EBS Faces Challenges as Forex Trading Platforms Diversify

Tokyo: The Electronic Broking System (EBS), once the cornerstone of foreign exchange (forex) transactions, is witnessing a significant decline in its market share. This shift could potentially undermine its role as a key provider of indicative market figures, a status it has long held in the forex market.

Run by the Chicago Mercantile Exchange (CME) Group, EBS was formerly the preferred platform for interbank transactions. In the late 1990s, it was a crucial instrument as its efficiency in handling transactions between financial institutions, with little human involvement, guaranteed. Unlike stock exchanges, EBS became associated with forex trading, bridging a vital need in a sector without a centralized exchange.

However, MBS's supremacy has dropped over the past few years. Data from the Bank of International Settlements (BIS) shows that from January to September 2022, the daily volume of exchange transactions on electronic platforms, including EBS, averaged $170 billion on the spot market. This value reflects a more than 40% drop from $290 billion in 2010, reflecting a notable loss in EBS's market prominence.

One of the leading causes of this fall is the increase in the bank-to-customer transaction market. Early in the 2000s, central Western banks started asking customers to adopt proprietary electronic systems. This action sought to boost profitability by matching internal buy and sell orders, reducing dependency on outside markets such as EBS.

“Most forex transactions are now conducted inside our systems,” said a trader from a central bank. Internal systems appeal because they allow buy/sell positions hidden from other market players, which is crucial for significant transactions. The growing need for “dark pools” (private exchanges) and banking systems where trading may occur with little effect on the market follows this trend.

Not only are banks among the institutions turning toward proprietary trading platforms. Leading Western hedge funds have also created their own FX platforms, undermining the interbank market's transaction volume. EBS has significantly suffered from this fall in interbank trading as these big firms want their systems for transaction execution.

Rivalry has increased because of the many new electronic trading platforms that have just surfaced. One such site, FX Spot Stream, opened in the United States in 2011 and has grown steadily. With an average daily volume on the spot market quadrupling over the previous five years, FX Spot Stream links banks with consumers to reach $68.8 billion as of June 2022. The company's 2016 Tokyo expansion increased its transaction volume even more, especially among foreign currency margin traders.

According to BIS statistics from 2022, banks initially provided 23 platforms, whereas the currency industry now boasts 32 electronic platforms for the secondary market. Although these systems have attracted large transaction volumes, banks are using EBS less and less.

Changes in the infrastructure of the CME Group also contribute somewhat to EBS's problems. CME Group rebuilt EBS's trading system a few years ago, grouping its regional engines into two main sites: New York for Group of 10 (G10) currencies and London for emerging market currencies. Closing the Tokyo server, especially in Asian markets, some market players have hampered seamless transaction execution, reducing the attraction of EBS.

There are growing questions regarding EBS's effect on market trust as its transaction share declines. Historically, rates set on EBS were essential benchmarks as they provided a picture of the currency market's situation. However, the ongoing drop in transaction volume may undermine EBS's reliability as a consistent benchmark for market rates.

A market member underlined the difficulties of depending on EBS, pointing out that as banks improve their systems, “bad flows” invisible within bank systems show more often on EBS. This problem makes it more challenging to determine if EBS prices fairly reflect the state of the market.

Notwithstanding these difficulties, others contend that EBS is very important, particularly in times of significant market volatility. Paul Houston, global head of currency products at CME Group, underlined that “EBS becomes even more important when the market volatility is high.” In a similar vein, a dealer from a Japanese bank voiced hope for EBS's future, saying that even with declining transaction volume, “EBS will continue to be the most important place for market participants to check forex prices.”

The Bank of Japan's 2014 structural shift in the forex market analysis highlighted the concentration of trade within megabanks and the decreased trading volume on essential platforms like EBS. The study underlined the importance of attentive observation in the medium to long term and warned that these structural changes may make it challenging to grasp general market trends.

EBS needs help to remain relevant as forex trading platforms diversify. Although it is still a vital instrument in tumultuous markets, its diminishing transaction volume raises issues regarding its future importance in the always-changing forex scene. The market's move toward proprietary systems and the development of new platforms imply that EBS has to change to be a major participant in world FX trading.

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