Why Balance is Best For FX Liquidity Sourcing

By Vikas Srivastava, Chief Revenue Officer, Integral 

Balance has long been considered an important part of a happy and healthy existence. Work-life balance, a balanced diet, and a balanced exercise routine are sure fire ways to achieving a productive life. It appears to be increasingly true for FX trading and distribution, as recent Coalition Greenwich research highlights FICC traders are increasingly looking at direct trading solutions. 

After years in which multi dealer platforms (MDPs) dominated as the primary electronic FX distribution channel to clients, there appears to be a move by the buy-side towards greater adoption of API trading and SDPs, alongside existing MDP usage, as part of a balanced approach to automating the workflows and achieving best execution. Best execution in a sustainable fashion requires minimizing both the direct and indirect costs of execution. This often means balancing getting the best price for a trade with need to minimize market impact and information leakage.

As stated in Integral’s recent FX trading technology survey, 33% of respondents expect big growth in API usage in the coming 12-months. While fewer respondents thought single dealer platforms (SDPs) would grow in importance over the next year, the FX turnover survey from April 2020 found that SDPs had seen more volumes than MDPs in the preceding year. At the same time, 46% expect to see more growth for MDPs over the next year. More than anything this highlights that the industry does not expect one trading method to dominate. 

One cannot ignore the benefits of trading in an MDP setting, which includes giving customers greater choice in a competitive environment, trading style optionality, and of course, ease of proving best execution. But there are undeniable benefits to utilising a range of distribution channels.

With the volatility of the last 15 months, the buy-side has learned the immense value of maintaining bilateral and long-held relationships between counterparties. Two ways in which this has flourished is through direct bilateral connections, via SDPs and also by connecting directly to their LPs via API. While trading channel usage and trends can be cyclical, ultimately, the decision of where and how to trade should always come back to the user’s needs in each scenario and market environment – which are changing all the time.

With these different styles of trading now at your fingertips, it’s important to remember why variation and balance has never been more achievable than right now. As the market structure has developed, it is cloud computing that has enabled flexibility and cost-effective adoption of a variety of means of serving your customers. Seamless integration of systems into a market participant’s workflow and with a lower total cost of ownership has created the environment in which balance can be achieved. 

Despite the urgency of certain financial institutions to rush their employees back to the office, we can expect balance in another crucial area – working environment. As more choose to spend some or all their time working from home, the need for different styles of execution will remain and so will the need to easily adapt and integrate new technologies into daily trading and risk management.