety into the industry.” In 2014, a committee that included representatives from the public and private sectors, and central and commercial banks, began putting together a principles-based code of conduct for how the foreign exchange market should work, called the FX Global Code. Its first iteration was released in 2017. “The world is extremely complicated post financial crisis, and people need help,” says Penney, “smaller institutions don't have the lawyers and the regulatory experts to help them on staff. They look to people they trust and we have their back.”

The FX Global Code reflects two fundamental requirements underlining good regulation: transparency and auditability. “It used to be enough to do a good job and you could brag about being a great trader,” says Penney. “Now you have to be able to prove that to your manager, your internal compliance officer, and potentially, the regulator, with data and audit trails.” Most of the recommendations in the code enforces this. For instance, market participants are urged to communicate only via approved means of communication that allow traceability and record-keeping; records should be kept for a minimum of five years and timestamps should be able to record activity in millisecond intervals.