Robbert Sijbrandij, head of FX at Flow Traders, talks to Galen Stops about why he thinks there’s still room for more non-bank liquidity providers in the FX market.
Dutch proprietary trading firm, Flow Traders, has spent the past two years building out its FX business line. The firm trades in the region of €750- €800 billion of ETFs per year, of which roughly two-thirds has an FX angle, meaning that Flow Traders was already doing in the region of €2-3 billion of FX on a busy day before they decided to become a liquidity maker in FX.
So when Robbert Sijbrandij joined as head of FX in January 2017, the first thing that he oversaw was the centralisation of its FX trading, ensuring that it all occurred on one desk so that internal flows could be netted off before going out to the market to trade the rest.
“There was a lot of infrastructure that needed to be built out for this to happen,” recalls Sijbrandij. “We had to build a whole layer in between our prime broker and ourselves and then ensure that everything was centralised on one desk. But the beauty of working for a fintech company is that we were able to build all of this very quickly.”
The next step was to build out connectivity to the broader FX market, which is why in November 2017 the firm announced that it had partnered with MarketFactory in order to access a wide range of trading venues. In 2018, Flow Traders continued to build access to more platforms, while also developing its disclosed trading capabilities. The firm has NatWest and ABN Amro as its FXPBs. In total, the firm now has six people on its FX desk, with about 10 sales people in Europe and 20 globally that are now pushing FX alongside its traditional ETF offering, where it is connected to almost 1,000 counterparties in ETF trading globally, which the firm sees as a big cross-selling opportunity.
“We’re going to basically stream all of our prices through platforms into people’s aggregators or whatever trading system they use, so there’s going to be very little manual work and it’s going to be extraordinarily scalable. We don’t anticipate needing 50 sales people, which these days bring about 30 compliance people along with them,” explains Sijbrandij.
The idea, he says, is to stay very nimble and focus on deploying extremely efficient technology. Sijbrandij is quick to add, however, that Flow Traders is not a proponent of the latency arbitrage model for FX trading, pointing out that the firm has stated publicly that the FX Global Code of Conduct – which Flow Traders has signed up to – doesn’t go far enough on the issue of last look. Indeed, Flow Traders provides firm liquidity without any holding time when trading FX.
“We’re trying to build this business on the basis of our expertise, the inventory that we have and the technology that we have,” says Sijbrandij. “We quote global baskets of ETFs all day long, some of these markets will be closed and so we have to hedge them with proxies, which we then hedge out in the open. So, we actually trade a lot of correlation, whereas some firms just say that they do. This makes a big difference because anyone can trade a bit of EUR/USD or USD/CHF, or trade a bit of commodity currencies against gold, but we have genuine exposure in FX from trading other asset classes and activities.”
Of course, Flow Traders is hardly the first prop trading firm to decide that the FX markets offer an opportunity for them as a liquidity provider. With firms such as Virtu Financial, Citadel Securities, XTX Markets, HC Technologies and Jump Liquidity all now active in FX and advocating on behalf of non-bank liquidity, to what extent is Flow Traders trying to enter an already crowded market?
The first point that Sijbrandij makes in response to this question is to highlight the extent to which banks have pulled back from running risk in the FX markets.
“There’s not many banks that take risk anymore in FX. I think that if I were to say that there’s 10 banks that really take risk I might be exaggerating, whereas there probably used to be about 100 that did,” he says.
Sijbrandij adds that smaller banks are broadly welcoming of liquidity from Flow Traders because it gives them an additional pricing option from a firm that is never going to compete with them for corporate or private wealth clients, or indeed any kind of clients that require significant balance sheet usage.
While he concedes that there’s “obviously” more competition now on the non-bank side, Sijbrandij argues that there are clear differentiating factors between these firms. Some, he claims, actually run a risk book and are able to “bring something different to the table”, while others, he contends, are simply latency arbitrage firms that are trying to pivot and rebrand themselves as liquidity providers, aggregating liquidity and using last look.
