Articles tagged by market impact
That we are still debating the positive or negative impact of non-bank market makers on the FX market doesn’t surprise me – what does is the simplistic level of debate over what I consider to be a fairly complex issue.
Yes the big prime brokers could shut these firms down with a hefty rise in prime brokerage fees or a withdrawal of credit totally - that would send most of them back to where they first emerged – the cleared world with its very limited spot foreign exchange market opportunities.
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.
Today’s column is definitely not one for the teenagers – indeed it looks at an issue only those of us of a (ahem) certain vintage, will remember.
I was fascinated to read over the weekend that there is a something bubbling up in Malaysia over FX losses made by the country’s central bank in the early 1990s. Apparently the issue has re-emerged as a whistle blower now claims that the bank lost $10 billion trading and that there was no official investigation.
The FX TCA analysis from LMAX Exchange should be welcomed for highlighting the absence of price improvement in too many TCA calculations, but there is still more work to be done and ground to be covered before the industry truly has a genuine TCA metric. What about market impact relating to the "parent" order? Do we differentiate between rejections for predatory traders and hedgers? After all, as any divorcee, if they are honest, will probably tell you, both parties play a role in the break up.
Shortly after Citadel Securities won the Best Market Maker in Major Currencies category at Profit & Loss’ The FoXys Reader’s Choice Awards, Kevin Kimmel, global head of e-FX at Citadel Securities, sat down to discuss what firms want from a modern liquidity provider.
“I think it’s important for market makers to customise their liquidity to each individual consumer,” says Kimmel.
Although he acknowledges that “market impact” has become something of an industry buzzword recently, Kimmel maintains that there truly is a large segment of the liquidity consumer universe that is looking to trade with firms that are willing to warehouse risk because it will help minimise their market impact. There is also though, he says, clients that are much more aggressive in accessing the market that just want tight prices and a high fill rate.
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.
We’re back on asymmetric response times because I have new data from another platform that highlights the absolute – and to me mystifying – divide in the industry over how much longer it takes to accept or reject a trade. I am really confused over how 16 LPs can take much longer to reject a trade than accept, while another 16 take longer to accept than reject. Someone out there must have a reasonable explanation but I’m blowed if I can come up with one.
Gain Capital’s GTX has launched full-amount streams on its ECN platform.
The new facility, which enables clients to execute small and medium-sized spot FX orders on firm prices for the entire trade quantity, is designed to minimise information leakage and market impact for buy-side traders as well as benefit liquidity providers.
For buy-side traders, full-amount streams minimise pre- and post-trade information leakage and market impact by limiting knowledge of the prospective order (pre-trade) and execution (post-trade) to the buy-side client and the single liquidity provider counterparties to the transaction.
NEX Markets has launched a new suite of analytical tools on its EBS FX trading platform that seeks to match the sophistication levels of those available at banks and trading firms, however at market level.
NEX Quant Analytics was launched today and uses benchmark data taken from the entire EBS ecosystem. It delivers “real and measurable” insight for clients into their own trading activities and the ability to look at their performance versus that of their peers.
With execution quality taking a more prominent role in FX market participants’ thinking, especially around their market impact, the timing would appear to be good for the firm.
Today is all about questions – the most pressing of which has to be, if Switzerland issues a digital currency, will it immediately put an offer in the market? Perhaps more pertinently, it is also about the impact of the lack of traders in the FX market, because if the first week of the year is anything to go by then cryptocurrencies will continue to steal the agenda – the traditional FX market just doesn't seem as though it can be bothered.
I was not surprised to hear that another two FX platform providers are working on the delivery of a mid-market matching, or ‘dark’ mechanism to add to their suite of services. Inevitably given the (apparent) success of BGC’s dark pool MidFX, this is an avenue that they should explore. Given that nothing is launched without extensive customer feedback, one has to assume this is client driven, but that begs the question. If customers like ‘dark’ trading, why has there been no serious challenge to BGC?
This will be brief, it being a public holiday here in Australia (happy birthday Liz!) – and on the subject of the aforementioned Queen Elizabeth II, my congratulations to former RBC and State Street FX stalwart as well as former ACI president Marshall Bailey for his OBE (to financial services and charity).
That’s as nice as it gets today, because I need to talk about that most polemic of men, the US president and his irresponsible, but not out of character, leaking of the employment data.
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.
Information leakage is the new “issue” in foreign exchange markets for many players (actually its just signalling risk renamed surely), and for several participants it is a question of their past catching up with them in how the LPs are not willing to help them anymore. For others, however, it is a genuine issue, but I am not sure how easy it is to solve given how everything we do online leaves a digital signature – and trading in no different.
This column comes with a warning as I am getting increasingly grumpy with attitudes to FX market price action. You clearly can't please everyone, but how can someone complain - as they did to me this week - that what we have seen in sterling this week was "the wrong kind of volatility"? Luckily I have this column to let off steam so let's do that - with a take down of the model that has turned FX traders into glorified brokers.
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.