Regional e-FX Perspective - Amazon S3 · 2018. 4. 26. · Olympian Capital Management page 101 One Zero page 131 Option Computers page 41 P Philip Futures page 65 Progress Software

January 2013

visit us at www.e-forex.net

FX under Dodd-Frank Making strategic choices

Real-time analytics Achieving improved TCA in FX

Prime of Prime BrokerageExtending market access

Retail FX BrokeragesGetting the right tools for the job

Adaptive FX algorithmsGiving control back to clients

Retail FX trading servicesCapturing investment opportunities

Regional e-FX Perspective China and South East Asia

Happy New Year!

We start this year with a leader article that examines the still evolving regulatory landscape and some of the strategic decisions that are facing FX market participants as

they grapple with the new rule-sets. As one of our contributors has noted, an important issue facing FX firms today is ensuring they are connected to the various entities in order to fulfil their regulatory requirements. Apart from the enormous infrastructural challenges involved in connecting - and then maintaining connectivity - to multiple CCPs and other ‘new’ FX destinations like clearing brokers and trade repositories, participants will also have to meet the challenge of managing increasingly complex collateral and credit obligations. This is an important topic which we will be re-visiting in another edition later in the year.

Our regional report in this edition focuses on China and South East Asia. The leading FX banks and specialist trading technology providers are all active in this part of the world and e-FX trading continues to grow and spread throughout the region as new adopters connect to the market every day. Everyone of course has their eyes on China and it’s going to be particularly fascinating to see if the currency restrictions are eventually lifted there. If so, we agree with another of our contributors who thinks we’ll see a natural regional hub establishing itself in China, in both institutional and retail FX markets, with Shanghai being the likely centre.

With the rise and spread of the agency model in Retail FX trading, liquidity management has now become a key topic of concern for many brokers. As a result, increasing numbers of firms are looking at Prime of Prime brokerage (PoP) solutions. We go along with some commentators who expect PoP brokerage to increase in popularity, particularly given the restraints imposed on Retail FX providers by more onerous regulation, increased capital requirements and the adoption of a more conservative approach by banks who are becoming less flexible on which brokers they will do business with. The main challenge for providers of PoP brokerage may well be developing additional capabilities, including bespoke technology applications, aside from their core, liquidity-based services. We are covering more on this subject in our FX Brokers Handbook, which is being published in the Spring.

As usual we hope you enjoy this edition of the magazine.

Charles JagoEditor

Welcome to

Winter 2013

Susan [email protected] Editor

Charles [email protected] (FX & Derivatives)

Charles [email protected] Manager

Helen [email protected] Manager

Michael [email protected] Manager

David [email protected] Manager

Larry [email protected] events manager

Felix ShipkevichContributing writerRegulatory Roundup

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Although every effort has been made to ensure the accuracy of the information contained in this publication the publishers can accept no liabilities for inaccuracies that may appear. The views expressed in this publication are not necessarily those of the publisher.

Please note, the publishers do not endorse or recommend any specific website featured in this magazine. Readers are advised to check carefully that any website offering a specific FX trading product and service complies with all required regulatory conditions and obligations.

The entire contents of e-Forex are protected by copyright and all rights are reserved.

e-FOREXtransforming global foreign exchange markets

4 | january 2013 e-FOREX

January 2013

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FOREwORd

22. Benchmark fixings under review Manfred Wiebogen outlines why he is concerned about a possible withdrawal of panel banks from benchmark fixings and how this may weaken the entire system and erode confidence.

LEadER

24. Cost and convenience - making the right strategic choices for FX under Dodd-FrankFrances Faulds examines the rules and regulations governing SEFs and what steps the industry is taking to mitigate the IT burden and ready itself for the new regulatory environment.

FEaTURES

36. Speed and precision - empowering clients with faster and smarter FX e-commerce engines

Nicholas Pratt talks to one leading bank and specialist FX technology provider to explore the impact of technology on the FX trading market and what factors have led to a step-

change in the speed, flexibility and transaction processing capabilities of FX e-commerce platforms.

48. From platforms to market penetration – electronic currency derivatives trading takes further steps forward The birth of ‘standardised derivatives’ looks set to herald a new era of electronic trading for currency derivatives and as Frances Faulds finds out, it is long overdue.

ThE e-FOREX InTERvIEw

58. e-Forex talks to Zeeshan Khan, Global Head of e-commerce at Standard Chartered Bank

REgIOnaL e-FX PERSPEcTIvE

62. China and South East AsiaRichard Willsher investigates what factors are shaping the foreign exchange market in China and South East Asia and what growth in e-FX we can expect to see taking place in countries throughout the region.

Manfred WiebogenForeword

Benchmark Fixings

Frances FauldsLeader

FX under Dodd-Frank

Zeeshan Khan The e-Forex Interview Standard Chartered

Richard WillsherRegional e-FX PerspectiveChina & South East Asia

Nicholas Pratt Prime of Prime BrokerageExtending market access

Daniel Proville Tradertalk

Mern Capital

Stuart Grant FX Mythbusters

Complex Event Processing

Heather McLean Retail FX services

Capturing opportunities

William Essex Adaptive FX algorithms

Giving control back

Dan BarnesFOCUS

TCA in FX

>>>

A

Abel Noser page 79

ACI page 22

ADS Securities page 2&3

Aite Group page 35

Azul Systems page 93

B

Bloomberg Tradebook page 103

BNP Paribas page 100

C

Caplin Systems page 10

Celent page 71

CFTC page 22

Citi page 44

CME Group page 51

Commerzbank page 7

cTrader page 139

Currenex page 15

D

DBS Bank page 74

Deutsche Bank page 37

Devexperts page 123

Digital Vega page 54

Digitec page 112

DTCC page 26

Dukascopy Outside Back Cover

E

Easy Forex page 149

Interactive Brokers page 143

ITRS page 90

J

Jyske Bank page 10

L

LCH Clearnet page 28

Leverate page 109

LMAX Exchange page 11

M

MarketPrizm page 95

MarketsPulse page 135

MarkitSERV page 25

Mern Capital page 158

MetaQuotes Software page 157

Murex page 52

O

Oanda page 108

Olympian Capital Management page 101

One Zero page 131

Option Computers page 41

P

Philip Futures page 65

Phillip Capital Management page 69

Progress Software page 10

EdgeSense Solutions page 104

eSignal page 57

Eurobase page 39

F

Fair Trading Technology page 133

FC Stone page 17

FinFx Trading page 145

FlexTrade Inside Back Cover

First Derivatives page 31

FIXI page 118

Forex Magnates page 165

FXall page 5

FX Architects page 83

FX Bridge page 53

FXCM page 147

FXDD page 151

FxPro Inside Front Cover

G

GAIN Capital page 121

GFMA page 26

Gold-i page 137

GreySpark Partners page 33

H

Hotspot FX page 21

I

ICE page 8

Insch Capital Management page 106

Integral page 14

R

Redline Trading Solutions page 94

S

SAP page 110

SmartTrade Technologies page 87

Standard Chartered Bank page 58

State Street Global Markets page 66

Squared Financial page 107

Sucden page 19

Sumerian page 91

SWIFT page 28

T

TABB Group page 78

360 Treasury Systems page 49

Thomson Reuters page 71

TMS Brokers page 9

Top FX page 125

Tradency page 129

TraderTools page 81

TradingScreen page 79

Traiana page 27

Two Four page 43

V

Valbury Capital page 67

X

Xenfin page 55

allall the liquidity

all currency pairs

all instruments

all order types

all execution mechanisms

all stages in the trade lifecycle

all types of institutional FX participants

all on one platform

The institutional FX community’s strategic partner of choice.Transparent • Neutral • Investing for the future.Now a Thomson Reuters Company.

allallContact us at +1 646 268 9901 or [email protected] www.fxall.com

Publication: eForex, January 2013 IssueContact: Silver Communications, Gregg Sibert, (203) 957-3370, [email protected]

allHave It

FX trading solutions for Active Traders . Asset Managers . Corporate Treasurers . Banks . Broker-Dealers . Prime Brokers

We’ve added • FX options

• Resting & algorithmic orders

allallNow there’s even more to

Authorized and regulated by the FSA

FXall Ad-A4_12.10.12.indd 1 12/11/12 12:22 PM

Improved TCA in FXApplying real-time trading analytics

Adaptive FX algorithmsGiving control back to clients

Retail FX tradingA new generation of services


FOcus

78. Applying real-time trading analytics for achieving improved TCA in FX Transaction Cost Analysis is still nascent in the FX environment but as Dan Barnes discovers, it has the potential to leapfrog development stages found in equities.

FOREX TEchnOlOgy90. Software, hardware and hybrids: optimal configurations for achieving low latency FXDan Barnes investigates why delivering effective low-latency for FX trading requires a tailored technology stack.

AlgORiThmic FX TRAding

100. Adaptive FX algorithms - giving control back to clients The FX market is big, liquid, changeable, unpredictable, and a lot of other adjectives as well. William Essex explores why, in such a complex environment, maximising the adaptiveness of your FX-algo suite is a good idea, but it may not always be a simple process.

FX myThbusTERs

110. Complex Event Processing – a proven technology and highly scalable for FX Stuart Grant, business development manager, SAP, answers some questions relating to the application of CEP technology in FX.

RETAil e-FX PROvidER

114. Prime of Prime Brokerage – extending market access for Retail FX providers

Nicholas Pratt examines the Prime of Prime brokerage (PoP) model and why it has been an increasing feature of the retail FX market as a consequence of numerous factors, including a more educated client base.

126. Becoming more competitive - giving Retail FX brokerages the right tools for the job Heather McLean explores what mission critical technology and business services are now required by FX brokers to meet increasing operational challenges and how these services can be leveraged by firms to reduce risk, maintain their competitive offerings and grow their market share.

viEWPOinT

138. eFX - Still lagging in Web and Mobile?Brian Martin argues that in a world where mobile, desktop and cloud are losing their seams and joining together into a larger multi-faceted user experience it’s time eFX caught up to speed.

RETAil e-FX cliEnT

142. Capturing investment opportunities with a new generation of Retail FX trading servicesRetail FX trading has advanced in leaps and bounds over the last few years so Heather McLean explores how traders can access some new ways of exploiting the fast moving currency markets.

TRAdERTAlk

158. Mern Capital e-Forex talks with Daniel Proville, Co-Principal of Mern Capital, a leading research partnership focused on the application of algorithmic trading techniques in the FX market.

January 2011

contents>>>

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Obortis cipisis alit do odit wissenim aciduisl ullam ipisim dolum quat. Magnis augue molestrud eugue feugiatue vullam, vel delit esequisi exercilit la faci blamcon volore: www.webaddress.com

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In command, in control, with confidence.

At Commerzbank, we have over a decade of experience in electronic trading in Asia. We have pioneered the systems, infrastructure and liquidity to keep you trading, whatever the market environment.

Every aspect of our development is driven by what our clients tell us they need. From new products to advanced intuitive functionality, experience user-driven innovation with Commander – our enhanced etrading platform for FX and Commodities.

Start trading today: contact [email protected]

Subject to local regulatory requirements, as applicable. The products/services described here are not to be provided to general investors in Japan, and some of them are not available for Japanese professional investors, either. Please contact your local representative for further details.

Corporates & Markets

What I need is electronic trading that I control

Sucden Financial now provides Index and Commodity CFDs through its API,

strengthening the organisation’s offering to retail brokers who have their own execution systems. Through Sucden Financial, clients seeking competitive liquidity into trading platforms such as MetaTrader now have the option of streaming FX and CFDs.

Jonathan Brewer, Head of e-FX Business Development at Sucden Financial comments, “Up until now, we have only offered these CFDs to clients who use our white label, not to our clients who require liquidity-only solutions. We realised we were missing out on a significant business opportunity because CFDs are becoming increasingly important for retail brokers. Whilst CFDs aren’t the prime product by volume, it became apparent that retail brokers wanted a ‘one stop shop’ for their products. We are delighted to be able to meet our clients’ requirements and provide both FX and CFDs through our API.”


NEWS

Jonathan Brewer

Sucden Financial adds to its API offering

Building on the success of their streaming spot service (Supersonic), 360T have

again broken new ground with the launch of the innovative Streaming Swaps (FXS) platform. This is the first time a multibank streaming swap trading platform has been introduced and represents a significant step forward for this global marketplace. FXS builds on 360T’s leading position as a global

FX swaps dealing platform with its current Request-for- Stream (RFS) capability and leading liquidity from over 125 market makers. The platform gives swaps traders the ability to co-mingle swap streams in customisable formats and tenors with a 1-click ability to trade. The price taker also has the option of setting up different trading views and environments based on how they like to transact their business.

360T launches Streaming Swaps (FXS) platform

ICE, Intercontinental Exchange and Traiana have announced an agreement to process over-the

counter (OTC) foreign exchange contracts via ICE Link, ICE’s middleware service. The extended offering will provide affirmation, regulatory reporting and clearing connectivity for OTC FX market participants in line with G20 commitments and new regulatory requirements in the U.S., Europe and Asia. Clive de Ruig, Global Head of ICE Link, said, “The synergies between ICE Link and Traiana Harmony create a powerful tool set for buy-side clients and

will facilitate the implementation of OTC FX clearing for ICE Link clients as well as the banks and clearing brokers that serve them. We are pleased to work with Traiana on this new development.”

ICE and Traiana extend ICE Link

Clive de Ruig


EBS has announced the launch of a new service, EBS Direct, providing

relationship-based disclosed liquidity, in addition to its traditional anonymous spot FX offering. EBS Direct will be available alongside EBS’s flagship anonymous matching platform and will deliver increased trading opportunities by enabling liquidity providers to stream tailored prices direct to liquidity consumers.

EBS Direct has the following features:

• EBS Direct prices will be separate from the anonymous prices but integrated within the same screen so users can hit either a disclosed or anonymous price, as they wish

• Price granularity will be in one pip and tenth pip increments

• Minimum size and increments of 100K

• Available through the EBS Workstation, EBS Global Access (browser-based trading solution) and EBS Spot Ai (API-based trading)

NEWS

EBS launches EBS Direct

Progress Software Corporation and Caplin Systems have announced

they are partnering to provide a fully integrated, end-to-end FX e-commerce solution for Jyske Bank, one of Denmark’s largest banks. The bank has selected Caplin Trader, an HTML5 front end that runs on the Caplin Platform, for end-user delivery. The Caplin solution will seamlessly integrate with Progress Software’s Apama Capital Markets Platform to provide a bird’s eye view of

aggregated FX markets in real-time and perform smart order routing, real-time pricing of spot and derivatives, auto-hedging and more. Jyske Bank’s Head of Department FX, Interest rates & Commodities, Lene Papsoe, explained the reason behind the move: “We see our eFX offering as strategically important to the growth of our business. Our new platform will mark us out as a market leader in the rapidly growing online trading market.”

Jyske Bank partners with Caplin and Progress Software

Spotware Systems has released the highly anticipated mobile version of the cTrader STP/

NDD platform. It follows the launch earlier this year of cTrader Web - which before this month’s release had only been available for desktop devices. cTrader Mobile Web is a mobile version of cTrader Web which can be accessed from Safari on iOS or the Chrome

browser for Android. As with all Spotware releases, users can log in to cTrader Mobile Web using the same login credentials as the other platforms, cAlgo, cTrader, and cTrader Web.

The platform itself is a slick, easy to use tap and slide interface which lets cTrader users view, open and manage their positions and orders.

cTrader Mobile now available for iOS and Android

Photographer: Jakob Stigsen Andersen, Midtjyllands Avis

Lene Papsoe

T H E P R O F E S S I O N A L F X E X C H A N G E

T: +44 20 3192 2682 | E: [email protected] | WWW.LMAX.COM

*LMAX Limited operates a multilateral trading facility. Authorised and regulated by the Financial Services Authority. FSA Registered no. 509778FX and CFDs are leveraged products that can result in losses exceeding your deposit. They are not suitable for everyone so please ensure you fullyunderstand the risks involved. LMAX Limited operates a multilateral trading facility. Authorised and regulated by the Financial Services Authority.FSA Registered no. 509778. The information contained on this advertisement is not directed at investors who reside in the United States of America,Singapore and or any other jurisdiction where their FX trading and/or CFD trading is restricted or prohibited by local laws or regulations.

awards 2011W I N N E R

LMAX Exchange is the first FSA regulated MTF for FX and metals,delivering the benefits of exchange quality execution to the institutional market.

Our open order book is driven by streaming limit-orders from top-tier banksand proprietary market makers, matching buyers to sellers consistently,

with total pre and post-trade transparency and execution speeds of less than 3ms.

Order matching is on a stric t price/time priority basis with no ‘last-look’ or rejections,and all trades are cleared through prime brokers.

LMAX Exchange - a level playing field on which to executeyour FX trading strategy with optimal precision.

FX tradingas it should be

*

eForex 07/12/2012 17:03 Page 1


NEWS

SmartTrade Technologies has launched several new components for LiquidityFX, its packaged FX eCommerce system. In addition to connectivity,

liquidity aggregation and smart order routing, the new system now includes pricing, price distribution, order management, hedging and risk management.

“As an asset class, FX represents tremendous potential opportunity for mid-tier and regional banks and brokerages,” said smartTrade’s CEO, Harry Gozlan. “LiquidityFX gives them a complete FX dealing platform with transparent execution and no volume-

based fees. This gives regional financial institutions the ability to attract and retain more of their customers’ FX business. LiquidityFX is an affordable package built on smartTrade’s proven Liquidity Management System used by more than a dozen global Tier-I institutions.”

smartTrade offers new components for LiquidityFX™

The first public appearance of the brand-new dxFX trading platform by Devexperts was made in London, in November 2012. The

platform’s modern and user-friendly UI, dxTrade, has been translated to several languages, including Chinese and Japanese. Meanwhile the backend order routing and risk-management capabilities are being beefed-up with new features as requests keep coming from new clients.

Stanislav Stolyar, VP FX products at Devexperts, says, “The feedback was great and several brokers have already signed up and are working on the launch with the Devexperts team. Powerful OMS and risk-management, highly-customizable back-office and APIs ready for integration, attracted the attention of brokers that are interested in new opportunities which make dxFX one of the leading product suites in the FX technology market”.

Devexperts dxFX suite goes global

DealHub (Option Computers Ltd) has announced the launch of FX Distribution Hub, a new service which allows customers

to price into any FX market destination via a single interface. A number of Banks, including a top three market maker, are already using the service to price into trading venues, taking advantage of connectivity which includes Reuters Matching, EBS, FXall, 360T, Currenex, Bloomberg, CFETS and FX Connect.

“With 10 new FX venues in the last year and a raft of changes to existing ECNs, the cost and complexity of getting your pricing into the market has never been greater” said Peter Kriskinans, CEO, Dealhub “With a huge surge in demand in recent months, we’ve launched this new service, which wraps our tried and tested adaptors with a new technical, commercial and support offering, to create a true ‘connectivity as a service’ model.”

DealHub launches FX Distribution Hub

Peter Kriskinans

Harry Gozlan

This advertisement has been approved and/or communicated by Deutsche Bank AG. This advertisement does not constitute an offer or a recommendation to enter into any transaction. The services described in this advertisement are provided by Deutsche Bank AG or by its subsidiaries and/or affiliates in accordance with appropriate local legislation and regulation. Deutsche Bank AG is authorized under German Banking Law (competent authority: BaFin – Federal Financial Supervisory Authority) and authorized and subject to limited regulation by the Financial Services Authority. Details about the extent of Deutsche Bank AG’s authorization and regulation by the Financial Services Authority are available on request. Deutsche Bank Securities Inc., a subsidiary of Deutsche Bank AG, conducts investment banking and securities activities in the United States. Deutsche Bank Securities Inc. is a member of NYSE, FINRA and SIPC and its broker-dealer affiliates. Lending and other commercial banking activities in the United States are performed by Deutsche Bank AG and its banking affiliates. Investments are subject to investment risk, including market fluctuations, regulatory change, counterparty risk, possible delays in repayment and loss of income and principal invested. The value of investments can fall as well as rise and you might not get back the amount originally invested at any point in time. “Passion to Perform“ is not a product guarantee. © Copyright Deutsche Bank 2013.

Deutsche Bank db.com/fx

World’s No.1 FX Bank Euromoney FX Survey 2005 – 2012

Deutsche Bank. Leading the way in FX.When the only constant is change, the right partner can guide you on the road ahead. At Deutsche Bank our market-leading platforms, expertise and insights can help you navigate the markets with success.

Doremus Deutsche Bank FX eForex 297x210mm 301161 Proof 01 14-12-2012


NEWS

The US and UK-based Jefferies Bache Treasury business has gone live on

TwoFour’s Cash Management solution, TwoFour™. TwoFour’s solution provides Jefferies with intra-day real-time aggregation of balances and cash flows across their multi-entity, multi-currency environment. The solution additionally consolidates cash forecasting and processing of payments and receipts in one core system and provides global real-time liquidity views, intraday cash-flow matching and exception handling. These features yield

reduced settlement risk while increasing funding accuracy for Jefferies.

Using TwoFour’s robust blotter functionality users can easily drill down from consolidated balances to the actual cash flow item level. This feature allows for a quicker resolution of issues and optimal use of funds which increases Jefferies’ market efficiency and client satisfaction. TwoFour’s usage is now undergoing a planned multi-phase expansion for more than 200 users across Jefferies’ other affiliates in the U.S., Europe and Asia.

TwoFour successfully implemented by Jefferies

Integral Development Corp has been selected by Wells Fargo & Company to launch

their new FX pricing service. The platform allows Wells Fargo to electronically access liquidity directly and indirectly from over 50 sources, including market making banks, ECNs and professional trading firms. Under the agreement, Wells Fargo manages its liquidity sources, price-making streams and customer-specific offerings from Integral’s hosted administrative tools. “As Wells Fargo continues to strengthen our FX capabilities, we needed a reliable and effectivesolution that would ensure the best possible service to our customers,” said Steve Godfrey, head of Wells Fargo’s Foreign Exchange

Ecommerce group.“Integral’s ability to customize their technology to our needs, while providing cost savings and time-to-market benefits made their platform a clear choice. We are very pleased with the results.”

Integral launches new FX Platform for Wells Fargo

ADS Securities selects FlexTrade

FlexTrade Systems, Inc., has announced that Abu Dhabi-based ADS Securities

has globally deployed its white label and enterprise FX trading solutions as a comprehensive package called Orex, which includes MaxxTrader, a complete turnkey ASP white label front-end system, and FlexFX, the company’s foreign exchange software solution for trading and risk management.

“The platform allows ADS to provide aggregated liquidity on a worldwide scale for trading spot, precious metals, forwards, and NDFs in a stream via RFS and RFQs,” says Vijay Kedia, President and CEO of FlexTrade, “Their orders will be able to trade directly from client to client, directly from the trading desk, or back-to-back with the liquidity providers. Additionally, ADS will also have access to state-of-the-art risk management tools, integrated bank and custom algos, margin control, routing rules, credit limits and dynamic spreading.”

Vijay Kedia

Steve Godfrey


NEWS

TMS Brokers has become the first FX brokerage house in Poland to offer a social investment trading platform. The company’s new GO4X

Social platform is a quick and easy way to execute trading ideas on the Forex market, using not only conventional technical analysis, but also following best performing traders within the GO4X Community. The GO4X Social platform automatically calculates the performance of social traders and publishes this information for other community members to view all the results, even on the single trade level.

The performance of top traders are summarized for easy reference in the Best Performers section. Mariusz Potaczala, founder and CEO of TMS Brokers explains that, “By creating their own profile and network of friends, traders on GO4X can share their trade ideas and strategies. By viewing how other people trade in real-time and while observing trader’s performance, even a beginner or inexperienced trader may easily follow the Best Performers and copy their trades.”

TMS Brokers launches GO4X Social platform

Two innovators in retail FX trading, Gold-i and Think IS, have formed a partnership

to strengthen their offering to clients.

From now on, clients who use the super low latency Gold-i Gate Bridge to connect MetaTrader to liquidity providers can also benefit from having Think IS’s HQ business intelligence and CRM tool to manage their clients and business more effectively.

Tom Higgins, CEO of Gold-i commented, “Whilst we have developed our own suite of risk management and execution tools, we did not want to develop our own back office system as that is not our core skill. Instead, we looked for the best back office technology in the market and have partnered with Think IS to offer our clients a full service CRM, business intelligence and business operations tool. Think IS’ HQ, with its real-time dashboards

and easy to apply indicators, helps us to offer an even more compelling proposition to clients.”

The latest trading software release from eSignal, version 11.5, features a new study with applications in the Forex markets. Seasonal

studies aren’t necessarily limited to commodities markets. The study implementation in eSignal opens up a fresh set of analyses for Forex traders.

No longer limited to year-over-year pattern comparison, Forex traders can now do yearly, monthly, weekly, and intra-day comparisons. This opens up so many possibilities: from comparing the first week of every month, to the first 3 hours of trading periods.

Gold-i partners with Think IS

eSignal version 11.5 features new study

Tom Higgins

Mariusz Potaczala

OURSHELFis

SAGGING.

INTL FCStone Inc. subsidiaries have recently won the following awards: WINNERS of P&L Magazine’s Award for THE BEST NON BANK FX PRIME BROKERAGE 2011 & 2012 and WINNERS of the Forex Magnates Award

for THE BEST LIQUIDITY PROVIDER 2012

Futures trading may not be suitable for all investors. The trading of futures/options involves substantial risk of loss and you should fully understand those risks prior to trading. O�-exchange foreign currency transactions involve leveraged foreign currency denominations with a futures commission merchant as your counterparty and foreign currency trading is not on a regulated market or exchange. Your dealer is therefore your trading partner, which is a direct con�ict of interest; and your deposit with the dealer is not subject to regulatory protections. Due to leverage, losses greater than your deposit may be experienced. O�-exchange foreign currency and physical foreign currency conversion is o�ered by FCStone, LLC and INTL FCStone (Europe), Ltd. On-exchange foreign currency futures/options contracts are cleared by FCStone, LLC. INTL FC Stone (Europe), Ltd. is authorised and regulated by the Financial Services Authority.

Sure, awards are good to get. But now that you know what we’ve won, we’d like to remind you why we won: Superior service. Sophisticated technology. Deep market access. And a wide array of services through our subsidiaries, including Forex prime brokerage, cleared on-exchange foreign currencies, physical delivery of foreign currencies in more than 150 countries, and both electronic and voice execution 24 hours a day.

Plus the �nancial strength of INTL FCStone Inc., a Fortune 500 company. That’s the solid foundation our reputation rests on, today and for the future.

Otherwise, we're all good.

Chicago New York LondonFCStone, LLC FCStone, LLC INTL FCStone (Europe), Ltd.212-485-3529 212-485-3529 [email protected] [email protected] [email protected]


NEWS

Squared Financial is now offering access to one of the most potentially profitable

financial markets in the world, online crude oil trading, which is becoming increasingly popular with all types of traders and speculators. Crude oil contracts are used as main international pricing benchmarks due to their price transparency and extreme liquidity. Crude oil futures (and options) are also an excellent way for companies in the energy industry, on the production and consumption side, to hedge their price risk and protect themselves against adverse price movements.

Jeff Grossman, Managing Director at Squared Financial Services says that “Increasing political tensions surrounding Iran’s nuclear program and various other global and local issues has increased a record demand for oil throughout the world. Crude oil prices have been breaking new records on a quasi-daily basis. The high volatility of crude oil futures in recent years has made crude oil trading an investment with an extremely interesting potential return.”

Jeff Grossman

Squared Financial offers Spot Crude Oil trading

LMAX Exchange, the first FSA regulated MTF for FX trading, has selected the

Equinix London LD4/5 data centre campus in Slough as its primary operational site. Globally, Platform Equinix™ provides access to more than 700 financial customers spread across the world’s top 16 global financial markets, as well as the leading equity MTFs, multiple FI platforms, dark pools, commodities, and new derivative products. Andrew Phillips, Head of Systems at LMAX Exchange commented: “There is a significant amount of FX activity taking place on Platform Equinix, not just in Slough, but

worldwide. Locating our matching engine in one of the key centres of this community puts LMAX Exchange at the client’s fingertips.”

LMAX Exchange selects Equinix

A growing number of banks have come to a point where spreadsheets are no longer

reliable and user-friendly enough for a 24h price distribution to FX e-commerce platforms. Only a centralized system with rich functionality and the support of an experienced team can guarantee the level of rate quality that is required today. 2012 has been the most successful year for the

D-3 Pricing System. The rate engine for FX forwards has been selected by six major banks in America, Europe and Australia. The software vendor Digitec plans further enhancements for 2013 and every new D-3 release includes additional features. Over the years traders from more than 30 banks have added their ideas and helped to make D-3 a leading product for FX forward pricing.

Six new banks choose D-3

Andrew Phillips


NEWS

Thomson Reuters enhances FX Matching Platform

In a recent webinar, hosted by TraderTools’ VP Strategic Services, Aharon Haber, entitled “Spotlight on LightFX™ - FX Aggregation - Doing It

Best #2”, the Executive Director and Head of Spot of a prominent European bank said they decided to go with TraderTools because, “It was the only platform that was not charging the LPs.” He continued, “That makes a big difference when you speak about relationships with LPs. We thought it was nonsense for the LPs to have to pay for the liquidity they were giving. They give a service but they still have to pay for it. It was ridiculous for us [because] if they got charged they widened the spread. It was a disaster.” Hear it first-hand and decide for yourself at www.tradertools.com

TraderTools’ LightFX™ – No Charge for LPs

Thomson Reuters has announced a number of significant enhancements to its FX Matching platform to bring increased capacity, scalability

and performance to the FX community whilst providing customers with the additional functionality and services they need in the fast-changing FX market.

A new Graphical User Interface (GUI) improves the user experience and provides additional capabilities

Superderivatives has launched DGX, a cloud-based real-time market data, news & commentaries, chat and analysis platform, which

delivers a wide range of cash and derivatives market data direct to a clients desktop, iPad or mobile device through a modern, user-friendly interface. Developed over the last two years in direct response to market need, DGX will provide wide data coverage for both cash and derivatives in all asset classes, including bonds (sovereigns, agencies and supra-nationals, corporates, euro bonds, MBS, ABS), stocks, indices and ETFs, CDS curves, energy products (power and gas, oil, oil products, emission), metals, agriculture products, wet and dry freight, interest rates (all yield curves including OIS, implied correlations, basis spreads, inflation, BMA) and currencies of every country - major and all emerging markets.

