New Player Challenges Status Quo With Continuous Forex Benchmark

Integral’s system offers investors an alternative to the popular London fix, which is based on relatively limited currency trading data.

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After allegations emerged last fall that currency traders had colluded in a bid to fix prices at the 4 p.m. daily foreign exchange fixing in London, market participants wondered if there was a better way to establish market prices. Some want a change to the London fixing, whose administrator, consortium WM/Reuters, calculates its result from an average of trades in the one-minute period before and after 4 p.m.

“The problem is the 4 p.m. fix is based on a very small volume of trades,” says James Sinclair, CEO of MarketFactory, a global electronic forex platform based in New York. “Perhaps if it was spread out across a continuous time frame throughout the day, it would be more manageable for everyone.”

Reuters says investors use the fixing to set prices on about $4 trillion in assets, including stocks held in exchange-traded funds and by institutions in foreign markets. Into this market opportunity for a better benchmark have stepped several potential suppliers. For example, Russell Investments, the Seattle firm behind the Russell 2000 Index of small-cap equities, has two daily forex benchmarks that it calculates for clients.

Now Integral, a Palo Alto, California–based firm that offers a platform called FX Grid, has come up with a benchmarking system. It delivers a second-by-second continuous benchmark on seven of the major currency pairs, and the data is free to download from Integral’s website. “One of the things we felt was missing in the FX market compared to other markets is a lot more transparent, continuous benchmark data,” says Vikas Srivastava, managing director for business development. Asset managers such as pension funds have a particular need for accurate forex prices, Srivastava explains. “As asset managers, one of the things you need to know is where was the market, not just to achieve the best execution but to prove to stakeholders that they did in fact achieve the best execution.”

Unlike WM/Reuters, which averages actual trade prices, Integral uses streamed quotes, offers from banks and others to buy and sell at certain prices. The firm doesn’t disclose its turnover, so it’s unclear how valid the benchmark data is. As of last month Integral had about 100 liquidity providers on its platform that were streaming quotes to some 1,600 clients, Srivastava says.

Integral designed the system in cooperation with Stanford University, where it’s sponsoring research on benchmarks by Kay Giesecke, an associate professor of management science. Giesecke says he compared the Integral benchmark with trades and found it to accurately reflect the market. The benchmark is “based on an exceptionally broad stream of recent dealable quotes from many sources rather than a set of trades from a relatively narrow selection of sources,” he adds. “That’s a big plus.”

By reducing dependence on any single source of information, the Integral approach resists the kind of manipulation alleged in London, Giesecke notes. The continuous benchmark data is retrospective; users can download a day’s worth after the New York market closes, at 4 p.m. Eastern time. Without giving a date, Srivastava says Integral plans to make the benchmark available in real time.

In the wake of U.S. government claims that some custodian banks were overcharging customers, many investment firms now do transaction cost analysis to see if forex prices given by their banks were near the best possible market rates. When using the 4 p.m. fix data, firms knew they had the same information as competitors. With the Integral data, although an asset manager can see how close a 9:15 a.m. EST trade was to other quotes, for example, the sell-side client must choose the time of day to value portfolios. Would it be the London or New York close, or some other time

Whether Integral’s data becomes the primary forex benchmark will depend on how widely other firms adopt a continuous standard. Some asset managers may prefer the simplicity of a once-daily fixing, but knowing exactly what was offered at the second a trade occurred is also very appealing. • •

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