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.
A new research note from Pragma Securities is seeking to challenge the perception that banks are increasingly stepping back from providing liquidity to FX markets.
The firm notes in the paper that the “typical narrative” is that
reduced appetite for risk, controls on
capital at banks, as well as juniorisation of dealer staff have all contributed to this withdrawal that led to an “increased fragility of the FX markets”. The paper adds that the general consensus seems
to be that liquidity is getting more expensive, and while spreads are
narrow in times of normal volatility, in
times of market stress dealers effectively pull away from the markets, contributing to extreme volatility and events like flash crashes.
CLS Group (CLS) and NEX (Nex) Optimisation have together announced the expansion of CLS Aggregation Services to support the aggregation of non-CLS currencies.
The aggregation service handles spot transactions and aims to address the operational and capacity challenges experienced by banks as a result of high frequency FX trading.
A joint venture between CLS and Nex Optimisation’s Traiana business, the service works by aggregating matched FX trades to a single trade which in the case of the CLS currencies is then processed through to settlement in CLS.
A study released by Deutsche Bank seeks to challenge the assumption that having more liquidity providers in an aggregator inevitably leads to better execution.
Aggregators are popular in the FX market, enabling trading firms to routinely put multiple liquidity providers in competition and then transact with the one offering the best price. Being able to consolidate liquidity, in the form of bid and offer prices and amounts, from various sources into a single, consolidated order book is particularly valuable in an OTC market with no centralised exchange.
“But in a market where the terms of trade are privately negotiated and the liquidity provided is bespoke to the trader, deciding on a suitable aggregation setup is not a trivial task,” according to the report, titled “Execution in an Aggregator”.
Before getting onto today’s subject matter – which is last look – I wanted to clarify something from Monday’s column – which was about last look!
Some in the industry are definitely moving towards the moral high ground on this issue and along the way, hopefully, they will squeeze out those that still wish to abuse the practice. New initiatives and growing support for a crucial change mean I am, possibly for the first time, vaguely optimistic the problem of last look will be solved.
FXSpotStream has onboarded State Street as the latest liquidity provider to its service, hired a new CTO and revealed plans to make a new analytics suite available to its liquidity providing banks and clients.
State Street becomes the 13th bank to go live as a liquidity provider on FXSpotStream’s price aggregation service, after Bank of Tokyo-Mitsubishi UFJ (BTMU) was added in December 2015.
“We know from client requests that liquidity from State Street will be a welcome addition to FXSpotStream’s existing bank liquidity. Our service provides State Street an expanded e-distribution network through our global connectivity network and client base. With co-location sites in New York, Tokyo and London, clients can use either our GUI or single API connection to access State Street’s liquidity,” Alan Schwarz, CEO of FXSpotStream, tells Profit & Loss.
Raj Sitlani, co-founder of IS Prime and managing director of ISAM Capital Markets, sat down with Profit & Loss in Shanghai to talk about the challenges associated with expanding into Asian FX markets and why technology remains the key differentiator for prime-of-primes.
Profit & Loss: So what’s your business focus in Asia?
Raj Sitlani: We have a large market share in Australia but, until recently, never truly had the manpower or the resources to crack the broader Asia market. However, there’s a very big opportunity in the region for us to provide our flagship product – which is a prime-of-prime service with aggregated FX liquidity – and so last year we set up a Hong Kong office through which we can build out our presence in North Asia and China.
There is a changing dynamic afoot when it comes to relationships between service providers and clients in the foreign exchange industry, one driven partly by liquidity providers developing a better understanding of the value of their clients’ flow and partly by clients seeking to optimise their execution – specifically by reducing market impact. Colin Lambert talks to Roel Oomen, managing director, e-FX spot trading at Deutsche Bank, about his latest research paper that advances the study of optimal liquidity aggregation via a data driven analysis of price signatures.
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?
There’s an intuitive logic which states that the more liquidity providers (LPs) that a client puts in their aggregator, the better prices they should get. After all, increased competition should cause LPs to tighten their prices in order to win the trade.
However, as Roel Oomen, managing director, electronic FX spot trading at Deutsche Bank, explains, this logic only holds up in a static environment, which the FX market most certainly is not. The reality is that LPs alter their spreads depending on how they perceive the liquidity environment to be at any given point in time.
In a rumbustious podcast this week Galen Stops relates how he took on the Twitter world following a tweet that was clearly misunderstood (he says) and he and Colin Lambert get into a debate over the value of speed bumps in futures markets. One group, as Stops observes, is very unhappy about it, but Lambert points out there is another – rather influential – group, that really like the idea.
Our two podcasters also follow up on a recently published story by Profit & Loss about the potential buyers of Refinitiv as well as take a look at a recent blog post on aggregation in FX which inevitably leads to a question from Stops to Lambert, ‘what do you consider full amount trading?’ Luckily for everyone, the latter keeps his answer reasonably (to him) short – even delving into the depths of his own trading career for an analogy.
Speaking of delving the depths, the podcast closes out by fulfilling its promise of the previous week through delivering “considered analysis” of a recent rival podcast which took a look at the events surrounding the death of crypto exchange Quadriga’s CEO. There are those that think, as Stops notes in this podcast, that the FX industry likes a good gossip and wild speculation, but his report on the investigation into Quadriga leaves FX standing well in the shade…