Superderivatives launches DGX

Aharon Haber

that support the changing trading workflow. Traders are able to lock customer and internal orders into Matching and trade their own book individually whilst traders who cover more than one instrument can now monitor their net and average position in up to five instruments by displaying their net position and position average in those instruments. Click to Trade capability also enables faster trading for aggressors and the ability to trade both top of book and depth of book prices.

Whilst we held our ACI FX Committee meeting on November 15th in Casablanca, the US Treasury announced the following day that it is exempting

both foreign exchange swaps and foreign exchange forwards from the definition for ‘swap’. As a result, FX swaps and forwards will not be subject to central clearing and exchange trading requirements but will be subject to reporting and business conduct requirements. What we traders knew from the very beginning has now become officially accepted: - The

FX swaps and forwards market is markedly different from other derivatives markets. Existing

procedures in the FX swaps and forwards market mitigate risk and help ensure stability. I am therefore very happy about this outcome. Simply put, these products don’t hold any ‘future unknowns’. They are a pure and simple mathematical solution.

But what concerns me now, is a possible withdrawal of panel banks from benchmark fixings. Allow me to make a digression into interest rate fixings, which has similarities to foreign exchange:


Benchmark fixings under review

Market stories may still be dominated at concerns over Europe’s debt crisis, Greece’s negotiations for aid, the US debt problems or the fiscal cliff and possible effects of a clumsy economy. But for us the hot spot remains regulation.

FOREWORD

Manfred WiebogenPresident ACI, The Financial Markets Association.

Bank participation

A recent concern about the manipulation of benchmark fixings, which has resulted in some banks being obliged to make settlement payments, has caused other banks to have reservations regarding their future participation in the benchmark fixing process. We have been made aware that both European and International Banks are reviewing their operational and reputational risks, as well as potential costs, when participating in benchmark fixings.

At ACI we are particularly concerned about the withdrawal from rate fixing panels of bank contributions to the daily fixing’s. In the traded markets, the fixing of benchmarks has always been the responsibility of independent market participants. Central Banks across the globe have clearly expressed their objections to taking over the rightful place of banks, preferring the market participants to continue to fully play their role in the rate setting process. In a common press release of ACI The Financial Markets Association and EBF (European Banking Federation) Guido Ravoet, Chief Executive of the Euribor-EBF recently added to the discussion: “Bank’s responsibility in setting benchmarks is part of their core role as market participants. That responsibility must remain theirs and nobody else’s. Withdrawing from the benchmark setting process would send the wrong signal.”

Mandatory requirement

The European Commission informed us that they wish to have, in respect to the Euribor, a panel as large as possible in order to enhance the credibility of the benchmark. They are therefore considering making mandatory, banks with a significant turnover in the money markets, to be a part of the panel. Of course we all strongly condemn any manipulation of interbank rates or any other benchmark and strongly remind market participants of the responsibility of care they owe the market when setting theses crucial rates. But we are also concerned by misleading commentary and judgements concerning the impact of this, before forensic evidence has been examined, and the cost assessments have been correctly applied. The consequences of banks being coerced to make compensation payments is wrong and the individual’s responsibility needs to be

assessed for fraudulent behaviour when a trader has tried to manipulate any fixing! The public shaming and blaming of banks in general is a risky and unfair tactic in this regard and can be seen to condemn the entire financial services industry and needs to be stopped. A bank’s balance sheet is built from assets and liabilities. Whilst one side takes profit from low interest rates the other side loses – and vice versa. ACI deplores the lack of, in some of the discussions, a rational and fairly balanced viewpoint being put forward by prosecutors. The withdrawal of just one bank participating at a fixing weakens the entire system and erodes not just confidence but also professional and public interest.

january 2013 e-FOREX | 23

The impact of the new regulatory environment is now spreading geographically with EMIR likely to come into eff ect from mid next year.

Bank entities that already have to manage Dodd Frank for trading with US entities will now, additionally, have to manage EMIR and other regulations for non-US entities and address their connectivity requirements for both clearing and reporting.

Buy-side clients will need new connectivity to clearing members and onward connectivity to clearing houses - in some cases using existing affi rmation/allocation platforms. In many cases, however, new processes are demanding a new look at post trade


Cost and convenience - making the right strategic choices forFX under Dodd-Frank

LEADER

As e-Forex went to press the FX industry was awaiting the imminent publication of the fi nal rules and regulations governing SEFs from the CFTC. Frances Faulds looks at how the industry is readying itself for the new regulatory environment.

Frances Faulds

processing across asset classes due to fundamentally different requirements in the world of OTC clearing. Consequently, firms will be mindful to select vendors that are offering services capable of providing platform interoperability and that have the ability to cope with evolving regulations and processes globally. Traiana’s recent agreement with ICE Link to provide NDF affirmation, allocation and clearing services using Traiana’s CCP Connect platform and MarkitSERV’s FX CCP gateway providing a single point of access to LCH, CME, SGX, HKEx and ICE are cases in point. Firms will also need to ensure they have connectivity to the appropriate trade repositories.

Connectivity

Steve French, director of product strategy at Traiana, says, “The important issue facing FX firms today is ensuring they are connected to the various entities in order to fulfil their regulatory requirements. For clearing and reporting connectivity, our paradigm is to connect once to Traiana and we connect to many different end points. This is essential to be able to dynamically affirm, allocate and route trades to each participant’s chosen clearing brokers, CCP and repository depending on the instrument being traded, geography of their counterparty etc.”

Apart from the enormous infrastructural challenges involved in connecting - and then maintaining connectivity - to multiple CCPs and other ‘new’ FX destinations like clearing brokers and trade repositories, participants also have the challenge of managing increasingly complex collateral (margining) and credit obligations. Other challenges include ensuring that SEF and non-SEF flows co-exist seamlessly and affirmations and allocations can be managed effectively within new regulatory workflows.

Keith Tippell, co-head of MarkitSERV FX concurs: “There is no question that vendors like MarkitSERV - already well connected to sell and buy side participants and with live connectivity to the world’s CCPs and repositories can offer ease of access and scale efficiencies as well as provide the comfort of a ‘future proofed’ solution in respect of evolving clearing and reporting obligations.”

French believes the final piece of the jigsaw, and one which he believes will be a hot topic in 2013, is the whole issue of complying with new rules for pre-trade limit enforcement by clearing firms and their clients, especially the asset management community. “Traiana is doing a lot of work in this space to ease the introduction

of this new regulatory requirement by establishing a centralised limits hub and this is not just for FX but for rates and credit default swaps too”, he adds.

From a planning perspective, much of the work for trade reporting should be now be in place; planning is still needed for the medium to long-term when clearing comes into effect starting next year, with the need to be flexible as regulations get finalised, wording gets changed, and the European and Asian regulations come into effect.

“Despite regulatory vagaries, participants can’t keep their heads in the sand,” says Tippell. “We’re seeing significant demand to discuss clearing and reporting solutions. Buy side clients that have already begun to address Rates/Credit clearing and reporting connectivity are now focused on our FX proposition. FX PB and FCM clients are in the process of upgrading connectivity to ensure that they meet future obligations, banks (and entities becoming SEFs) are working actively with us to prepare for the new regulatory landscape and some are looking at outsourcing the complete clearing connectivity conundrum to us.”


>>>

“The regulations around clearing and reporting transparency are being embraced now but the

potential knock-on effect on uncleared instruments such as how margin will be managed cross instrument

and cross asset should be taken into account when looking at regulatory solutions,”

Steve French


Not since MiFID has regulation impacted the way in which products are traded. With the move of FX options to electronic multi-dealer platforms such as SEFs and MTFs, there is concern that this will prove difficult where options are illiquid and a belief that electronic trading will boost liquidity in the more commonly traded option structures.

French says that in addition to the impact of implementing solutions for instruments mandated for clearing there are a number of others areas being debated such as uncleared margin requirements and minimum tenors. “The regulations around clearing and reporting transparency are being embraced now but the potential knock-on effect on uncleared instruments such as how margin will be managed cross instrument and cross asset should be taken into account when looking at regulatory solutions,” he adds.

Outsourcing

The sheer volume of the changes in the FX industry is expected to spur a new round of outsourcing as banks start to re-look at their core activities and as the plumbing gets more complex as there are a greater number of connections needed. French says: “Clearing connectivity is moving on from the classic CCP to FCM interface we see in rates, to include the FX model where a middleware platform such as Traiana CCP Connect provides matching and FCM connectivity and the forthcoming trade certainty requirements where a centralised hub can provide pre-trade credit checking. Banks are re-evaluating the capacity of existing systems because they expect to see increased volumes on the cleared side of the business.” For this reason, French says reporting, clearing, credit monitoring and margin management are all earmarked as growth areas for outsourcing.

Keith Tippell says that continuing uncertainty in when and how new regulations will pan out is exactly the reason for a significant upturn in interest from across MarkitSERV’s key client categories of banks, clearing brokers (FCMs/FXPBs), ECNs (emerging SEFs) and buy side participants to discuss outsourced clearing and reporting solutions.

“There’s a lot for participants to think about when making a decision on going it alone, working with service providers like MarkitSERV, or as seems increasingly to be the flavour of our discussions, outsourcing clearing and reporting connectivity and workflow management in its entirety to a third party like us,” he adds.

James Kemp, managing director of the Global FX Division of the Global Financial Markets Association (GFMA) says that a fuller picture on clearing for FX options will be available in Q1 when data collected from the clearing banks has been analysed. Meanwhile, he adds that the Global FX Division’s Market Architecture Group is working with a number of jurisdictions around harmonising reporting.

It still remains to be seen how much harmonisation there will be between the regulators and if there is going to be two rule sets, one for business in the US and one for everything outside. Kemp says: “There has been well documented debate around extraterritoriality issues. For FX, we are keen to see the US Treasury ‘exemption for clearing’ mirrored internationally and there does seem to be consensus for a harmonised approach to ensure the continued efficient functioning of a global FX industry.”

Stewart Macbeth, President and CEO of DTCC’s Deriv/SERV subsidiary, says that its FX Global Trade Repository has been in internal testing for a few months with a view to going live on January 10, the reporting date under Dodd-Frank for registered swap dealers, major swap participants trading FX, equities and commodity asset classes, as well as clearers for these asset classes.

LEADER >>>

“For FX, we are keen to see the US Treasury ‘exemption for clearing’ mirrored internationally and there does seem to be consensus for a harmonised approach to ensure the continued efficient functioning of a global FX industry.”

James Kemp

Says Macbeth: “One of the big differences between the FX market and the other derivatives asset classes is the sheer volume of trades so capacity testing is critical. The key aspect of FX reporting is that whilst clearing exemptions have been applied to FX swaps and forwards, all FX transactions will need to be reported, irrespective of whether they have been cleared or not.”Building connectivity for reporting into the FX workflow in time for compliance is a major industry-wide operation and DTCC offers a standard point-to-point MQ Series connection enabling direct electronic messages as well as file upload over the internet for data captured automatically internally. “These are the two primary methods that the large firms testing directly with us are expected to use, although a number of FX market participants are also looking to use vendors offering reporting services.”

DTCC is working closely with SWIFT, which will continue to carry confirmation traffic and will be part of the reporting requirement for all confirmation data. MarkitSERV, half-owned by the DTCC, and other vendors such as Traiana are also building a reporting service with the capacity to feed into the DTCC trade

repository for a swap dealer.

Managing the IT burden

While the majority of the larger players are choosing to connect

directly to the DTCC trade repository on a real-time basis, some reasonably large non-US participants are choosing to use reporting solutions. Macbeth says: “The reason behind this is

that some of these firms are faced with a number of rules from different jurisdictions impacting them at once and so they are looking at ways to manage the IT burden. The larger dealers seem to be opting for direct connectivity”

Reporting for FX will create new industry-wide data sets not only for the regulators but

it is hoped that reporting will help at a later stage with product standardisation, clearing eligibility, i.e. data to help understand the nature and structure of the market with the view to deciding whether products should be cleared. Macbeth says: “Ultimately, by stripping off counterparty names, there can be a public data-set that could lead to more productive conversations at an industry level and that can help firms better understand their trading and positions in a full market context. We have seen this with other asset-classes.”

Macbeth says that reporting is another step in further automating the FX market and it will perhaps increase the usage of messaging standards and help firms to ultimately fully automate their processes. “For example, there is a need to get to a common identifier and to use this identifier downstream and this can lead to operational efficiencies within firms,” he adds.

Joe Halberstadt, head of FX and Derivatives Markets at SWIFT, says SWIFT is focusing on facilitating standardised communications to the new CCP and trade repository infrastructures being built globally. “There will be multiple new infrastructures, repository providers and CCPs and SWIFT will provide a single pipe into many different end points,” he says.

At the moment, clearing for the FX market is limited to NDFs. A number of global CCPs are offering NDF clearing – LCH.Clearnet, the CME Group, the Singapore Exchange and ICE – as well as several local clearing solutions that are being developed in countries such as Poland and Chile. Halberstadt says that SWIFT is offering market participants the ability to use the existing message confirmations over the SWIFT network to feed trades into these CCPs for clearing.

Says Halberstadt: “This is a very simple action both for us and for the end-user because all they have to do is send their existing MT300 confirmation over to us after trade and we will seamlessly copy it into the infrastructure for central clearing.” To this end, SWIFT is working with MarkitSERV to enable this, as well as in Poland and Chile to make MT300 directly available into their local clearing system. In effect, banks can simply utilise the SWIFT messages they

LEADER


are already paying for to communicate with the new infrastructures they need to connect to.

This could provide a solution for a large part of the FX market. The SWIFT network carries more than 200 million trade confirmations each year in MT300s, add this to the CLS traffic it carries, and Halberstadt estimates this to mean SWIFT covers the majority of the FX market.

Similarly, for trade reporting, Halberstadt says that existing messaging over the SWIFT network can be copied into repositories for the purpose of trade reporting. For DTCC’s Global Trade Repository, SWIFT is able to both carry what FPML messages there are as well as create FPML files from existing MT300s confirmations automatically and SWIFT is working with REGIS-TR in Europe to enable receipt of existing messages.

Promoting convergence

Derek Sammann, Senior Managing Director, Interest Rate & Foreign Exchange Products, at CME Group says that the incoming regulatory changes and subsequent infrastructure being built could further enhance the electronification of the FX market as well as prompt further convergence of the listed and OTC FX markets. Today, he says, 99 per cent of CME Group’s FX futures

market is electronically traded, and 78 per cent of options, on Globex, across 56 currency pairs.

He says: “I would say that roughly 40 per cent of the OTC FX spot and less than 10 per cent of the OTC FX options market is electronic at the moment so there is more work to be done. We have found that customers have been much more accepting of certain levels of standardisation, in terms of options expiration dates and underlying trade sizes, as the technology required to support an electronic FX options platform is pretty significant. It is not something that comes off the shelf or can be built overnight so we believe we are in a strong position given our significant footprint in FX options now in listed derivatives and the relative growth in our market versus the OTC market.”

As NDFs move towards central clearing, Sammann says that emerging markets has been the fastest growing part of CME Group’s FX business in the past 18 months. The Mexican Peso has been its single biggest growth product, and in Q1 the exchange operator will launch a deliverable Renmimbi future. Sammann says: “It is a small market now but our customers have indicated that that would be an important currency pair for them, to be able to trade in the form of a future which then benefits from the credit mitigation of a central counterparty, the capital and operational efficiencies of future, as well as the electronification of that market as well.”

Since May this year, CME Group has been clearing OTC FX in terms of non-deliverable forwards (NDFs) across 12 different NDF currency pairs and 26 ‘cash-settled forwards’, which are what Sammann describes as the equivalent of an NDF in the G7 currency pairs. Sammann says: “By clearing these products we are letting our Buy Side and Sell Side customers determine how and where they want to use our clearing services – if they just want to clear OTC transactions or if they want to get the same benefits of clearing by trading our underlying futures and listed options.”

Benefits of a central counterparty

Although clearing OTC FX is a new business stream for CME Group, the bigger picture is that the exchange has actually seen a significant growth in its core futures and options business because its customers are not willing to wait for clearing. “Instead they get the benefits of the central counterparty, the benefits of the credit mitigation, the benefits of the transparency, and they can trade in markets that are already deeply liquid and already deeply electronic, in the form of futures and listed options,” says Sammann.

“One of the big differences between the FX market and the other derivatives asset classes is the sheer volume of

trades so capacity testing is critical.”

Stewart Macbeth

>>>


By providing choice to its FX customer base, and catering for demand for both OTC bilaterally-traded and listed products, Sammann believes that the CME Group is helping the FX market adapt to the new regulatory requirements, ahead of time.

He adds that Dodd-Frank and EMIR are trying to create the same regulatory structure that the futures market already operates under. “We are actually already regulated in a way that promotes transparency and central counterparty credit mitigation and creates the safety and security benefits of a listed environment. All market participants have significantly benefitted from this model,” he says. A comparison of the growth rates of the OTC market to the listed derivatives market for FX, he says shows that CME Group has been outperforming the OTC market for five years running.

To this end, Sammann says that CME Group has continued to add currency pairs to its product range as well as attractive pricing programmes, such as programmes that make block transactions and exchange-for-physicals (EFPs) more cost effective. EFPs allow customers to take an OTC transaction and convert it to a listed futures position.

Sammann says: “This has been a significant driver of the growth in our volumes, and more importantly, in our open interest that we are holding currently on-exchange in our foreign exchange futures and options. Open interest is up 19 per cent meaning customers are voting with their feet. They are voting to put their transactions, and hold their risk, in the form of FX futures and options where they already benefits from the very same principles that Dodd-Frank and EMIR in Europe are trying to promote. And this is confirmed by the record levels of “Large Open Interest Holders” as reported by CFTC that tracks the number of customers holding open interest at CME”

For OTC trades, CME Group is providing back-end clearing services, and Sammann says that it is clearing that CME Group’s customers are asking the exchange to focus on as there are enough execution venues for OTC products already. Furthermore, OTC clearing is a direct compliment to CME Group’s futures business as it can provide margin offsets between positions held as futures and OTC transactions that are cleared, resulting in a significant capital saving and margin reduction for customers that trade cash versus futures and clear all at CME Group.

Sammann says that CME Group has not had to develop much from a product perspective in readiness


LEADER

“There will be multiple new infrastructures, repository providers and CCPs and SWIFT will provide a single

pipe into many different end points,”

Joe Halberstadt

>>>


for the new regulatory environment for FX, but the exchange and clearing house is working on connectivity with OTC execution venues and CME Group’s OTC clearing service and engaging with the broader trading community in FX now that there is much greater level of interest in trading FX futures as opposed to just trading bilateral cash products.

Sammann says: “The work streams, or the STP pipes, between the listed derivatives market clearing houses and the OTC execution venues are all converging in a better and much closer working relationship for the market.”

Making the right choices

Keith Tippell of MarkitSERV says that FX market participants are, fundamentally, looking for painless and effective solutions that enable them to make the right strategic, and tactical, choices in the face of mounting regulatory mandates.

One of the key challenges facing all participants, however, remains on-going uncertainty in respect of exactly what assets will ultimately be regulated, how, when and of particular relevance, where. He says that, according to the Financial Services Authority (FSA), speaking at a recent industry event, regulatory

authorities “very much appreciate the level of change involved and recognise that [regulation] will take time to put in place” but at the same time remain committed, absolutely, to the principle of “more transparency and more standards to create a safe and vibrant market”. FSA also acknowledged that there were “issues about how in practice clearing and settlement process will work” and that this might result in a “slightly longer time frame” before FX clearing obligations will actually kick in.

Tippell says: “Clearing and other regulatory obligations change processing economics and that change is key to the growing interest in outsourcing STP, clearing and reporting processing to companies like us.”

“However, attitudes are changing. The bigger banks may be leading the charge, but the investment and asset management communities are fast catching up. The buy side may be more cautious because they know, ultimately, that whatever route they take will increase their cost of trading, but our clients are actively engaged and the trend is for greater engagement.”

Ultimately Tippell believes there will be at least two major FX CCP players globally, with perhaps more

“Clearing and other regulatory obligations change processing economics and that change is key to the growing interest in outsourcing STP, clearing and

reporting processing to companies like us”

Keith Tippell

LEADER

“The work streams, or the STP pipes, between the listed derivatives market clearing houses and the OTC

execution venues are all converging in a better and much closer working relationship for the market.”

Derek Sammann

to come in Asia, and does not believe that the market will choose one exclusively over another. “All will clear some volumes which again favours connectivity to agnostic platforms that will de facto be connected with – and offer a single gateway to - all CCPs – now and as they continue to emerge,” he predicts.

Frederic Ponzo, managing partner of capital markets consultancy GreySpark Partners says that another major strategic decision facing firms today is actually whether they will continue trading NDFs or exit the market completely. He believes they should be considering how marginal or core this flow is to them, and how much they want to retain. He says: “Ultimately we are going to start to see regulatory arbitrage, with not all banks deciding to register as swap dealers, so we can expect to see, relatively quickly, a Balkanisation of the FX market and that leaves European and US banks with a shortage of clearinghouses to clear with. They are probably already members and connected to all of them.”

For Ponzo, choosing a clearing house or a set of clearing houses to clear SEF flows is not a difficult decision; the hard decision is whether to stay in the NDFs. Whilst NDFs are attractive because it is still 100% voice traded so there is room for efficiency, and it is commanding wider spreads and trade-by-trade profitable, Ponzo adds that there are only three or four currencies that are liquid and worth trading. “It is more a question of stay in the game or exit the game more than which is the best way to optimise your NDF business.”

Similarly, Ponzo says that the main challenge for the FX options industry is that it is fairly manual and before the industry is able to connect to CCPs and trade repositories the banks need to re-engineer their internal business processes and improve STP rates internally. He says: “This is not a trivial project. It is lengthy, expensive and it will probably be about another year before banks are ready to tackle external STP for FX options. This should be relatively straight forward as this is a process that interest rate swaps and credit default swaps have been through so the external connectivity will be in place but the big challenge is for internal STP.”

Outsourcing much of this work would be viable if FX options were being executed

on SEFs but Ponzo still thinks this is a long way off. He says that while there is a case for a movement towards greater standardisation FX options are fairly bespoke and exotic structures that are hand crafted. “Once the trade is done and reported to the SEF it can be automated and that is the part that banks are working on now, as reporting will start sooner than this. Right now there are regulations to comply with and this means re-engineering trading of FX options. Banks have a big incentive to go to central clearing,” he adds.

Globalisation of regulation

Regulatory arbitrage will be a key feature in the landscape that is emerging according to Ponzo due to the fact that two worlds are emerging: the converging North American and European markets on one hand and the emerging markets, where there is no equivalent implementation of the G20 agreement in local law. This, he believes, will essentially create a wall within the FX market where regional players will choose not to be subjected to the CFTC and they will exist outside of that. “It is going to be a long time before it reconverges,” he says.

John Beckert, managing director, e-trading and risk management solutions at First Derivatives, believes

that the FX industry is facing greater globalisation of regulation, and what began as the regulation

of the US domestic retail FX is morphing and has become more international.

He says: “It is not to say the rules will ever be exactly the same in all

jurisdictions but at least now there is greater awareness of the need for a global

regulatory push and the need for new rules to inter-relate. Although

it will take time, the regulators are now talking to each other and I think

there is going to be a push for more rulebook consistency globally.”

He adds that it remains to be seen whether the new regulations will have a positive or negative impact on volume. He argues the potential for growth, particularly in retail FX, is huge but if regulation is viewed by any of the stakeholders are restrictive this could have the opposite effect.

He says: “First Derivatives implements enterprise-wide solutions so we


Cost and convenience - making the right strategic choices for FX under Dodd-Frank >>>


LEADER

have got to work with all of the stakeholders in the trade workflow process, including other technology providers, to remap and realign to the new workflow requirements dictated by the changes in regulation. It means more work, more expense, at least in the near term, amidst a lot of uncertainty in terms of what the impact is going to be. I think we will be reacting to evolving change for a period of time to come.”

Beckert believes that the main dynamics of what the regulators are trying to achieve are very basic. They want to ensure that there is sufficient competitive market-making and that the workflow ensures a standard consistent and fair way of executing against those multiple market-makers as well as transparent reporting back to the regulators, and to the client.

He adds: “The big discussion now is about how much of it is going to become equities exchange-like and I don’t think it will ever get completely there because the nature of the business is so different.”

Conclusion

Trying to emulate and adjust the exchange trading market in FX terms has, according to Beckert, one interesting repercussion in that even technology companies that are not actual market participants are still going to hire a chief compliance just to make sure the technology complies with the workflow regulations.

While the ultimate impact of moving NDFs and FX options to electronic trading is unknown, Beckert believes that it will create a more liquid market for NDFs. “There is already a quasi-liquid market today. Typically the core liquidity in NDFs comes during the time zone when the relevant futures market is operational. With banks being able to provide relatively good two-way executable market making, collected in a multi-bank venue, this will create a 24 hour market for NDFs.”

First Derivatives is already working with the banks, prime brokers and post-trade providers to certify the technology solution to become a SEF. Beckert says that the FX industry is now faced with a raft of decisions in order to continue the business they are doing today. “Market participants need to make choices today about how they are going to connect the stakeholders in the process, either by connecting with the market makers and CCPs directly or leveraging a provider that already has that connectivity in place. Then a decision has to be made about the scope and services which will be provided in the new environment and choose software for a wholly new component – that of market surveillance – which didn’t exist before.”

“It is more a question of stay in the game or exit the game more than which is the best

way to optimise your NDF business.”

Frederic Ponzo

“Although it will take time, the regulators are now talking to each other and I think there is going to be a

push for more rulebook consistency globally.”

John Beckert

Speed and precision - empowering clients with faster and smarter FX e-commerce engines

FEATURE


The astounding rate at which technology has developed in recent years has allowed the FX trading market to execute in huge volumes, at microsecond speeds and with unerring precision. Nicholas Pratt talks to one leading bank and FX technology provider to explore how these enhanced capabilities have allowed traders to pursue strategies previously unthinkable and to also discover what factors have led to a step-change in the speed, flexibility and transaction processing capabilities of FX e-commerce platforms

Nick Pratt

The march of technology is often perceived as coming at the expense of durable relationships. Speed becomes all-important, volume becomes

too huge to be managed manually, the machines take over and human interaction diminishes. Automated efficiency comes at a price, some might say, especially in a market like the FX world where it is still heavily reliant on relationships.

For the large liquidity providing FX banks, this is an issue they have had to manage in terms of how they develop their e-FX services and how they manage to combine all the benefits of automation, online access and algorithmic execution yet maintain a fruitful and communicative relationship. Furthermore, they must also consider how the FX e-commerce platform can be specifically customised for each client without incurring unmanageable development costs.

Design and user experience

According to John Bartter, Head of FX Institutional Platforms at Deutsche Bank, the client relationship is always placed as the highest priority when considering the design and provision of FX e-services. “Given this, we have brought clients into our design process earlier than we have ever done in the past. We have also re-engineered our platform to allow us to distribute new features more rapidly.”

In terms of the factors that have precipitated a step-change in the speed and transaction processing capability of FX e-commerce platforms, Bartter says that the growth of FX volumes and the number of dealers on single dealer platforms have been directly correlated. “As clients become more comfortable with ecommerce platforms, there is a demand to have their dealing experience automated as much as possible.”

The leading FX providers are also looking to assist their corporate and institutional clients in working their orders

and improving the way they communicate with the marketplace. “With the development of intelligent algorithms which give clients access to advanced liquidity in all timezones, we are also seeing the expansion of order types along with the extension of orders into new FX products such as Swaps and Options,” says Bartter.

Similarly, the leading FX banks are aiming to provide an enhanced user experience of their trading platforms and gaining market share by deploying more scalable and flexible platform infrastructures to facilitate improved price generation, order management, post trade services and risk management operations.

“Single dealer platforms need to be more nimble and adjust to rapidly changing client and regulatory requirements. To address this, Deutsche Bank completely rebuilt our Autobahn platform from the ground up and recently announced the launch of the next generation FX trading platform on Autobahn.”

Deutsche Bank’s new platform is an example of the trend for liquidity providing banks to combine access to cross product research with trade execution and connectivity services to provide clients with even more powerful e-FX services, says Bartter.


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“We have created the Autobahn App Market, which we believe is the first app-based electronic distribution system in the financial services industry. This integrates the pre-trade, trade, and post-trade experience onto one platform. And it allows clients to customise the information and applications they need across all asset classes.”

Deutsche Bank is also personalising the provision of post trade services and helping clients to prepare for planned changes in FX market structure by being as transparent as possible around its understanding of the new regulations. “We are releasing post trade functionality as early as possible to allow our clients to test and prepare for any upcoming regulatory changes which will affect their banking requirements.” Ultimately, says Bartter, banks should consider treating their investment in electronic FX platforms as a strategic asset and the feedback from clients should decide where the banks’ resources should be focused for future e-FX development. “Clients want bespoke solutions because everyone has specific needs and priorities. Solutions that allow our clients to grow their business will always be at the center of any strategic business plan.”

Evolving technology

Similarly, says Bartter, finance is at the heart of evolutionary technology. “Within FX we are capitalising on advances in the technology space to service the growing demands placed upon us by clients and regulators alike. The speed of this evolution continues to increase and it is our responsibility to continue to drive these innovations further.”

In order to achieve this drive of innovation, the major FX banks will have a sizeable in-house IT development team to call on but increasingly they are reliant on the third party vendors that provide a range of services for building or enhancing electronic trading platforms.

According to David Woolcock, Global Head of Sales and Business Development at Eurobase Banking Solutions, a bank’s strategy for developing its e-FX services depends primarily on the constituent group of buy-side clients it is serving. For small and medium sized enterprises that do not trade especially frequently, a very basic request for quotes (RFQ) platform with easy to use features is required. For larger corporates and multinationals, the ability to pool requirements across entities and trade on behalf of subsidiaries, along with features such as up loadable cash flows, should be part of a bank’s e-FX offering.

For asset managers the ability to net trades into one transaction and then book them across multiple entities is essential as well as robust procedures for the pre-trade netting requirements and rules. And finally, for active trading clients looking to maintain good and profitable client relationships, detailed MIS capabilities to monitor clients’ behaviour are needed.

