Refinitiv is considering a series of changes to its daily foreign exchange (FX) fixing, including lengthening the trading window used to calculate it, a senior company executive said, amid industry concerns over the global benchmark which used to value trillions of dollars of assets.
The 27-year-old WM/R benchmark, which is calculated by its owner Refinitiv, has a five-minute trading window, known as the “fix”, at 4:00 p.m. in London each weekday when investors and banks flood the market with buy and sell orders.
The WM/R is by far the most popular benchmark and baked into contracts such as those used by U.S. fund managers wanting to buy European stocks, who would sell dollars and buy euros at exchange rates set at the fixing.
One concern among some asset managers, who move billions of dollars through the window, is that more nimble hedge funds can spot and trade off large transactions, leaving investors with worse exchange rates.
A European Central Bank-organised FX group said in April 2020 its members were concerned that concentrating end-of-month trading at particular FX fixings was “likely to create additional volatility and pressure on market functioning”.
Unusual price swings at the fixing were reported during 2020 when the COVID-19 pandemic raised currency market volatility, and most recently on July 27 when sterling suddenly surged alongside a spike in trading volumes.
“We are very focused on making sure (the benchmark) evolves, and aligns with changes in the market structure,” Shirley Barrow, Global Head of Benchmarks and Indices at Refinitiv, said, adding that it was open to lengthening the window, but had not decided what was “insufficiently wide”.
Beyond expanding the trading window, Barrow said other possible improvements include sourcing trading data from more than the current three platforms, Refinitiv Matching, EBS and Currenex, which could make prices more representative of the $6.6-trillion-a-day FX market.
Concerns about the fixing and whether investors were getting a good deal have existed for years but resurfaced during the pandemic, encouraging Refinitiv to assess its options.
Refinitiv began gathering data on the benchmark’s performance and asking clients for feedback on potential changes last year, Barrow said.
This revealed that some users want the window widened to address concerns, including that computer-driven algorithmic traders are taking advantage of slower-moving asset managers.
By widening the window, large buy or sell orders should have less market impact as transactions can be spread out, making it harder for algorithms, or so-called algos, to track investor order flows.
However, some asset managers say the current system works well and that lengthening the window would solve little because when putting a large order through a defined period, there will always be a ‘market impact’ others can spot.
These managers say there are already measures the funds can take, such as not executing the whole order within a single window.
“You are going to have impact whether it’s a 20-minute window or a five-minute window. There’s a cost to trading,” said Mike Eyre, Global Head of FX trading at asset management giant Vanguard. “There are some orders where the best outcome is to take more time, to do the order over multiple days.”
Refinitiv will publish a white paper this month asking for more feedback on a list of possible improvements, Barrow said.
“Our focus is on getting that optimal, the size of the window versus still having our objective of a price at a specific point in time,” she said.
The fix has become more important in recent years, with more currency trading coalescing around it, possibly as equity market turnover is concentrated towards the end of the trading day.
Some rivals have sought to capitalise on concerns and in April a benchmark called Siren was launched by Raidne, a company which provides analytics and trade surveillance.
This is calculated using an algorithm over a 20-minute window. Raidne says it will save users execution costs compared with “the legacy 4 p.m. fix”, claiming the longer window and its algorithm can limit the adverse impact on prices that users get when they transact big orders.
Unlike stocks, currencies are traded across dozens of platforms, making the market highly fragmented. Hedge funds and high-frequency traders deploying so-called algos are particularly active on platforms that feed into WM/R.
Barrow said WM/R offered a series of regulated benchmarks that fix at different times, adding that investors who use the 4 p.m. window and are worried should “consider other times”.