Fragmentation and liquidity in FX - is it worth upsetting the balance? >>>
forcing the market to introduce new sources of liquidity will not necessarily be beneficial and may, in fact, bring about more fragmentation and lead to the opposite effect to the aims of the regulators.
Piecing together the picture Estimated proportion of volume executed using algorithms
for best execution and so forth) have differentiated importance and balance for different market-users.
Beyond these, different trading parties have many other demands, from API feeds to knowledge of who else uses a platform so that one can interpret the pricing better or calibrate a strategy according to the ability to transact odd sized trades. Satisfying the need for tailored services while maintaining sufficient liquidity on each platform is the challenge the market has largely met. Te consequences on liquidity from
Te FX market is a large and fragmented market, with many participants for whom to cater. Te regulatory changes and advances in technology further complicate the market. Each significant type of participant has a particular set of needs, some which need thought and possibly evolution in order to
move forward successfully in an evolving environment.
Sell-sides Sell-sides need the ability to be able to make prices across a range of channels in order to access their clients, who have different requirements and preferences when it comes to executing their foreign exchange business. In order to manage this, banks need to focus on understanding the different venues’ and clients’ flows’ characteristics and price them accordingly. Consequently, they also require the facility to manage the risk acquired through these multiple venues back to their trading book. In turn, the risk can be laid off (or off-setting flow sought) through numerous channels.
In order to provide a service that both satisfies clients’ needs and is profitable, it is time for a review of cross- asset margining. In order to be most effective, detailed analysis of what works best for a particular style of trading is crucial – balancing your need for reliability of fill against price is only possible once you have looked at costs, fill probabilities, activity, ticker on different venues and bi-lateral platforms and use them to make choices on where and how to approach trading.
Buy-sides David Poole
“Te contrast between algorithmic trading using a selection of API feeds and calling up a salesperson who shouts across the floor to a trader for a price is huge and far bigger than the historic e-/manual divide.”
Te issue for buy-sides in accessing market liquidity surrounds the trade-off between liquidity and service- led pricing. Tey need to consider the benefits accrued from aggregation processes and a highly liquid market, but additional responsibility for handling complex trades and processing, compared to outsourcing the risk and more complicated processing to a sell-side and be willing to pay for it. In short, buy-sides must
october 2011 e-FOREX | 27
Growth of algorithmic execution (source: ClientKnowledge)
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