Category Archives: Risk Management

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!)

The New Meaning of ‘Mine’

Sometimes I get the question how Integral’s products and services fit into all the different FX solutions offered to banks and brokers today.  Let me clarify and explain how what we do is unique, but also uniquely apt to augment the solutions of others.

The largest FX network of its kind in the world…

For starters, Integral helps FX market participants by organizing and automating their FX business.  We provide what we do as a service that is delivered in the cloud.  That means our customers never have to worry about issues that come with buying a software package such as addressing installation problems, building adapters, ensuring connectivity, etc.  We take care of all of that for them. We also offer access to an FX network that we believe is the largest network of its kind in terms of scope of reach. By connecting once to Integral, you gain access to basically every kind of business that is involved in foreign exchange. Integral’s FX Grid is the place to connect with all the different entities (i.e. liquidity providers, prime brokers, banks, brokers, hedge funds, corporates) and venues that comprise today’s FX markets. Once on FX Grid, you’ll find every potential business partner, from retail and institutional brokers, prime brokers, buy-side and sell-side banks, to algorithmic trading firms — on a global scale.

… plays extremely well with others

Integral is a neutral technology provider, not a broker or a bank. This simple statement already gets us a long way to being an acceptable partner for many. However, unlike other technology providers that offer a stand-alone software package or framework to enhance the business fortunes of one customer at the time; from the beginning, we designed our system with the concept in mind of providing a utility-like service that has the potential to serve the entire FX industry.  Every customer benefits from not only our expertise, but also from the network effect that comes from having created a virtual business community. Whether you’re looking to expand your customer base, add to your list of liquidity providers and prime brokers, or want to do what you do more efficiently, FX Grid delivers.

The new meaning of mine

Unlike systems set up by competitors, where participants are forced to adapt their unique business to the cookie cutter approach of their vendor, Integral’s approach is completely different. We believe that OTC market participants have unique business models which require custom configured deployments. By giving users the ability to differentiate themselves while also using a shared service environment empowers them with the best of both worlds: increased flexibility with reduced costs.

Integral’s new advertising campaign

You might have seen our new advertising campaign (Mine) in various trade publications and online.

Mine is a term from the world of FX voice trading. The counterparty that’s saying it indicates that they are willing to buy at the conditions outlined to them.  I propose an extended definition of ‘mine’ to mean; the direct ownership of one’s FX trading and aggregations. It means that the bank or broker has the complete control over their world while still reaping the rewards of using a shared cloud infrastructure. That way, they benefit from all the advantages of this business model with the knowledge that it’s uniquely their liquidity, their customers, their algos, their brand and ultimately their profits.

Integral puts you back in control of your FX business. Who is in control of your FX business?

If you want to discuss this further and happen to be at the Profit&Loss Forex Network show in Chicago, I encourage you to stop by our booth.

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

‘Just-in-time’ — Just in time for FX Brokers?

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. Continue reading ‘Just-in-time’ — Just in time for FX Brokers?