Hedge fund, Aston Capital Management, has launched an FX market making business.
Explaining the decision to set up a liquidity provision arm in addition to its principal risk trading business, founder and CEO of Aston Capital Management, Isaac Lieberman, says: “Aston Capital Management has a robust credit and technology infrastructure, as well as cutting-edge software for managing and distributing risk, so it made a lot of sense to start offering those services out to end-users of liquidity”.
Lieberman says that Aston Capital Management has launched this service with three initial customers, with a specific focus on niche markets such as emerging markets, and is currently in discussions with several other firms to expand the offering.
The ultimate plan for the fund is to offer a full service e-commerce line of business, whereby the liquidity provisioning customer base brings in steady revenues and the principal risk and macro trading arms are embedded in the core of the business, providing a collective revenue stream.
Lieberman says that a combination of the continued move towards electronic FX and US fixed income trading displacing the role of the traditional sell side trader, the recent trend of restrictive regulation around risk taking and the imposition of globally-applied onerous capital requirements are in some instances limiting the bank’s ability and willingness to engage in principal trading, or offer the range of services that they have previously provided in these markets.
As a result of this, he claims that there is an opportunity for technology-focused buy side players to become more involved offering market-making services in FX.
“I believe we are going to see a number of private buy side firms coming in and complimenting the role that sell side firms play in offering a full service business model. Initially we are starting in the FX markets but I see a tremendous opportunity to run a similar business model across corporate bonds and treasuries. End-users are hungry for solutions and I believe that Aston Capital Management is well structured to provide the technology solutions, the relationships and the credit facilities that are needed to bring these markets into a new era,” says Lieberman.
Accessing credit has become a hot topic in the FX industry recently, with many prime brokers trying to rationalise their business models by raising fees and imposing tighter credit restrictions.
Lieberman says that Aston Capital Management will seek to help end-users in this regard by creating a credit facility between itself and the end-user which allows them to trade with each other and then settle up between their prime broker or prime-of-primes.
“Credit is a major issue right now but if you have the proper credit facilities you can then bridge the gap between the primary dealers, the primary market and end-users who might have to go through a prime-of-prime,” he says.
Lieberman argues that the trend of banks shifting from a principal to agency execution model, where customer flow is channeled through best execution sources such as ECNs or Swap Execution Facilities (SEFs), also offers an opportunity for buy side firms to profit from servicing these flows.
On the derivatives side, he says that open access to different electronic frameworks and the efficiencies created by technology will give buy side players an opportunity to disrupt the current market structure.
Lieberman notes that in today’s marketplace a derivatives trader queries the spot desk, the interest rate desk, and the options desk in order to get pricing on the various components of the derivative he is seeking to trade. Then, post transaction, each piece of the derivative’s risk is hedged in a slioed trading arm, leaving the spread capture – minus the hedging costs of the components – as the businesses’ retained earnings on the trade.
He says that there is vast potential for firms like Aston Capital Management to integrate these financial products, creating greater efficiencies and therefore capital returns.
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