Central limit order book (CLOB) trading has seen a significant increase across several platforms over the last 12 months. For instance, LSEG’s average daily volume in 2022 was up 20% year-on-year, EBS Market reported an 11% volume increase over the same period, and Cürex saw volumes rise more than 29% compared to 2021. CLOBs are anonymous trading systems used by majority of exchanges that matches orders. Buyers and sellers submit orders to the CLOB, which collates all outstanding buy and sell orders. When a new order can be matched against an existing order it gets executed, otherwise, the new order enters the database and waits for another order to offset it.
Jeff Ward, the Global Head of EBS at derivatives marketplace CME Group said, “we saw some particularly intense individual days. October 21st, 2022 was the largest day for USD/JPY on EBS Market since November 2016, representing nearly seven times the average daily volume level.”
The increased trading on CLOB venues over the last 12 months has been a reaction to increased market volatility as well as structural changes and commercial incentives introduced at the start of 2022, said Geoff Jones, the Director of FX Spot Venues at financial markets infrastructure and data provider LSEG. However, transparency may be a worthy goal for regulators or the industry at large, but individual market participants are primarily driven by cost and profitability, said Edward Bolton, the Institutional Business Development Manager at StoneX Group. “CLOBs do not present a clear benefit to many market participants,” he added.
Volumes at the main electronic communication networks (ECNs) grew at a faster rate than the primary CLOBs in 2022, according to Clinton Norton, the Head of FX Global Sales at pan-European bourse Euronext. “This growth deviation is due to the flexibility of ECNs to create bespoke liquidity pools tailored to client expectations for fill rates, real-time trades, and market impact,” he said. “Speed and transparency are paramount in times of volatility.”
CLOBs and the Reduced Use of Last Look
The presence (or otherwise) of a link between the increased use of CLOBs and the reduced use of last look has been a widely discussed topic in FX circles for some time. Jamie Singleton, the Chairman & CEO of Cürex Group, an FX-focused execution services, and data analytics provider said the increase in trading volume during 2022 suggests this is the case. However, the spot market is massively diverse and last look practices are still widely used based on counterparty type and their objectives.
“We believe that the buy side clients we deal with and represent should never be subject to the last look,” he said. “The buy-side and their fiduciary responsibility should never be confused with high-frequency traders and those who seek to take advantage of market data to score trading profits and last look has no place in the conversation when it comes to the buy side. How the banks protect themselves against predatory trading activity is up to them, and we respect that.”
On the subject of ‘hold time’ – discretionary latency associated with last look execution – LMAX Group believes that there remains significant opportunity cost in this period and that on a long-term basis, CLOB-style low latency order-driven execution is more cost-efficient. Xavier Porterfield, the Head of Research at the benchmark administrator NCFX, notes that tighter spreads are just one consideration when assessing if good execution has been achieved. “Just as individual dealers will have a skew in their pricing that reflects their own positions, bespoke pools of liquidity will also exhibit skew relative to the overall market,” he said.
Technological Advancements
The migration of spot matching to LSEG Exchange technology will allow matching participants to benefit from exchange-based order types and matching paradigms that reduce signaling risk within a CLOB, creating a new ‘best of both worlds’ platform, suggested Jones. A spokesperson for financial services technology company LMAX Group observed that its view on last look hasn’t changed and that it believes it should not exist on any public multilateral trading venue for reasons of fairness and transparency.
“On LMAX Exchange, orders can be refreshed 10-20 times in 1ms so the market probably needs to evolve to measurement in microseconds in the near future to correctly evaluate the opportunity cost of last look pricing versus streamed limit order liquidity,” added the spokesperson.
In conclusion, while CLOBs seem to have become increasingly popular among traders, it is still a subject of debate whether they provide a clear benefit or not. Moreover, the use of last look in the spot market remains diverse with different parties using it based on their objectives. Nevertheless, the migration of spot matching to LSEG Exchange technology and the technological advancements in the industry might create a new platform beneficial for all participants.
