All posts by Harpal Sandhu

No Dealing Desk – The Next Blockbuster

“Welcome back Kotter”

We noticed that an old favorite of ours has been getting more and more recognition in discussions about the best way to organize FX markets. I am talking about an organizational element that is sometimes referred to as ‘no dealing desk’, an ‘agency model’ or even’ straight-through-processing’ for retail FX brokers. (This latest descriptor might be the most confusing one, given the meaning STP has in institutional markets.) What is NDD and why does the term bubble to the top in numerous industry conversations these days?

“Take your stinking paws off me, you damn, dirty …”

No-dealing desk describes an order flow where a customer puts in an order with her broker. Instead of the broker touching the order – internalizing it, or filling it in the market on his terms – the order is passed on without interference to a third party that executes it in the market for the best price available at that moment. The beauty of this arrangement is that customers will always get a fair execution. Brokers obtain new leverage to increase their market share because they no longer have to worry about exposure and related capital requirements that limit how fast they can grow. They can really turn on their marketing machine. Last but not least, regulators are at ease because there is less room for a possible conflict of interest between trader and broker/market maker. Also, brokers tend to be more upfront about their pricing models (usually a fee, a spread or a mixture of both). For regulators, such a transparent market is easier to regulate. Continue reading No Dealing Desk – The Next Blockbuster

Taking a Fresh Look at DMA

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. Continue reading Taking a Fresh Look at DMA

Clarity of Thought

One of the traditions at year end is to take stock. Reflecting on the past 12 months is an exercise that brings clarity of thought. Going through a crisis can have a similar effect.

As the economy finally stabilizes following the events in the fall of 2008, we are looking over a changed landscape. There has been a lot of change in the FX market place, in the number of participants, and in how the survivors do business. In the world of financial services, we have noticed a renewed focus on core competencies. Banks and brokers who owned real estate, sold their offices and leased them back. They outsourced proprietary operations and are leasing back services that do the same.

On the positive, the state of the Internet economy allows for many business services to be delivered On Demand.  While consumer-focused businesses embraced that trend and started to reap its benefits years ago, we see it finally taking hold in FX markets as well. A crisis brings clarity of thought.

Instead of investing millions of dollars in a proprietary IT infrastructure to run foreign exchange operations in-house, while simultaneously assuming operational and market risk, FX brokers and banks took stake and realized there is a smarter, low-cost way to do the same:

  • Participate in a shared FX infrastructure that spreads operational cost and system risk amongst hundreds of participants
  • Subscribe to On Demand services that scale seamlessly up and down in line with customer demands
  • Only pay for services when actually using the system, i.e. generating revenue for oneself
  • Free company resources to focus on marketing efforts to build one’s business

Fear, Uncertainty, and Doubt (FUD) Strategy Applied in Foreign Exchange

In my many years working in foreign exchange markets, I have seen many innovations that shattered business models and changed the way things are done. One truth that I still consider to be relevant is the distinction between the role of an agent and that of a market maker. Agents are incentivized to maximize a customer’s welfare because that is how they make the most money. Market makers are incentivized to learn as much as possible about how markets function, and about the various strategies of market participants (including their own customers), so that they can use this proprietary intelligence to their advantage by being smarter than the next guy. Or in other words: An agency broker makes money charging a fix fee for best execution; a market maker makes money from the bid/ask spread by internalizing the order flow. You can imagine my surprise as I came across a marketing pamphlet of one of the largest banks in the world that seemed to have melded the two roles into one

There are Friends and Enemies, but no Frenemies

In its brochure, the bank claims to be able to fulfill the role of being both an agency for a customer and a market maker. An agent/market-maker-hybrid sounds to me like something straight out of Dr. Frankenstein’s laboratory. To illustrate the inherent lethal conflict, let’s look at key elements such as order creation, order execution, and order completion. Continue reading Fear, Uncertainty, and Doubt (FUD) Strategy Applied in Foreign Exchange

A Retort on Euromoney’s “Have Reuters And EBS Lost Control Of FX?”

There is an interesting article in the November 2009 issue of Euromoney titled ‘Have Reuters and EBS lost control of FX?’ It’s a good read that tries to assess the punch that the two interdealer brokers still carry with respect to overall price discovery in foreign exchange. Euromoney then attempts to answer the question where the market is going to be tomorrow, now that it obviously is no longer with Reuters and EBS. I think this is the wrong question to ask. Continue reading A Retort on Euromoney’s “Have Reuters And EBS Lost Control Of FX?”

TrueFX.com — The Way FX Is Supposed To Be

You might have heard already about our most recent initiative, the launch of TrueFX.com. We are very excited about this project! I would like to take the opportunity to highlight some key aspects that that might have gotten lost in the initial media coverage.

What is TrueFX?

TrueFX is Integral providing retail FX brokers with direct market access to the interbank FX market. This is a disruptive move in the tradition of other Silicon Valley companies, using more-advanced technology solutions to fundamentally change a market for the benefit of everyone in it. More on that later.

On TrueFX.com, market participants will find streaming real-time tick-by-tick data of all major currency pairs for free. We are also publishing historical market data, again tick-by-tick at no cost. We believe that this will to some extent change the way foreign exchange markets are organized. I encourage you to register to get full access to everything www.TrueFX.com has to offer.

The disruptive but benevolent nature of TrueFX

While some brokers already have embraced TrueFX, it is a disruptive move and here is why: In today’s retail FX world, brokers often face a conflict of interest because it is so easy for them to trade against their customers and make extra money. For some it proves to be too big of a temptation as too many lawsuits illustrate bear witness.

We are convinced that at the end of the day, most everyone will be better off with TrueFX. On the TrueFX platform, when a customer trades against a broker, that broker immediately and in real time offsets that price directly against the TrueFX price. That TrueFX price is immediately and directly executed against the market, against the aggregated liquidity from major market banks. And since their price is always in competition with other banks, they can’t skew it because another bank might take the deal.

By handing over trade execution to a neutral technology provider, everyone wins. Market making banks who were always hungry for retail flow, love the exposure and easy access TrueFX offers them. Brokers are supportive because instead of working with a larger broker (and a potential competitor), they now get direct market access by working with a neutral third party. Plus, their customers get better prices and service, which enhances their competitive standing.

I call TrueFX a disruptive but benevolent move because it is hard to imagine strong criticism from anyone other than brokers that (ab)use the current system by acting as a market maker and broker in unison. As such, they are not acting as a neutral agent that is providing customers with best execution. The way markets are organized today, there can be a strong conflict of interest because brokers can influence currency rates to their advantage and, if there is no transparency, most customers will never know that they were taken advantage of by unfair business practices. Continue reading TrueFX.com — The Way FX Is Supposed To Be