In addition to client segmentation a bank needs to decide in which capacity it wishes to engage, says Woolcock. “The most basic choice is between being a market making bank with the risk taken onto its own books, or a customer service bank using its e-FX platform to source liquidity and cover the resultant customer trades - a so called ‘Bank in a Box’.”

The latter group need to rely on extremely fast business processes and limit checking supplied by a vendor who can supply all stages of the deal chain in a modular way, says Woolcock. “This allows the offering to seamlessly expand as the customer base grows post adoption of an e-FX single dealer trading platform.”

Combating latency arbitrage

Woolcock acknowledges that there has been a conspicuous step up in the speed, flexibility and

“As clients become more comfortable with ecommerce platforms, there is a demand to have their dealing

experience automated as much as possible.”

John Bartter

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transaction processing capabilities of FX e-commerce platforms and says that the primary factor in this change was the need to combat latency arbitrage, where the slower platforms would find their prices being exploited by high speed and high frequency traders scouring the market for pricing anomalies caused by high latency. This led to a revolution in bank technologies deployed in the FX arena.

“The client segmentation mentioned above and the resultant differing requirements have led to increased flexibility for bank e-FX platforms to be able to appeal to a broad constituency of buyside clients. In today’s market, a pretty GUI is just not enough. Robust flexible workflow solutions are essential as well as the ability to customise the platform for local markets and customer segments served,” he says.

Now that the latency arbitrage issues of a few years ago have been generally addressed by most FX banks via enhanced MIS, speed is becoming less of a factor and low latency is less of a priority, says Woolcock. “Now good relationship clients and those with genuine business to do are being targeted and other factors such as rejection levels are becoming more critical.”

Working orders

FX providers are also dedicating more resources to assisting their corporate and institutional clients in working their orders and to generally improve the way they engage with the FX marketplace, says Woolcock. “As best execution rules and new developments such as execution quality analysis (EQA) and transaction costs analysis (TCA) have come to the forefront so have new additions been made to e-FX platform’s functionality to assist.”

Buy-side clients are also expressing more interest in specific algorithmic order types designed to suit their trading needs. “Orders at the FIX are proving popular with institutional customers along with algo orders especially for those customers who have large amounts to do and who do not wish to disturb the market as they execute.

Resting orders are also moving from being placed over the phone with the bank to being placed electronically and those still preferring to place orders by phone will probably find that the sales trader electronically enters them into the bank’s resting order book using the same functionality being made available to clients.”

Another key component to assisting client engagement is the rate engine with the ability to add a variety of margins and mark ups to tailor the price being shown to either groups of customers or down to, if necessary, the sub-account level of an individual client, says Woolcock. “The ability to view these complex price tailoring rules in an overall summary is also crucial for assessing the correct engagement with customers.”

Linkages and combinations

The linking of strategies found in bank research to execution is seemingly becoming a must have for FX traders, says Woolcock. “For example, this could include the ability to place a trade and set of limit orders from a technical analysis strategy directly from the graph or to launch a trade ticket directly from research in the correct currency pair. These combinations of research and execution services are becoming common place as we move to an era of machine readable news and the development of strategies that will execute on actual breaking news.”

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“Another feature that will become more prevalent is the combining of FX and commodities and this offers an interesting opportunity to offer FX covered/uncovered commodity trades designed for end users to increase the alpha from the FX component in their hedges. If you are a utility used to transacting your FX online it makes sense to also conduct your commodity hedging requirements online as well,” says Woolcock.

Banks are also looking to extend the personalisation of services in both their pre and post-trade areas in order to strengthen the relationships with their clients. And while the banks have been present in the pre-trade space with a variety of offerings, it is the post-trade area that most opportunities are presenting themselves. Items such as early take ups, extensions, partial fills, multi deal capture are becoming mainstream requirements. Additionally the demand to provide services which support a client’s cash flow forecasting and enable them to enter hedging strategies is becoming an increasingly common requirement.

“As banks take advantage of investments made in the capabilities of e-Prime Brokerage the new regulations are offering a window to be able to offer a more rounded and complete post-trade service and get paid

for doing it,” says Woolcock. “From trade reporting to clearing, customers are looking to their banks to provide services to solve these new issues for them. Getting the post trade offering right will increase customer loyalty and open additional sources of revenue.”

Dawn of a new era

Woolcock wholeheartedly agrees with Deutsche Bank’s Bartter that banks are now treating their investment in electronic FX platforms as a strategic asset. “We are moving, or some would say we have moved, to an era were the provision of electronic execution and related services is a statutory requirement. What we are seeing now is banks developing a robust strategy towards meeting their customer’s requirements and chosen execution style.

“Those that have not invested in a single dealer platform are realising it is a must have. So whether it is a top 20 player offering a full blown service or a niche regional bank going down the route of deploying a “Bank in a Box”, the trend is certainly heading towards 90% of all FX flows being traded electronically in the coming years.”

These coming years are likely to see a continuation of the fast paced evolution that has occurred in the last 10 to 15 years and a rise in demand from FX traders for even more flexible and powerful tools. This will undoubtedly have an impact on how FX-e-commerce engines and order management solutions develop.

“The FX market has seen more than a decade of continual growth post the re-alignment of the Euro blip in volumes and although this has been followed by sluggish or lower growth post the crisis the FX market is still attracting new participants. Meanwhile electronic developments have continued at the same frenetic pace with a plethora of new developments in recent years,” observes Woolcock.

“Given the amount of work required on the regulatory and reporting fronts it is reasonable to suggest that now the focus will shift from trading engine enhancement to STP, reporting and MIS fuelling the continued development of FX e-commerce platforms. The addition of FX options being electronically traded and the drive towards cross asset class platforms will add to this as more markets become transparent and commoditised making them ideal candidates to feature in future plans for e-FX platforms,” he concludes.

“In today’s market, a pretty GUI is just not enough. Robust flexible workflow solutions are essential as well as the ability to customise the platform for local markets and

customer segments served,”

David Woolcock

What was the thinking behind Citi Velocity 2.0 and what did you set out to achieve?

Although it takes its name from our former platform Velocity 2.0, launched in January 2012, is a completely new build and not simply an upgrade of the old platform.

Our objectives were clear in terms of what wanted to achieve. The platform we had was not a bad platform. We kept the name because we wanted to do the predecessor justice. We were quite happy with the name and the brand we had built under Citi Velocity, it had made a meaningful impact to our business, but recognising the need to innovate in this space, even though the platform was doing quite well, we decided it was time for us to leap ahead of the competition. We wanted to rebuild the platform to achieve faster execution times, lower transaction costs, greater liquidity for our clients, a high standard of real-time information and far more efficient use of desktop space.


Citi Velocity Trading 2.0 Delivering speed and far more efficient use of desktop space

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Offering a host of customisable pre-trade analytics and trading tools Citi Velocity 2.0 is a next-generation cross-asset trading platform that is leading from the front. Frances Faulds talks to Alaa Saeed, Global manager for Citi Velocity Trading about its recent launch.

Our first goal was to change the core platform to achieve greater speed – speed of access and speed of execution, low latency, pricing, confirmations and processing tickets. Speed was a key driver. The time to market from tick-to-trade determines in many cases the profitability on that trade for both our clients and ourselves.

In what ways did you make more efficient use of desktop space and improve the user experience?

We recognise that our clients use multiple banks and their associated platforms so we wanted to make it as space efficient as possible. This involved an entire rebuild of the interface. Until about two years ago, many of the platforms being built were very trader-driven and then pushed out to clients. Velocity 2.0 looked at the best design for clients and how we would meet their requirements in the interface and make the GUI easier to access. The upshot of this is that there is no standard view of Velocity 2.0 and no two customer screens look the same. It is entirely customisable. Everything is floating and can be rearranged and layered in any combination.

You get a lot more from a Velocity price tile today – swaps, forwards, NDFs, orders, order management and information. Everything is compacted into one window but we have managed to keep it clean and simple.

Did the rebuild include mobile apps?

We had dabbled in the mobile space before with basic concept apps under the Citi FX brand but they were very simple, offering just prices. The Citi Velocity app we have today is fantastic and has matured into a comprehensive analytics and news suite. It provides cross asset information, price commentary, real-time market prices, research, analytics, videos, and our internal newsfeed, CitiFX Wire, which is run by Lee Oliver.

The CitiFX Wire is a unique offering that has grown massively with both journalists in London, New York and Asia, and our Sales and Trading teams in all the countries we operate, contributing to its content. Often what our local teams see on the ground is more relevant than perspectives from our hubs, and so the CitiFX Wire offers valuable insight into market activity. This is a key differentiator for us and something our competitors cannot replicate because they do not have the local market footprint.

What does Citi Velocity 2.0 offer users in terms of cross-asset trading?

Citi Velocity 2.0 has been built from the ground up as a cross-asset platform; nothing has been bolted on later. As well as FX users can trade Rates, credit, futures, and some precious metals. We are coupling cross-asset trading capability with cross-asset information.

We want to help our clients identify opportunities for correlated trades. Citi Velocity 2.0 provides all the cutting-edge trading capabilities with real-time comprehensive information and analytics to make trading decision and trade in a higher capacity than before.

Historically, the platforms that have had cross-asset trading capabilities have patched applications together, sometimes with different user IDs and trading accounts. It has not been done well at all. With Citi Velocity 2.0 we control all the design across Markets centrally so they all look and feel the same and are part of one platform. All asset classes are truly integrated.


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“You get a lot more from a Velocity price tile today – swaps, forwards, NDFs, orders,

order management and information.”

Alaa Saeed


What new functionality have you added to the platform?

We have also integrated trade aggregation, allocation and roll functionality into the Citi Velocity blotter for the first time so that users can build their own workflows around their trades. This is something we have not historically included before, simply because the nature of our clients. We haven’t needed it before but we have expanded our horizon with Citi Velocity 2.0.

Within options, we’ve launched first generation exotics and we are on the cusp of a new multi-leg options platform, which is looking to be very cutting edge.

We’ve added to our NDF offering, with NDF crosses and NDF Swaps and have continued to develop Algorithms with the addition of the Dagger suite.

How have you provided deeper liquidity on the platform and helped users lower their transaction costs?

In terms of providing deeper liquidity and lower transaction costs, I really feel we have come a long way in our abilities there. What we have launched is a tremendously powerful client-to-client matching system which facilitates free exchange between clients so clients can post interest, match up against one another and essentially reduce their transaction costs. As a result of this matching the liquidity is much deeper.

How has Citi utilised algorithms in Velocity 2.0?

In addition to the speed of execution and interface, Velocity 2.0 facilitates trading in general by allowing users to see the best possible spreads and the deepest possible liquidity. Our algorithms add to this execution strength, and clients can also choose from 5 strategies to accommodate passive or aggressive execution, internalized or direct market access (DMA) models. Ripple, uses our internal liquidity pool and leverages the CitiFX franchise. Silent Partner, TWAP and Daggers 3 and 5 offer passive and aggressive execution using a combination of internal and external

liquidity. Together, the algorithms offered on Citi Velocity 2.0 deliver an award winning suite.

How do you see the e-FX market evolving over the next few years, and what changes should we expect to see in the industry?

I don’t believe in the death of the single dealer platform. To the contrary, I believe banks will continue to differentiate their offerings, and deliver value and high quality service to their clients through their platforms. Within these platforms, there will continue to be a focus on great design, latency, transaction costs and liquidity, options, Emerging Markets, algorithmic execution and real-time cross asset information. That’s a lot of areas, and so you can see, there is still tremendous opportunity to grow. We will be pressing ahead into each of these areas.

That said, regulation and the implementation of new regulatory requirements into the eFX space will continue to be a trend, but I don’t see this slowing growth in eFX. As a spin-off, we will trend towards better post-trade reporting services and transaction cost analysis.

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From platforms to market penetration – electronic currency derivatives trading takes further steps forward

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On unveiling the Wall Street reform bill, CFTC chairman Gary Gensler said standardised derivatives will be required to

trade on open platforms and be submitted for clearing to central counterparties sealing the future trading model for currency derivatives. The term ‘standardised

derivatives’ was first used by the G20 leaders in Pittsburgh in 2009 to describe the over-the-counter derivatives that could be cleared, adding that those deemed too exotic and too illiquid to be cleared would then be subject to higher capital requirements.

The upshot is that the bulk of OTC currency derivatives have become standardised, and therefore clearable, and therefore electronically tradeable. The FX industry has made several attempts in the past to trade FX options electronically in the past and they largely failed. Now however, the timing is right, and it is mandatory.


The birth of ‘standardised derivatives’ looks set to herald a new era of electronic trading for currency derivatives and as Frances Faulds finds out, it is long overdue.

Impact of regulations

Alfred Schorno, Managing Partner at 360T, says that the regulations, both Dodd-Frank Act, due to implemented end of Q1, and EMIR/ESMA, due at the end of 2013, are continuing to push forward to change the FX landscape. He says: “The regulations are driving a lot of the discussions at the moment, and also product investment and investment in connectivity in how these products will be traded.”

Up until some months ago, banks with while-labelled solutions and single bank portals invested heavily in pricing engines were not much interested to improve auto quoting services for FX options into multi-bank portals Schorno says, but changing regulation requirements has changed this and there has been a drive towards the multi-bank portals. This refocus has triggered several new interface projects.

He says: “With this change of regulation comes the requirement that professional users execute deals through a multi-bank portal for best price execution and later clear through a CCP. Market makers have shifted their development resources to tackle, and automate, the volumes for quotes that will eventually come through multi-bank portals.”

According to Schorno, banks will no longer have a captive audience on their single bank platforms and FX options pricing will be impacted by this, as well as NDFs. Market makers began hooking up their pricing engines on to the multi-bank portals for NDFs and in the past two years Schorno reports 360T has seen volumes increase by 400% annually for NDFs and for FX options they have also increased by 300% per year, over the last three or four years. He adds: “This makes 360T, according to statistics, one of the FX portals with the biggest turnover in FX options at this point in time.”

“Obviously much of this is being driven by the regulatory demands but these changes are also being driven by more demand from the buy-side in terms of transparency and straight-through-processing for these products, which has already led to extended export functionality for these products.”

Drivers

360T has concentrated on plain vanilla first generation FX options where the biggest volume is found and where the market has most standardised. He believes that the more exotic options in the second generation will follow soon but that third generation structures are not suitable to be traded electronically, and there are too few transactions to make worthwhile supporting the products electronically. The same goes for NDFs. Volumes in Brazil, Malaysia and the major NDF


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“Market makers have shifted their development resources to tackle, and automate, the volumes for quotes that will

eventually come through multi-bank portals.”

Alfred Schorno

360T RFS Option Pricing with Fenics ePricer

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currencies are greater because of greater standardisation. “Standardisation means it is easier to trade products in competition, and on multi-bank portals,” Schorno says.

“In terms of currencies, 360T’ executed volume is very much driven by customers who have underlying real business, i.e. hedging and investing in those currencies. We have seen a dramatic shift in investment into currencies which are NDFs, or more exotic, such as China, Malaysia, India, and Brazil as well other Latin American countries. This has to do with globalisation but also to do with the fact that these products are quoted by more banks, with bigger books, and also because volatility in G10 currencies has decreased so there is more interest by institutional investors in trading these currencies.”

For Schorno, the incoming regulations spell the final shift from telephone trading for FX options and the new era of compulsory electronic trading and the SEF. In the institutional world, Schorno says that the demand is for pre-trade analytics, dealing via APIs and more sophisticated straight-through-processing requirements, with demand for interfaces to link order routing systems further downstream from portals to position-keeping systems. He adds: “We have also seen strong demand for transaction cost analysis (TCA) from institutional investors. Best price execution is a requirement and this has been handled by the portals for some years but TCA offers more in-depth analysis of their execution behaviour and the moment of execution is a big discussion.”

Fine tuning

With the requirement to execute all NDFs and FX options on electronic portals, wether SEFs or MTFs, Schorno says concern over having a single point of failure has become all the more important and the bigger institutional desks are looking into adding a second portal. For corporates, workflow is not a new discussion but the impact the new regulations will have on the workflow cycle still needs to be considered.He says: “None of this is new; it is more about fine-tuning what we have already in place and optimising trading structures. To this end, internalisation has become a hot topic and a lot of the larger banks are already aggregating as many flows as possible to first internalise and to then hedge to optimise risk

management.” It still remains to be seen whether banks actively direct NDF and FX options flow to the multi-bank portals or leave it to their customers to decide.

Going forward, single bank portals are not going to be able to price FX options in the same way, due to the proposed five bank RFQ requirement, so there is going to be a growing need for multi-bank portals to distribute both NDFs and FX options. Despite its late entry into the market last summer, momentum is fast growing for FX options on FXall.

Eric Jawitz, Director, Options Product Manager at FXall says that the request-for-stream options platform has been built to appeal to a wide spectrum of users – corporate customers, real money managers as well as banks and hedge funds. At the same time, the platform includes specific functionalities for different client segments. For example, corporates have the ability to do zero-cost structures and hedge funds can hedge and remain delta neutral. NDFs can also be traded on the same platform.

Says Jawitz: “One of the great features of the FXall platform is that the same screen can be used for executing spot, forwards, swaps, NDFs or options by changing the value of one dropdown.”

The new NDF and FX options features are seamlessly connected to FXall’s Settlement Center for those users that are using FXall for matching and confirmation. The FX options platform matches flow straight through to settlement and confirmations are automatically sent out via Swift. FXall provides the full cycle for execution and matching and

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confirmation. In addition FXall will become a SEF in mid 2013, and will comply with all SEF regulations including sending all information to the appropriate clearing house when options clearing starts.

More functionality

Currently, the FX options structures are plain vanilla but Jawitz says a number of clients are interested in trading exotics on FXall and there are plans to launch these. In addition to having an RFQ that asks the bank to solve for strike, FXall also supports strips and has solve-for-strike functionality in the strips as well. This allows a client to do one trade that includes monthly collars for the year ahead. “Some clients have told us that it can take half an hour to get a price for a strip of collars with their current manual approach, and even then they have to go back to the banks to firm up the price because of the time delay. However, with auto-pricing they are able to get a price back in real time,” Jawitz says.

Jawitz adds that another feature that sets the FXall platform apart from its competitors is that the ticket entry screen, where orders are actually input, is also a calculator. He says: “This means that we can provide indicative prices or indicative strikes to the client before they go to the bank. The calculator gives users a good indication of where the price is going to be and this can help them with their pre-trade decision process. These calculations use industry standard models, and volatility

surfaces that come from the banks, with a full smile, so it’s a pretty reliable calculator.”

He adds that following the merger with Thomson Reuters, the Eikon product has a complete library of pricing the first generation and even second generation exotic options making it easy for FXall to use Eikon’s library in the FXall calculator and hence support these products efficiently and more quickly.

According to Jawitz there has been an interest in an options product offered by FXall for some time but FXall was waiting for the timing to be right. “We started developing the options platform about a year and a half ago. Following robust testing we decided the time was right to launch because of the support from our liquidity providers and regulatory developments,” he adds.

While it was once argued that FX options were the last to move to electronic trading, owing to their complexity, Jawitz does not believe it was the complexity that held back developments. He says: “Those who trade options have to deal with the complexity of options anyway, so for them getting the information back in real-time and being able to get it from more than one bank at a time simplifies the process, makes trading easier and reduces errors downstream.”

Jawitz believes it is not so much about changing the old way of trading options but more about automating the existing model and supporting the demand for greater transparency from regulators. He says: “We are not looking to change the way the market behaves, we are trying to make it easier for the banks and customers to share that information quickly and more efficiently. We expect that relationships are still going to be a big part of trading options.”

User Experience

For Franck Dewannieux, e-Trading platform Product Manager at Murex, the superior user experience, with user interfaces tailored to a clients particular business processes, is becoming increasingly important in easing the path towards greater adoption of electronic currency derivatives. He says, “Providing a superior User Experience with user interfaces tailored to the business processes of the different actors from the trading floor to branches and the final customer is becoming more and more important; we have strongly invested in this area to provide user-centric integrated trading environments. We are also working on solutions that provide the right level of user experience on mobile devices (smart phones, tablets)”.

“Some clients have told us that it can take half an hour to get a price for a strip of collars with their current manual approach, and even then they have to go back to the banks

to firm up the price because of the time delay.”

Eric Jawitz

From early one, the Murex platform has supported trading and risk management for all currency pairs across vanilla, simple and complex exotics and structures. He adds that customers trading currency options are expressing increasing interest in using cross-asset order management functionalities on a variety of products including structures.

Says Dewannieux: “We also think that having state-of-the art analytics, including real-time cross-asset volatility surface management tools remains fundamental in today’s market and we have worked at multiple levels, including in the development of specific analytics, to ensure that our PFE/CVA solution supports currency options.”

The need for platforms built to seamlessly support high volume without compromising latency comes high on Murex’s customers’ list according to Dewannieux coupled with increased integration of the entire lifecycle of a trade, from pre-trade quote publication, order management, automated and manual Request For Quotes management, execution, capture, automatic hedging, trade lifecycle, risk management, processing and settlements.

He says: “It is fundamental to consider the complete chain to make sure that all opportunities for the automation of processes are taken. More generally, interacting with our customers tells us that in

today’s volatile regulatory and market conditions, it is important for them to be able to adapt quickly to changing conditions and that they need to rely on systems that are not only robust but also agile.”

SEFs

Stephen Best, CEO of FX Bridge Technologies, believes that the move towards the adoption of SEFs is a prime example of regulation driving automation. He says: “FX options, for the most part, will have to be traded on SEFs in the US and this is really going to drive a lot of what happens over the coming months and years. This will fundamentally change the way in which FX options, and all non-exempt instruments, will be transacted.”

Already, ahead of electronic trading becoming mandatory to ensure best execution and transparency for off-exchange FX options, Best says banks are intensifying efforts to automate FX derivatives. “Previously they have been focusing their strategies around single bank connectivity and single bank products but now that FX options and NDFs are non-exempt they need solutions that are more generalised and we are seeing improvements in the way they provide API pricing and this is helping drive the abilities of ECNs and MTFs to provide options liquidity, ” he says.

FX Bridge enables trading in exchange-style calls and puts and vanilla strategies, such as spreads, strangles and butterflies, and is adding customisable strike price and date functionality to the platform so users can go to any date or strike price they need. The FX Bridge platform is being further developed to offer pricing for exotics, such as knock-ins, knock-outs and binary options.

Best says: “There are certain standard options structures that are popular such as strangles, straddles, butterflies and risk reversals, and liquidity providers are providing those structures through their APIs now.”

Best believes there are still potential opportunities in the development of trading systems for NDFs, once

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“We also think that having state-of-the art analytics, including real-time cross-asset

volatility surface management tools remains fundamental in today’s market…”

Franck Dewannieux

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greater clarity has been achieved. He says: “There is still not a standardised solution for trading NDFs and there are a number of different methods used. This will most likely be played out over the next year. Whoever develops a standardised solution for electronic delivery of NDFs is going to be in a very powerful position.”

FX Bridge Technologies is in the process of applying to become an SEF and is in the process of upgrading to be compliant with regulation. Much of this work is transparent to users as it relates to surveillance functionality and the reporting and monitoring requirements needed for them to be compliant, rather than focusing on changes to platform or transaction methods.

Demand for automation

Best says the demand is high for greater automation and electronic trading in FX options, where between 95-98% of trades are still traded manually. “It is not that they want any specific functionality; options are rarely traded electronically. Market participants are looking for some form of automation as soon as possible.

“This is the way forward and too many participants have not been forward thinking enough to date. Market participants have to look at the new regulatory environment as an opportunity. Few trades are too complex to automate. The technology exists for those who are innovative enough to view what might be seen as a complex transaction as an opportunity to differentiate themselves.”

Additionally, he adds, a lot of feedback from FX Bridge customers highlights concerns around the protection of client assets in light of recent failures and fraud. He says: “Clients want to be able to trade FX derivatives but more broadly, they want to trade everything and feel that their money is safe. Automated solutions that can provide

comfort that customer funds are protected are solutions

that are going

to be successful in the coming months and years.” This pertains to clients, brokers, prime brokers, credit intermediaries, and central counterparties, having a method of operation that allows for the proper protection of client funds and Best expects a number of solutions being put forward in the next year to address this.

Mark Suter, CEO of Digital Vega, which launched multi-dealer FX options trading platform, Medusa, last April, says that

electronic trading in options may not yet be fully established in the market but it is

certainly gaining traction. He says: “Against a background of lower activity and lower

volatility in the FX market, we are pretty pleased with progress so far. We are adding customers all the time, and numbers of tickets

are increasing. There is growing acceptance and more and more participants are now considering

using options’ platforms. What has helped drive this adoption is an increased perception that Dodd Frank will be implemented following the re-election of Obama. There was for a while, a growing belief that under a Republican administration, it would have been watered down or delayed still further.”

New functionality and services such as precious metals options, generic spreads, portfolio trade execution and integration to leading OMS providers have recently

“Whoever develops a standardised solution for electronic delivery of NDFs is going to be

in a very powerful position.”

Stephen Best

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FEATURE


been added and Suter says Digital Vega is now working closely with its strategic partners at e-Exchange, Currenex and FX Connect to add spot, forwards and NDO/NDF trading to the Medusa platform, clients will be able to trade everything: spot, forwards, options, precious metals and NDO/NDF’s in a single GUI.

Growth potential

However, until the rules governing a SEF are fully defined Suter says further SEF focused development will have to wait. Currently the focus is on ensuring compliance with short-term requirements such as providing unique swap identifiers and published mid-rates on options prices. “We have had pre-trade analytics and indicative pricing from the get-go. Right now, we are fully SEF compliant given the rules we are aware of but to finalise how it is actually going to work as a SEF will depend on the final rules from the CFTC,” Suter adds.

Suter is upbeat about the growth potential. He says: “As with any market, once you start to see greater transparency, improved liquidity and ease of use, people become progressively more comfortable with using it and it becomes part of their daily process. The whole point of this, when we started on the Medusa

Project, was to make it much easier to trade options quickly, efficiently and easily.”

Conclusion

The move to electronic trading is not just about transparency; it is also about pre and post trade workflow management and Suter says Digital Vega has been working with several large FX market participants looking to trade options as a way of enhancing yield in a low interest rate environment. “This is as much about providing a fully integrated solution as well; Digital Vega has already developed Options Connect which combines pre and post trade workflow tools with a range of execution types; two large real money managers are already integrated with more due to connect in 2013. There is a growing requirement for a solution that delivers a combination of ease of execution, regulatory compliance and complex workflow management tools,” he adds. “We have also already started working on integrating a full FX option trading capability into the Currenex and FX Connect platforms.”

Looking further ahead, as FX option trading migrates to a cleared market, the major question that many end-users want answered is what the all-in cost of trading and clearing FX options will amount to. Says Suter: “They want to know what the execution, clearing and margin costs will be as this may impact their decision process”

The answer to this question may well temporarily influence the market penetration of electronic trading for FX options. The collective market view however, is that once this new trading paradigm beds down, volumes will grow as participants start to see the real benefits of increased transparency, liquidity and greater certainty around credit.

“As with any market, once you start to see greater transparency, improved liquidity and ease of use, people become progressively more comfortable with using it and

it becomes part of their daily process.”

Mark Suter

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As e-FX becomes increasingly competitive how is Standard Chartered aiming to differentiate its e-commerce services from other leading players?First and foremost is our expertise in emerging markets across Asia, Africa and the Middle East. Secondly, based upon our market leading Straight2Bank transaction banking platform, which has been around for a number of years, we have developed our Straight2Bank exchange - S2BX - fi nancial markets platform. Straight2Bank delivers products, clearing and payment services to a wide range of clients from local corporates to international fi nancial institutions. We decided to integrate S2BX with our transaction banking and consumer banking site, so in the future our clients will be able to utilise our payments, settlement, rates, forex, commodities and other assets capabilities under one roof. Th e concept is ”One Bank” : a highly competitive, seamless platform that spans wholesale and consumer banking.

Lastly, in line with Standard Chartered’s geographical footprint, S2BX is aimed at linking emerging markets with developed ones; linking West to East. Th is is a very powerful off ering in the current global economy.


e-FOREX : IntervIew

e-Forex talks to Zeeshan Khan, Global Head of eCommerce at Standard Chartered Bank

What steps has Standard Chartered been taking this year to further strengthen your very strong global FX franchise and enhance your range of FX e-commerce services?We continue to invest in our infrastructure and to strengthen our franchise across our footprint. Our local presence gives us a unique viewpoint on what are some of the most exciting and fast growing markets and we are committed to rolling out new services to our clients. Our aim is to provide customised services across our footprint which will continue to distinguish us, and focusing on rolling out S2BX.

Has Standard Chartered made any significant changes to enrich the features and functionality of your FX trading platform?The process is an on-going one. We started to work on S2BX only three years ago and given the size and diversity of our footprint and the complexity of some of the geographical and financial markets we work in, we are constantly adding new functionality. We have been pushing out S2BX internally for about two years, introducing it to our clients externally for about a year, quoting over an API to ECNs. We have been using our own single-bank GUI for about six months.

In what ways has the wide global footprint of Standard Chartered and deep insight into emerging markets helped you to develop your e-FX services?We have deep local market expertise across all functions. This knowledge is invaluable when developing solutions for local clients whether it is in pricing, execution, regulation, documentation or other areas. We are already able to offer 5,000 currency combinations and we are live in over 130 separate currencies. We are locally distributing FX, forward and FX swap capability in most of our footprint countries across Asia, Africa and the Middle East. We have a very sophisticated order management framework.

We developed S2BX from the ground up for emerging markets currencies, emerging

markets regulation, emerging markets pricing and execution. To do that you have to think about each of the countries as if you are in that local country and ask, “What am I trying to deliver to my client?”

The answer is that you have to provide onshore pricing and execution but you have also got to manage the onshore regulatory framework and the regulatory experience that both our clients and our local operations are managed under. We have taken the time to extensively seek feedback from our clients on what they require. In the case of pricing, for example, we seek input from local brokers and then align all of the related execution ticketing, returns and recording in conformity with local requirements.

