Paul Aston, CEO of Tixall Global Advisors, discusses the feasibility of peer-to-peer FX matching between large buy-side firms.
One of the long-standing problems with the concept of peer-to-peer matching between buy-side firms is that the probability of being able to actually put together complimentary buyers and sellers is very low. For example, the chances of a large asset manager needing to sell a certain amount of a particular currency at the exact same time that an insurance company needs to buy the same amount of that currency are remote.
Aston refers to the need to “get away from the quantum problem of having to know when something is available in time and level”, and suggests that there needs to be some form of “dark mechanism” whereby these buy-side firms can leave an order without it being exposed to the market, in order to make peer-to-peer trading more feasible.
According to Aston, “what really matters peer-to-peer is a mutually beneficial price that doesn’t leave them worse off” and therefore if there was a mechanism for firms to be able to leave interest out at a certain level and have these interested quietly intermediated it could be advantageous to all involved.
“So you can get rid of the time problem completely, which is really important because once you know you can find deep pockets of liquidity you eliminate your market impact, you eliminate your information leakage and now you’ve got the prospect of doing several yards at a clip if there’s complimentary interest, and in the traditional market model that would be extremely costly to implement.
“And all you need to know is that the person that you match against has reasonable credit quality, they won’t default, that the collateral is there, all the usual plumbing and requirements but that’s now very easily facilitated by technology,” says Aston.
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