LEADER
of which price to execute from a range of API feeds, where the price change is measured in milliseconds.
Te same differences apply to the sell-side – there is a wide gap between the bank algorithm that makes prices and pushes them out to clients in the blink of an eye and the salesperson who has to shout to a trader who makes a price manually. Te time taken and margins paid and made are vastly different in both cases but the underlying processes are the same. Tese different methods lend themselves to being treated separately, by different providers or by different services from a single provider – hence the fragmentation of services we find in FX. Te tipping point comes when the liquidity is spread too thinly and execution ability is affected.
Justyn Trenner “One key effect of electronification is
that it has dramatically improved transparency – prices can be seen at the click of a button and consequently it is far easier to know whether the price you are being offered is reasonable.”
have successfully marketed themselves to become specialist providers to different users. For example, EBS attracts banks and high frequency hedge funds (although HFTs can only access the EBS market through an approved EBS Prime bank), FX Connect is successful with institutions and FXall is popular with both corporations and institutions.
Of the buy-sides that ClientKnowlege interviewed that use multi-dealer portals:
t >95% of FX Connect and >60% of FXall users are buy-side institutions
t >60% of Currenex users are corporations t >35% of 360T’s and Bloomberg (FXGo)’s users are banks
A fragmented market with separate providers emphasises and enhances the differences in behaviours between types of consumer. Tere is an enormous depth and range of methods of trading, from the person in a corporation who phones their bank to the algorithm at a hedge fund which makes the decision
26 | october 2011 e-FOREX
Te proportion of fully automated algorithmic trading (where a computer rule both determines the signal and executes the trade) is still small, as is execution of risk (where the signal is determined separately, often manually) by smart algorithms for order routing, but the algorithmic market is growing, and is already influential, even in its infancy. Te systematic trader (man or machine) is able to identify and punish bad pricing faster and more often than an unaided human trader, leaving less alpha on the table.
Irrespective of actual activity levels, algorithmic trading has a significant impact on the wider market, forcing other market participants to fight back – to adopt appropriate systems so they can price better, win the race to find alpha themselves and to implement the necessary risk techniques; similarly, venues and vendors need to develop processes to allow manual traders to compete on a more even basis, with rules and processes that compensate for human interaction.
Liquidity, liquidity, liquidity
Tere are some attributes that everyone in the market needs from a liquidity source, starting with deep liquidity and including reliability and accessibility. Tese terms have different implications for different types of trader. For example, liquidity for a corporation using FXall entails being confident that your banks are on the system but with EBS, it implies having a high degree of confidence that another party will cover you if you place a passive order. In other words, while, in simple terms, liquidity translates to certainty of fill when you want it, the wider considerations and conditions (the willingness to trade off certainty of fill for the possibility of a slightly improved price, or knowledge of counterparty so you can reward them
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