Moreover we have a front end that can work in the lowest of bandwidth environments which we have tested in 12 African countries. This allows us to deliver client-rich information to more or less any desktop which has required some pretty sophisticated engineering across our technology. What preparations has Standard Chartered been making to help clients address the impact of new regulation on FX market activities?Standard Chartered has been engaging with regulators to understand how various proposed regulations will impact the real economy and at the same time we are active in a number of established forums to consider how best the industry should respond to these new


>>>

e-FOREX : IntervIew


challenges. Despite these interactions, the direct impact to our clients remains uncertain. The FX product set seems to have the least clarity and reflects the degree to which the industry and regulators recognise the need for ongoing access to these markets, in particular corporates across emerging markets. We also continue to engage with clients on the evolving regulations, to communicate how the bank views both the impact and timeline of the various proposals. The critical consideration for our clients remains the cost of doing business in the new market environment and how best to manage their businesses under these new regulations. In the short term Standard Chartered expects to extend a number of services to clients to enable continued access to products and geographies. These services are likely to concentrate on how best to provide access to liquidity, utilise available assets for

any required margin or collateral arrangements and meet any clearing requirements relevant for FX products.

Why has offshore Renminbi trading become so popular and how has Standard Chartered been facilitating the electronic trading of CNH?The increasing move towards internationalisation of the Yuan is an event of major ongoing global economic significance. One of the key drivers of this trend is international trade. The total volume of RMB trade settled transactions with China through Q1 2012 was CNY 580 billion or 10.7% of total China trade – up from less than 2% for the same period in 2010. This upward movement is borne out across all of China’s key Asian trading partners - Singapore, Taiwan, South Korea as well as Australia. Forward projections indicate that the overall figure for RMB settled trade transactions could reach 20-30% by 2015. The creation of additional offshore clearing hubs and agreements will serve to drive and underline this trend. BoC Taipei has been approved to clear offshore Yuan transactions, HKMA and UK treasury co-operation continues to target greater offshore CNH business activity, and Singapore has recently issued full banking licenses to 2 Chinese lenders in a move that is widely seen to be a precursor to establishment of a local RMB clearing bank.

Beyond trade settlement, broader drivers of offshore CNY activity include FX hedging, dim sum bond issuance, and loans. Added to this, portfolio utilisation opportunities for CNH have also seen a boost across 2012, specifically with an increase in the RQFII quota to USD$32 billion in November.

The cornerstone of Standard Chartered’s eCommerce offering is a partnership model – combining our presence in core markets and our unique pricing capabilities to offer a deeply tailored ‘e’ offering to our client base. Within this is absolute support for realtime liquidity and execution for all CNY variants – onshore, offshore, as well as the non deliverable offshore variant. Our eCommerce platform, driven by the need to operate in regulated as well as unregulated markets, has a highly sophisticated and flexible permission model that serves to clearly regulate which portion of our client base gains access to which currency set, onshore versus offshore. Equally critical is support for major onshore liquidity venues, and our provision of pricing to CFETs serves to highlight this.

The deployment of our platform to trading teams and clients in all relevant onshore as well as offshore liquidity centres means

that trends in the globalisation of the RMB, and the impact of these trends on the 3 currency variants will be reflected in realtime on the platform, and be made available to our client base on a global basis. Many commentators believe e-FX is evolving away from just a transactional process towards helping clients to extract more value from risk, research and advisory services. In what ways do you think Standard Chartered is strategically placed to benefit from this trend?Transactional FX in isolation meets only one facet of our client requirements. The key to creating highly relevant content, and deep long term relationships, is understanding the client profile and how that drives client behaviour. Comparing a trade backed transaction banking client with a retail consumer, a high net worth individual, or a treasury centre user, will yield very different results in terms of their drivers and modes for FX execution – as well as what their overall pre- and post-trade requirements are.

Ensuring that these diverse client sets are fully catered for has been a design principle of our eCommerce strategy from day one. Our platform offers a number of execution models depending on client profile. On the one hand, we are heavily integrated with the bank’s consumer banking, payments, trade and custody systems to ensure that clients see executable FX as part of an offering tailored uniquely for them. As alternatives to this, we also have a Single Dealer


The e-Forex Interview

entry point for execution, as well as complete support for automated execution on ECNs or sophisticated FX consumers such as hedge funds.

Investment towards value added, non transactional, functionality is a key area of ongoing focus for us. As an example of how we have been leveraging technology as part of our overall ‘e’ offering, Standard Chartered Global Research now also offers research content via an iPad app. The recently launched market-leading Renminbi Globalisation Index is now available via this app. Added to this, our platform

already supports sophisticated client MIS – all of which is used in direct support of tailored reporting and pricing. Development of support for full cross border mobile remittances is also on the roadmap and user base projections are at 1.1 billion users by 2015.

The key to an integrated offering is a well understood and globally diverse client base, the deep internal verticals to service them, and a ‘One Bank’ view of channels that sit across these verticals to offer highly tailored functionality. eFX plays a pivotal role as a platform in its own right, as well as a provider of critical real-time execution services into bank-wide platforms. It is a compelling combination of best of breed functionality being leveraged across a solid global client franchise.

Looking ahead what parts of the world do you expect to see increased demand for e-FX coming from over the next few years and how is Standard Chartered gearing up to meet that?Emerging markets sit right within the bank’s footprint and will continue to be a key focus. We expect to see increased trade activity from China and Africa in particular. With strong growth expected across our footprint, we expect to continue our focus on developing S2BX for these markets. We will use our local expertise, working closely with our clients to provide them with the most comprehensive integrated e-offering.


Regional e-FX PeRsPective


>>>

As it stands, Singapore and Hong Kong appear to account for roughly 10% of global turnover in FX spot and forward markets, based upon

the 2010 Bank of International Settlements Triennial Central Bank Survey, a report on the global foreign exchange market activity which is due for update in April 2013. More recent data collated by The City UK, the body that promotes UK financial services, suggests that Singapore ranks equal third with Tokyo after London and New York in terms of share of global foreign exchange turnover. The Singapore Foreign Exchange Market Committee reports that in April 2011 average daily turnover in spot, outright forwards and FX swaps was US$308bn, while average daily reported turnover in OTC foreign exchange derivatives was US$46bn. The latest figures are below.

Regional e-FX perspective on

Rapid growth and technical change are continuing to drive electronic foreign exchange trading in China and South East Asia. The world’s biggest technology providers, banks and market makers are all active in the region, beefing up their capabilities and many hiring new staff. At the same time regional banks and brokers are rushing to offer more sophisticated technology to their customers. In the meantime they all have their eyes on China so that they’ll be ready for any significant changes that could open up the world’s most populous market and soon-to-be world’s largest economy.

By Richard Willsher

China and South East Asia

Instrument October 2011 (US$ m)

April 2012 (US$ mn)

Spot transactions 2,264,854 1,893,604Outright forwards 1,055,554 822,883Foreign exchange swaps 3,108,440 3,284,292Total foreign exchange turnover

6,428,848 6,000,779

Currency swaps 502,163 672,019Foreign exchange options 422,890 352,555Total foreign exchange derivatives turnover

925,053 1,024,574

Number of working days 20 20

Total FX and FX Derivatives Monthly Volume (adjusted for double counting of deals between survey contributors)

Source: Singapore Foreign Exchange Market Committee



The rise of the Renminbi In Hong Kong meanwhile a standout story has been the growth of CNH, the currency created in the Special Administrative Region to facilitate controlled trade into mainland renminbi (CNY). The take up of CNH has been rapid and liquidity has burgeoned. Spreads have tightened as overseas corporates, traders and investors have embraced it. We might interpret this as proxy for expectations of liberalisation of the Chinese onshore currency in due course. Indeed, research by the Washington based Peterson Institute for International Economics published in October provocatively entitled, “The Renminbi Bloc is Here: Asia Down, Rest of the World to Go?”, argues that in the last two years, seven local currencies have come to use the renminbi as their dominant reference currency, more than the US dollar. These currencies are the Indonesian Rupiah, Philippine Peso, Taiwan Dollar, Hong Kong Dollar, Malaysian Ringgit, the Singapore Dollar and the Thai Baht. Practically, this reflects the importance to these economies of trade with China.

This demonstrates the increasingly significant role Chinese currency is playing. “CNH trading is progressing fairly quickly,” says FXall’s head of Asia-Pacific Jonathan Woodward. “It is certainly becoming a more viable currency with over $1 billion traded

electronically just last week. Bond issuance and amount of CNH in savings accounts are rising. In China there was previously a small group of corporates that were allowed to trade FX, now there is a small group of corporates that aren’t allowed to trade. We are certainly looking to service our global customers in China as well as the local corporations in trading their G7 flow.”

Nick Johnston is head of corporates and markets in Asia for Commerzbank Corporates & Markets, a bank whose clients outside Germany are many of the major international exporting and importing corporates. “Many of our clients formerly billed or were billed into or out of China in dollars or euro; now they are billing or are billed in renminbi. It’s still not the majority but this continues to grow.” Commerzbank’s China analysts on 16th November following the announcement of the new Chinese leadership noted, “The old model has passed its use-by date. Foreign exchange reserve accumulation due to an undervalued exchange rate is excessive and unsustainable. Globalization requires greater Chinese investment abroad and greater integration between Chinese and foreign companies – something that is hampered by strict capital controls. In our view capital account liberalisation and a flexible exchange regime will likely be the defining reform for the new leadership over the next five years.”

>>>

“In China there was previously a small group of corporates that were allowed to trade FX, now there is a small group

of corporates that aren’t allowed to trade.”

Jonathan Woodward

“Many of our clients formerly billed or were billed into or out of China in dollars or euro; now they

are billing or are billed in renminbi.”

Nick Johnston



Role of e-tradingWhat shape these developments will take and at what speed are the big questions but what is clear is that e-trading will pay a major part. Nicholas Wang, a strategist at Phillip Futures notes, “The more prevalent use of electronic trading channels in China as compared to Singapore and countries in the West can be attributed to two reasons. Firstly, China’s financial markets started only after 1990 when computers and electronic trading were already available. Traders therefore never quite had the experience of placing orders by phone. Today, there are very few China brokerages with dealers available to take client’s orders by phone as most traders use electronic online trading. The second reason for the growth in use of electronic trading by traders in China is because forex trading is not available to the public in mainland China presently. Traders in China who want to trade forex will have to go through foreign brokerages and trade using online platforms.”

“If the currency restrictions do ever come off in China, I think we’ll see a natural regional hub establishing in both institutional and retail markets in short order,” adds Hu Liang a senior managing director of State Street Global Markets and head of their e-Exchange business in Asia Pacific. By common consent Shanghai will likely become that centre.

There are however some technical constraints as Dealhub’s regional director Asia Tim Finch points out,

“e-FX development has been limited by the ability of electronic communications networks (ECNs) to obtain a licence to operate on the mainland. China Foreign Exchange Trade System (CFETS) provides not only the main execution venue for CNY, but also has a responsibility to manage the controlled emergence of the Chinese FX market as the CNY internationalizes. This means that the fragmentation and rapid evolution we have seen elsewhere is unlikely to be the pattern going forward in China. Nonetheless there is still scope for significant efficiency gains as the market automates within the existing constraints.”

Technology or bustInfrastructure efficiency and bandwidth availability explain why Hong Kong and Singapore are likely to remain the regions main e-hubs for the foreseeable future. Especially so as the battle for clients and turnover is being fought with technology, despite the growth rate in forex trading.

“A strong API (application programming interface) offering that provides an execution speed in a single digit millisecond timeframe serves as the basis for ultra low latency and results in fewer deal rejections,” are important factors according to Patrik Nagel who heads up Asia Pacific and MENA Sales for ADS Securities in Abu Dhabi. “These are strengths of ours and they are more and more important.” He continues, “On the retail front there is still double digit retail FX growth in Asia because people are becoming more and

>>>


more educated, the internet is more widely accessible and iPhones, iPads and Blackberries are more widely used so people can easily trade FX using these. And on the institutional side in order to get started with institutional clients straight through processing (STP) is already a standard which you have to be able to offer or you won’t even be able to start pitching to institutional clients. You need to offer liquidity and be able to offer it to clients over any channel they might have chosen for their trading.”

This explains why local, regional players are now scrambling to compete and DealHub’s Tim Finch echoes Nagel’s view. He says that despite the wider context of investment in e-commerce, many regional banks are still heavily focused on phone business where relationships and service to clients are seen as the key driver of volumes and client retention. “Customers are beginning to see things differently, perhaps driven principally by global banks with a strong Asia focus, who have continued to invest heavily in their e-commerce infrastructure, raising customer expectations in the region. If you are a regional bank looking to secure your customer base against this global competition, you just cannot afford to sit still. In 2013 your customer base demands that you provide a variety of ways for them to trade FX with you, and that could still be by phone – but equally likely by a mobile device, a tablet app or

online. Alongside this change in customer mind-set, your branch network is probably expanding quickly, which brings its own challenges in terms of operational efficiency and risk if you rely too heavily on traditional manual processes.” DealHub is one of the providers looking to ease this transition.

State Street likewise recognizes the rapid take up in technology that is conditioning the market in the region. “In terms of meeting clients’ needs, just about all products available in US and EU are now available in Asia Pacific (APAC),” says Hu Liang. “In some cases, specifically in the retail FX space, APAC is actually leading the way in terms of product innovation, adoption and penetration. For State Street’s eExchange group, we’ve nearly doubled our sales and support staff in the region in the last couple of years and made huge investments in infrastructure. We truly believe that offering the product in APAC isn’t enough, the service level has to match for adoption to really take hold.”

Product portfolioIn terms of demand for product, spot trading of G10 currencies still dominates though hedging tools are important to corporates buying or selling goods in the region.


“Today, there are very few China brokerages with dealers available to take client’s orders by phone

as most traders use electronic online trading.”

Nicholas Wang

“If the currency restrictions do ever come off in China, I think we’ll see a natural regional hub establishing in both

institutional and retail markets in short order,”

Hu Liang


>>>

“Corporates are mainly hedging their exposures into Asia,” says Commerzbank’s Nick Johnston. “Either they are exporting into Asia and hedging back their revenues or they have factories here and they are hedging dividend payments and debt service back to Europe. We see simple structures where they are willing to give up some of the upside in order to hedge whatever position they have.”

Johnston’s colleague and head eFIC trading based in Singapore, Paul Scott adds that he sees the sell side business maturing away from simply streaming a spot or a forward rate. “Both asset managers and the corporates in the region are requiring pre- and post-trade servicing. Pre-trade, block trade, multi account allocations - having all this automated is becoming an important requirement. Post trade they are looking for STP and more importantly is the growing trade cost analysis (TCA); more of this information is being disseminated to clients demanding real time trade information about execution costs. That’s where I think the growth has been and will be going forward.” Nick Johnston also notes that there is significant demand, not only for G10 / CNH and NDF currencies and options but also for spot gold and trading in other precious metals. He says that this a strong preference among Asian private investors with whom Commerzbank does not deal directly, but can reach through regional banks which have access to its newly launched Commander platform.

Wilson He, a fund manager at Phillip Capital Management in Singapore provides a different angle on buy side client needs. “Fund managers traditionally hedge their foreign assets exposure passively through prime brokers. To remain competitive, brokerages now offer more compressed bid-offer spreads, so that we are able to formulate more active hedging strategies

Regional e-FX perspective on China and South East Asia

to deliver alpha to our investors at lower cost. The improved electronic FX platforms come with live charts, news feeds, advanced order types like One-Cancels-the-Other (OCO) orders, and contingent orders, and most importantly less latency issues. A fund manager would prefer to execute an order himself using the electronic FX platforms, than to make an order over the phone.”

So the picture is clearly one of liquidity providers adding more instruments and capabilities to their platforms. At the same time banks are also distributing across various multi-bank platforms. “We’ve seen growing volumes of NDFs within the B2C segment and CNH has also started to be offered by liquidity providers on a B2C electronic basis,” says Anthony Northam, head of marketplaces in Asia at Thomson Reuters. “A number of the larger liquidity providers also offer API connectivity to their customers in the region. There is a growing number of liquidity providers offering foreign exchange office (FXO) pricing/execution, which to date has been focused on their own proprietary platforms, but has recently been launched on multi-bank platforms such as FXall.”Meanwhile beyond the commercial needs of corporates, the scale and scope of products on offer

“If you are a regional bank looking to secure your customer base against this global competition,

you just cannot afford to sit still.”

Tim Finch



has been powered by two distinct client types, one the wholesale, sophisticated swiftly growing hedge fund community. The other is the retail community where growth has been ballooning for some time.

Hedge funds and active traders“We are seeing more hedge funds being set up in Singapore and Hong Kong,” explains FXall’s Jonathan Woodward who is based in Singapore. “Although 75% of the hedge funds in Singapore have less than US$30m under management. Many are creating their track records before going out to market to institutional clients and some of them may never get there. Some of the large ones have struggled to achieve position returns in 2012 as the volatility levels have been low and the market has been very difficult to read. There is still a large amount of money looking for quality managers and we are going to see a trend from the asset management world of really diversifying their investment portfolios through the alternative, hedge fund, market.”

He goes on, “I still think we will see more consolidation in the banking industry and those who leave and can get some money under their belts may either prop trade for themselves or try and run a fund. More banks are entering the primebroking market and I think it is likely that they will offer a customer clearing capability shortly. A number of Japanese houses that have been successful in the Japanese retail market have started to spread out through SE Asia. They are keen to work in Malaysia and Indonesia for example.”

So while not all hedge funds are successful there is no doubt about their dynamism in setting up and trying to build their businesses. Many of these are becoming clients of ADS Securities where Patrik Nagel confirms that their forex needs include narrow pricing and scope for leverage. The appeal for many industry professionals from London, New York and Switzerland is the availability of a relatively light regulatory regime in the UAE and GCC which attracts quite some business to this part of the world whilst elsewhere people are dedicating quite some energy into keeping up with possible new regulations and changes.

Meanwhile Wilson He, at Phillip Capital Management confirms that algorithmic and high frequency trading (HFT) are both growing in the region. “Firstly, as we are moving towards a 24-hour trading environment for global assets, trade execution by phone is no longer popular. Secondly, users of electronic FX platforms are becoming more and more IT savvy, and in time to come, we could see traders self-coding trading strategies to suit individual needs. Having said that, there is certainly room for more prime brokers in the region, to bridge the gap and simplify the process of coding and testing trading strategies on platforms. Although we notice that Indian traders are more inclined to HFT, the HFT market is still in its infancy in this region as compared to countries in the West. As the market becomes more liquid, HFT is expected grow in tandem. But feasibility remains an issue as Asian currencies still cannot be traded using HFT due to liquidity and regulatory restrictions,” he says.

There is also some resistance from those who believe that HFT spoils the market for those whose needs are simply to get a price and carry out a simple spot or forward transaction for commercial, rather than speculative purposes, especially if their technology means that they cannot connect at fast speeds to pricing screens.

However the problem of latency due to slow connectivity remains and Commerzbank’s Paul Scott adds that part of client servicing is dealing with this in the best possible way. “There are technical challenges wherever you are in the world with e-FX. Keeping high-speed low-latency connectivity to thousands of clients on a 24-hour basis is demanding for any bank. In China most of the flow comes mostly via our Hong Kong hub where we have pretty good connectivity. But we have the ability on our system to give tolerance and leeway for people in regional areas that are less technically advanced. So we give them more latency allowance in order for them to transact, tolerance can be connected to a level of e-sophistication.”


>>>

While the future of the wholesale community has complications, depending on you view of the market, one sector that is certainly booming in the region is retail FX trading.

Retail FXIn August 2011, research company Celent produced a report entitled, “Retail FX: Entering a Phase of Mature Growth.” It concluded firstly, that “Retail FX is growing to become a US$200 billion business by 2011 at an annual growth rate of 33% since 2007. While this growth has been heavily influenced by the regulatory control over leverage as well as the exit of many players due to higher capital requirement demands, Celent expects growth to be prosper in a safer environment which will attract more medium and long term investors to the market.”

Secondly the reports says that “Asia is the key growth opportunity for [retail] FX growth, with more than 40% of the volumes, while growth is plateauing in the US and Europe. With China starting to make small steps towards opening an FX market, Asia will be the key focus area for retail FX firms in the medium term.”


This view is certainly supported by those supplying services to the market in China and South East Asia.

Thomson Reuters’ Anthony Northam describes the market in clear terms. “Retail FX has grown substantially in the last decade and will only continue to grow as the general levels of wealth and levels of customer sophistication increase across the region. From an investment perspective, the low interest rate environment combined with the painful memory of the recent financial crisis has meant retail investors have continued to shy away to some degree from the equity market. This has led to an explosive increase in FX related investment products – dual currency deposits, structured products etc.

The most significant change however that has allowed this growth has been regulatory and an ever-growing number of countries that allow retail investors to trade FX, whether on exchange e.g. in Thailand the launch of the Thai Bhat Futures contract or OTC trading of FX. International service providers that have the sophistication and systems have been quick to capitalize on this opportunity either by increasing their footprint in the region, for example the number of retail FX trading service providers in Singapore

“There is double digit retail FX growth in Asia because people are becoming more and more

educated, the internet is more widely used, the iPhones and iPads and Blackberries are more widely used so they can trade FX using these.”

Patrik Nagel

“Both asset managers and the corporates in the region are requiring pre- and post-trade servicing. Pre-trade, block trade, multi account allocations - having all this automated is becoming an important requirement.”

Paul Scott


has exploded from around three firms licensed in 2003 to over 20 in 2012, or through partnering and white labelling with local distribution channels. Local firms have been slower to respond but momentum is growing in some markets where local firms react to maintain their market share.”

State Street’s Hu Liang adds, “Asia Pacific has demonstrably the largest market share of retail FX trading volume in the world. In the last four to five years, system providers, foreign and regional, and banks have spent a great deal of resources to ensure this market is well served. While Japan is the largest single market in the world, Singapore and Hong Kong are also regional hotspots for retail investors looking to trade FX.” He goes on to point to thee main factors driving the development and change within retail FX: pricing - which is becoming finer as more providers compete for the business, technology - which enables services to be delivered more cheaply in e-form and, thirdly, regulation.

The last of these however has become something of two-edged sword, at once a means to cut through red tape and liberate markets but also a method of controlling markets where central authorities perceive that customers may be exposed to undue risk.

RegulationWe have recently seen liberalization of rules governing foreign exchange trading in Malaysia where banks have been freed to offer margin trading to their clients.

However Singapore’s Monetary Authority has adopted greater caution as Phillip Capital Management’s Wilson He, explains, “ MAS has introduced the Customer Knowledge Assessment (CKA) framework, that requires licensed FX brokers to assess their customers’ knowledge and experience before they

“To remain competitive, brokerages now offer more compressed bid-offer spreads, so that we are able to formulate more active hedging strategies to deliver

alpha to our investors at lower cost.”

Wilson He

Dark areas denote higher numbers of retail FX online visitors. Source: Aite Group


can open leveraged FX accounts or continue trading leveraged FX. Creating a higher barrier to entry for retail investors will eventually slow down the growth in the retail segment, making it more difficult for the retail investor to hedge foreign assets and to diversify his investment portfolio.”

Japan also restricted leverage limits for banks offering services to retail investors, which, although it does not fall within the scope of this article, demonstrates the sorts of measure that can be taken to staunch trading even in a very large retail market. Meanwhile retail traders in markets such as Indonesia, Vietnam and mainland China are becoming increasingly active but because of restrictions in their home markets chose offshore strategies and communications to circumvent regulations. In China for example brokers introduce retail customers to offshore providers who then service customers using their electronic platforms.

The biggest wave of regulation is yet to break over the markets of the Far East however. Dodd Frank, once it is fully evolved, looks likely to affect most and probably all jurisdictions and restrict trading in all but spot and forward transactions to governed, on market, regimes.

“I speak to my peers in other banks and it’s very difficult to plan a strategy around a regulatory environment that hasn’t been fully established,” says Paul Scott at Commerzbank. “People have differing views on what Dodd Frank will look like but nothing is set in stone. So we focus, no matter what regulatory trends are coming, on best execution and market transparency via our single dealer platform or multidealer venues, this should assist in preparing us for most of the regulatory requirements.”“Dodd Frank will impact everybody globally in a year,” adds FXall’s Jonathan Woodward, “but much of it is unclear. We’ve seen a number of people opt out of Dodd Frank and many people around the world are opting to trade derivatives with foreign branches of banks so that they don’t cross the US$8bn dollar limit where they have to register as a swap participant, at least until next year, when everyone will be caught.”

State Street’s Hu Liang summarises his views, which perhaps make it clear what in the final analysis the region’s regulatory landscape is likely to look like – i.e. the same as everywhere else. “APAC’s fragmented nature leads to a challenge in regulating the region. There is no central organization to set the framework. So there will likely be differences that will affect

how providers implement their systems in different regions. In the long run, however, especially given the regulators’ awareness of regulatory arbitrage, we do believe the rules will level out in major jurisdictions. It is already becoming apparent that regulators in the region are open to foreign central counterparty (CCPs) clearing or establishing two-tiered clearing infrastructures. This is a statement that while each jurisdiction is set to implement its own set of rules and operate its own locally regulated CCP, it is nevertheless willing to play in the global landscape.”

ConclusionIn the final analysis it is all too easy to take a distant look at the huge and complex pattern of peoples, cultures and markets in China and South East Asia and wish for a single set of rules and behaviours. But it is not like that. What is clear is that e-FX trading continues to grow and spread throughout the region and new adopters are connecting to the market day-by-day, month-by-month and year-by-year. This is not the United States of America nor the European Union nor the Eurozone and one of the significant challenges facing market providers and practitioners remains how they provide the right products to the right people at the right time. But then this has always been the way with markets, even in a globalised, e-enabled age that we currently transact in.

“We’ve seen growing volumes of NDFs within the B2C segment and CNH has also started to be offered by

liquidity providers on a B2C electronic basis,”

Anthony Northam




Regional PRovideR PRofile

What was the impetus that gave rise to DBS e-FX strategy?According to the BIS triennial survey, the average daily turnover of global FX was $4 trillion in 2010 compared to $3.3 trillion in 2007. Th is was a 20% increase which substantiated our long-held view that FX, with its continuing rate of growth, could easily out-strip our trading and dealing resources, we put together an e-commerce strategy and reviewed how we conducted our businesses In order to maintain our competitiveness and meet these ever changing dynamics.

We began in 2006 to put in place a modest but ambitious e-commerce plan to handle this growth. We envisaged that DealOnline would be our fl agship e-commerce platform for distributing DBS Treasury’s products to internal users, corporations and fi nancial institutions.

Starting with FX, the most commoditised asset class, we began to roll out DealOnline internally to sales and customer facing units – DBS Private Bank and DBS Treasures affl uent banking – that traditionally had to call us for prices manually.

DBS Bank – developing e-strategies and customised FX solutions for clients throughout Asiae-Forex talks with Kwa Woei Kyet, Head of FX Liquidity at DBS Bank

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These early changes ensured we were able to handle the growing volume of vanilla FX transactions without compromising on trading and sales resources.

What range of instruments can be traded on the platform?With RET-AD (award winning auto-dealing solution from Thomson Reuters) as our core platform, we are able to trade a range of our treasury products that currently include Spot, Outrights, Swaps, Forwards, Time Options and Non-Deliverable Forwards with added services such as proprietary DBS Group research and real-time news coverage from Reuters.

DBS is known for its strong presence in the small and medium-sized enterprises, how have you tackled this opportunity?The small and medium-sized enterprises (SME) segment is one of DBS’ key priorities and is a key contributor to DBS’ growth. As a bank with over 200 branches across 15 markets in Asia, we service well over 145,000 SMEs: DealOnline gives us the means to effectively service these clients.

Being close to our customers has helped DBS understand their internet user-experiences. To create a seamless e-commerce user experience for our SME customers, DealOnline is integrated with our IDEAL™ 3.0 corporate internet banking platform.

With a single secure login, customers are able to conduct a range of banking activities anytime, anywhere. Customers benefit from being able to manage their cash and trade transactions over a highly customized IDEAL™ 3.0 dashboard, enquire/book FX rates, receive real-time updates via email and mobile text messaging on all banking activities and always stay informed.

Did you see any potential limitations in such a focus approach to your customer base and how did you resolve it?DBS has in place an extensive support network with well over 18,000 staff providing a full range of consumer and institutional banking services in Asia. Working with our vendors and regional trading technology teams, we came up with customised

“Working with our vendors and regional trading technology teams, we came up with customised solutions

for the consumer and institutional banking world.”

Kwa Woei Kyet

Regional PRovideR PRofile


solutions for the consumer and institutional banking world. With DBS looking to actively expand its FX business in the region and regulators’ calls for greater reporting transparency, these e-commerce initiatives came at a good time.

DBS developed RET DealOnline specific Application Programming Interfaces to their core banking systems as part of our platform strategy. As a result, our consumer and institutional banking relationship managers are able to access and book real-time FX (on RFQ basis) and board rates on their core banking systems FINACLE and IMEX and are more competitive and efficient in closing client FX transactions directly. The systems are fully integrated with our treasury back-office systems, so countries that have specific MIS or regulatory reporting requirements can be assured that these will be available to them in a timely manner. This capability has been enabled in Taiwan, China, Indonesia and India, and is upcoming in Hong Kong.

With this integral technology ensemble in place, we are taking the next step in our Treasury e-commerce distribution plan in prepping the regional countries to begin offering a localized DealOnline over IDEAL™ 3.0 to their SME customers.

DBS has a very sound reputation in the FX inter-bank markets especially in Asian currencies, what are your e-commerce strategies in this space?

DBS has garnered several accolades such as Best FX Bank in Singapore (FinanceAsia) and Best FX provider in Southeast Asia (Global Finance). As one of the leading Asian currencies banks in the region, we are keen to build on our strengths, especially in SGD and Asian NDFs. It is essential to have an e-commerce solution and strategy if we want to remain relevant and continue to support the many financial institutions’ liquidity needs via trading bi-laterals.

While Singapore remains the market making centre for DBS regionally, currencies such as the HKD and CNH are auto-managed and warehoused directly by our trading colleagues in Hong Kong over the same DealOnline rate engine. This activity ensures we remain best-in-class when it comes to managing key Asian currencies risks as part of our strategic currency liquidity management ethos.

With the number of multi-dealer bank portals competing in the markets for the same customers, where is DBS DealOnline being positioned?

