How to Fix Forex’s Transparency Problem: Are Broker-Dealers Being Silently Exploited?

With a daily trading volume of $7.5 trillion, the foreign exchange market is one of the most liquid financial markets in the world. Accessibility is also increasing significantly in the era of digital innovation, as broker-dealers open doors to the market by offering new trading pathways. But is the lack of transparency from market makers mitigating the impact of the FX revolution?

Broker-dealers provide valuable services to traders, providing trade execution capabilities, market insight, fundamental analysis, and even educational content to help form market strategies.

However, the quality of service provided can be negated by a lack of industry transparency, which in turn can undermine the value and revenue provided by broker-dealers.

According to a recent survey of European fund managers, 82% of respondents They argue that there is a lack of transparency in the foreign exchange market. This problem, which stems from difficulties comparing market quotes, is correlated with high foreign exchange hedging costs, affecting 84% of fund managers in Europe, 75% in the UK and 71% in North America respectively.

In addition to this correlation, approximately 73% of UK fund managers reported the same transparency issues, a figure consistent with their respective hedging costs.

Navigating the Complex FX Ecosystem

This lack of transparency stems from the level of complexity surrounding the industry, both in terms of how it is implemented and how much of it is implemented. Trading platform has grown The wider FX ecosystem has become more digital.

In the 21st century, the emergence of electronic multi-dealer platforms gave rise to dealer-customer marketplaces where customers can submit requests for quotations (RFQs) to different counterparties. Since then, the trading ecosystem has grown further with most transactions taking place online.

The digitalization of the FX market has created a number of issues that can impact the performance of broker-dealers, including:

• Market Separation: Modern FX trading does not take place on a single exchange, but instead is facilitated by broker-dealers over the counter.
• Increase in opacity: Due to this separation, the lack of available information prevents competitive quotes from helping customers find the best option for executing online transactions.
• Lack of liquidity: Because segregated exchanges use the dominant currency to leverage trading, the market can become more illiquid with other currencies potentially offering more value to traders. This has resulted in more institutions extract more costs For currencies with few transactions.

For broker-dealers, this lack of transparency can place more power in the hands of market makers who can provide market quotes at their own discretion and make it more difficult to pursue true value across the foreign exchange environment.

The Challenge of Transparency

From the recent European Commission draft proposal to respond to transparency issues by using central bank interest rates as the benchmark for calculating FX markups, we see that regulatory intervention could soon help provide a fairer ecosystem for broker-dealers. can.

The European Fintech Association (EFA) dismissed this proposal due to concerns that the static nature of central bank rates does not provide a real benchmark for foreign exchange rates, but it is fair to see the regulator as a problem solver in the future.

The EFA recommended that payment service providers (PSPs) should: Currency exchange fee disclosures and FX markups are applied at total cost against aggregated real-time mid-market rates provided on a neutral basis. This integrated mid-market exchange could prevent PSPs from using independent sources for markup and instead implement a more integrated approach to payment utilization.

Moving to a similarly transparent process for the foreign exchange trading environment will provide a fair and integrated solution to the ecosystem. It can also help leverage more customer trust and root out fraudulent activity within the FX environment.

The move to maintain a more direct connection to the world of FX trading is increasingly taking place. prime service We have been working to provide our own level of transparency in areas plagued by inefficiencies.

Emerging technologies enable prime brokers to offer intuitive TCA and market impact tools that help provide greater coordination and transparency to the decision-making process surrounding broker-dealers and trade execution workflows.

War to protect market participants

Increasing market transparency requires incorporating emerging technologies and improved regulation to protect broker-dealers and other institutions from fraudulent market quotes.

True protection gives investors full access to a fair, transparent and efficient foreign exchange market where opaque quotes and hidden costs do not hinder your actions.

This fundamentally depends on ensuring that investors always have access to the information they need at the right time, allowing them to better anticipate market conditions and emerging trends before they negatively impact performance.

In creating a level playing field for quotes, we ensure that FX is built on competition and innovation and is full of companies that must adopt the best industry standards to support the fair functioning of the market and the services provided to institutions and investors. You will see the ecosystem. Same as each other.

Prospects for a transparent future

The foreign exchange landscape has now become a major digital industry, with trillions of dollars changing hands every day, making transparency more important than ever to support long-term sustainability.

In creating higher levels of trust and compliance, the environment can help broker-dealers achieve their individual goals with as little friction as possible.

Trust and transparency are critical to the efficiency of any financial market, and their support for the FX environment can help us continue to grow the ecosystem as we welcome both more traders and trading volume in the future.

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