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examine the order and reject it, pulling the liquidity out and leaving the trader with an unfilled order just as the market is moving. Real-time aggregation across multiple execution venues is one approach to addressing this fragmentation.
However not all sources of liquidity are equal. An FX business is keen to gain access to as much cheap liquidity as possible, but fill probability and quality of liquidity are also very important. For example, trading larger sizes on one venue may move the market across all venues. Some venues might be dominated with large numbers of liquidity providers who ‘last look’ trades, leaving traders offside or rejected. Many smaller firms do not have expensive Quant teams and time- series databases to analyse quality of execution. So they would need technology that can bundle best execution reporting statistics within their FX aggregator to fulfil this need.”
Peter Atkinson “Integrating an aggregation and smart order
routing engine with an internal matchbook will allow an FX business to maximise profitably and avoid the pitfalls of executing externally.”
may use graphical techniques for setting ‘trading levels’ or ‘path ways’ along which a human trader will follow in pursuit of an alpha strategy.”
“And visualisations are used extensively in off-line FX analysis. Many statistical approaches in data analysis lend themselves well to graphical techniques. For example smartTrade has adopted graphing techniques that display fill probabilities by executing venue, but again these are used off-line or for ‘after the event’ analysis,” says Atkinson.
Quality of liquidity
In addition to spotting data anomalies, visualisation is also being employed to display the quality of liquidity, but this is largely dependant on the ability of liquidity management toolsets to provide granular and intelligent analysis of the movements in FX liquidity. “Te FX market is very fragmented and can behave like a mirage at times so liquidity, although visible, may not necessarily be easy to take,” says Atkinson. “For example, the market might move away quickly when a trader is attempting to execute a large order. Some markets might have prices that require a ‘last look’ where the liquidity source may
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SmartTrade has made a considerable effort to bundle best execution reporting statistics within its FX Aggregator to fulfil this need. According to Atkinson, “A trader can drill down on a single order to see the state of the market at the point of execution. He can also take a higher level statistic view across a set of his orders, enabling him to look for patterns in fill probabilities by venue, by quote age, by order size, etc. With intelligent insight it is possible for an FX Business to rank the quality of available liquidity and adjust their execution strategies maximising fill ratios and reducing slippage.”
Best execution
Te ultimate goal for these liquidity management toolsets is to help firms achieve best execution by helping them to capture more efficient pricing opportunities from the FX flows that they see and are able to analyse intelligently. “Capturing liquidity is a complex business,” says Atkinson. “Te FX market moves very rapidly, so network latency can seriously hamper a best execution strategy. Te geographic location of the execution strategy also has an impact because long physical distances introduce unavoidable latency, which in a fast moving market may result in slippage. At the end of the day it’s all relative. Co- locating or proximity hosting close to the executing venues and utilising fibre cross-connects will reduce network latencies, especially under high market data volumes. Many firms find that they need to co-locate near execution venues in each major market if they’re trading globally.”
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