As an Asian bank with insights into Asia, we are often a complement rather than a direct competitor

of European and American banks. With long-term issuer and counterparty credit ratings by

Moody’s, Fitch and S&P of Aa1, AA- and AA- respectively, we are well-placed as

a viable trading alternative for any counterparties that

are seeking an Asian name

or looking to expand their list

of counterparty banks.

The portals that we work with provide

us with the necessary avenues to auto-price directly to corporations and financial institutions as part of our ongoing market-making initiatives. In using these portals, the challenge that we face is how to overcome the geographical distances that give rise to transaction latencies. However, multi-dealer bank portals bring both the sell and buy sides even closer providing a technology alternative to reach customers anywhere in the world.

What work are you doing to further enhance the capabilities of DBS DealOnline?

DBS will continue to invest and focus on our E-Strategy going forward. We are constantly working with our internal and external clients on further enhancements, adding products and ensuring its resilience. We currently have several enhancements programs, such as version upgrades, running in parallel for different clients.

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Transaction-cost analysis (TCA) off ers buy-side fi rms a better understanding of their execution quality. Typically it operates by

taking key data points such as the price and time of trade execution for a fund and setting those against a benchmark of other funds’ trading data to create comparative performance charts. But these services, that have been pioneered in the equities market, face some fundamental challenges in FX not least because it is predominantly an over-the-counter (OTC) rather than venue based model of trading.

“Fifteen years ago there was no need for TCA because everything was on the phone; your base price was 70-71, if the client told you he wanted to buy it you told him 75, so four pips were yours. You could achieve this by an activity-based costing approach or by a looking at the unit costs,” says Ralf Behnstedt, managing partner of FX Architects. “With the advent of electronic trading over the last couple of years, where you have multiple liquidity providers and liquidity aggregators set up, you are not just holding out your prices to your own clients you are holding them out via application programming interfaces (APIs) and they can trade with you, so TCA has become more important.”

Fragmentation

Because foreign exchange is an over-the-counter market it is highly fragmented. Although there are exchange-like venues and electronic communication networks (ECNs), they are not interlinked like the equity markets are so there can be some variation in the prices found on them, creating a role for products that put multiple prices in the same screen, called aggregators. Aggregation technology grew up in the equity market along with TCA. “We have seen a huge shift to electronic FX trading

and that is leading to market fragmentation,” says Rebecca Healey, a London-based senior analyst at research fi rm TABB Group. “To establish your true level of performance you need to be able to incorporate historic and real-time data wherever possible to read transaction cost analysis (TCA) eff ectively. As a consequence people are starting to question where is best to trade. Historically buy-side fi rms have found that single-dealer platforms were the most eff ective way to deliver improved pricing. Some research we have seen studied showed liquidity provision from top fi ve banks versus an aggregated liquidity feed from Reuters, EBS and Currenex. Th e best-bid-off er spreads were better 95%-99% of the time on the aggregate spreads. Th e reality is that the well-trodden path should no longer be the


Applying real-time trading analytics for achieving improved TCA in FX

TCA is still nascent in the FX environment but as Dan Barnes discovers, it has the potential to leapfrog development stages found in equities.

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automatic choice. Participants need to understand where best to trade and when and TCA offers the ability to navigate the FX markets more effectively”.

Best execution

Jon Fatica, global head of analytics at TradingScreen says, “In FX, the concept of best execution is not as evolved as it is in equities, but we have devoted a lot

of time and energy to best execution analysis and execution-quality analysis for people to portray the best time of day to get the best price and to identify the right counterparties. There are some tools and techniques that trading firms can use to optimise their best execution goals, which are data driven like equities. It starts with having a broader view of one’s performance in the market than the singular focus on the price you did the last trade at with the last counterparty.”

“You can’t do just voice broking anymore, you have to dive into electronic trading,” adds Behnstedt. “The problem is how to approach it. If internal transaction costs are higher than the external transaction costs

then you are losing money. And so you need analytics which show you whether you are on

the profit or loss side. There are a couple of solutions on the market but it is still early days because the concept of TCA has not been implemented at all organisations. It starts by giving you an analysis at which millisecond the rejection rate starts and or where the slippage for latency started. This could be done on a per liquidity provider basis, so if you are dealing with a bank for example and you have a slippage of 200 milliseconds

because your client in Asia is doing everything out of London, your rejection rate

might get to 100%. These kinds of analytics are in the first stages and will continue to evolve.”

Drivers for TCA

Two trends have combined to drive interest in TCA. The first is the use of FX as an investible asset class by buy-side firms, the second is a response to the lawsuits that buy-side firms have levelled against custodian banks which were charged with executing the FX legs of equity and bond trades. The buy-side firms have alleged that they were overcharged for these trades.

“A big driver [for TCA] was the headlines; for years the custodian banks globally have had these captive relationships with the asset owners and the stewards of the assets, the fund managers. The whole irony is that FX is the largest market in the world but has never had the same type of transparency as equities or therefore the tools to monitor and measure execution quality,” says Peter Weiler, executive vice president, sales at TCA provider Abel Noser.

“The forex side was a natural extension of our equity business because with any global cash equity trading there will be a forex component to it,” he continues. “Greater scrutiny came from a lot of the litigation


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that started here in the US. The big distinction was the difference between standing order instructions versus negotiated transaction. What was happening is that asset owners were captive to the execution desks of the custodial banks if FX was required for a trade. Some fund managers would take that course, others had enough resources to provide currency desks where they would go ahead and negotiate for themselves, shopping around to try and get better prices for their clients. People saw there were discrepancies in performance by comparing the performance of the underlying cash equities to what the asset owners were reporting after the forex conversion.”

Nevertheless the market is still young and TCA is not yet being adopted by a large number of firms says Stuart Grant, business development manager, SAP.

“We’ve seen a slow pick up of FX TCA all in all, it’s one of those where firms with the largest flow and widest connections have picked up on it and we’ve also seen some interest from organisations taking flow from the retail market to blend that with institutional flow in order to improve the economics. They are also focusing on how they can use TCA to improve

that process and provide retail customers with almost algorithmic levels of capability. There’s the cost of execution and the cost of trade in terms of block size and opportunity cost. We’re seeing more focus on the cost of execution TCA analysis, and some quants are collecting historical data and starting to use that as reference material, at the moment just for near-post-trade analysis, so they can start to understand whether or not they have optimised the timing of their trades.”

New platforms

In June 2012 eight new FX platforms launched (FastMatch FX, FTSE Curex, FX SpotStream, Jiffix Markets, Liquidity FX, MoltenMarkets, tpSPOTDEAL and TraFXPure) signalling that perceived sentiment of the market is moving away from the traditional OTC model. Electronic platforms will not only help to reduce volatility in prices, but they will also potentially provide a valuable source of data for TCA systems.

“It is not certain that the introduction of these ECNs will change the FX market sufficiently to make the data they produce useful for TCA,” says Behnstedt. “You will always have market participants which try

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“If internal transaction costs are higher than the external transaction costs then you are losing money. And so you need analytics which show you whether

you are on the profit or loss side.”

Ralf Behnstedt

“To establish your true level of performance you need to be able to incorporate historic and real-time

data wherever possible to read transaction cost analysis (TCA) effectively. As a consequence people are starting

to question where is best to trade.”

Rebecca Healey

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to leverage inefficiencies in the market. This will grow as electronic trading grows. We all know that some liquidity providers behave in such a way that if they know you have a certain kind of aggregator running, they may widen your spreads automatically.Clients of those LPs need to pay close attention to TCA as here they are dealing with an increased likelihood of incurring losses.”

By providing a timestamp on the data, the venues could provide more consistent information across multiple trades which would assist with the reliability of TCA provided on the back of it; data inaccuracy and lack of consistency is one of the greatest challenges for TCA providers.

“There is the opportunity to get time-stamped data from a lot of the new FX venues and some market participants are requiring it,” observes Weiler. “We get our data from a number of data sources, some are aggregators like Bloomberg, and we get the data from 25 sources, but there’s still fragmentation in that and we don’t enjoy the centralised data that we typically get in equities, for example with the US consolidated tape. That said, in the early days of equities simply having clients capture data was a challenge.”

Order management systems (OMS) were perhaps a result of firms realising there needed to be more

efficiency in the investment process, he notes, as they became data capture mechanisms

(DCMs) and over several years business rules were captured and defined

making analysis a finer art.

“Today, many FX platforms are not as robust as they could be,” says Weiler. “Some use spreadsheets, some clients use an OMS to capture information. So from a variety of points of view there probably needs to be more work done on the client side capturing accurate information, whether it is timestamps or other sources of information. We are seeing quite a variety of data flow, and there needs to be more work done

to capture information, custodians specifically need to time stamp their activity, as of late there is just one that does, but there are challenges and I think we see parallels with equities.”

However some commentators have observed that the new trading platforms may inhibit the development of TCA in the short term.

“The time stamp element is an important one here,” says Grant at SAP. “The emergence of these new FX

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venues is delaying TCA as these organisations are focusing on connectivity, building out the capabilities within their existing systems, to manage that. The time-stamp issue is one that we are starting to see a number of organisations focus on, to provide a consolidated view across currencies. That is valuable information that can be provided to their traders in terms of understanding where they can be executing or providing that automatically into their algos.”

The big picture

Once the data has been collected it has to be represented appropriately for its use, either representing historical comparisons or immediate real-time trading decisions. Advances in the electronic trading technology being used in FX can provide a system of both capturing and representing this data.

Fatica says, “Clearly the development and use of execution management systems is a huge step forward, and that is where we are well positioned, having a broad-based multi-asset-class capability for execution. We can capture that, we don’t have to have clients source that data. Any legacy technology will inhibit the development of TCA. The new EMS platforms do allow advanced TCA. Firstly they allow you to see multiple dealers at the same time, which in a

parallel with equities, is the equivalent of seeing level 2 liquidity. You can see it visually and we can capture that. You can not only have the gestalt of watching the execution in the market, but also you can capture the data behind it.”

SAP offers a reference architecture and a pilot-based environment for real time TCA which is asset independent. The technology which is facilitating that is in-memory systems; the event-stream processor (ESP)and SAP Hana, which are two high performance memory-based analytical environments.

“We don’t have a single shrink-wrapped solution,” says Grant. “The ESP engine is the real-time piece, it has the capability to do the analysis in real time in an FX environment. Hana gives you the ability to have near real-time access to high volume big data analytics. You bring the two together and use the ESP engine to do your decision making about where to execute a trade based on the TCA elements. You use Hana to start doing your historical analysis or broader TCA which can be referenced in real-time by the ESP engine. That can make more intelligent decisions. Rather than making it an order router you can bring in timing decisions and volume decisions based on historical profiling.”

“Any legacy technology will inhibit the development of TCA”

Jon Fatica

“If you’re trading a yen dollar and spots or forward you want to understand how

your costs are versus everybody else.”

Peter Weiler

SAP has partners like visualisation specialist Panopticon, which has a push capability for data analytics which the SAP systems can plug straight into.

“We’re able to do all of the heavy lifting analytical work using underlying in-memory components, push the results out to the visualisation so you can have very rapid updates occurring on the screen, but with much more complex analytics going on under the covers,” says Grant.

Weiler notes that his firm sees a demand from both asset owners and fund managers, who want to understand what their costs are and how they stack up relative to their peers.

“The concept that a picture is worth a thousand words and applying visualisation to a managers style and seeing how it works in different environments, Europe vs the US for example, that helps people to think about how they can tweak things,” he says. “If you’re trading a yen dollar and spots or forward you want to understand how your costs are versus everybody else. For any given month or quarter, at Abel Noser, we provide people with visual depictions of how they are interacting with the marketplace. We show them a

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“The time-stamp issue is one that we are starting to see a number of organisations focus on, to provide a

consolidated view across currencies.”

Stuart Grant

Applying real-time trading analytics for achieving improved TCA in FX

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chart on an aggregate basis of all of their positions for an asset class. We’ll look at things like the behaviour of a stock two days before a trade; then right at the trade date; when the order is entered in the market place; and five minutes later. We check if there is there any slippage, if there has been any information leakage, and so we start to get more and more detailed and decompose cost. Then we look at after the trade has been completed three days out and thirty days out which gets more into portfolio management.” Kitted out

There are some limits to the technology that is available for FX TCA at present. Weiler says that he is not aware of any tool kit on the FX side that is comprehensive and real-time.

“What happens is that vendors are gathering data on a quarterly basis and marrying the market data they get with the trade data and then coming up with online reports,” he says. “From what I see with our peers there are a number of steps that have to be taken first in terms of data improving, being more comprehensive, more robust data timestamps etc before there’s a push for real-time information.”Fatica also observes that there are some technical challenges to be overcome before every firm can use TCA systems as they stand today.

“The trick is to make sure that the latency on the execution platform is as low as possible; when you have another layer of software between a client and a dealer that is a bit more of a challenge. Clearly the equity marketplace leads the way in co-location, which minimises latency between the different parties,” he observes.

Real experts in the low-latency / high-frequency trading game may well be able to develop their own technology in house says Jim Kwiatkowski, Global Head of Sales at FXall.

“The HFT style hedge funds are enormous data consumers and in some ways they can create their own idea of best execution; because they collect so much data they can do their own data analysis,” he

says. “Where we see demand from people wanting us to assist them is in the asset manager and corporate segments. Both want to achieve best execution but have different ideas of what best execution means. They may be looking over time at how their FX transactions desk is performing at executing FX trades for funding or hedging. For example, are they executing in the right pairs and at the correct time of day?”

Execution quality analysis can inform alternative trading strategies that help to lower costs.

“In certain situations, clients may choose to execute a synthetic trade in a liquid

pair to get the best execution rather than trade the underlying pair.

If you need to do Euro-CAD, maybe a Dollar-

CAD and a Euro-Dollar

trade would get you a better price?

Asset managers are able to consider these factors

when trading and use execution quality analysis (EQA) tools

provided by FXall in order to do so. Corporates are a bit different, most are not trading firms by nature and only need to fund and hedge their business operations. However, they are public companies who answer to shareholders

and so are required to demonstrate that they follow a process for obtaining best execution of their FX trades. They need data and anlysis to help them understand

how they can best achieve this,” says Kwiatkowski.

Speed of change

Keeping track of price changes in the high-speed markets has become impossible for the human trader to do, making systems that can make decisions, such as complex event processing platforms, increasingly valuable.

“Five years ago you got one or two updates a second for a currency pair; right now especially if you have volatile markets we have seen for 300 updates a second for G10 currency pairs,” says Behnstedt. “If you have that many changes you have to move towards CEP engines, meaning a lot of technology has to be moved from a rule-based development approach towards complex event-based items which gives you more power and

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flexibility to move big data sets through, and to process them efficiently. That is another change that is coming with TCA as old technology can’t cope with the update rates. But if you move to CEP engines you have the possibility to dive into TCA. I know that some of the providers of liquidity aggregation, pricing, smart order routing such as smartTrade and Streambase they have these kind of things as well, and in some cases they have algorithms in place in order to minimise shortfalls in latency and processing which are useful.”

TradingScreen uses OneTick as its in-house CEP, but Fatica notes that using this for FX may be putting the cart before the horse at present.

“In fact, we have some processes running as we speak doing some analysis on the various currencies and relationships between quotes,” he says. “That has been in response to questions that have arisen from clients about how to provide perspective on their execution quality. There are a variety of issues: the difficulty of orders, a comparable concept in equities; people say that there is infinite liquidity in FX, but it doesn’t come without a price. For example in equities, we have only one given quote at a time for a given size. In FX you have multiple quotes for different sizes and

currencies. That is a very interesting aspect, because in equities, you can’t really measure the alternative trading tactic because you only have one event and it’s over. Effectively in FX you could measure concurrent events, large trades vs. small trades and see how that plays out in the market.”

No right answer

A challenge for the firms that want to use TCA for benchmarking against peers is that there is no standard data set that is recognised. In the equities markets an industry initiative entitled ‘Open TCA’ was launched by several sell-side firms, however one vendor, who asked to remain anonymous, expressed scepticism over the scheme.

“It hasn’t really gotten off the ground in equities, it stalled,” he said. “The difficulty there is that with open TCA there was just some sell-side brokers teaming up and the vendors weren’t invited to join. So I don’t think that will get off the ground.”

These are very early days in the evolution of TCA for FX. There are huge parallels with what equities went through but many think that it is on an accelerated timetable in the foreign exchange market. It is already delivering valuable results.

“Initially when we embarked on this we saw that custodial trades were higher across the board and then when there was more scrutiny those costs came in line with more negotiated transactions,” says Weiler. “Then the powers that be decided they would continue the same practices; their legal defence appeared to be that it was a disclosure issue. When they did that the costs started climbing back up.”

Fatica believes the example of the equity market is just repeating itself in FX.

“The challenge is that there is no centralised market data collection process, but our platform can serve as that. We see executable quotes and the more dealers we have on the platform, the richer the data set and the density of the transactions is increased, So, the concern that a transaction with a time stamp will find a match in the collected market data at the same instance I think is now being addressed. We are finding we have a plethora of activity and we will be able to measure the various sizes, and how active those quotes are and how active the quotes change. So it’s a rich data set, rich enough to drive some initial analysis and provide guidance on algos.”

“In certain situations, clients may choose to execute a synthetic trade in a liquid pair to get the best execution

rather than trade the underlying pair.”

Jim Kwiatkowski

Within FX trading there are two demographic groups that are really hooked on low latency; the hedge funds and proprietary

shops that are trading FX for alpha, and the big dealers. Speed is important for others, but true low-latency and the technology that underpins it is not for the faint-hearted.

Scott Sellers, founder and CEO of Azul Systems says that “Reducing latency is a never-ending challenge. Where once people thought that you couldn’t get below ten milliseconds and that was best of breed, now you can achieve sub 1 millisecond and sub 100 microseconds. It’s an arms race and with a continued, almost maniacal, focus on reducing latency. There are a variety of products that a trading firm can use to continue to pursue this end.”

Measuring latency

The appetite for measuring latency has seen a significant pick-up over the last year as people try to gain a better understanding of the performance characteristics of their FX trading. Kevin Covington, CEO at ITRS, specialists in application performance monitoring and management, says that prior to two years ago the firm did not see much interest from the FX space.

“The take up has been significant especially in this last year,” he says. “What has been quite encouraging for us is that where people slowly built up knowledge in the equity world i.e. they looked for quick wins by focusing on networks and then worked their way into the technology stack, I think that in the FX world people have understood that journey and are looking straight at the holistic picture rather than one little component part of it.”

He continues “We’ve seen a lot more people in the FX world looking not just at what’s going on ‘on the wire’ but also what’s affecting the way their customer connectivity is performing; how their round-trip


Software, hardware and hybrids: optimal configurations for achieving low latency FX

Forex Technology

Dan Barnes discovers why delivering effective low-latency for FX trading requires a tailored technology stack.

Dan Barnes

delays look; how processes are going from

one part of an application to another; all the way to the trading

process and beyond. The people doing it in FX have jumped straight to the level of

instrumentation which people had to grow into on the other assets classes.”

Traders are not dealing with just one primary venue and a bit of fragmentation across a few smaller platforms, as in equities, but with a huge range of potential dealers and trading platforms. Buy-side firms are forcing their sell-side partners to relinquish their monopolistic grip over their FX liquidity and new venues are sprouting up – eight were launched in June 2012 alone. That is creating a very different and complex model.

“The more you understand about the entire process flow the better off you are,” says Covington. “It’s not entirely obvious where you get quick wins by getting close to a venue or co-locating with somebody, or trying to buy a faster network. There are significant parts reflected in the picture.”

Internals

The internal measurements are the starting point says Peter Duffy, chief technology officer at IT analytics provider Sumerian, as the lack of a standardised approach to measuring latency makes comparison between venues and dealers hard.

“People bandy a lot of figures about in both this and the equities space, where exchanges will often talk about tens of microseconds, but that part they refer to really exists in a process that is tens of milliseconds overall,” he says. “Fundamentally people need to understand within their own four walls, where they have control, how long it takes from when they get the information that allows them to make a match to when they can send out a quote. The figures we see vary from sub-milliseconds to tens of milliseconds. The client then needs to know if, with the technology changes they are making, whether they are effectively stiffening the suspension, chipping the engine or just adding fluffy dice. The figures we have measured within a single client can vary dramatically from single digit milliseconds to hundreds of milliseconds. As a result in many cases our customers are focusing on fixing the variability in their latency as much as optimising their latency.”

To trade at speed requires each message to be accepted processed and acted upon as quickly as possible by the combination of hardware and software during the input of price data and output of execution.


>>>


Duffy says, “There might be 8-10 processing steps that have to happen when receiving a currency update and then pushing a quote out for spot or options to the various trading venues. If customers want to optimise their latency they have to understand in which of those steps they will get the best bang for their buck. If you are preparing to invest six-figure sums in areas that only affect 5% of your end-to-end latency, the starting point is understanding where you need to make the investment.”

Typically a firm receives formatted market data from its supplier of choice, and then passes that off to a pricing engine to decide how it wants to trade for the various currency pairs it trades.

“Crossing those pairs is the heavy ‘calculation stage’ in the process and is followed by the pre-trade risk assessments for various counterparties,” he explains. “You then apply various spreads, which will vary according to the different counterparties and different venues. Then the trades have to be formatted into the international language of finance - the FIX protocol – and pushed out the door to the trading venues themselves. The quotes that are pushed out then have a lifespan of maybe five to ten seconds.”

Getting each stage in this chain processed correctly relies on the underpinning of technology to minimise unnecessary steps, bottlenecks or interfaces. Depending on the stage in question, latency can be best improved by adapting the hardware and software used, although some are more appropriate than others.

Hardware 101

Starting at the hardware layer, the one simple thing that any firm can do is simply buy the latest and greatest x86 server. It might seem obvious but it was not that long ago that more traditional firms used Solaris-based systems developed by Sun Microsystems (now Oracle) or proprietary systems with internal processors that are much slower than today’s modern hardware.

“By migrating to a modern processor based on Intel’s Nehalem or beyond microarchitecture, the capabilities of off-the-shelf x86 server platforms solve many of the things that used to be latency limiters,” says Sellers. “Memory bandwidth, CPU performance and network input/output (I/O) are getting faster and faster with the latest platforms from Intel. There is a great need for Intel to continue making faster and faster

>>>Forex Technology

“Reducing latency is a never-ending challenge. Where once people thought that you couldn’t get below ten milliseconds

and that was best of breed, now you can achieve sub 1 millisecond and sub 100 microseconds.”

Scott Sellers

“We’ve seen a lot more people in the FX world looking not just at what’s going on ‘on the wire’ but also what’s affecting

the way their customer connectivity is performing; how their round-trip delays look; how processes are going from

one part of an application to another…”

Kevin Covington

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Forex Technology

processors to further reduce latency and improve their system architecture with the chip sets, the memory systems and the I/O systems to continue to reduce the hardware latency component of the application stack.”

Lee Fisher, vice president of technical marketing at application provider Redline Trading Solutions agrees, noting that developments in industry-standard chip technology have delivered significant reductions in application latency. This trend has motivated Redline to move off of specialised acceleration hardware and instead to optimise its ticker plant and execution gateway applications to catch the wave of Intel x86 innovations.

“Intel is spending over US$8billion dollars a year in R&D, introducing a new architecture approximately every three years and bumping the speed of that architecture a year and a half later,” he says. “In a prior generation Intel eliminated the “front-side bus” and integrated the memory controller onto the processor for faster memory access. In the spring of 2012 the new “Sandy Bridge” processor (E5-2600 series) delivered additional architectural innovations that improve low-latency trading applications, such as 33% more cores and the Peripheral Component Interconnect (PCI) controller being integrated on the processor. When bringing in data over the network adapter, not only is an extra hop eliminated but Intel’s architecture now allows that data to be written directly into cache where it can be quickly accessed by the automated trading application.”

Sellers says that Azul recommends that a modern x86 server is being used as the very first step for a client focused on achieving low latency response.

“The second point on hardware is looking at the pieces of functionality of the overall application that are relatively fixed, and assessing whether it makes sense to utilize hardware accelerators,” he says. “I emphasize the word fixed because in trading environments many things can change. The algorithms used to make trade decisions have to be quite dynamic. They are constantly changing as firms come up with novel new ideas and refine their overall trading approaches and algorithms.”

Certain technology components in an overall trading platform stack are relatively constant. For example the networking infrastructure itself will not change once it is set and therefore using dedicated hardware that is optimised for low-latency networking is sensible. There are also changes that can be made to the server architecture, for example using blade servers which allow more servers and therefore computing power to be housed in a single rack and inter-blade communication latency is reduced.

“There are also a variety of vendors specialising in low-latency network infrastructure,” says Fisher. “Network interface adapters from our partners like Mellanox and Solarflare provide kernel bypass and RDMA methods that we and our customers exploit for lower latency. Intense competition has opened among switch vendors for delivering ultra-low latency between trading servers and the Exchange servers as well. Forex trading applications written to the x86 architecture can more quickly communicate with x86-based feed handlers and order execution applications, all residing in a single multi-core server, than FX applications written to fixed-function, difficult to program hardware accelerators.”


Data challenges

The market data feed handler is the first point of contact between a trading firm’s internal technology and the external world. The field programmable gate array (FPGA) is a chip that can have algorithms “hard-coded” onto it, which in some cases results in higher performance than software-only approaches. FPGAs are typically very useful for parallel processing tasks. As such they have been widely touted as a method of speeding up feed handling, but there are some market participants who are cautious about advocating FPGAs for this task.

Tanuja Randery, CEO of MarketPrizm says, “We introduced a product called PrizmX, an FPGA-based feed handler, and I think it is of value for those firms who want to achieve really fast processing. There are maybe 10-15 players who require that level of speed and when you work at that level even FPGAs can be considered too slow. They use are even more aggressive approaches that use massive processing power and work on raw data with no conversion at all.”

“There are FPGA cards you can buy which are not really normalising much at all, they are pure processing power contained in hardware and they are quite fast, you can get them in the 1-2 microsecond (ms) range,” she

continues. “But it’s a card, there’s limited intelligence behind it. When you go beyond those 10-15 players you see there are very few firms that need to trade in the 1-2 ms range, they can live with 30-40 ms which is still fast but is achievable with software, and which is so much more flexible. People know software code and have the skills to develop it rather than be hostage to a certain way of programming hardware that is only known to a few people. I think as a result, the risk attached to using FPGAs for most firms is too high. Software is so much more flexible and with multi-threading on modern x86 hardware and other tweaks, software can work pretty fast.”

Fisher agrees, pointing to a recent STAC-T1 tick-to-trade benchmark of Redline’s automated trading software that reports audited mean results of 6.1 microseconds (μs) from receipt of a tick to delivery of a trade, wire-to-wire, excluding the customer’s proprietary trading application itself. Like Covington, he prefers such end-to-end holistic measurements over simpler component level benchmarks.

Duffy notes that FPGAs are being used by some firms that Sumerian works with but he acknowledges that they do have challenges.

“The development lifecycle and programming model is quite different from what most software developers are used to,” he says. “However that is starting to change; some of the vendors are introducing higher-level languages that are more akin to normal software development provision. Still, I’m not sure anyone has their head around how to manage release cycles, customer updates and trouble-shooting which is a challenge for everyone in that space. A number of Tier 1 banks are looking at offloading various algorithms to graphics cards from PCs (GPUs) to speed up the various algorithms that people use. We haven’t been explicitly involved in that but the people are using that technology in various places and that has a more standard development cycle writing standard code.”

>>>


“There might be 8-10 processing steps that have to happen when receiving a currency update and then pushing a quote out for spot or options to the various trading venues. If customers want to optimise their latency they have to understand in which of those steps they will get the best bang for their buck.”

Peter Duffy


Sellers adds, “There are FPGA accelerators and graphics cards where algorithms can be hard-coded. The problem with those solutions is that they are very difficult to change once you put an algorithm into them. In today’s trading environment and the way trades are handled, all of these things are evolving very rapidly so trying to bake those operatives into hardware can be very challenging because they may only be relevant for a small time window. So those pieces will more often than not need to be in software. The decision-making element of the application is almost always written in software, with Java as the most popular language. So when banks hire programmers it will be Java that they are skilled in and often these trading platforms are written in Java. The downside of using Java as a language for these low latency applications is that the off-the-shelf Java runtime from Sun /Oracle was never designed for low-latency environments.”

Any application written in Java requires a piece of software called the Java Virtual Machine (JVM). To get around the lack of low latency design, Azul provides its customers in financial services with a low-latency, high performance JVM called Zing.

“Trading Firms use our Zing JVM and all of a sudden the sluggish and inconsistent response times, lack of scalability, and limited visibility in terms of what is going on within the Java application are all fixed,” says Sellers. “Suddenly the application has much more consistent response time, with better performance, can handle greater trading volumes, is more scalable meaning that more volume can be passed to a given server. Also it is substantially easier to monitor and manage a large set of servers.”

Why FX is different

In the FX market, unlike some others, liquidity providers are not operating regulated exchanges. This means the way that they communicate with their clients is very different, typically updating trade data as a TCP-oriented communication, to subscribing firms.

Fisher says “Stock exchanges typically distribute equity tick data as a UDP Multicast stream which, like a fire hose, is very fast for receivers who absorb it at broadcast rates. But this model is not representative of foreign exchange tick data, which is distributed by liquidity providers via the TCP-IP protocol and requires an acknowledgement of receipt which slows the connection. This is another reason why any niche benefit of FPGAs in equities/options may not accrue to those doing FX trading.”

TCP-based communication is more reliable because the receiver has to send a reply back to the sender to confirm whether or not they got a message, but that increases overall latency. A case had been made for looking at other protocols as a result.

“Some firms have gone beyond traditional networking stacks and instead are using other messaging protocols that are not based on the standard TCP-IP protocols, rather they have migrated to using newer protocols that have the potential for reducing latency,” Sellers observes. “Several years ago people really thought that TCP-IP had reached its limits in terms of how much latency could be eliminated, but then a number of the networking companies figured out a way to put the TCP-IP stack in hardware, as well as Intel adding networking acceleration into its chipsets and processors. Now the TCP-IP network latency bottleneck has largely been reduced, and application developers can continue to use the TCP-IP protocol which is so well established and understood. A firm doesn’t have to change an application itself to get the benefits of a newer low-latency TCP-IP infrastructure; it can just plug in a new low-latency networking


Forex Technology

“Stock exchanges typically distribute equity tick data as a UDP Multicast stream which, like a fire hose, is very fast for receivers who absorb it at broadcast rates.

