CME Group’s new tool offers unique insight into the FX market. The FX Market Profile tool combines data from CME FX futures contracts with data from the EBS spot FX market to give market participants a powerful view on the intra-day structure of the FX market. It provides data that market professionals can use to hone their trading strategies and ensure they are taking full advantage of the range of liquidity available to them.
The FX Market Profile tool provides side-by-side data on bid-ask spread and top-of-book size for both the EBS cash and CME futures markets. Both liquidity pools show firm, immediately executable pricing that is accessible to all participants. This in turn enables a comparative analysis of the two markets and allows traders to assess the appropriate course of action of a particular transaction or trading strategy.
This use case looks at two major currency pairs, demonstrating some important takeaways:
Looking first at the USD/JPY analytics, and taking the default view for October 2020, this shows market data between the hours of 00:00 and 20:00 GMT.
The first chart in the view – the Traded Volume and TOB Spread Graph – carries a lot of information. The bar charts show the trade volume distribution for the three platforms, i.e. CME futures, EBS Market and EBS Direct. Whilst the markets are active throughout the day, it can be seen that futures are relatively more active during US trading hours, and EBS Direct is relatively more active during Asian trading hours.
The lines in this chart highlight an important feature of these markets. These lines show the average top-of-book spread in CME futures and EBS Market. Japanese yen futures – the white line – can be seen to have a very tight spread, typically between 0.6 and 0.7 pips. Yen futures are quoted in the inverse, i.e. JPY/USD. A spread of 0.6 pips in USD/JPY is just slightly in excess of the minimum price increment in futures of 0.0000005 USD per JPY. The purple line shows the EBS top-of-book spread. This is consistently below 1 pip throughout the trading day.
The blue line also gives some color to the market profile. This shows the volume weighted average price (“VWAP”) spread, which is the spread observed in futures where the total size quoted equates to the top-of-book size on EBS. A typical level for this in October is 1.25 pips. Or approximately 2¼ futures ticks. Scrolling down the page to the fourth chart – the Average TOB Volume Graph – provides an explanation as to how the blue line is derived. This chart shows the top-of-book size displayed in futures and EBS cash. In futures, the average size is between $2.0 and $2.5 million, whereas on EBS the top-of-book size is double this all day long. So, the blue line in the first chart shows the average spread in futures in the orderbook for a size of around $4.5 million.
Combining this information suggests potential trading tactics. Both markets – cash and futures – demonstrate strong liquidity in yen throughout the day. However, if you are able to trade in both markets, the data shows the value of this optionality. For smaller size tickets – up to $2 million – the futures market offers the tightest pricing. For larger clips, EBS Market might provide the more cost-efficient solution.
Of course, trading isn’t as straightforward as that. With the ability to work orders in each of the orderbooks, and block trading at privately negotiated prices available in futures, price or size isn’t limited to what is visible on the screen. The information in the tool is indicative of the relative liquidity of each market.
Returning to the two charts in the middle of the page – the TOB Spread Percentile Plots – whilst these are perhaps more prosaic, they also carry relevant information, particularly when taken together. These charts show details on the distribution of the top-of-book spread. For both markets, these charts show that the spread is very stable throughout the day. On EBS Market, the spread is typically 1 pip, but frequently comes in tighter to 0.5 pips. For futures, the spread is fairly consistently under 0.6 pips. This shows there are times when EBS pricing is tighter than futures.
Turning to the EUR/USD data, which is the most active market on both platforms. Again, the traded volume distribution shows EBS Direct having relatively high volumes in Asian hours. In this case, both EBS Market and CME futures have relatively higher activity during US trading hours, with little surprise that the European afternoon/US morning hours are the most active time.
Futures again have the tightest top-of-book spread at approximately 0.6 pips, whilst EBS Market is usually between 0.9 and 1.0 pips on average.
As with USD/JPY, the futures VWAP spread is wider than EBS. There is some variability, but on average, the futures VWAP spread in 0.2 pips wider. The top-of-book size chart again shows where this difference arises. Futures top-of-book size is between $2.0 and $2.5 million, whereas the EBS Market top-of-book size is consistently over $4.0 million.
The spread distribution charts also show great consistency throughout the day, with the EBS Market median spread being 1.0 pip, with a tendency to be tighter in the middle of the US trading day. Futures are typically 0.5 pips wide ‒ although they tend to widen slightly during the European morning hours.
Let’s compare the information provided by the FX Market Profile tool for both the USD/JPY and EUR/USD markets.
In each case, the data shows that the futures market exhibits the tightest top-of-book pricing. However, there is more size quoted at the top-of-book on EBS Market. For a single large-size clip, EBS seems to offer the most effective solution in terms of bid-ask spread. However, working orders through the orderbook in both futures and cash, breaking orders into multiple clips, and using blocks to obtain a single price for ‘large’ FX futures orders can all be used to improve outcomes.
The data shows that top-of-book pricing is very tight all through the day, but also suggests that there are times when slightly tighter spreads can be observed and acted on, particularly with EBS Market.
The tool also hints at the resilience offered by these markets. Substantial volumes are traded through these markets every day. For example, on average, nearly $25 billion was traded in EUR/USD futures each day in October 2020, with over $40 million per minute being traded during the most active hours. Despite this, the top-of-book spread distributions are very stable and very tight, showing that the replenishment rate for these orderbooks is robust.
This use case has looked at just a fraction of the data available in the FX Market Profile tool. Data is available with five-minute granularity and date ranges can be chosen flexibly, enabling detailed analysis of FX markets. The tool includes data on 11 currency pairs and not all the currency pairs show the same results as USD/JPY and EUR/USD. The data reviewed was a snapshot over the month of October 2020. With the continued development of both platforms, further trends will emerge.
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