“I think that a lot of the non-banks are trying to sell themselves in a new coat of paint, but for us it’s a different story. We want to build our business out of inventory and risk and correlation, not latency arbing and last looking,” says Sijbrandij.
The good news in this regard, he claims, is that increasingly sophisticated transaction cost analysis (TCA) tools are making it easier for market participants to determine which firms are actually taking risk and which are not, and as a result, Sijbrandij thinks that “quote and cover” strategies will ultimately be weeded out of the FX market.
“It’s so easy to put a signature in the price these days, when we price someone new, we can tell if they have genuine flow or if they’re just using it to stream to someone else. It would take me literally minutes to figure that out,” he says.
The FX market is already crowded in other ways too, however. Spot FX, certainly in the most liquid currencies, is a largely commoditised product, and pricing is already so tight that it’s hard to see a market maker being able to sustain themselves on revenue from just this segment. This is why many non-bank market makers have increasingly been focused on EM currencies, and Flow Traders is no exception to this trend.
“You have to be in G10 spot FX and we have enough flow there to be involved, and so that’s where we started. But as a firm, Flow Traders has always been very strong in emerging market ETFs and some of the more esoteric products out there. This means that we have a lot of EM flow and expertise on the back of that,” says Sijbrandij.
Liquidity, always a hot topic within the FX industry, has come under more scrutiny recently due to flash crashes in the market, the most recent one coming during Asian trading hours on January 3. Although some market participants have pointed the finger at automated trading firms using algorithmic trading strategies over these events, Sijbrandij – unsurprisingly – takes a different tack.
“We used to have these swings on a daily basis when the market wasn’t electronic. If you look at USD/JPY, on any given day it could do 2-3% just because someone was pushing a large order through,” he says, adding, “I think it’s shortsighted to blame the machines for flash crashes – firms like us will always trade from where we see the market and where the real value is. At some stage we’ll start going against these moves, which is why the market comes back quickly from these events.”
One trend that has been discussed at length during Profit & Loss events in recent years is that while there is more liquidity available in smaller sizes at top of book, it’s getting harder to conduct large size trades in FX. Interestingly, Sijbrandij says that he is beginning to see a reversal of this trend. Instead of breaking up an order into small clips and sweeping the market, he says that often firms will end up getting a better price with no information leakage by putting a few good counterparties into competition to stream the full amount they need.
“We have a full amount disclosed stream where we feel comfortable giving that full amount price to people that we actually know want a real price, as opposed to being swept on platforms by people that are sweeping everyone, and you don’t know how much they actually have to do. So, I think the world will revert to full amount trading to a certain degree, where you know exactly what you’re getting, and someone can sit on your price and trade it out against their own book over time,” explains Sijbrandij.
Another area where he sees liquidity changing is in the use of last look.
“I don’t know if it’s due to the fines that were handed out or due to the Global Code of Conduct – or both – but there has been a change in last look behaviour,” says Sijbrandij. “We trade with banks and I can see that the behaviour has improved. We’re committed to providing price streams with firm liquidity without any holding time, something that goes down very well with customers, and with some other firms doing the same, it forces the banks to follow suit.”
That being said, Sijbrandij acknowledges that it can be a challenge to stream a good price to everyone in the market when some firms, namely the buy side, still pay virtually nothing in spread, and are not expected to.
“It’s like Facebook: people don’t pay anything for Facebook, but then they got angry that Facebook was selling people’s data,” he says. “Either we move to a cleared, commissioned based model over time, which is possible, or the buy side will have to start recognising that paying a little bit of spread is normal.”
Ultimately, part of the reason that Sijbrandij sees a place for more non-bank liquidity in the FX market is that the majority of banks are shifting more towards a utility model.
As he puts it: “There are a few big powerhouses who can match up flows internally, but most of the others have a lot of infrastructure, but they shouldn’t really have a trading business, from a risk perspective, from a knowledge perspective and from an IT perspective. Most of them are getting aggregators in place, they’re streaming five to 10 disclosed names to a mix between banks and non-banks, and the best price wins. As we are genuine liquidity providers, we’re happy to compete with anyone on that.”