But this model is not representative of foreign exchange tick data, which is distributed by liquidity providers via the

TCP-IP protocol and requires an acknowledgement of receipt which slows the connection.”

Lee Fisher

card. That’s an example of when something in the application stack is fixed-function it can and should be done in hardware, i.e. the networking protocol is not changing very often. Yet, as you move up the application stack then more and more things need to be changed quite frequently and therefore required to be done in software.”

Is software a saviour?

The FX market also differs from other markets in that a small range of instruments are typically traded in the form of currency pairs, and a greater volume of information tends to be pricing data, compared to equities where a firm might trade hundreds or thousands of instruments, or fixed income where each instrument is issued in a number of differ price ranges, and the need for the same level of processing technology begins to look weak.

“I would only use hardware if I was crunching large volumes of data, running massive simulations, Monte Carlo simulations, where you are crunching loads of numbers,” says Randery. “Then you can use FPGA even use GPU chips designed for graphics and video processing. There are some very nice appliances in the market where you can crunch data very fast and that is using GPUs rather than FPGAs. GPUs are proven faster than FPGA and don’t have the issue of a few people who understand how to program it. Coming back to FX, I believe that FPGAs are overkill because you’re not working with those sorts of volumes at all. Software is way more scalable and flexible, which is its beauty. When it comes to data consumption software is much more scalable.”

Nevertheless software, even the Operating System itself, can be a significant inhibitor to latency. In these environments firms typically run Linux or Linux variants, which can allow for a lot of tuning and customisation.

“If you’re not careful with the never-ending set of knobs and controls that are built into Linux kernels you can get into trouble, but we have experience and work with our customers to properly tune their

operating systems to reduce latency associated with things like networking and file system stacks but also the kernel itself,” says Sellers. “We can optimise and tune the scheduler using techniques like thread affinity, i.e. matching a running Java thread with a specific CPU core. On a normal operating system, as threads are created typically the operating system will context switch every 10-20 ms, and sometimes if you are not careful, when the operating systems does context switching, a thread that was running on one CPU core will get placed through the context switch onto another CPU core. That adds to latency as the thread has to warm up the caches on the CPU, and re-initiate the optimisations that were already done on that other CPU. Where data is stored in-memory

on the server, maybe that CPU core is further away from that location in terms of latency to memory. Thread affinity settings allow a given Java thread to remain on a certain CPU core, keeping the caches warm and allow for consistent and low latency application response. This is just one example of many tuning techniques we use with our customers to get the best possible low latency result.”

Other standard components such as power-saving modes can be problematic. Although they are useful for overall energy saving, their use means that different parts of hardware will be put to sleep which is

really bad for latency as it takes time to go to sleep and then brought back to active operation.

Optimising software is typically a better option for traders than trying to implement complex hardware, says Randery, simply because of the nature of the market.

“I don’t know if that will change as the FX trading world is not defined by high volume, so I’m not sure if there is ever a reason to utilise hardware or even massive parallel processing,” she says. “Having said that the top ten in players in FX such as Citi, Deutsche and UBS are using parallel processing hardware in their large pricing engines because of the number of clients they have, the number of sources that they are reaching, and the amount of portfolio adjustments and pricing strategies happening. Because they are big aggregators it makes

>>>



sense. However even if I trade in an equity market where the volume is low like Hong Kong or Singapore, I don’t need to do massive parallel processing and throw a lot of fixed-function hardware at the problem; the same is true for FX unless you’re an aggregator.”

High-frequency trading firms have proven to be powerful volume multipliers in other markets where they can contribute the majority of trading, and they may yet deliver a similar result in FX. However they have yet to materialise and so the hardcore technology found within the data centres of some equity markets is still out of reach in terms of necessity, if not cost, says Randery.

“We’re at an extremely early stage of development with FX HFT,” she says. “Less than 20% of volume is HFT and I think I am stretching it even with that figure. But I do see players getting more interested and we have got a couple of clients working with HFT-oriented FX traders. There are opportunities for trading FX globally and you can take advantage in terms of price availability and literally hitting the ‘pick’ button when you have the top price, but I think the number of players and the volume going via HFT is still a relatively small right now.”

Forex Technology

“Coming back to FX, I believe that FPGAs are overkill because you’re not working with those sorts of volumes at all. Software is much more

scalable, which is its beauty.”

Tanuja Randery

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To define terms at the outset, adaptiveness might be flexibility; it might be agility; it might encompass low latency and HFT

functionality. Ideally, it delivers closer control. In the real world, FX-adaptiveness also necessarily crosses boundaries between asset classes. BNP Paribas’ Cortex iX FX spot algorithmic execution service, for example, may be a “tool in the toolbox” for FX execution, as Asif Razaq, global head of FX algo execution at BNP Paribas has described it, but it also plugs into the overall Cortex “cross-asset electronic trading, market intelligence and post-trade service”.

Discussing adaptiveness, Razaq says: “Cortex iX is third generation, in that it is able to take signals from the market and adapt its execution strategy mid-execution as a function of what it sees going on in the marketplace.”

The previous generation would just press on with its execution order, following its pre-set execution rules, regardless of price actions, liquidity bursts, flash crashes, volcano eruptions, sovereign-debt cancellations, et cetera. Any stop would be pre-set. This might once have been enough for a back-office FX trade (hedging an equity position, perhaps), but the advent of adaptive algos coincides with FX’s decisive move into the front office. Razaq says: “What we’re looking to do with adaptive capability is have the algorithm mould itself into current market conditions and use the appropriate set of execution rules to work the order into the market.” Razaq describes an AI-driven learning process that culminates in the choice of the appropriate ruleset for the situation.

ALGORITHMIC FX TRADING


Adaptive FX algorithms - giving control back to clients

What, do you suppose, is the opposite of “adaptive”? Rigidly inflexible, perhaps? Incapable of adapting to changed market conditions? To suggest that we trade/execute in FX with rigidly inflexible algorithms would be ridiculous. But if we’re talking about adaptive capability (adaptiveness) in the context of the microstructure and dynamics of the FX market, there’s a surprising amount more to be said than just: let’s be as adaptive as we can. FX is big, liquid, complex, changeable, unpredictable, and a lot of other adjectives as well. To maximise the adaptiveness of your FX-algo suite is a good idea. To believe that this will always be a simple process – no

William Essex

Shelf lifeNote that this is ideally an ongoing and cumulative process. The machines may never have to pass the Turing test (as in: convince the counterparty that they’re human), but the shelf-life of an artificially intelligent FX algo is notionally extensible if it is, in effect, informed by its own past and current experience – assuming quality real-enough-time analytics! Also, to the (significant) extent that shelf-life is a function of market “invisibility”, it is tempting to suggest: the more rulesets, the better.

Michael J Levas, founder, managing principal and director of trading at Olympian Capital Management, says: “FX algos do have a shelf life. The algos that do exist are being maintained and being used by various participants for a variety of reasons.” One reason: invisibility. Levas says: “Developments in the algorithmic space for FX will be about leaving less of a footprint so that predatory algorithms cannot get in there and expose what each participant is trying to do within their trading position or portfolio.” Yes, but – so far, so familiar: not leaving a big fat footprint is hardly a new preoccupation.

The value of adaptive FX algos goes further than that. Peter Bondesen, sales manager for FX, EMEA, FlexTrade, says: “There are several enhancements going on in the FX algo space. Some are about simplifying the logic; others involve multiple layers of calculation using complex-event processing (CEP). The new generation of algorithms is about aligning business requirements with complex trading logic.”

And thereby meeting those requirements more effectively – after having identified what they are, of course. Challenging one preconception, Bondesen says: “I’m not sure to what extent best execution is seen as a key driver in FX. It’s something that everyone is trying to do; they’re trying to be as efficient as they can. Certain people will look at best execution one way; others will see an FX-hedging trade that they just need to get out of the way before they can get back to their equity strategy or futures strategy.”

Learning processMultiple players, multiple priorities. If this implies a need for a learning process – well, that’s all part of being adaptive. Gary Stone, Chief Strategy Officer,

>>>


“What we’re looking to do with adaptive capability is have the algorithm mould itself into current market conditions and use the appropriate set of execution rules to work the

order into the market.”

Asif Razaq

“Developments in the algorithmic space for FX will be about leaving less of a footprint so that

predatory algorithms cannot get in there and expose what each participant is trying to do within their trading position or portfolio.”

Michael J Levas


Bloomberg Tradebook, says: “You need adaptive algorithms that will learn from themselves, learn what is going on in the marketplace and understand the liquidity with which they’re interacting, so that they can maximise liquidity capture. That’s the adaptive part of it.”

The necessary learning capacity is extensive. Stone illustrates his point with the example of what it takes to understand liquidity in Asian equity markets, where trading is heavily manual. In such a trading environment, says Stone, algos can trade too fast. Therefore, there’s a case for following up an aggressive move with a pause, to allow the market to react. Stone says: “What that means is, you need an adaptive algo. The point for FX is, different liquidity providers will respond in different ways to what you do, depending on how their algos are set up, so you need statistics in the background that tell you,

for example, if you respond to this liquidity provider, chances are they’ll come back with something more for you.” [Note, again, the wider variety of liquidity providers in FX.]

Existing adaptive FX algos are also being maintained because there aren’t enough of them –

yet – to meet demand. Levas says: “There’s going

to be a pretty big increase going through 2013 and 2014. We’ll see new algos coming out, and I think

we’ll continue to see development. We’re nowhere near saturation. That could happen eventually, with consolidation among vendors, but we’re not seeing it right now.”

Next generation functionalityEarly movers in the race to develop the next generation in FX-algo functionality include Deutsche Bank, where a “next-generation FX trading platform” is now accessible through the bank’s Autobahn electronic access point. Speaking in advance of the phased roll-out of the new platform (begun July 2012), Zar Amrolia, global head of foreign exchange at Deutsche Bank, said: “This represents a quantum leap forward for the FX market at a time when volumes continue to increase.” A virtuous circle indeed.

In passing, it is a pleasing sign of the times that Deutsche Bank’s new FX platform may be described as an “app”, in that the bank’s modular approach to electronic provision enables a neat brand name: search the Autobahn App Market for further information. But Deutsche Bank is not alone at the cutting edge of FX-algo technology. Others competing to fulfil Michael J Levas’ forecast of a big increase in FX-algo provision include Citi, with CitiFX Velocity, another 2012 launch (building on an existing product suite). [The Citi Velocity Mobile app is among various banks’ research tools available on iTunes.] UBS announced its 2013 move into FX algo trading in October 2012.But we’re getting ahead of ourselves. Adaptiveness is fast by definition, because change happens quickly; it is also necessarily “smart-fast”, not least in the sense that FX is such a wonderfully unpredictable asset class (key feature of the UBS launch: smart-order routing

>>>


“The new generation of algorithms is about aligning business requirements with complex trading logic.”

Peter Bondesen

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based on regulatory compliance, of which more later). But there is also beginning to be talk of another aspect of this challenge: the mindset.

Stone says: “I think now what’s happening is that the machines are a complement to the person. The market structure is very complicated, and therefore, you need algorithms to source liquidity, but a good algorithm with a good trader can give you an excellent result. It’s not that the machines are taking over the world; it’s that they’re working with us.”

Liquidity So much for all those Terminator analogies. Effective execution requires good-quality liquidity, and we can imagine a model in which the algo finds the liquidity to which the human trader may or may not choose to bring an extra layer of creativity. Gary Stone’s observation is not revolutionary, and of course, nor is it a proposal to build subjectivity back into the equation. But is there perhaps a detectable attitude shift here?

Stone says: “In the past, there used to be the approach: I get an order, I put it in an algo, I try to get that benchmark. Now what we see happening is, the trader is coming from a different mindset: I’m amassing a position in a certain currency, I’m going to put some of it in an algo, I’m going to pick my spots and when opportunities arise, I’m going to buy at those levels and overweight it to get a better average.”

Similarly, Levas is talking about traders not quants when he says: “To me, the algo is only as good as the person behind the algo.”

And in the course of an exchange about machines, humans and adaptiveness in general, Alex Krishtop, management consultant and trading systems designer, EdgeSense Solutions, says: “I have always been in opposition to adepts of pure science, as I believe that financial markets are not much different from, for example, oriental bazaars, and if we’re going to profit from them we need to understand their participants’ psychology first.”

Wow! Alex Krishtop goes on to reference “trading psychology and its successful exploitation by mechanical traders”, and in the context of FX in particular, with its wide range of participants with their various motivations to trade, we might infer that an acknowledgement of the presence of human traders can add value to a trading strategy on more than one level. This is a shift of emphasis rather than a wholesale reconfiguration of the front office, but you don’t develop adaptiveness by sticking to yesterday’s processes. Simplistic, no doubt, and while we’re discussing the human element, it has even been suggested that the FX market’s equivalent of that chaos-theory butterfly is a world traveller with

a corporate credit card. But back to the subject at hand. If we’re talking about

mindset we’re talking about openness, and that by definition is symptomatic of

a capacity to adapt to complexity.

It’s also a refreshing change. The old-style conversation about FX algos typically circled around their

translation from equity markets. But the third (and no doubt fourth, and

fifth) generations tend to be discussed in terms of finding their place in a

complex environment. They’re “FX algos”, yes, but that doesn’t make them stand-alone,

one-trick applications. They’re part of the team. Levas, from his multi-asset,

macro perspective, says: “This to me is the real use of algorithms. If you’re very busy, or you’re in a particular sector or currency pair, or you’re in something where there’s a

lack of liquidity and you want this algorithm to work very hard for you without you having to focus in on what it’s doing ... this is where algos are perfect.”


Combining ingredientsWe’ve lost the Terminator analogies, but can we still use the line about algos fixing the coffee one day? If we’re discussing the ways in which addressing the microstructure dynamics of the FX market can help providers to engineer better algorithmic execution solutions for their clients, we might conclude that such a micro-focus is fundamental to addressing complexity. But if we go on to ask how the coming (and existing third) generation of FX algos will combine the “ingredients” of adaptiveness – more sophisticated logic using better data to learn – to help clients take greater responsibility for their FX-trading activity, we get into very interesting territory.

Discussing transparency, Stone says: “FX traders need to understand pre-trade and the working trade; they also need post-trade to reflect upon what’s happened. It’s not just machine learning; it’s human learning at the same time.”

Thought-provoking, yes? Not just in terms of the basic human:machine interaction either. Consider this. FX is complex. Yeah, right, got that. FX algos have the capacity to enable, leverage, enhance a two-way information flow. And if we push this out a few generations, we’ll have human and algo finding a way to high-five each other. Yeah, sure. If there’s a blue-sky part to this, it’s that some day, all algos will work this way. We’re using the term “FX algo” and the term “adaptive algo”, and already, they’re almost synonymous with each other. For a multi-asset strategist like Michael J Levas, an adaptive algo is already part of the team; maybe the future holds multiple/single-asset algos developed from the evolving FX/adaptive ranges. Adaptive is also responsive, and not just to markets.

DriversBut none of this is happening in isolation. We have ahead of us the prospect of derivatives reform, swap-execution facilities (SEFs), assorted new venues and venue types, ongoing debate about regulation, China gradually opening up a whole “new” reserve currency; and with all that we’re embroiled in an ongoing industry re-organisation led in large part by democratically accountable politicians. These are interesting times. Bondesen says: “With the potential for a powerful regulatory regime looming over FX, based on perhaps Dodd-Frank or MiFID, there could be a future where FX could be traded with different reporting requirements and indeed best-execution requirements.”

The irony, given Bondesen’s comment earlier about best execution as only one of the possible drivers in FX, is that clients could, so to speak, be forced to want it. This could make regulation a driver towards increased algo trading of FX. Bondesen says: “Proving best execution is much easier when an algo has been

>>>


“You need adaptive algorithms that will learn from themselves, learn what is going on in the marketplace and understand the liquidity with which they’re interacting, so

that they can maximise liquidity capture.”

Gary Stone

Adaptive FX algorithms - giving control back to clients

>>>

working the order for you on the main venues or with major banks and brokers.”

Regulation: key driver of the future. It’s not exactly counter-intuitive, but certainly striking, that micro-focused and adaptive FX algos should be playing a part in delivering the simplicity – via transparency – that regulation demands. But what of the impact of the current and ongoing, substantially (increasingly?) regulation-driven upheaval in the finance industry generally that we see all around us?

Chris Cruden, CEO, Insch Capital, says: “Anything that increases liquidity and transparency is a good thing for any market. That said, markets tend to take on the personalities of their participants. If those participants are inexperienced, easily spooked, over-leveraged, this makes a market less safe and probably negates the benefits of increased liquidity.”

Interestingly, Gary Stone speaks of a shift in the participant demographic in FX, but not in those terms. Stone says: “Because of the restructuring that’s going on in the marketplace, FX coming up from the back office to the front office, front-office traders having experience as sell-side market-makers, you’re starting to see a very different way of looking at algos and looking at usage and workflow.”

Traders are looking at algos as part of a toolkit, Stone explains, that makes the picking of a spot much more valuable and easy. Stone says: “We’re starting to see the sell-side arrive on the buy-side. At the same time there is a shift toward all traders taking greater control over their orders. Just like when a sell-side trader takes an order, he takes control of the order and he owns it as well.”

Influencing the marketAs to whether adaptive algos can themselves influence the “personality” of the FX market, Cruden says: “Algorithmic trading is simply systematic decision-making. Anybody I’ve ever met who’s successful is systematic, although they may not have encoded their decision-making.” Human traders should aspire to the condition of algorithms, maybe? If it is reasonable to assume that market participants, including regulators, are easily “spooked” these days, given everything that’s happened over the past (say) six years, maybe it is a good idea to bring adaptive algos onto the team. If “spooked” is the mindset, “spooked about algos” is an obvious subset, but what if the term “adaptive” embraces an ability to step back before plunging into another flash crash? Oh, and rogue traders are all too human, really, aren’t they?

In the long run, we can reasonably adopt the view that adaptive algos will potentially deliver an extra measure of stability to FX markets. This may not yet be widely appreciated yet, but they are “regulator-friendly”, in the sense that their thought processes can be tracked back and their decision-making relatively



“I have always been in opposition to adepts of pure science, as I believe that financial markets are not much different from, for example, oriental bazaars, and if we’re going to profit from them we need to understand their participants’ psychology first.”

Alex Krishtop

www.squaredfinancial.com00 353 01 662 2038

Squared Financial Services LimitedCustom House Plaza 2, Harbourmaster Place, IFSC, Dublin 1 , Ireland

Squared Financial Services Limited is an independent, full-service broker headquartered in Dublin and regulated by the Central Bank of Ireland (CBI). Squared Financial’s proprietary trading platform

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easily audited. Key point here – again, not as widely appreciated as it might be, at least among politicians – is that algorithmic trading is not synonymous with high-frequency trading. Cruden says: “We would take the view that trading less frequently is better than trading more frequently. When you put trading into an ever more complex, more frequent technology environment, it seems to me you increase the risk.” Cruden goes on to explain that his definition of risk here is the simple, broad and colloquial possibility that “things can go wrong”.

Changing relationshipsSo much of this discussion has centred around the potential for an enhanced relationship between the human trader and the adaptive algo. But that isn’t the only relationship that might be changing. Courtney Gibson, vice president, trading, OANDA, says: “There’s a growing base of traders who are using micro models to analyse their brokers for short-term strategies. The same approaches can be turned around to analyse client flows. From our perspective, this is an ethical issue that both clients and market-makers need to acknowledge.” It is an interesting dilemma. Gibson says: “We’re finding that clients are very interested in algorithms that look at micro-dynamics to try to anticipate movements, but there’s the flip side: brokers might be trying to do

the same to them. That’s why transparency with our clients is so important to us.” Hmm.

It’s a valid point, but the positive flip side is, surely, that it’s possible. The enhanced capacity to measure patterns of behaviour, and indeed to conduct analysis of the kind Gibson cites, is suggestive of an enhanced form of what we might as well call a “know your client”, or indeed “know your broker” process. The key features of adaptive algos extend to embrace AI-driven learning, agility, the capacity for HFT, an enhanced form of what we’ve called relationship-building, and a positive impact on the overall toolkit of which the algo is a tool.

But let’s give the last question to Peter Bondesen, whose answer is reassuringly traditional. What have become the dominant factors influencing how FX-trading firms choose the most appropriate FX algorithms to deploy for their own specific strategies and trade-execution requirements? Bondesen says: “The classic efficiencies: latency, slippage, market impact. Trading desks need different ways to handle different types of trades, which makes understanding what type of liquidity providers dominate certain marketplaces an essential piece of the puzzle.”



“Algorithmic trading is simply systematic decision- making. Anybody I’ve ever met who’s successful

is systematic, although they may not have encoded their decision-making.”

Chris Cruden

“We’re finding that clients are very interested in algorithms that look at micro-dynamics to try to

anticipate movements, but there’s the flip side: brokers might be trying to do the same to them. That’s why transparency with our clients is so important to us.”

Courtney Gibson

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We see interesting user applications for CEP in other markets and asset classes where it has cut its teeth, but surely most of these cannot be translated across to FX?

We have customers using CEP (or Event Stream Processing) in FX environments for a variety of use cases ranging from real-time MTM, risk analytics,

algo execution and monitoring, pricing and system monitoring. In fact, FX is showing itself to be a perfect environment for our ESP engine due to its scalability, resilience and ability to underpin a variety use cases with a single operationally supported tool.

Doesn’t CEP mainly benefit sell-side firms?

It’s true that the majority of CEP usage started on the Sell-Side, however, the last 12 months has seen significant increase of interest and use from the buy-side. Part of this is down to ease of use and speed to market. Speaking for the SAP ESP engine, we have a visual model development environment that allows a Business Analyst to quickly create quite complex models. This allows buy-side firms, who have significantly less development resource than most Sell-Side firms, to be able to use existing resources to build models with relatively little development capability required compared to traditional ground-up development. In particular CEP provides buy-side firms with the ability to both develop models and deploy into production using the same tool, attached initially to development database and then in production to live streams allowing for more accurate and faster implementation.


Complex Event Processing – a proven technology and highly scalable for FX

FX MYTHBUSTERS

By Stuart Grant, business development manager, SAP.

Stuart Grant

Isn’t CEP tooling and deployment really a job for IT professionals and something which needs to be left to skilled programmers?

Not necessarily, as I’ve mentioned before our visual design studio allows Business Analysts or Quant Analysts who have strong business or analytical knowledge to develop the core of the model. The IT professional can then provide the elements required to strengthen the model to company standards as required whilst all the time allowing any development work that takes place to be rendered back in the design studio where the business users can instantly see the changes made. This reduces previously weeks-to-months development cycles to days-to-weeks, and with far improved confidence in the model due to the closer interaction of business and IT during the development process.

Achieving speedier time to market with our strategies is vitally important to us and we do this by employing significant computing resources and Quant manpower. Can CEP engines, even with easy to use front-ends for developing models, compete with that?

An element of the CEP environment is the framework or design methodology that surrounds the tool. As a result firms can benefit in a number of areas by adopting a CEP based approach. There will always be bleeding edge requirements that firms feel need to be implemented using their own proprietary methods, depending on how sophisticated the firm is. There is always a trend of bleeding edge business lines having to ‘industrialise’ these capabilities at some point, and this is where CEP comes in. CEP allows organisations to focus on developing their IP, not the development of the execution infrastructure. As a result firms can focus on being more customer centric and deploy or maintain their business analytics faster.

Our existing trading infrastructure utilises multiple proprietary interfaces and has numerous latency issues. Shouldn’t we wait until all these bottlenecks have been resolved before we try to integrate a CEP framework?

Quite the reverse. The SAP ESP solution comes with both maintained adapters and an open adapter framework enabling us to connect to any source or destination system. Most deployments see ESP being deployed alongside existing systems, and then taking the load off over time allowing for a lower risk migration strategy to a simpler, more effective and real-time enabled platform. Even if a source is unable to provide streaming data, the engine can receive data as it’s currently provided, with the ability to support

real-time or full streaming when the source system is able to provide it. This gives firms the ability to deliver ROI in the short term with improved TCO in the medium and long term as legacy systems are removed.

We develop our own specific execution algorithms and generate our own trade signals. Where is the evidence that CEP can give us greater flexibility in doing this which might enable us to gain an edge over our competitors?

Where organisations have developed a core library of algorithms and functions the CEP engine can call out to these, and importantly support a more uniform approach to executing these analytics across front and middle office. Many firms struggle with Analytics governance with different functions being used in different environments. Where rapid event processing or real-time analytics is required, CEP can become the integration point between siloed business functions, where previously there may have been disparate technology siloes preventing the re-use of analytics. In addition, the CEP engine provides a good mechanism for back testing and stress testing new or updated models providing a common environment for all LoB. It is this Enterprise approach that we are now seeing as the new benefit of CEP.

We spend a lot of time working with derivative products. Can CEP adequately deal with the complexity of these instruments?

CEP is asset agnostic, and its modelling environment enables very complex models and relationships to be developed. As with all development principles, providing the time is taken at the outset to implement the correct design approach then CEP provides an ideal platform for supporting multiple asset types, something that with the introduction of requirements such as pre-deal Credit Value Adjustment (CVA) analytics is becoming the norm as desk now need a view across all traded assets with a single counterparty.

As a retail FX broker we are always interested in leveraging the benefits of new technology but isn’t CEP something with more specific applications in the institutional FX space?

Not at all, as some Retail providers are now offering algorithmic capabilities through their portals it’s just as relevant. In some circumstances organisations are employing complex blends of retail and institutional flow to achieve efficiency and CEP is an ideal decisioning and routing environment to support this type of logic. Some users leverage CEP just for


>>>

FX MYTHBUSTERS

integrating Market Data streams, it doesn’t always need to be a high scale, complex business environment in order to benefit from CEP technology.

Doesn’t selecting a suitable CEP provider just come down to weighing up the costs involved?

That’s one element, and of course an element that always factors in to a project. However, it’s important to look at the design and functional capabilities. For example, the SAP ESP engine is written in C to ensure the fastest execution with stability. We also have core support for failover and scalability to enable firms to benefit from distributed processing etc. Where in the past CEP technology has typically been a point solution for an organisation, it’s now becoming an Enterprise requirement due to the recognised volume of use cases that the technology can be employed for. As a result, these capabilities for scaling and Disaster Recovery become paramount. Lastly, firms need to remember where the data is coming from and going to around the

CEP environment. It’s important to look at the platform element and how easy, or how much experience, the CEP provider has in making the CEP engine a non-disruptive positive addition to a firms existing infrastructure.

CEP has sometimes been called a disruptive technology. Isn’t that an exaggeration and can it really change the way the FX market operates in

unexpected ways?

It’s disruptive in that it’s helping firms to industrialise their ability to implement and execute their Business knowledge and analysis. However, now that the technology is widely adopted it no longer disruptive from an operational perspective as there are more available resources with knowledge of running CEP technology than there once were. A big element of the success of CEP in other asset classes or functions is that firms are able to deliver more development capability, faster to the business than if firms relied on traditional development techniques. This in turn accelerates the pace of innovation that firms are able to achieve.

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Retail e-FX PROViDeR

According to Jonathan Brewer, head of e-FX Business Development at Sucden Financial, the rise of the PoP broker is the result of the

pressure applied from more educated retail clients that now expect a better standard of service from their FX brokers. “Under the market-making model, firms would sometimes act more like a casino than a broker. They would take the other side of their clients’ orders and make money from their losses,” he says, so the temptation to skew prices in their favour was too much to ignore for some retail brokers under this model.

However, thanks to an increasing number of internet forums populated by retail FX traders discussing their experiences – such as the Forex Peace Army – the nefarious practices of some retail brokers and the potential conflicts within the market-making model have been much publicised within the retail trading community. Consequently, says Brewer, brokers are choosing to eschew the market-making model in favour of the agency model where they take prices

from the big liquidity providers and pass them onto their clients. But rather than providing this service directly, a number of brokers are choosing to employ PoP brokers, such as Sucden Financial.

One might think that the retail brokers would bemoan the change in retail traders’ attitudes and begrudge having to use PoP brokers. “The retail brokers in some cases do not make as much money as they used to but this is a more stable and predictable revenue stream and a less risky business model. It is also a change that has been driven by their end clients. For example, some major brokers have spent millions of dollars advertising the benefits of the agency model to retail clients and so now there is a growing demand for retail brokers offering this model,” says Brewer.

The result, he maintains, is that there is a definite split in the retail client base between those that want the straight-through-processing (STP) agency model and those that want the market-making model and brokers not offering both options are missing out. Consequently there are a number of brokers running a hybrid model to offer this choice.

The genuine article

Prime of prime brokers may be able to offer cheap, quick and easy access to retail brokers to the FX market but, warns Brewer, those retail brokers considering a switch from the market-making to the


Nicholas Pratt examines the prime of prime brokerage (PoP) model and why it has been an increasing feature of the retail FX market as a consequence of numerous factors, including a more educated (and consequently more suspicious) client base.

Prime of Prime Brokerage – extending market access for Retail FX providers

agency model would be well advised to ensure that any PoP they employ is in fact offering a genuine agency model. “It is completely counter intuitive if you move to an agency model, usually due to client demand, only for your wholesale broker to be market-making the flow. Also, don’t take a claim that the PoP is offering 100% STP at face value. Ask questions and challenge that statement.”

There are a number of retail brokers that do not appreciate the importance of verifying the credentials of the PoPs, especially given the fact that there are a lot of newcomers in this space that may have experience in electronic FX but a limited track record in traditional FX prime brokerage. “Sucden Financial has been an active futures broker for 40 years, but it is only in the last four or five years that we have been active in the eFX space. Contrastingly, there are the specialist eFX PoPs that have very little scale or history. I do not think the retail brokers are questioning this enough because the worst thing that can happen is that their PoP goes out of business.”

The benefits and additional services and support that a bona fide PoP can offer and which go beyond what is available from regular prime brokers include better access to liquidity, says Brewer. “We are a wholesale broker. The majority of retail brokers do not have the credit lines that a PoP broker would have. We trade with mutiple liquidity-providing banks. In order to have a direct relationship with these banks you need a relatively sizeable balance sheet.”

