Posted: April 12th, 2010 | Author: Harpal | Filed under: DMA, No Dealing Desk, Risk Management, Uncategorized | 1 Comment »
How inventory got its bad rap
Traditionally, enterprises viewed inventory as a way for a company to store value, and as a safety feature to ride out market fluctuations. It was perceived to be a good thing. That view has changed dramatically with the advent of information technology that made just-in-time (JIT) delivery possible. As I will explain, reducing inventory also reduces market risk. In FX, just-in-time delivery of currency rates holds the promise for FX brokers to eliminate a major headache that has been a source of major risk taking in the past: Internalization of deal flow. I think JIT will fundamentally improve the risk structure of a broker. Given the reduced risk, brokers will begin to divert their energy to marketing and sales with the eventual goal to lower their prices to the optimal level to maximize market share and overall profits, not marginal profitability.
Why holding inventory equals holding market risk
The simple truth is that inventory is costing you money in more ways than one. Obviously, it is tying up capital because there are costs associated with you acquiring products and holding them. It might be less intuitive that you also just bought yourself market risk, i.e. you are now on the hook for your product to sell as predicted. If it doesn’t, you will have to discount it later just to get rid of it. Because companies know all this, their initial go-to-market price needs to be higher to account for said risk, in addition to covering costs and a profit margin. Read More »
Posted: February 5th, 2010 | Author: Harpal | Filed under: DMA | No Comments »
About five years ago, we took the concept of direct market access (DMA) from the world of equities and introduced it to the world of FX. We did so because we had witnessed its benefits of neutral execution in equity markets and knew it would be advantageous to FX market participants as well. As we had predicted, DMA quickly enjoyed wide market acceptance, in part because it has something to offer for everyone. Integral hasn’t stopped innovating, however. While others still view DMA as just a better technology to achieve connectivity, Integral views it as a philosophy to organize today’s market into one that has less friction, more transparency and lower barrier to entry.
Not all DMAs are created equal
The (wrong) mental model of most DMA providers today is using technology to deliver a connectivity network between buy-side participants, market makers and other liquidity venues. I call this process, providing DMA services at level zero.
Integral has arrived at a much broader understanding of DMA, one that goes far beyond the connectivity level. Our model is a combination of functionality that resides partly in FX Grid®, Integral’s multi-sided trading network, and partly with on demand services that run on top of it. On the level of FX Grid, we added multiple price discovery aggregation mechanisms, credit line management, netting, straight-through-processing for pre and post trade processes, verification of execution with QOS, and most importantly, monitoring services for connectivity and rejection rates. A set of user-controlled algorithms for blending, splitting and spreading liquidity for internal and external users rounds up the service. Read More »