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September 2, 2013

The Great Liquidity Search

Despite slow development, aggregation technology is now making greater strides toward helping investors achieve best execution

By Mary Schroeder and James Armstrong

According to a recent report by U.K. consultancy GreySpark Partners, the foreign exchange market is moving to an "all-to-all" model similar to the equities market whereby traders will be able to access disparate pools of liquidity in their search for best execution.

Rather than the hodge-podge of closed-end platforms that is the marketplace of today, a fully linked model will emerge in the future, GreySpark predicts. Getting there, however, may not be so easy. The problem is how to aggregate all the different pools of liquidity that have emerged over the years.

At the present time, "there is no consensus yet among different multi-dealer platforms on how to present the liquidity streaming on the platforms in a consistent manner, which creates a challenge for buyside firms seeking to aggregate their pricing across all relevant platforms," GreySpark reports.

Howard Tai, Aite Group

At least one observer agrees. Over the past year, several providers have introduced FX liquidity aggregation tools for the buyside, but "overall buyside adoption of aggregation technology is still early," said Howard Tai, senior analyst at Aite Group, an independent financial markets research and advisory firm.

"A lot of firms use multi-dealer platforms to trade FX and stay there," said Tai. "They don't want to take the next leap of faith to a true liquidity aggregation platform as a logical next step in the process."

Firms like Mellon Capital Management, which has built its own aggregating technology, are "the exception rather than the rule," Tai said. "Those firms are in front of the pack."

MCM connects to all of the single-dealer platforms in the market, streams their prices directly into an aggregator and has created its own mini exchange, said Lynn Challenger, managing director of global trading (for details see cover story). "So we can in real time trade at the top of the book and the price ends up being 10 times tighter than it would be if we went direct."

 

BUYSIDE TOOLS

Banks and vendors that have come to market in recent years with aggregation solutions for the buyside include Credit Suisse, Barclays, Integral and smartTrade Technologies. So have a number of multi-asset-class EMS platform providers like FlexTrade, Portware, TradingScreen and RealTick.

One vendor offering an FX aggregation solution is smartTrade Technologies, based in Aix-en-Provence, France, with additional offices in London, Paris, New York and Tokyo.

In 2012, the firm rolled out Liquidity FX, a hosted and fully managed service that provides connectivity to more than 40 venues, including banks, non-banks and ECNs.

The package also includes smart order routing, aggregation, pricing distribution, risk management and an OMS, said Annalisa Sarasini, global head of sales for smartTrade.