“In addition to the liquidity access and more favourable leverage terms and larger limits, the PoP brokers can sometimes offer a more flexible service than the traditional prime brokers – enabling retail brokers


>>>>>>>>>


to open accounts or amend existing trading facilities (such as a change in limits) in days or weeks rather than months, offering the ability to trade in small sizes, offering client money segregation and also offering white label technology services for reporting,” says Brewer.

Choosing a service

However, retail brokers must consider what PoP service is best suited to their specific business requirements. In Brewer’s opinion, the obvious qualities to consider include the spread and depth of liquidity available, the cost of commissions, the leverage terms, ability to offer segregation, and the quality of the technology required for connectivity.

“Typically we try to fit in with the technology requirements that the broker has. Some brokers have their own trading technology and just want liquidity, and some want white-labelled platforms. We are typically able to fit in with whatever technology requirements the client has,” says Brewer.

There is also a need for PoPs to demonstrate distinctive customer service credentials. “The FX market is very entrepreneurial and every retail broker is looking for a particular angle in order to differentiate themselves. As such, it is the job of the PoP to be exceptionally flexible and reactive in the service that they can offer to their clients. One example of this is that we had a client who came to us asking for DMA single stock


CFD’s in MT4, which we delivered to them in a very short timeframe. Typically larger organisations struggle to be as reactive to client specific customisations as we are often able to be.”

Regulation

The FX business is very fast-moving and therefore difficult to predict but one inescapable development will be the presence of greater regulation, says Brewer. “I don’t think the FX market would suffer too much if that does happen. If we see greater transparency in the transaction flow, that could only work in our favour.” And despite the precarious nature of being an intermediary in a chain, especially given the examples of disintermediation that technology developments have created, Brewer believes that PoP’s will have an essential role to play in the FX market of the future.

“There will definitely be some encroaching from some prime brokers because we are essentially reselling. But having worked at a big bank in the past, they generally want to deal with brokers of a certain size and they do not want lots of smaller customers because it is a hassle and a risk and a cost. They would rather deal with one of us, than 50 smaller clients.”

Another FX PoP broker is UK-based FIXI. According to Head of Business Development Paul Ambrose, one of the main reasons that retail brokers are choosing to leave the marketing making model in favour of agency execution is the changing economic and regulatory environment. “Prime of Prime Brokerage allows retail brokers access to the benefits of Tier 1 liquidity, institutional roll rates, integrated technology and all at one point of contact. This enables clients to focus on growing their income and profitability through higher sales and new partnerships.”

There is also the benefit of more attentive customer service and bespoke services, says Ambrose. “At FIXI our PoP clients are able to rely on us to provide them with a complete solution that is tailored to their business. Our clients range from those that use us purely as a clearing mechanism to those that have outsourced their platform, hosting and liquidity provision. The level of involvement and flexibility that can be offered ahead of a regular Tier 1 Prime Broker means that retail brokers are now able to enjoy the level of service that was previously restricted to just the very biggest brokers along with assistance on the full range of their platform setup.”

PoP broker selection

When it comes to PoP broker selection, clients will always shop based on headline commercial terms

“It is completely counter intuitive if you move to an agency model, usually due to client demand, only for your

wholesale broker to be market-making the flow.”

Jonathan Brewer

such as spreads, commissions and leverage but there are many other factors that should be considered as well, says Ambrose. “A broker’s regulatory status, operational robustness and transparency, along with 24 hour support should all be taken into consideration along with the integrity of their pricing. Every broker is unique and should make sure that their PoP service is perfectly suited to their needs.”

It is also important that PoPs are able to assist their clients overcome any implementation or deployment issues and offer good connectivity, thereby minimising any frustrating technology-related issues that might arise. “A good PoP will have already integrated into a number of technology vendors and will be able to offer you a choice of aggregator, bridge provider or API and the relevant liquidity depending on your target market. Essentially, unless the platform is new to market your PoP should be able to launch your desired setup without much difficulty or at least assist you through the implementation,” says Ambrose.

He also stresses the need for retail brokers to be diligent when assessing the relative merits of a prospective PoP, especially in relation to customer service. “Brokers should be very careful as a number of PoPs offer a ‘one-size-fits-all’ product that can be attractive initially but the lack of flexibility very swiftly hinders the growth of the client. Leading PoPs are able to offer flexible solutions to clients whilst still offering the tight spreads and competitive commission rates that are now the benchmark in our space.”

And in terms of assessing the sustainability of the PoP model in light of likely market developments, Ambrose also believes that greater supervisory scrutiny will be hugely influential. “Continuing, indeed increasing, regulator scrutiny of the retail sector will pressure the smaller players to look for larger partners to help them grow their businesses. FX PoP

>>>

offers many of the advantages that the larger players enjoy and can help ease the operational issues that the regulatory burden will bring.”

He goes on to say that “It also seems clear that the liquidity providers will become more discerning about where their liquidity in going and how it is being used. Pricing spreads are being pushed to the limit and liquidity provider scrutiny of this flows profitability will mean that even more time and effort will be required to manage multiple liquidity provider relationships – FX PoP is an idea venue to help in this task.”

Flexibility

Technology plays an integral part in many FX PoP’s offerings and Cyprus-based TopFX recently partnered with the trading technology service cTrader to enhance its own offering. According to TopFX chief executive


Prime of Prime Brokerage – extending market access for Retail FX providers

Authorised and Regulated by the Financial Services Authority

www.fixi.com

Gabriel Styllas, it is the general trend towards agency model execution that is the main contributing factor towards more widespread adoption of FX PoPs.

“Market makers who had before only concentrated on incoming price streams suddenly needed a way to automate the rapid sending of orders as well as reception. At the same time, many brokers came to accept the widely held viewpoint in other quarters that flexibility is key to a successful liquidity partnership. The agency model quickly changed the game for Retail FX’s biggest players, and there was no telling when the next big change would come that could undermine current prime broker agreements.”

There are also the various number of service benefits that PoPs can offer retail brokers which they are unlikely to get from prime brokers. “Firstly, there’s the issue of pricing. Non-specialty brokers generally need competitive pricing across their whole instrument portfolio. They need to draw from a wide pool of potential investors - many of whom are easily swayed by slightly better offerings between brokers,” says Styllas.

He also notes that, “It becomes difficult in competition on such small margins to manage complicated prime broker relationships - and the quest for fair pricing will more often than not involve striking complex arrangements with a range of prime brokers, many

of whom hold conditions of significant capital requirements which brokers are unable to meet - either because they are startup brokers without titanic levels of investment, or because even as an established broker, having so much margin so widely dispersed can have a telling impact on cash flow and reserves.”

The hefty capital requirements needed to enter into a prime broker agreement comes not only from initial integration costs (many prime brokers demand initial equity amount of around 3 million USD, whereas PoPs make no such demands from their clients), but the prime broker often also imposes strict minimum deposit and minimum volume conditions that smaller brokers struggle to meet. “The PoP model becomes ideal in this sort of scenario,” says Styllas. “Brokers and banks can stretch their reach using the PoP’s wide network of LPs, without complicated arrangements, rigid structures, or astronomical capital requirements.”

Leverage

When it comes to the considerations that retail brokers make when selecting the most suitable PoP, leverage can definitely play a major role, says Styllas. “While PoPs generally offer higher leverage terms than traditional prime brokerage, there remains quite a wide range of leverage amongst the various PoP offerings. At TopFX, for example, we offer a leverage limit of 100 to 1. What we’ve found is that 100 to 1 gets much closer requirements for many brokers, a good portion of whom are currently having to make do with 40 or 50 to 1.

“Another consideration is the number and variety of agreements the PoP has with liquidity providers. While one advantage of the PoP is the eclectic liquidity they are able to source, some do choose to specialise, and instead of making agreements across the full FX and CFDs spectrum, will use a large number of specialty liquidity providers,” claims Styllas.

As for the implementation and deployment process, Styllas says that TopFX’s setup process means that clients are usually live in a matter of days from signing (provided due diligence as per CySec regulation has been taken care of ). “There’s no setup, ownership and operation of costly IT infrastructure, and no long, complicated migration process either. Integration is straightforward, and our team is on hand to help at every step.”

Use of technology

In addition to easing any technology related set-up and maintenance costs, PoPs must also ensure they can

retail e-FX PrOViDer >>>


“A good PoP will have already integrated into a number of technology vendors and will be able to offer you a choice

of aggregator, bridge provider or API and the relevant liquidity depending on your target market.”

Paul Ambrose

demonstrate a differentiation in their customer service capabilities

if they are to build a strong base of retail broker clients. Much of this

will rely on the PoP’s ability to use technology to enhance the transaction process, says Styllas.

“Nowadays PoPs are able to flexibly handle highly volatile markets and large or small volumes by efficiently processing hundreds of thousands of tickets per day. Retail brokers that use PoPs to submit their orders and execute trades in real-time are taking advantage of low latency networks that reduce rejection rates from LPs caused by connection delays or interruptions, and increase the profitability of every filled/executed order,” he says. “At TopFX, we give our clients the consistent and stable pricing they need to compete in a cut-throat market, with full scale price


retail e-FX PrOViDer

reception and delivery through low-latency ECN networks. We provide a number of APIs (FIX, Java and C++), through which clients can receive real-time quote feeds, submit trade requests, set and modify orders and receive automated confirmations of trade activity.”

Styllas says that he expects the popularity of the PoP model to endure the next pahse of development in the FX market, a phase that is likely to feature much greater regulatory requirements and therefore a need fro much greater risk management and liquidity management facilities for the retail brokers. “We expect PoPs to continue their increasing popularity, mainly due to looming FX regulation, increased capital requirements required in an ever more competitive marketplace, and the adoption of a more conservative approach by banks who are becoming less flexible and unwilling to take risks with unproven brokers.”

“The PoPs normally offer a full suite of compliance based hedging services with a customised and innovative approach that satisfies retail broker objectives. These currency hedging solutions help broker-dealer market makers offset risk in a way that best serves them and all currency trading counterparties. TopFX provides hedging security under all spot trading scenarios, whether it’s to protect against individual accounts holding exceptionally large volume orders, or to hedge against total risk exposure held for a particular trading instrument by, for example, setting your average transactions held for a specific position against average prices observed over a period of time. Effective reduction of accumulated risk requires top price streams which guarantee the best hedging prices for protecting your bottom line from losses caused by exchange rate fluctuations, thereby boosting your revenue forecast capabilities. Again, solutions are tailored to individual client needs, and they’re given full control of their risk exposure,” says Styllas.

Widening appeal

FCStone, LLC is a leading US-based FX broker that is also providing technology as part of its PoP offering. According to Joe Conlan, Global Head of FX Sales at FCStone, the growing popularity of the PoP broker model is due in part to the attempts of retail brokers trying to widen their appeal to an institutional

>>>

“Brokers and banks can stretch their reach using the PoP’s wide network of LPs, without complicated arrangements, rigid structures, or astronomical capital requirements.”

Gabriel Styllas

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audience, especially those that have adopted an agency or STP model of execution. “Retail brokers that are using STP to execute, are attempting to use their relationships with liquidity providing banks to expand into the institutional business with that same liquidity. The retail space has become more challenging and the institutional traders are seen as a potential growth area.”

FCStone only focuses on institutional clients that are considered “north of retail but south of bank prime brokers,” says Conlan. They may have the sophistication that requires a large prime broker, but not the size. “So we offer a service that is just as professional, but more accessible and with better leverage terms. FCStone has been operating this service for seven years and its offering has always had the same focus – to offer a service that mimics the bank prime brokers with additional technology that banks don’t offer.”

The PoP market has become more crowded as of late admits Conlan, however this is where the technology capability of the competing firms falls short. “There are more companies competing in this space with us but we have been here a long time. Some of our competitors may be running an agency desk but do not have the automation level that is needed. For us, automation is our main selling point. We have also focused on providing greater customization and access to a wider range of international markets and currencies. We have been running a 24 hour trading desk and we are constantly adding to it in terms of currency expertise.”

One area Conlan does not expect competition from is the prime brokerage space. “I think the prime brokers are happy with their offerings. There may be some of them that are being more selective about their customers but I think it is marginal and I do not anticipate any of them looking to lower their threshold. If anything, I expect the real encroachment to come from the retail FX brokers looking to move up. For example, a retail broker looking to broaden their institutional offering would have to offer all the reporting that a PoP provides, but could possibly have more flexibility on the type of client they allow rather than an exclusively institutional broker like FCStone would be willing to consider,” he says.

If the PoP model continues to be successful, will the PoP brokers have to look at enhancing their set-ups to account for more scale and potentially greater volatility? And, especially for those brokers that choose a more flexible model in terms of the clients that they take on and the leverage terms that they allow, will there be a

need to enhance the risk management and liquidity management capabilities used? After all, the FX market has seen unprecedented levels of volatility in recent years even if 2012 has been relatively mild. Will PoP brokers increasingly have to turn to automated risk management systems where trading limits are managed by machines rather than through negotiation and how will this affect the client relationship?

“We are using margin-based models where the clients have to keep collateral on deposit to support their trading activity,” says Conlan. “But I have heard of some PoP brokers that manage their clients’ exposures by using automatic liquidations. That is more controversial for us because our clients are all institutional and are more used to having an on-going dialogue with their brokers in times of stress.” Conlan says that there are efficiencies in the automatic risk management model where limits are set rigidly and controlled according to models but there can also be data issues if, for example, a client receives a bad price that unfairly skews their trading values. “Our value is in managing risk with a mix of humans and machines.”

Extending market access

As far as Muhammad Rasoul, Chief Product Officer at GAIN Capital, is concerned, the extension of market access to retail FX providers has been a key



>>>

“Retail brokers that are using STP to execute, are attempting to use their relationships with

liquidity providing banks to expand into the institutional business with that same liquidity. The retail space has become more challenging and the institutional traders

are seen as a potential growth area.”

Joe Conlan

component in the increasing popularity of the PoP brokerage model. “Many new entrants into the retail FX space do not have the ability to get credit with banking institutions. The PoP solution generally provides start-up firms, firms without a strong track record or balance sheet, or those operating outside the top regulatory jurisdictions access to larger liquidity pools. Even for brokers who might be able to secure a credit line with a bank, the non-bank firms offering PoP solutions typically have more flexible terms, the systems in place to monitor trading activity, credit, and provide reporting.”

Few POPS can provide truly customised liquiditysolutions, says Rasoul, that match the different type of customers the broker serves and the markets they trade. “The liquidity a retail MT4 broker needs is very different from a broker looking to provide quality liquidity to their high end retail customers, who demand extremely aggressive spreads and the ability to deal in size across a wide range of FX and CFD products,” he says.

Integration

When it comes to the factors that influence FX brokers in their choice of PoP service, Rasoul says that the key items are access to liquidity in a range of markets,

competitive terms on fees, quality price discovery and execution, and all around good customer service. Similarly important though is the ease in which technology and integration issues are managed.

“The level of integration required really depends on the way the PoP is setup. Generally, firms are looking for a combination of FIX integration for pricing and STP along with manual trade execution capabilities via a GUI as well as sometimes voice access to a trading desk. The key is finding a PoP partner that can match liquidity to the specific needs of the broker and has the right tools, such as APIs, and experience integrating with a variety of partners. All order flow is not the same, and many retail FX Brokers find this out too late when they choose their PoP partners,” notes Rasoul.

The customer service element cannot be forgotten either adds Rasoul. “A handful of PoP providers differentiate themselves in terms of their ability to customise liquidity and manage more complex, bespoke integration efforts. At GAIN we’re in an interesting position; we obviously understand the retail market very well and with GTX, our ECN technology, we now have a compelling PoP solution. Our recently announced partnership with the Indonesian Commodity and Derivatives Exchange is a good example. ICDX is using GTX technology and liquidity to launch their new currency contracts early next year.”

Rasoul provides a final comment on the evolving FX PoP landscape and increased competition within this space. He believes that the main challenge for providers will be developing additional capabilities aside from the core, liquidity-based services. “As the leveraged retail trading space matures, PoP solutions will not only be measured on access to liquidity for FX and other OTC products like CFDs, but also their capability to deliver exchange traded clearing services, voice support, and custom technology development,” he concludes.



“The key is finding a PoP partner that can match liquidity to the specific needs of the broker and has the right tools

- such as APIs, GUI trading and voice execution services, and experience integrating with a variety of partners. All order flow is not the same, and many retail FX Brokers

find this out too late when they choose their PoP partners.”

Muhammad Rasoul


When assessing the main operational demands that FX brokers now face in the ultra competitive retail FX industry, Brandon

Russell, president, sales and operation (Americas) at Fair Trading Technology, says that over the past few years his company has seen a tightening regulatory environment

and greater focus on the interest of the retail trader specifically, as it relates to client retention. “FX Brokers are realising that customer churn and profitability (or lack thereof,) is an anathema to their business in this new environment. This has led to brokers being quicker to adapt and enhance their offerings to retain customers as well as manage the cost of client retention,” said Russell. He continues: “Brokers have to adapt to the demands of the market as it adopts various avenues to remain profitable. Social trading, mobile trading and algorithmic trading (EA’s) are some of the avenues that have pushed brokers to increase and adapt their service offering to keep up with the demands of the retail market growing up. Retail money is no longer the ‘dumb money’.”

Competitive

Tom Higgins, CEO at Gold-i, states that in order to be truly competitive, FX brokers now need to offer institutional-quality trading to their retail clients


Retail FX brokerages now have to keep up with both increasing operational demands and external market forces in this highly active market. As the Retail FX brokerage industry becomes progressively more competitive, Heather McLean explores what mission critical technology and business services are now required to meet all of these challenges and how can these services can be leveraged by brokers to reduce risk, maintain their competitive offerings and grow their market share.

Becoming more competitive - giving Retail FX brokerages the right tools for the job

across a whole range of asset classes. “Gone are the days of a big fat brokerage fee (‘Bro’ as it is known,) due to the saturation of the market,” says Higgins. “Brokers have to offer super tight spreads in all their asset classes with very few rejections, and give excellent customer support. It is near-on impossible for brokers to find skilled technology staff, which has reinforced the global trend to move to specialist vendor-sourced products and services. The vendors of choice have to be both business and technology experts to be able to provide the winning solutions that the brokers need. The vendor becomes a critical partner to the broker’s business and will share in the success that this will bring the broker.”

Graeme Watkins, head of new business development, EMEA and Asia at oneZero, agrees, stating the retail FX industry is facing a slowdown in volume and an increase in competition. In order to remain competitive, he remarks that brokers are having to offer increasingly lower fees, higher leverage and a wider array of services.

“This is leading to businesses having to focus on low overheads to remain profitable,” expounds Watkins. “This can be achieved through lower head counts and higher automation. It can also be achieved by moving from established fixed costs for technology into per-transactional pay structures. There is huge pressure on brokers to thus ensure that they are selecting the right staff and technology providers to deliver reliable and risk free solutions. Too many staff or technology costs and a broker can’t make money. Too few staff and poor technology will see errors that cost the broker dearly. Finding the sweet spot is the greatest challenge for a broker in this climate.”

Market forces

Brokers are also under pressure from market forces, says Watkins. “Decreasing trade volumes and increasing regulations are largely out of the control of brokers and as such they need to do their best to simply weather the storm. This can be best achieved by removing costs that are not associated with volume, and thus don’t scale down with the broker, and by trying to address as many regulatory requirements as possible with smart technology, such as automated reporting rather than expensive compliance staff. Smart technology can largely help to address clients’ requirements for service and trading tools by automating the application and support processes as well as allowing for multiple trading tools or different platforms to be integrated into a single management solution.”

FX brokers are under pressure particularly from the changing regulatory environment, agrees Russell. He says regulatory forces have been felt globally, but nowhere greater than the US as a consequence of Dodd-Frank, he claims. “Overall, regulation was required but regulators may have over-reached as a consequence of the state of the markets at the end of 2008. The cost to implement the relevant compliance coupled with the measures of the actual act has seen retail volumes drop. Higher capital requirements didn’t help the growth of the market segment either. While reports of volumes dropping off are filtering through, this may be a simple case of volatility being lower in the instruments that count. Once we see volatility return, we should see volumes increasing too,” he notes.

Russell adds: “Most retail traders’ biggest enemy is leverage. They just don’t realise it yet. In time, the market will come to realise that the regulators may have done them a favour. Once they realise this, they will return to the space with the peace of mind that it is a safer environment to operate in. Brokers are being increasingly accommodative to traders’ requirements and demands and as a consequence, traders are being


>>>>>>>>>

“To stay competitive, brokers will need to be less insular and seek partners that assist them in client retention, risk management and technology that is relevant so as to better serve their customer’s ever changing trading requirements.”

Brandon Russell


better equipped. To stay competitive, brokers will need to be less insular and seek partners that assist them in client retention, risk management and technology that is relevant so as to better serve their customer’s ever changing trading requirements.”

Higgins adds that retail-focused brokers can soon expect more competition from institutional brokers who are feeling economic pressures. He explains: “Whilst institutional trade volumes are reducing, retail volumes across the whole asset class range are increasing. This will lead to pure institutional FX brokers branching into retail broking to bolster their volumes.”

While Russell comments that there is a misconception from the retail trading community that any bid or offer should be filled by the broker because they were showing the price to begin with. He states: “Brokers are seeking solutions that allow them to automatically manage market and limit order flow with a minimum of human interaction, resulting in better execution and the eradication of spreads appearing to widen for

Retail e-FX PROViDeR >>>

no apparent reason. When this happens, the retail market perceives it as manipulation. While this may be the case at times, most often it is the broker trying to protect himself too.”

“The problem becomes infinitely more complex when one considers that brokers are providing multiple liquidity providers, various trading platforms, bridge providers and white label partners in addition to their in-house processes,” he continues. “The solution lies in the ability of the broker to redirect various flows seamlessly to relevant liquidity pools based on predetermined risk criteria allowing the broker to accommodate the trade flow that is preferred and isolating the toxic flow allowing for an absolute minimum of human intervention. Basically it’s a form of game theory where the best solution is when most participants are not disadvantaged by the actions of a minority.”

Russell adds that because of the many moving parts of this equation, it may be more than just the broker adding to liquidity management concerns. Platform and bridge providers are capable of adding to the problem too, he warns.

“In order to ensure that brokers are able to maintain good liquidity across all currency pairs and time

zones they need to invest in technology that is capable of keeping the banks’ costs down and delivering the

banks with the right kind of information to manage the flow they receive from the broker,”

Graeme Watkins

“Retail clients are more demanding than institutional clients and have more regulatory protection,

requiring the broker to have more robust technology and processes in place.”

Tom Higgins

Crowd intelligence and consensus

Russell says that for a very long time the playing field has been in favour of the broker. This means that over the past 15 years or so, the retail FX community has come to distrust their broker. Only in the past few years has there been a greater awareness and understanding by the retail FX community of this imbalance, and this has come about by forums that essentially ‘police’ brokers; while relatively toothless, Russell says the community is now forewarned and on alert. “This, coupled with regulation that provides greater access for recourse for disenfranchised traders and the obvious knock on effect of greater transparency, all have brought us to a point where the balance is being righted,” comments Russell.

“Brokers have also realised the acquisition cost per customer is substantially higher than the replacement cost. As a consequence, we see greater measures being taken to accommodate traders within the parameters set by regulation. Agency brokerage is another step in the right direction as the broker aims to look after their customer’s best interest. The retail FX community certainly has choices like never before. Ineptitude and ignorance, so often drivers of broker profits, are being replaced by crowd intelligence and consensus,” surmises Russell.

“With brokers embracing this reality, the focus is on now on providing services which enhance trader account sustainability while hopefully keeping volumes high. While brokers don’t have to implement every fad, they certainly have to be far more cognitive than in the past as to what the drivers are and how they can implement a product range that provides the best ROI without draining resources,” Russell notes.oneZero’s chief executive officer, Andrew Ralich, notes that many brokers in today’s market are looking to achieve more consistent, predictable revenue. The days of bucketing trades and profiting off pure ‘client churn’ are long gone, he remarks. “Educating the trader through social interaction is one way brokers have succeeded in helping extend the value of the client’s account, and the expensive process

of marketing and converting client leads. Once the volume is there, and sustained, many brokers have now begun to employ an agency model which provides more consistent revenue based on volume alone, not just PnL. The oneZero technology suite has been focused on reliable processing, reconciliation and reporting of client flow via an STP model since day one. At the end of the day, this added value of consistent, sustainable business is what will be the staple of the FX industry in years to come,” he states.

New services

The provision of new services, such as social investment platforms and mobile trading applications

as well as new trading models, are helping brokers to improve their overall value

proposition, achieve significant growth in their businesses and reduce client

churn.

Higgins comments: “Anything that positively differentiates

a broker from the crowd is good, and social media

integration is really good. People are not

machines and, unless they are using an algo, trade on feeling and consensus. Social

media integration is really powerful and

companies like MT4i are doing extremely well.

Gold-i works very closely with MT4i and our joint clients are always delighted with the

results, which can be startling. Mobile trading will be really key going forward with smarter mobile devices with bigger screens and much better connectivity. Clients are free to trade where and when they want, and no longer have to be sitting at their PC.”

One exciting development in the area of Retail FX services which is actually encouraging wary retail investors to re-enter the market and trust brokers, is mirror trading. Greg Hay, co-founder and vice president of business development at Tradency, states that there are many benefits for brokers adding the company’s Trade-by-Knowledge investing platform and mirroring capabilities to become part of their core online FX trading services with the primary benefit being that their clients start trading again and stay active longer.

retail e-FX PrOViDer >>>


He explains: “Confidence is a major reason that users do not start trading or stop trading quickly. Dormant accounts or inactive accounts that are funded, but trade in a very low volume, are a major hurdle to most brokers. Brokers’ have huge capital expenditure while acquiring new costumers but many never become active, long lasting traders. Yet our latest figures show that when our brokers introduce Mirror Trader to their entire client base, the activation rate, from live to funded and active, rises to an amazing 88% and their trading volume increases by 45%.”

“Due to the Trade-By-Knowledge nature of our platform, traders feel empowered since they base their trading decisions on the actions of track-record proven, expert strategies,” continues Hay. “At the same time, with Mirror Trader, each trader chooses to follow on average, three to seven different strategies to trade for him automatically thus increasing the number of trades performed in the platform. Combine all this with zero extra cost to the client with server based execution, it’s actually a great deal for the user.”

The Mirror Trader platform encompasses a full spectrum of traders from novice to the experienced,



claims Hay. He says Mirror Trader also attracts those that have been previously ‘burned’ by bad forex experiences, hence, why he claims it is an incredibly useful tool for activation of past clients. For Mirror Trader users it comes down to down to the basics, says Hay; ease of use, knowledge and confidence.

Hay notes: “The Mirror Trader platform is user friendly but comprehensive at the same time. It delivers the inexperienced trader an enclosed solution to enter forex trading. Since no previous knowledge or experience is needed, the user need only apply a little common sense. All users need to do is evaluate the strategies by their historical performance and add their preferred strategies to their trading portfolio (the list of strategies they follow).”

“For an experienced forex trader it offers all the charts, analytical tools and oscillators that can be found in other retail forex platforms, but with the added capability of mirroring proven traders. Additionally, this allows the experienced trader to diversify their own trading by using third party strategies. These functions are served as three complimentary trading methods: automatic trading; semi-automatic; and manual trading. Each and every trader can choose and adopt the correct method of trading to suit their preferences, experience and comfort levels,” he continues.

In the current market conditions, brokers who offer only a standard trading platform are finding it increasing hard to attract new clients, claims Hay. “The forex market can be overwhelming and difficult to learn, therefore new traders often seek different investment products. The mirror trading concept

>>>

“Confidence is a major reason that users do not start trading or stop trading quickly. Dormant accounts or

inactive accounts that are funded, but trade in a very low volume, are a major hurdle to most brokers.”

Greg Hay

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Technology is king

Technology has an increasingly key role to play in facilitating a large part of a brokers day to day business activities, including many mission critical operations, says Ralich. “For a broker to run a more consistent, client volume driven, agency model, they need to truly offset the risk via technology that is 100% consistent and reliable. Having a bridge, the traditional end-all tool for STP brokering, is not the sole solution anymore. Brokers are demanding reporting, reconciliation, and client analysis that not only allows them to deploy an agency model, but also to analyse and adapt based on their client flow.”

“As brokers are able to take their focus off the day to day fluctuation of PnL, or reconciliation, and onto marketing they inevitably grow their market share through focusing on what they do best; attracting and maintaining new client relationships. This comes from a solid end to end suite of bridging, reporting, and client facing front ends that work in a sustainable way with each other to ensure 100% uptime and zero risk,” he says.

While Russell, commenting on the application by brokers of technology to help them meet market challenges, says, “We are seeing three primary areas of focus: social trading; mobile trading; and accessibility to multiple platform providers. Brokers are at a crossroads as to whether they internalise these processes or outsource them to service providers. The ability of brokers to produce technology in house and remain current and relevant is questionable and at the moment, a risk that many will not take, choosing rather to outsource.”

Brokers will have to concentrate on procuring and retaining customers by ensuring that their service offerings reflect the current trends in the marketplace and demands of the end user, says Russell. He claims platforms are another key pressure. “As new platforms come to the fore that make trading more accessible and easier to use, we will see greater demands from the end users on brokers to incorporate those into their service offerings and for ease of trading, see them synced with each other and mobile platforms, all through a shared account. The goal for the broker has

to be to partner with technology and service providers who can remain dynamic not only in their service offering, but in how they price their products.”

While Higgins says regulation is an area Gold-i has concentrated on; medium and large brokerages have strict regulatory requirements in all areas related to pre-trade and post-trade management. He notes that Gold-i has opened up all of this rich data via standard FIX interfaces so that it can be made available to middle and back office systems in near instantaneous, sub millisecond time. “An additional requirement for regulated brokers is to have backup or disaster recovery systems available at all times,” Higgins adds. “Gold-i works with leading data centre and software providers of these services to build robust solutions for our clients.”

Staying relevant and up to date

Specialist FX technology providers can help brokers to overcome the complexities of continually integrating new systems and software into their existing trading architectures, which are needed to ensure they are always operating at peak efficiency and offering state of the art trading services to their clients.



“Educating the trader through social interaction is one way brokers have succeeded in helping extend the value of the client’s account, and the expensive process

of marketing and converting client leads.”

