Category Archives: Liquidity

FX markets are experiencing a paradigm shift and many are hurting. Don’t be afraid. What you are experiencing are growing pains.

Precursor:

Reading industry-related headlines over the last eight months or so must have been scary. Volumes dipped to historic lows towards the end of last year and some major players including many market making banks and large ECNs have been experiencing internal reorganizations with the associated departure of high-profile executives. Let me state for the record that this is not an attempt to judge anyone as they are going through tough times. This is an attempt to put what is happening into perspective and provide FX market participants with a better understanding of what we are experiencing. Where many see only gloom and doom, I also see a story about opportunity and growth.

One-size-fits-all era is coming to an end

In a recent commentary on personnel changes at EBS, Colin Lambert, Profit & Loss (restricted access), puts the finger for the firm’s difficulties at “increasing competitive pressure” and suggest among other things that EBS is “feeling the squeeze from internalisation and more granular streaming from banks”.  I don’t want to make light of what this may mean for individuals affected by these restructurings, but for the industry as a whole, these changes are a positive sign. They prove that FX markets are maturing, that competition is increasing and that the one-size-fits-all area in FX is coming to an end. The future will see a much larger number of different business models, liquidity sources, risk management approaches, FX exchanges, all co-existing in an even larger market than FX is today.

Continue reading FX markets are experiencing a paradigm shift and many are hurting. Don’t be afraid. What you are experiencing are growing pains.

Aggregation works at any rate (no, really!)

When trading in larger sizes, liquidity takers have come to understand that FX aggregation services have a profound positive impact on the quality of the execution they see. They know the risks involved and want to be sure that they are getting the best deal possible. An FX aggregation and Execution Management System (EMS) understands how to aggregate different streams from liquidity providers who each may have imposed their own trading rules, and still ensures that you’ll get what you clicked on. To that end, an FX aggregator is a trader’s best friend in ensuring competitive bids. It virtually guarantees (pun intended) tight spreads on the top of the book, full fill in the market with little slippage, and even possible price improvements.

While a majority of traders intuitively understand its value when trading $20m,$50m or more, they are sometimes ignore its advantages when trading $500k, $2.5m or $5m. That might be because with large trades, the monetary value often is self-evident vs. with smaller trades, the value is strategic and harder to quantify.

Short-term gain but long-term pain
Long term trading strategy, not short term cost concerns, should be driving your trading system choices. Here is why you shouldn’t trade smaller amounts on a single-bank system, even if it offers tighter rates.

Continue reading Aggregation works at any rate (no, really!)

Why Single-bank Systems Are Losing Ground

As the operator of FX Grid, a global inter-institutional connectivity and trading network, linking market making banks to FX market participants, we are getting good visibility in how other systems are performing. During the hectic days in May that put strains on everybody’s systems, we know for instance who had outages. (Integral did fine by the way. Read more in our press release and in an earlier blog post.) Single-bank systems were among the ones that suffered the most severe outages. I see this as a clear indicator that their decline is ongoing, despite some marketing hype.

Greenwich Associates already reported in April 2008 that “single-bank systems are failing to keep pace with the growth of multi-dealer platforms.” (E-Forex Comes of Age, Greenwich Associates, e-Forex Magazine, April 2008). In analyzing the results of its 2010 FX survey, Euromoney magazine made several observations that substantiate this claim. Euromoney writes: “The top three banks in the survey accounted for 40.44% of the total market in 2010, compared to 45.99% in 2009.”While Euromoney doesn’t say to where the market shifted, the fact that it continues to move away from the largest financial institutions suggests that single-bank systems are still losing market share. In my opinion, multi-dealer systems have clear advantages and the market seems to agree. Here are the four key arguments that proof my point. Continue reading Why Single-bank Systems Are Losing Ground