Welcome to 2025, and in the spirit of a happy new year, let’s start by giving someone a kicking! What is happening to fill rates in the FX market?

This has been raised to me by several traders in recent months, but is reinforced by public and private data from platforms – and what they are seeing is a decrease in fill rates, largely, I am told, via last look, but also because of an increasing number of quick price changes.

I understand that we have had a volatile few months, and this could, perhaps, be a reflection of that, but the conspiracy theorists amongst my contacts have another reason – new LPs to the market. There has been a fair bit of noise around a couple of major non-bank LPs entering the FX space in the last six-to-nine months, seeking to replicate their success in equity and futures markets in OTC FX, but I wonder if all they have done is slightly worsened the ecosystem? It’s either that or an existing major LP has recalibrated its systems and I have yet to hear any suggestion of that.

One factor that makes me think the cause is not volatility is the timing of small changes in the ecosystem. I was first alerted to this in May by a friend who shared with me details from a platform that does not publish reject or fill rates, but does, naturally, provide it to their clients. This indicated an increase in reject rates – from a trade volume perspective – of around 3% from the start of 2024.

This prompted me to look at the data from those platforms who do the right thing and publish these datapoints and while at first there didn’t seem much to it, as the year prgoressed a similar pattern emerged. As an example, the fill rate on Euronext FX’ skew safe streams started the year in the 82-84% range, but in June it dropped to 80.6%. It recovered in July (when things were quite lively in markets), before dropping to around 80% for the rest of the year (it was 81.4% in November).

The firm’s platform fill rate was largely around the 81-83% range until July 2024, when it fell sharply to 78.3%, and then again in August to 72.8%, before finishing the year in the 73-75.3% range. Even Euronext’s Full Amount streams saw a dip, from just under 95% to between 93 and 93.9%.

The situation is not as obvious at Cboe FX, but even here, there was a drop off, from over a year sitting in the 89-91% range, in August it dropped to 88%, went to 87% in the following two months, before ending the year at 88% and 89% for November and December respectively.

My friend tells me the situation on the other platform has not improved (nor has it worsened), therefore, we have at least three platforms with data indicating a fall in fill rates. Given this comes at a time when we have seen an increase in volatility and new LPs enter the market – are they linked? It is hard to see how they can’t be, and, again, given the timing, it is not clear it is linked to volatility. Liquidity consumers I have spoken to say that there have been periods during which it has been harder to access liquidity, but generally they have been short and the market has recovered quickly. This tells me the LPs have dealt with the situation well, but either someone has changed their style, or new LPs – about whom we have heard a lot regarding grabbing market share – are having an influence in certain areas.

One quant analyst I spoke with on the buy side suggested their models indicated the increased volatility should have led to a drop in fill rates of around 0.5-0.7%. I don’t know the maths behind it, (and probably couldn’t understand it if I did!) but it sounds reasonable, which means that on certain venues, the drop off has been steeper. The analyst said that fill rates on “more than three platforms” had worsened over the year, but that things were stable on disclosed or bilateral streams.

Any platform now basking in volume growth and higher reject rates might want to tread carefully

One swallow does not make a summer, but perhaps the rebound we saw in December is a good sign and things are “normalising”. It is to be hoped it does, because otherwise we clearly have parties raising the ante when it comes to the use of last look, and that ends up in one place – a poorer liquidity ecosystem. And if anyone is thinking that is OK, perhaps it is, these are, after all, different times, but for those who like their history, this could have echoes of 2007-2013 and EBS, which boomed as new market makers entered the business, bringing with them higher reject rates and information leakage.

The complaints about the trading environment on EBS around that time were very public and loud, leading to other venues getting the rest of their torso through the door after spending the best part of a decade with a foot holding it open. Equally, a number of attractive (to the LPs) liquidity consumers learned that top-of-book was not always equated with best execution.

EBS over the years dealt with the problem, but thanks to internalisation it, and its peers, are not going to get back to those days of $150-200 billion monthly ADV – the decline was inevitable, but was it given impetus by the decline in the trading environment? It is hard to answer that definitively, but I would suggest the balance of probabilities is that it was, which means any platform now basking in volume growth and higher reject rates might want to tread carefully.

We cannot predict the future, but what we can say is that competition in the FX platform world is unlikely to diminish, which means it is no time for a platform to risk its trading environment becoming even slightly toxic. Talking to people on the consumer side, they remain comfortable with their choice of venues, but are increasingly alert to signs of deterioration, which does at least highlight their growing understanding of the nuances of FX execution.

Spot volumes on the platforms are up across the board for 2024, which is good news, and I am comfortable that some platforms at least, will ensure that the trading environment remains a positive one. But while things are going strong, it would be wise not to take their eye off the bigger picture, and to ensure that any new LPs to the venue are actually improving the environment rather than polluting it.

colin@thefullfx.com