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.
Liquidity providers are constantly analyzing your flow and trying to take advantage of what they know. If you trade on a single-bank platform, they can see the full size of your trade and if you trade small sizes with them, they will know it is not a large order. Their strategy will be to just take the other side of the trade. If you only do big tickets, they will deduct that from the market reaction to your trades. Therefore going forward, every time you trade, they will push it against you.
So, while single-bank systems may at times offer tighter prices for small trades, realize that this is a lure so you expose more information about your trading style. While you stand to make a little bit of money in the short run, you will lose in the long run since you just provided a single-bank system with very valuable information about yourself. A liquidity provider will happily ‘pay’ you for such valuable insights into your trading strategy and means.
As a trader, it is in your best interest to hide as much information as possible. Trading electronically through an FX aggregation system at all times is a liquidity taker’s first line of defense. For some, it is their only defense in what is an unfair fight to begin with.
Remember, only you can prevent unequal trading relationships
As a consumer of liquidity, you are already in a disadvantaged position because liquidity providers are most likely larger and better informed than you are. They also spent a lot of time and efforts to build systems that are designed to analyze your flow. In such an environment, wouldn’t you do anything to hide your trades?
Aside from all the obvious advantages an FX aggregation system offers in terms of trade execution, it also has a very important effect on liquidity providers since it signals them that there is an informed consumer of liquidity, a smart player, on the other side; somebody, who knows how to use technology to level the playing field and to mask his tracks. You want this advantage, whether you’re trading $5m, $50m or $150m.
Make anonymity work for you
If you start doing your small trades on FX Inside as well, liquidity providers will have no idea if what they see is part of a big trade, or in fact your entire order. So they won’t know whether to hold or run. They won’t be in a position to push it against you when you do big trades either. Even if you pay away 0.1 pips on every small trade, it is worth it, because you keep them in the dark and make more than that back on the big trades. Don’t just opportunistically look at the trade-by-trade results; take a strategic view to position your entire trading optimally for the long run!
The simple truth is that a liquidity maker is looking to make money on every trade, not just the large ones. They will take advantage of uninformed traders, of soft market conditions, of counterparties that are less technologically-savvy than they are. That’s the business liquidity makers are in and they have every right to be aggressive and explore every weakness in a counterparty. It is the responsibility of liquidity takers to understand these dynamics and do their best to come prepared. Therefore, use an FX aggregation system every time you trade. The worst thing that might happen is that you actually increase your profits — at any size. At any rate.