Matchbook FX

Founded in 1999, Matchbook FX (sometimes referenced as "MatchbookFX", "MatchBook FX" or "Match-Book FX") was the world's first[1][2] open and inclusive internet ECN for Foreign Exchange trading,[3] available to all willing FX trading participants including hedge funds, CTAs, banks, corporations and, uniquely at the time, retail FX traders as well.[4]

Matchbook FX was initially conceived by Daniel Uslander, Ron Comerchero (commodity futures and equities traders) and Josh Levy (former Goldman Sachs FX trader) of the New York-based proprietary FX trading firm Valhalla Forex Inc, as well as Mark S Smith of the Florida-based equities-trading technology firm NexTrade ECN. Several months later, GlobalNetFinancial.com, a NASDAQ-traded financial news and technology firm, bought in as the third major equity partner in the three-way joint venture.[5]

As one of the earliest providers of open-access FX e-trading,[6] Matchbook FX received considerable acclaim for its efforts to instigate change and level the playing field in the insular, closed, clubby, and highly profitable domain of interbank Forex dealing, likely to the chagrin of the major international money center banks.[7]

Matchbook FX was recognized in 2000 as one of Silicon Alley Reporter Magazine's "12 to Watch", its annual listing featuring top internet companies.[8]

Prior to Matchbook FX, most FX trading was transacted mainly by phone or amongst large banks (such as Chase, Goldman Sachs, UBS, Deutsche Bank, or Citibank) in the "interbank market"[9] or by phone between large banks and their multinational corporate clients (such as IBM, Intel, Coca-Cola, etc.) or institutional clients (such as hedge funds, pensions, mutual funds, and other asset managers).[10][11][12]

Despite on-line FX "e-trading" being rare at the time,[6] Matchbook FX's ECN approach was considered unique by market participants because of its stated aims to democratize the Foreign Exchange market[13] by empowering all "Buy side" FX participants (including retail traders and institutions) to be, for the first time, Market Makers or Price Makers, instead of only Price Takers.[14][15]

Matchbook FX functioned as an open limit order-book, also known as a Central Limit Order Book or CLOB – similar to an online exchange – where any participant subscribed to the network could either post its own bids and offers just like a market maker, or immediately trade on any other existing bids and offers for a given currency. This process allowed users to join or better the prevailing prices in the network and thus directly impact (and tighten) the bid–ask spread widths on which they traded. As such, Matchbook FX was considered to be one of the main catalysts that presaged rapid technological advances,[16] sharp compressions in bid/ask spreads, and other sweeping changes into the currency market.[17][18]

Matchbook FX was also unique in that, in addition to its own user-generated bids and offers, it was the first ever e-FX trading platform to feature dynamic fully automated, executable streaming currency prices (as opposed to Request for Quotation "RFQ" driven prices) contributed directly from a major FX bank (rumored to have been Deutsche Bank).[19] Though such a configuration is now commonplace, it was widely considered by those in the industry to be a technological innovation in 1999.[16]

One of the most important factors that set MatchbookFX apart, however, was its 100% pass-through, "agency" brokerage model, as opposed to the 'market-maker/principal,' or 'counterparty' model which was far more common at that time, and is still.[20][21] Market-making/principal FX brokers typically assume the opposite position & risk from their clients' trades, which causes an immediate conflict-of-interest; The brokerage gains when the clients lose. These types of FX brokers are sometimes referred to as "bucket-shops"[22] because most customer trades are not immediately offset, but simply accumulated in the broker's 'bucket' and are managed, either actively or passively, at a later time.[23][24] As an ECN, MatchbookFX never carried market-risk or managed FX positions[20] and thus was never subject to conflicts-of-interest with its users.[20]

Matchbook FX also innovated on the US FX regulatory front, by being the first major US-based FX dealer to voluntarily subject itself to NFA (National Futures Association) regulations,[25] prior even to the Commodity Futures Modernization Act of 2000.[6]

At the time of Matchbook FX's launch, a handful of other retail-focused online FX dealers existed, none of which were NFA regulated, notably CMC Markets, GFT Forex and MG Forex but these firms served as Principals/Market-Makers, where clients could only trade on the prices they were quoted, at bid/ask spreads they could not control.[26][15][17]

The implosion of the dot-com bubble in 2000 severely hindered Matchbook FX's ability to raise continued operating funds. The stock price of GlobalNetFinancial.com (NASDAQ: GLBN), Matchbook FX's main financial backer, fell from a high of over $70 per share in 2000 to less than $1 per share by the end of 2001. By 2002, Matchbook FX was sold to a consortium of investors who made the decision to discontinue the Matchbook FX brand.[27]

Following Matchbook FX, many technology-driven FX trading operations soon emerged including Currenex, Atriax (now defunct), FXall, Hotspot FX (a Matchbook FX carbon-copy ECN), as well as FXCM, Gain Capital and Saxo Bank which together with CMC Markets ushered in an explosive new era of online retail FX trading.[28][11]