Taking a more holistic approach to the business of FX Liquidity Management >>>
employs complex event processing (CEP) technology to assign a weighting factor to particular liquidity providers, in particular currency pairs in addition to the price of any sourced liquidity, to decide which liquidity provider to execute against. While this may work in theory, we are yet to see a fertile market for such an approach, however there are a rising number of application developers providing exactly this mix of qualitative and quantitative information.
“We are primarily focused on liquidity redistributors that deal with 18 or 19 of the top banks and then feed that liquidity down to their clients,” says Yaacov Heidingsfeld, founder and chief executive of TraderTools. “We gather and provide a wealth of statistics to both the providers and the distributors that tells them who were the most successful trading partners over the course of a month in both specific currency pairs and in all currency pairs – i.e., who offered the best price and who was able to fill the highest percentage of both orders. By using this
information and this technology, both liquidity providers and liquidity redistributors are able to monitor and improve their relationships.”
Te developments in technology has forced banks, to some degree, to deal with non-traditional participants such as high-frequency hedge funds and multi-asset traders who are able to place electronic orders through ECNs and compete with the traditional FX banks for business. Te new participants are using CEP engines to enter the market and while they do not have the long-established relationships with liquidity takers that the major FX banks have, they are able to offer highly competitive pricing in an increasingly transparent world. And they are being included in the aggregation engines of the liquidity providers.
Two consequences of the increasing number of non- traditional FX participants are an increased focus on technology and greater adoption of the kind of trading tools that have been more commonly used in the equities market, for example. “Te technology is constantly pushing the industry to new speed limits. It is not so much a question of latency but if you are using algorithms, the faster you can generate orders, the more successful you will be, ” says Heidingsfeld.
New trading models Yaacov Heidingsfeld
“Te liquidity mirage applies to any institution that does not understand that when they make the same price available on multiple venues they are creating the potential to be traded against in a much larger way than originally intended.”
One of the biggest changes in the FX marketplace that has resulted from the increased use of algorithms, is the fact that not all participants are posting two-way prices, says Heidingsfeld. A lot of the new algo-driven trading models are creating orders that are either buy or sell, but not both, and posting them on multi-party anonymous platforms. Tis is a fundamental change from the traditional trading model where banks post bid and offer prices – a change that has sparked a debate between the traditional and non-traditional participants in the FX market, says Heidingsfeld. He goes on, “Te traditional players think that all participants should be forced to issue two-way prices and the non-traditional players disagree, arguing that just because this is the way things have always been done, does not make it right. Tey argue that they are providing extra liquidity, even if it is one-way, thereby satisfying market demand. If that were not the case, there would not be anyone executing against their offers.”
But from a technology perspective, liquidity management systems have to cater to both models and this is where there can be a knock-on effect in
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