New Bank consortium 'bank only' FX platform. Doomed to fail?

Recent press coverage (here) about top Global FX banks setting up a new ‘inter-bank’ only FX platform, dubbed “PureFX”.

At first glance, this looks like a repeat of ‘doomed’ BrokerTec Consortium (set up in 1999 by 14 top banks, and sold to ICAP in 2004), where top Fixed Income Primary Dealers, who were concerned about level of brokerage being paid, and ‘leakage’ of liquidity to the buy-side (some brokers allowed clients to anonymously access IDB liquidity), set up a primary dealer only bond trading platform.

Top banks wanted to prohibit buy-side access to the IDB markets, or at least control the rate of disintermediation, plus the dealers wanted to break Cantor’s then stranglehold of the US Treasury market.

Roll forward to the close of 2010 and FX, and a similar situation has developed, with buy side firms accessing interbank liquidity. Only this time, it’s not the brokers ‘cheating’, but the banks themselves who have granted the access – via their Prime Brokerage arrangements with top hedge funds, HFT, and other leveraged players – non-bank participants.

EBS being the case in point, where BIS data confirms that High Frequency Trading (HFT) firms now account for some 45% of EBS flows, compared to only 2% in 2004.

The latest BIS Triennial Survey data shows (here page 3/16), a continuing concentration of liquidity amongst the top tier banks,

In theory, the top global FX banks could (if they acted in unison) re-direct liquidity provision through a new “PureFX” top bank platform, but the question is why would they?

Previous experience has showed that banks who are natural competitors, make poor co-shareholders, and perhaps the FX market is now too large, and too deep to control in such a way, and offers too great an incentive for one or two leading banks to ‘cheat’ on such a consortium, and continue to provide liquidity by taking up the slack.

Also, since these top banks are so efficient in terms of internalising flows, they have less need to access the interbank market themselves to unwind their risk positions.

Will be interesting to watch, but gut feeling is that this initiative will fail!