FEATURE
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to be and we are seeing them coming back into the light. I still think there is a place for dark pools and I think they are here to stay. But we are definitely seeing a greater appetite for transparent liquidity. We are able to tell our clients that we are aggregating single banks at a price they can execute on. We are not aggregating the aggregators, where the liquidity on display may be part of mirage. I don’t think anyone would deny that banks give different prices to different people, but in the whole debate over the need to be anonymous to avoid unfavourable pricing, the baby was thrown out with the bathwater. Now we are seeing that there are still some firms that favour anonymity because it is fundamental to their trading and business strategies. Essentially, they are trading firms rather than firms that also trade. But there are many others that have no demand at all for anonymity.”
Now, an educated market participant will be able to choose the solution that best suits them because all types of solutions are available. And by adding an expansive data service to the aggregation solution, Heidingsfeld believes that aggregation services can truly remain a trader’s best friend. “Information is the key to any industry and, in this context, the information is beneficial to both parties involved in the trade and is not harmful to either.”
Relationship-based trading
Tere are two broad trends in the aggregation game according to Richard Tibbetts, chief technology officer at StreamBase Systems, a complex event processing technology provider. Te first is a renewed focus on the importance of relationships, especially among the sell-side firms building aggregation platforms who are looking to develop customized connections to their distributing banks. “Tey want to aggregate a number of banks they connect to and how they connect to them. Price is still the major component but the relationship is also important.”
Te relationship aspect is that the routing decision may not be based on price. It may be based on who is providing the most flow, says Tibbetts. “We are automating that intelligence and building it into the cycle. It is something you have to be dedicated to constantly improving. Tere is a constant stream of changes. We will roll out a new system but have to check daily that the rules are right – the exposure to that firm; the daily volume supplied to that firm; TCA; specific currency pairs; percentage of order fills. Te question is whether, over the course of the
34 | october 2011 e-FOREX Richard Tibbetts
“Tose firms that are not aware of aggregation will probably see the quality of their execution erode.”
day, the counterparty is doing right by me so we have to look at the long-term and the short-term metrics simultaneously.”
Dealers used to have a simplistic model for assessing their clients based on gold, silver and bronze, but now it is increasingly complex and more attuned to individual firms, says Tibbetts. “Market makers will give more competitive prices to those firms that are keeping them honest by using aggregation technology.”
Te other broad trend is that there are trading firms using multiple ECNs, says Tibbetts. “Te question for them is how to ensure best execution from these ECNs. Can I predict liquidity? How do I ensure that the prices I’m seeing are real? How do I distribute my liquidity across multiple ECNs? Tis involves accumulating large amounts of pricing data and subjecting it to quantitative analysis.”
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