It’s been a busy 20 years since Profit & Loss launched. Colin Lambert and Galen Stops have picked out 20 key events or trends during that time and asked senior industry figures for their perspective on them – here’s numbers 20-16. 20. A New Currency for a New Era While the big event of 1999 […]
In the wake of the GFC and the allegations of misconduct aimed at institutions and individuals, the buzz word was ‘transparency’ – the word from market participants was that they were going to be transparent about everything, meanwhile regulators everywhere made a sustained push for absolute transparency in markets.
The thing is, in FX terms especially, it hasn’t worked – I am not convinced it has in any market actually – and market participants are showing this in where they put their business.
Discussing the launch of NEX’s (Nex) new data analytics suite, Tim Cartledge, global head of FX and head of product at NEX Markets, says that it aims to make internalization more beneficial to both liquidity providers and consumers.
“The problem that we’re trying to solve is that the relationship between liquidity provider and consumers on a relationship based platform actually doesn’t have much relationship left in it anymore because the way the market has evolved is that the liquidity consumers really don’t know how how the liquidity providers are making that liquidity, they don’t know how they’re holding the risk for an extended period until they find an offsetting client trade. In short, they don’t understand how internalization works,” says Cartledge.
When clients are looking at prices in an aggregator they could see a bunch of quotes that appear to be identical to one another.
But as Roel Oomen, managing director, electronic FX spot trading at Deutsche Bank, explains, this does not mean that the transactions costs for dealing on each of those quotes is exactly the same.
This is because rejection rates can vary, the liquidity that’s shown at these quotes can vary, and the risk management style of the liquidity providers (LPs) in the aggregator might vary, with some externalising the risk and other internalising it. But how to tell the two apart?
I was going to discuss a paper released by the Bank of England late last week entitled A discrete choice model for large heterogeneous panels with interactive fixed effects with an application to the determinants of corporate bond issuance but not only was I asleep by the end of the title, I was also taught never to discuss things I don’t understand – and I don’t even understand what a “discrete choice” is!
Instead I want to continue last week’s theme of the relationships in FX, this time looking at the choices around the make up of aggregators.