In this Profit & Loss video interview Jay Moore, CEO of FX HedgePool, says that peer-to-peer FX trading remains an attractive prospect for buy side firms and explains why previous attempts to make it a reality haven’t worked.
Noting that peer-to-peer FX trading is hardly a new concept, Moore says that buy side firms have long been excited about the potential to create a new community for liquidity that doesn’t need to be channeled through a third-party, such as a bank.
He argues that buy side firms can benefit from going to their peers for FX liquidity by reducing their market impact when they trade and potentially minimising bid-offer spreads.
Moore adds: “From a certain perspective it can be a performance enhancer because you’re able to track a benchmark that you might not have been otherwise able to achieve by having to execute through a bank.”
The problem why previous initiatives to create a peer-to-peer matching platform in FX have not proven to be fruitful, he contends, is because they have largely tended to focus on the spot market. Moore explains that if a firm has bought European equities then it will need to buy euros, either immediately or within a certain timeframe, and therefore to get an offset with a peer they would either need someone to be selling the exact same amount of euros at the same time or be willing to wait long enough for another firm to come along with the exact opposite position to them.
Given that there’s a high correlation of flows in the spot FX space, because if one large buy side firm is buying European equities, then there’s a good chance that others are too, this means that the hit rate for matching off with another firm on the currency side is low.
“The idea of [peer-to-peer] is there and people are excited about it, they’ve built products that try and capture this but the managers, the asset owners, the buy side have attempted to use them and I think what happens is that day one they come in, ‘Better luck next time’, day two they come in, ‘Better luck next time’, day three they don’t come back,” says Moore.
He adds: “Or, maybe they get lucky and they get hit and the next day they don’t. And so there’s no consistency or regularity about it and I think that’s what’s troubled the peer-to-peer space in the past.
Despite these challenges, Moore remains convinced that there is a clear opportunity to make peer-to-peer trading work for non-spot FX products. Click on the video below to watch the full interview and find out more: