The Big Flaw In Peer To Peer FX Trading Nobody Noticed

Peer-To-Peer spot FX trading is a simple idea. Directly connect an offsetting buyer and seller without using market makers, reducing execution costs and signalling in the market at the same time.

It’s genius right? So why, despite several attempts, has such an attractive concept never taken off?

The clue is in the name.

Peer-To-Peer, by its very name, disintermediates one of the most important stakeholder groups in the market: the banks.

But if the world’s largest market began making deals without the risk carried by the banks it could – and probably would – have apocalyptic consequences.

If we leave aside the basic yet critical components like legal documentation and compliance it’s worth reflecting on the dynamics of the market.

The market needs participants to hold risk, otherwise asset managers would quickly find themselves without a functioning market at all. If a currency was being heavily traded and banks were no longer market-making or holding an inventory of certain currencies, asset managers’ trades would likely remain unfulfilled, and the market’s credibility would collapse.

If this multi-trillion-dollar global, digital market did start to find itself in real trouble created by a bank-free dystopia, the implications for the global economy would likely be entirely catastrophic.

Having spent considerable time and investment developing an innovative new offering with LoopFX, we are well placed to say, even if the technology could make seamless Peer-To-Peer possible for every single market participant, the FX market ecosystem must be respected and banks must remain positioned at the heart of it.

We spent a lot of time listening to banks on the significant challenges they face – they get a pretty tough time of it truth be told. As a result we have developed a novel matching technology that centralises Peer-To-Peer trading with bank axes. Our tripartite approach addresses the fundamental flaws of Peer-To-Peer and advances to a new model: Peer-To-Peer-To-Bank, where our approach fairly rewards banks for the important services they provide.

The consultation process wasn’t always easy with these giants of the financial ecosystem, but our collective experience and contacts meant we were able to garner feedback.

Broadly we heard, “No one has ever offered to pay for my liquidity before.” Exactly the response we were hoping for – we questioned almost every aspect of the status quo and we were very aware of inverting standard practice. And the most common response from banks was, “I can’t see why you wouldn’t do this.”

Anyone who imagines FX trading without fairly rewarding banks for their critical role in the FX ecosystem is deluding themselves. At LoopFX we are making best execution processes better than ever before, we’re making Peer-To-Peer matching as efficient and flexible as possible, and critically all of this happens with the banks at the heart of every trade.