Using technology to better manage FX liquidity

5 February 2017  •  Author(s): Peter Garnham, Editor, FX-MM

Using technology to better manage FX liquidityFX-MM’s Peter Garnham examines how trading firms are leveraging the latest technology in order to manage liquidity and optimise their FX execution amid heightened regulatory scrutiny in an increasingly fragmented and dynamic market place.

The FX market has undergone a transformation over the last few years, with banks becoming more selective over their provision of liquidity and non-bank market makers leveraging technology to fill the void.

As Bryan Seegers, Director – Co-Head Global eFX Coverage, at ADS Securities, puts it, building relationships between clients and liquidity providers has never been more crucial.

“The days of paying for volume are long gone,” he says. “Banks now look at the value of each client, and if there is not profitability there, they are not going to service the business for volume in most cases.”

Of course, as Tod Van Name, Bloomberg Global Head of FX and Commodities Electronic Trading, observes, changes in balance sheet requirements have forced banks to examine the cost of participation across all financial markets.

“This, in addition to the Volker rule and the manipulation scandal has impacted risk appetite and in some cases reduced the amount of available [FX] liquidity,” he adds.

Van Name says investors can improve their execution success by utilising multi-dealer platforms that provide access to a wide range of liquidity providers.

Indeed, Chris Matsko, Head of FX Trading Services at Portware, says optimising access to FX liquidity is the name of the game these days in the FX market.

“First, trading desks need to be able to reasonably access historical trade details, for example post-trade transaction cost analysis (TCA), and then effectively and efficiently use those data points as drivers to what the next liquidity pool should look like given the risk characteristics of the next trade,” he says.

Matsko says the main factors investors should take into account when connecting to a trading venue are the liquidity available, platform flexibility and the quality of execution and automation tools on offer.

“If a trading venue can provide a highly integrated solution to streamline workflow and increase operational efficiencies across the trading desk, it’s a win for everybody,” he says.

Van Name concurs that the primary considerations investors should take into account are the breadth and depth of liquidity on offer at a trading venue, transaction cost, instrument coverage, and end-to-end workflow.

“Best execution is no longer just best price, but also access to a full range of services like netting, staging, pre- and post-trade allocations, reporting and straight-through-processing,” he adds.

The importance of reach

Seegers says with larger prime brokers being less willing to extend credit across multiple trading venues as they once were, some market participants have felt the pressure and now have to be much more selective when using a prime broker to access liquidity. This, he says, has caused investors to trade more bilaterally, thereby increasing the number of pockets of liquidity in the market and increasing the fragmentation of the market as a whole.

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