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.
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.
The non-bank liquidity providers include smaller market makers that can help to tighten up spreads but which are not always there on both sides of the market or 24 hours a day, said John Stead, pre-sales manager for smartTrade. These firms make markets based on their underlying algos, and their pricing will often be focused around the major G10 currencies; it can be heavily skewed at times and varies in depth throughout the day, he said. Such firms include companies like Virtu Financial and Lucid Markets.
Liquidity FX is geared toward smaller regional banks, retail brokers and buyside firms that don’t have the resources to develop and maintain such a solution, Sarasini said.
The firm charges a flat license fee for the service that is not based on volume, she said. SmartTrade also does not charge liquidity providers a fee, and the firm provides a best-execution report so clients can see how their order was filled, Sarasini said.
Smart order routing can be based on best price, prioritized by liquidity provider or fill rate and other factors, such as how long it takes a liquidity provider to reply, Stead said. “It’s about being more intelligent with whom you send your business to,” he said.
Clients can host the platform in Equinix data centers in London, Tokyo and New York, where most of the liquidity providers’ systems are based, and the router makes execution decisions based on that information, Stead said. “Locating in the data center and having it done automatically is essential for people,” he said. “It means you have less chance of rejection.”
FX TRANSACTION COSTS
Another hosted currency trading system called InvestorFX was rolled out by Palo Alto, Calif.-based Integral earlier this year. The system enables firms to access their current liquidity providers as well as other sources of liquidity, and view the real-time prices in a custom book, said Vikas Srivastava, managing director of business development.
Srivastava began his career on the buyside, rising to become the head of currency trading and risk management at Barclays Global Investors (now a part of BlackRock). He was later responsible for FX e-commerce at Citibank.
Integral offers a connectivity network linked to various entities, including brokers, banks, investment management firms, hedge funds and corporates, and provides tools to help clients decide where in that network they want to trade.
The network is combined with Integral’s execution management system, which allows customers to see which players are available to trade with and to customize how they want to interact with those potential counterparties.
One of the benefits of InvestorFX is that the system “takes the whole portfolio and maximizes the netting so less gets traded in the market,” Srivastava said. “If you are a multi-bank platform but you are owned by the people who benefit from that flow, there’s a conflict of interest there.”
Pricing is based on volume, and it’s pay as you go for both liquidity takers and makers, he said. “We only get paid if our clients use our system to trade,” he said. InvestorFX is hosted in a data center in the New York area, he said, declining to elaborate.
Srivastava said that many funds’ portfolios have evolved to the point where FX transaction costs are more of an issue. “Twenty years ago, most pension funds had a very small investment internationally; it didn’t really matter as much to the entire portfolio,” he said. “But as currency risk in the portfolio became bigger, the transaction costs incurred by trading had a much larger impact on the portfolio.”
‘GOOD VALUE PROPOSITION’
Most large sellside firms have built aggregation technology for spot FX, but they don’t necessarily make it available to their customers for fear that the banks may lose part of their clients’ order flow, Tai said. But there are two exceptions. Credit Suisse was out in front about five years ago with the introduction of its Advanced Execution Services FX.
The tool enables traders to work orders on multiple liquidity pools, increase productivity by automating trading and improve execution performance with a variety of algorithms, according to the company.
And earlier this year, Barclays came out with a similar offering: BARX Gator. Built for its spot traders, BARX Gator is a smart order router that also simplifies complex work flows by converting all fills into one spot ticket. More than 170 currency pairs are available.
BARX Gator is also integrated with BARX FX, Barclays’ FX platform, providing backstop liquidity for partial fills. BARX Gator works alongside BARX FX to give clients the choice of when to pass execution risk onto Barclays and when to take on more themselves.
For BARX Gator, a service fee is added onto the aggregated price of each executed order and is transparently displayed to the user. Counterparties on external markets only see the Barclays name.
The move makes sense for banks, because they are beginning to understand that if the buyside doesn’t get the tools from them, they’ll go somewhere else, said Tai.
(c) 2013 Traders Magazine and SourceMedia, Inc. All Rights Reserved.
http://www.tradersmagazine.com http://www.sourcemedia.com