Andrew Ralich

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Higgins says that the initial software integration of a new product is just a small part of the operation of a specialist FX technology company. Supporting the software and keeping it up to date with all of the third parties involved is a continual process that requires a very structured approach to make sure that nothing is missed, he warns. “All brokers have distinct and special requirements that a good specialist FX technology provider should be able to meet. Custom features and even whole bespoke systems are the norm in this industry and your specialist FX provider should always offer this,” Higgins adds.

While Ralich notes that as market requirements have expanded, so has oneZero’s portfolio: “For many of our clients, oneZero has become far more than just a bridge provider. We host brokers’ systems in our Equinix NY4-based cloud. We also provide end to end solutions that tie the various components of a broker’s e-trading infrastructure into one reliable, consistent means of reporting, interaction with different platforms, and managing risk. The state of the art within the FX environment is less the latest charting package, or newest front end, but more how

a broker can use proven technology to cross-manage their multiple offerings in a way that provides the same consistent experience and pricing to their clients regardless of how they choose to trade.”

“From the back end perspective, their dealers and risk managers have the same needs, one solution that solves multiple problems in a way that isn’t necessarily the flavour of the week, but is consistent and extensible across the wide array of platforms and asset classes that are already available to the industry,” Ralich concludes.

Russell states that: “The benefit of technology providers to the FX space is always going to be that they offer economy of scale. While we do see some brokers looking to internalise this process, the broader question has to be asked how they stay relevant and ahead of the curve. For the most part, internalising this process has companies following trends, not setting them and being slow to adapt could be costly as customers migrate to brokers with more relevant offerings. “It must be said that brokers should ask of their technology providers how they are helping them stay relevant,” Russell concludes.



Building on its suite of 20 bolt-ons, including the Gold-i MultiMAM, the Gold-i Position Keeper and the Gold-i QuoteChecker, Gold-i

continues to innovate. Gold-i has now added two more products to its bolt-on portfolio: the Gold-i IB Pro� t Share and the Gold-i RiskDBSnapshot.

Gold-i IB Profi t ShareTom Higgins, CEO of Gold-i explains, “MetaTrader has advanced commission functionality but doesn’t have the ability to set-up automatic pro� t sharing with introducing brokers (IBs) or agents. When one of our clients spoke to us about their need for multiple levels of agent rebate sharing, we developed a real-time pro� t sharing tool speci� cally for them. We created the Gold-i IB Pro� t Share to share pro� t in 10 di� erent ways, allocating it between di� erent groups – for example, between a client and multiple agents or in copy mode for trade following. We’ve now added it to our portfolio to sell to others and believe it will be very popular.”

� e Gold-i IB Pro� t Share allows real-time pro� t sharing to be con� gured for any number of client groups or individual clients and any number of agents/IBs.

How does it work? It monitors trading activity in real-time and whenever a client opens or closes a trade, the appropriate trade or pro� t or loss is added to the con� gured agents’ accounts. � e utility handles manual closes, stop

loss, take pro� t and stop out closes, all in real-time. It even converts the pro� t currency from that of the trading client to that of the agent/IB.

Once the con� guration has been completed the system is completely automatic and requires no human intervention. Changes can be made whilst MetaTrader is running and there is no need to re-start once the plugin has been added.

Gold-i RiskDBSnapshot According to Tom Higgins, “Gold-i introduced the RiskDBSnapshot to consolidate reporting from multiple servers in real-time, pushing all the information into a single database. With the Gold-i RiskDBSnapshot, it is far easier for brokers with multiple MT4 servers to gain a thorough overview of their current position.”

� e Gold-i RiskDBSnapshot is ideal for multi MT4 server environments. It updates a single MySQL database with real-time information from MT4.

How does it work? It uses a data model which is a super-set of the MetaTrader4 Report

Server tables, adding additional data to the tables to enable multiple MT4

servers to populate the same database.

Tom Higgins concludes, “A key part of our strategy is continual innovation – and we work closely with clients and partners to develop customised products to help them to address speci� c needs. We are always happy to

discuss ideas with clients and prospects in order to provide them

with tailor-made risk management and execution tools.”

Gold-i is a global market leader in multi-asset class integration. For further information, visit www.gold-i.com


Gold-i bolt-ons help brokers to trade more effectively

SPON

SORE

D ST

ATEM

ENT

Gold-i’s portfolio of bolt-on products are in high demand as they can play a signifi cant role in helping brokers to trade or manage their risk more effectively. They have largely been developed in response to client requests and all address a genuine need in the market.

Tom HigginsTom Higgins


The immediate reaction is to open your platform, close that position, and salvage whatever profits you can. But you’re carrying

work’s laptop, which won’t let you install the platform without 12 different security passwords. To add to your dilemma, there’s no web version of the software, and you’re locked out of mobile trading because you forgot to renew the activation key.

The frustrations this can cause are, as you can imagine, unimaginable. But incredibly, this scenario is all too possible when you consider the contemporary state of eFX platforms.

Lagging behindWith a few notable exceptions, the industry is lagging far behind others when it comes to cross-platform availability. Web and mobile access is both essential and severely lacking.

Mobile internet usage has been rising stratospherically for at least 5 years. One reliable method of measuring desktop versus mobile use it to look at search. In Europe, mobile search is forecasted to overtake desktop searches in 2014.

In China and India, perhaps counter intuitively, mobile already accounts for over 50% of all searches,

(mainly due to a lack of affordable fixed broadband connections).

It’s strange, therefore, to notice such an obvious lack of credible mobile trading solutions. Perhaps the problem is not that mobile trading is difficult to do. It’s that in the tunnel vision works of eFX, it’s as though mobile trading is still seen as some kind of VIP exclusivity. The realisation has not yet dawned that the paupers are now sitting at the king’s table - and mobile is important for everyone. Several key technology providers, for instance, charge extraordinary sums for the right to use a mobile version of their platform, with activation keys preventing access to un-swindled users.

The most bewildering thing about an extra charge, when mobile is even available, is its lack of technological motive. There is no high-tech reason that you don’t understand for enforcing a paid activation code - it’s a simulation of great innovation, and exudes a smugness unbefitting of the relatively low technological accomplishment. $500 for a 16-digit number, anyone? A mobile platform it may be, but a fine bottle of Pinot Grigio it certainly isn’t.

Catching upIt’s a bizarre state of affairs in a world where mobile,

eFX - Still lagging in Web and Mobile?

VIEWPOINT

Consider this scenario: You’re travelling for business when you receive a message from your broker mid-way through your flight (it’s a fancy new Boeing that doesn’t blow an engine when you check your email). The heads of the Eurozone have struck up an agreement on Greece’s new bailout. Hooray!

Wait, not hooray. You had SOLD the euro and now Merkel is eating her way Pac-Man-like into your profitable position. If you don’t do something fast, you’ll hit your stop loss sooner than the next Athenian can lob a petrol-bomb at a policeman.

By Brian Martin, Spotware systems


desktop and cloud are losing their seams and joining together into a larger multi-faceted user experience. Mobile is now a natural part of technological consumption - it’s time eFX caught up to speed.

With that argument made, it’s worth pointing out that, while crucial, mobile is not the be all and end all of FX web-based trading. For one, data lag, especially without wi-fi or 4G, can be problematic. Scalpers for example may fi nd that an unreliable connection will cause an entry fi ll at a price closer to what they had in mind for an exit. Th e other hang-up is the all too familiar case of “fat-fi ngers”, where users end up fi dgeting their way to disastrous trading.So while mobile is, yes, absolutely crucial - it’s not always ideal, and users still need web access to their trades without having to download a platform. If there was ever an industry in which all angles needed covering, FX is defi nitely it, and fast, responsive web-based platforms are necessary for this particular corner.

While web-platforms are more available than mobile platforms, they are more often than not clunky, slow, and eff ectively the ugly non-identical twin of their desktop counterparts, which means that traders must adapt to 2 or 3 diff erent interfaces. If the Buy and Sell buttons are switched between left and right, to give one possibility, the fi rst few trades may be sabotaged.

An example of getting it rightTh e response to the cTrader web and mobile platforms has been incredible. But perhaps this comes from a fl attering comparison within the market status-quo. In my opinion, the most remarkable thing about cTrader’s web and mobile platforms is how unremarkable they are. Th e web platform looks and behaves almost exactly as the desktop version, and the resemblance is so close that users may even forget temporarily which one they’re using. And with cTrader Mobile, user-testing shows that traders who are familiar with the desktop/web versions of cTrader can quickly navigate through the iOS and Android version when using it for the fi rst time, because they use common principles of design and natural usability. Mobile and web are now a natural part of everyday life. Th e sooner we stop thinking about them as a kind of holy grail, the sooner more developers will design platforms that work eff ortlessly and without fuss alongside desktop for a complete and thorough trading environment.

Brian Martin

On the 7th of November 2012 at On the 7th of November 2012 at their offi ces in Limassol, Cyprus, their offi ces in Limassol, Cyprus, MetaQuotes Software Corporation held a seminar entitled, ‘MetaTrader 5 Gateways, Connectivity to Exchanges and Liquidity providers.’ The event was designed to highlight the advantages of MetaTrader 5’s the advantages of MetaTrader 5’s Gateway system and the breadth of liquidity providers represented and it’s ability to allow brokers to provide liquidity themselves or trade as an ECN reducing both their own and clients risk.


MetaTrader 5 Gateways Connectivity to Exchanges and Liquidity providers Seminar

RECENT EVENTS


Well attended

The seminar was very successful and well attended by Brokerages and FX Technology providers from across the global forex marketplace.

After a short introduction from Gaeis Chreis, MetaQuotes Chief Operating Officer, underlining the commitment of the company to it’s 7 million global end users and clients and thanking them for their continued support, the seminars initial address was opened by Qassem Hamadeh, who delivered a brief overview of the advantages of MT5 Gateways and their advantages to liquidity connectivity.

Qassem’s overview was followed by an in depth users perspective of MT5 Gateways capability in practice by Andrei Savitski. Highlighting the ability of MT5’s White Label Gateway to allow Brokers to become listed liquidity providers themselves, connecting directly to other trading brokers.

After a productive morning lunch was provided by Metaquotes in the panoramic restaurant of the Seminar venues, St Raphael Hotel overlooking Limassol’s Marina.

Choosing a liquidity partner

Reconvening after lunch, Patrick McTurk, a Director of Technical Services at Currenex and Managing Director of State Street Global Markets, gave an articulate presentation of who to choose as a liquidity partner when using MT5 Gateways and the criteria best employed when considering a liquidity source. Stressing the intimate business relationship of this partnership.

With many brokers interested in Broker to Broker liquidity provision that MT5 Gateways facilitates he highlighted the advantages of this in terms of trade simplicity, higher leverage, lower capital requirements and overall fit for smaller brokerages but warned that these factors should be weighed against issues of competition and technology infrastructure, latency, reliability and business continuity requirements which may sometimes be better provided by larger dedicated liquidity sources to reduce risk. He concluded by saying that the MT5 Gateways direct liquidity access allowed increased interest in the retail market due to greater transparency.

Conclusion

The Seminar was concluded by a lively question and answer session with Renat Fatkhullin CEO and founder of MetaQuotes who answered all questions frankly for over an hour. Taking time to ensure that he had satisfactorily answered as fully as possible the attendee’s query.

The Seminar concluded at 4:00 pm though the lively debate continued at the cocktail reception hosted that evening in the Moroccan lounge of the hotel.

Retail e-FX ClieNt

Technology companies, platform providers and online brokers have all responded to the needs of the Retail FX market by upping their

game and delivering new products and services with enhanced features and functionality to help deliver a superior value proposition for clients.

UK manager at easy-forex, Zoe Fiddes, comments that a big issue in the retail industry just a few years ago

was execution speed, which meant private investors were faced with price lags and requotes. However, she says that market makers have invested heavily in this area to ensure the time delay is at a minimum now, as it is imperative that a trader can get the price they see on the screen in a fast market. “This has been improved hugely by removing dealing desk interventions and making electronic communications network (ECN) software available to private investors. The ECN model allows traders direct connection to the interbank market and other liquidity providers,” she explains.

Robots and copy trading

Private investors can now take a leap up the complexity ladder and use robots in their trading, adds Fiddes: “While this takes some skill and is not for the novice trader, it can increase entrance opportunities in a fast market and gives the trader the option to hit multiple liquidity venues simultaneously, if required. Algorithmic methods are commonly used by large funds especially for liquidity access, but a private investor can find methods to enhance their own trading if they know how.”

Fiddes continues that as private investors often trade in their spare time, rather than a full time occupation, a common problem is that they do not have enough time available to analyse the market. Yet she says this gap is being filled with the use of mirror trading, where traders can choose to automatically copy live professional traders. “The investor can control what percentage of their fund will go towards copying a certain trader and can switch it off and on at any time,” Fiddes explains.


Capturing investment opportunities with a new generation of Retail FX trading services

Retail FX trading has advanced in leaps and bounds over the last few years and today a new generation of retail investors are out there working the markets. Heather McLean explores why they demand a new, more sophisticated way of exploiting the fast moving currency markets.

Hether McLean

“This is relatively new to the retail space so it is wise to carry out research and get complete transparency on the chosen trader’s history before you start to copy them. It is essential that a trader has up to the second news feeds,” notes Fiddes. “If you are a fundamental trader you will rely on macro-economic announcements and you need to know the result as it is happening. Trading platforms are service driven and most forex companies have enhanced the news feeds they provide to traders. For example, private traders on the easy-forex platform can access the Market News International (MNI) live feed which provides useful interbank information such as where there is buying and selling interest in the market. You can’t trade off your own opinion, that’s why news on market sentiment from the bigger players is so important.”

Matching needs

Depending on the trading style and technical skills of a client, Interactive Brokers (IB), offers various features and functionalities to suit the client’s needs based on their trading style and technical skills.

Thomas Moser, head of foreign exchange at Interactive Brokers, says traders that prefer a clean and simple interface can use Interactive Brokers’ HTML-based WebTrader, which makes it easy to view market data, submit orders and manage their account. Traders who require more sophisticated trading tools find that Interactive Brokers’ market maker-designed trading platform, Trader Workstation (TWS), optimises trading speed and allows for many user-defined presets. Traders on the go can use one of the company’s mobile solutions, including mobileTWS for iPhone, iPad, Blackberry, and Android. In addition, trading access via the company’s API is supported in different programming languages.

Moser states: “Our system allows users to review order details and margin implications before they transmit, or to activate an instantaneous transmit to automatically submit orders with a single click on the bid or ask. In foreign exchange, the company


>>>

easy-forex TRADEDESK platform

Retail e-FX ClieNt


off ers more than 15 order types. Real time account data shows requirements for initial margin (at the time of the trade) and maintenance margin (when holding positions) to help the client understand his or her trading risk at any moment of the day and react quickly to the markets.”

“Post-trade, our proprietary price/risk analytics tool, the IB Risk Navigator, allows clients to monitor and adjust their risk profi le and run ‘what-if ’ analysis to determine the impact of potential future trades on overall risk exposure. Part of the TWS, this free, real time market risk management platform unifi es exposure across multiple asset classes around the globe,” continues Moser. “Our reporting tools allow clients to view and download activity statements into a variety of third party formats. Clients may also create reusable customised Activity Statement templates to show only those sections of the statements that are important to them.”

Cutting edge technology

As to which key features and functionality are now available with the latest generation of online FX trading platforms, Brendan Callan, CEO of FXCM Europe, states that FXCM combines cutting edge technology with market expertise to deliver its retail FX trading platform. It provides retail customers with software available in more than 16 languages, as well as customer support and research in more than a dozen languages. Each month an average of around £150 billion in notional volume is traded on the company’s platforms, helping to create a competitive spread in all major currency pairs.

Callan states that retail customers have easy access to the FX market through FXCM’s Trading Station Platform, where they can take advantage of one-click order execution and trading from real time charts, placing six diff erent types of orders. Trades can be executed by using desktop, web or mobile solutions. For more advanced traders, FXCM off ers a variety of automated trading platforms that allow users to take advantage of the 24 hour FX market. Th e selection of software - accessible through Mirror Trader, MetaTrader4 and the upcoming NinjaTrader - enables users to choose between a choice of systems, programming languages and hosting services.

Commenting, Callan says: “Traders can be sure that they are seeing fair and transparent market prices when using FXCM’s non dealing desk (NDD) forex execution model, where price quotations from many of the world’s leading global banks, fi nancial institutions and market makers in up to 56 currency pairs are streamed to clients with only a small markup.”

“Complementary to FXCM’s selection of retail trading platforms, it aims to provide the most up to date information, research and education needed for successful trading,” adds Callan. “Access to the necessary resources to inform trading decisions should be considered a crucial foundation by anyone looking to build a successful track record in the FX markets. We also off er demo accounts that enable users to try out new strategies before using them in live trades.”

>>>

“Most brokers provide training programmes but these vary in quality, so it is important to � nd a course that can give you personalised support appropriate to your experience.”

Zoe Fiddes

FinFx Trading Oy is one of the fastest growing global ECN/DMA brokerage

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retail e-FX ClieNt


Support services

Account and customer support services are also being offered by major brokers to deliver a first class value proposition to clients, and to move themselves to the top of the competitive retail FX provider leaderboards.

Price movements in currencies are closely monitored in FX, based on either macro fundamental or technical factors that depend on a chosen strategy, says Callan. Because of the liquidity, leverage and 24 hour nature of the FX market, it tends to attract traders that prefer short term strategies and that rely highly on technical analysis, he notes.

“FXCM offers real time and historical data for making calculated trading decisions for its platforms across web, desktop and mobile devices, with the Trading Station Web Solution allowing trades to be placed straight from the charts,” Callan says.

“Real time data is displayed tick by tick, while historical data can be analysed for the past 20 years for most currency pairs. Many traders use technical indicators and a variety of chart elements to analyse the market and locate trading opportunities, the most popular of which are deemed to be Moving Averages, Relative Strength Index, Average True Range Indicator and Bollinger Bands. Altogether, FXCM offers over 50 technical indicators and a range of chart elements to make it easy for traders to keep a close eye on price movements and work them into their strategies,” he remarks.

However, Fiddes warns: “Investors that are new to the market need the correct level of education before they invest seriously. Most brokers provide training programmes but these vary in quality, so it

is important to find a course that can give you personalised support appropriate to your experience.”

“In terms of customer service, brokers that are focused on building lasting relationships with their clients are moving away from a call centre environment and instead provide personal account managers who can recommend appropriate training and support them with any technical queries they may have,” she adds.

“This is beneficial to both the client and broker since many aspects of trading need to be explained

by someone who has experience and education in the market. Larger volume traders are also assigned a personal dealer who offers extra support such as arranging advanced training and providing tailored market updates that come directly to the trader, rather than the trader having to seek out such information themselves,” claims Fiddes.

Steps to add value

Regarding steps being taken by retail FX providers to add value to their offerings, a key one says Fiddes is

>>>

FXCM Trading Station

“Access to the necessary resources to inform trading decisions should be considered a crucial

foundation by anyone looking to build a successful track record in the FX markets.”

Brendon Callan

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retail e-FX ClieNt


that private investors should have access to interbank market reports, signals, and accurate information, through their broker with no time delay. “However, these reports are useless unless the trader knows how to use them, so a training programme is the best way for a novice to learn,” she adds.

“There are hundreds of trading strategies out there and broker education can be a very good way of gaining this knowledge, however it is important to note that one winning strategy for all does not exist; becoming successful takes practice and patience,” claims Fiddes. “Being successful is not something that can happen overnight, and longer term support in a mentoring environment with personal progress reports can keep a trader disciplined and focussed on their goal.”

Retail FX providers are adding value to their offerings by providing institutional grade currency research and market insights to assist retail traders with developing their strategies, comments Moser. “While there may

be some restrictions in distributing institutional-directed research to retail customers, we offer popular research and news feeds via the Interactive Brokers Information System (IBIS) research platform. The seamless integration of IBIS with the TWS equips active traders with a robust arsenal of research tools powered by a variety of tier one content providers.”

“A new all inclusive trading workspace called the Mosaic, now available to current and new TWS users, lets customers combine news, market data, order entry, charting and account monitoring into a single customisable workspace,” Moser adds.

Choosing the right broker

There is a lot of choice on which broker to choose and why. Mikhail Pozdnyakov, institutional services specialist at FinFx Trading Oy, comments that factors which affect traders’ applications of different trading models and styles have been spoken about a lot within the industry. He states: “Each trader has a trading style that is different from the next one. However, in my opinion, the forex broker business model is the most important issue that should be considered when first selecting a broker for a specific trading style.”

“True ECN brokerage companies typically have no conflict of interest between trader and broker, as all client trades are offset with a counterparty that actually executes client orders. Thus, ECN brokers are motivated to serve clients with the best possible order execution time and to ensure direct market access with no price intervention,” explains Pozdnyakov.

>>>

“Some trading styles such as high frequency trading (HFT) may prefer ECNs to market makers, as market making

brokers may have difficulties with very short term inventory times and deliver suboptimal executions as a result.”

Thomas Moser

IB’s FXTrader

He continues: “Once trading with a fully STP/ECN broker, one may expect to be able to act in the environment with deep liquidity and low latency with the liquidity providers. Making a broker more interested in your trading volume, than in the amount of your deposit, is the key factor when trying to meet trading style expectations.”

Factors influencing how traders utilise different models and styles of trading to choose a good broker are varied, agrees Moser. “These include the reliability of executions, speed, spreads and certainly the technological state of the broker’s access possibilities. Some trading styles such as high frequency trading (HFT) may prefer ECNs to market makers, as market making brokers may have difficulties with very short term inventory times and deliver suboptimal executions as a result.”

Callan says FXCM has noticed significant growth in automated trading amongst retail FX traders as the market has become increasingly sophisticated in trading techniques and strategies for this market. “Evidence suggests that a large percentage of volumes in retail FX trading now come from algorithms. This has a significant impact on market behaviour overall, opening up new possibilities for traders who would have otherwise been able to trade only for two or three hours but are now able to take full advantage of the 24 hour FX market.”

“Automated trading programmes continue to become more user friendly, requiring less knowledge of programming from traders, and have therefore gathered a united network of users, benefitting the whole FX trading community as the increase in volume helps to lower market prices. FXCM offers a variety of automated trading platforms that allow users to set up trades by simply selecting from a range of criteria and offer advanced charts, market analytics and trade management,” he adds.

While Fiddes says different trading environments call for different strategies, and those strategic choices come down to the trader. She explains that any given price is either trading in a trend, a range, a trend in a range, or sideways with no clear direction; and each

environment can take a different trading strategy. For example, she says a scalping method is likely to work well at a quiet time in the markets when the price is trading in a tight range, so the factor influencing which method to use is the market environment, and so there must be an element of human intuition when choosing which strategy to use.

“It is the same when using a robot; you can’t simply switch it on and wait for the profits to come. Traders I know who have achieved success from robots take a view on when to run them,” she says.

Fiddes continues: “The benefits of market maker versus ECN can open up a much bigger debate. Certainly when using a market maker you need to ensure that your trades are not intervened by a dealing desk (DD); you don’t want your execution to suffer because some trades are manually filled, and this is an important question to ask your broker. An ECN eliminates the DD; however you are exposed to the interbank climate. While it does have many advantages, it also means you may have to trade on variable spreads and you are not able to access other benefits like guaranteed stop loss orders. A market maker can bring more competitive prices at times of illiquidity, offering tight and fixed spreads.”

“To summarise, through testing a strategy you will discover what market conditions are needed for this to work and then you can make your choice between

retail e-FX ClieNt >>>


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ECN and a market maker. If you are using a robot, then the execution type may be more specifi c so you should check this requirement fi rst,” concludes Fiddes.

Instruments and access

Retail traders are now given more choice in the instruments they can trade via online platforms, and these are coupled with more powerful analysis toolsets and fl exible access channels, such as mobile devices, to help traders improve their risk management capabilities and lead to more profi table trading activities.

Fiddes states: “It’s good for a trader to have access to many diff erent products and investors should not be afraid to move away from the majors. In the forex market EUR/USD is the most traded pair and at easy-forex, that pair accounts for approximately 30% of all day trades, with GBP/USD as the second most traded pair, followed by XAU/USD (gold). However, traders may fi nd it easier to fi nd opportunities in pairs infl uenced by less variables such as the JPY crosses. Also, gold, oil and major indices such as the FSTE100 and the S&P500 can relate to currency market moves, especially the USD, and provide more opportunities to trade.

“But at the same time a trader shouldn’t go wild and trade every product there is,” warns Fiddes. “Instead they must fi nd the products that work for them and they must have enough choice to achieve this. When trading new products it’s important to check the costs involved such as the spread, rolling fee and margin requirement.”

Meanwhile, for short term traders who look to hold positions for a few minutes or a few hours, the day trade order should be used. However, for mid and long term traders, a day trade may not be suitable since there is a rolling fee each night and this cost will mount up if left for many days, notes Fiddes. Instead she recommends that longer term traders should trade off a forward rate to avoid these fees.

“On a forward trade, at execution, you will either pay or receive points depending whether you have sold or bought the higher yielding currency,” remarks Fiddes.

“At easy-forex we off er very competitive spreads and swap points on forwards. Another avenue is to trade forex options which can be used to speculate on volatility and as a strategy to hedge currency risk and can serve to insure an exchange rate.”

Fiddes adds that mobile and tablet platforms are becoming an increasingly popular way to trade in line with their growing popularity for other online

activities. Th e number of easy-forex clients trading via iPhones and iPads has increased by 50% over the last year, she remarks. Yet she notes that the drawback with mobile is that the charting packages are not as advanced, so technical analysis signals are harder to decipher.

While Callan agrees that mobile devices are becoming increasingly popular for retail traders: “Th e latest statistics clearly demonstrate that mobile trading is fast becoming increasingly relevant in FX, with the volume of

trades executed through FXCM’s mobile applications making up 10% of the total volume of trades. Th e apps have proven to be popular around the world, with China, the UK and US responsible for 50% of global trading volumes.”

retail e-FX ClieNt


eToro OpenBook

>>>

Ultimately, FXCM is looking to redefine the way clients’ trade on their tablets and mobile devices, continually improving the quality of platforms and increasing the amount of features available for traders based on customer feedback, says Callan. He states that FXCM’s Trading Station II application is well known in the FX and CFD industry for its user friendliness. Launched in June 2010 as a beta version, it was only made fully available towards the end of that year, with a recent update in April 2012 making the platform available on iPad and Android tablets.

“The mobile version of FXCM’s flagship retail FX platform, Trading Station, incorporates all the major functions of its web and desktop counterparties, providing easy access to quotes, order execution, charts and many other resources, including DailyFX articles and news,” Callan notes. Improving the value proposition

Issues are continually being addressed by the leading FX brokers so traders can be confident they are striving to reduce slippage, lower costs, deliver the highest speed and quality of trade execution and maintain client satisfaction across the whole client trading experience. Pozdnyakov states that a large number of those who trade FX sometimes fail to pay enough attention to and address important issues within professional trading, such as slippage that can result in great losses, and significantly, the abuse of trading profit.

He says: “As a rule, slippage comes as a difference in the price a trader has requested, and the actual execution price the broker was able to deliver. However, slippage is natural and traders should certainly expect it on an ECN,” Pozdnyakov says.

“One may think good bridge providers could help a broker to execute client trades at the best price available. However, two brokers with the same bridge and even with the same price feed provided may deliver dramatically different results. That is why the main issues are bought to a head by the retail broker to prime broker relationship, advanced technology, and the overall trading flow the broker may generate. Execution time can also be reduced at the aggregation algo stage on how the price feed may be packaged before being finally bridged.”

Pozdnyakov continues: “The true ECN broker can offer no-slippage limit order execution, or can turn slippage problems into additional value for clients when allowing positive slippage and providing full transparency of the order execution so the trader may adjust their trading style to receive more positive slippages than negatives ones.”

Yet Fiddes says it is important to remember that the broker is acting under real market conditions where slippage, variable spreads, limited trading

“…ECN brokers are motivated to serve clients with the best possible order execution time and to ensure direct

market access with no price intervention,”

Mikhail Pozdnyakov

The FinFX trading platform

FINFX Screenshot will be placed here


retail e-FX ClieNt

at illiquid times and margin calls exist. To make it easier for private investors, brokers work towards eliminating these burdens, she explains: “We believe we provide one of the lowest cost platforms through providing fixed spreads, no margin calls, guaranteed stop-loss on the easy-forex platform at no extra charge, no fees on deposits or withdrawals, no dealing desk interventions and fast execution.”

“Retail platforms are operating in a competitive landscape which is very good for their clients as the companies are forced to provide cheaper trading solutions. It only takes a quick look at a few adverts in financial magazines to see that platforms are charging lower and lower spreads. It’s worth bearing in mind that the spread is not the only cost; traders should also look out for the hidden costs as well as margin calls, as these can vary broker to broker. You need the broker you trade with to be transparent on all costs involved,” recommends Fiddes.

Moser comments: “Issues continually addressed to ensure the best experience for our customers include constant monitoring of spreads, execution times, execution quality, and the quality of venues/liquidity providers, combined with appropriate and timely communication with the client. In addition, we maintain a ‘new features poll’ where clients submit suggestions and requests for the TWS and other trading tools that other customers may vote on to show their support for the new feature. This direct feedback allows Interactive Brokers to react to the needs of clients according to the level of desire and importance.”

Conclusion

Retail forex traders are benefiting from new advances in trading technology coupled with a desire from increasing numbers of brokers to improve the overall customer trading experience for their clients. They are doing this by striving to reduce slippage, lower costs and deliver the highest speed and quality of trade execution. Retail FX providers are also taking significant steps to add value to their offerings by providing institutional grade currency research and market insights to assist retail investors in developing their strategies. At the same time the features and functionality of the latest generation of online FX trading platforms are being ramped up to help traders more easily exploit the fast moving currency markets and to capture trading and investment opportunities. With all of these developments there has never been a better time to be a retail FX trader.

Interested in getting into this Handbook?

If your online brokerage or FX technology firm is interested in getting listed in the directory section of this handbook or advertising in the publication,

please contact us to discuss what options are available so we can help you reach out to potential

forex business partners all around the world.

If your firm is involved with any of these activities:

we would like to hear from you…

Call us today on: +44 1208 821 801Or e-mail us at: [email protected]

Partnershipsincluding introducing

broker and money manager programs

White Label Servicesincluding trading

platform licensing and integration solutions

External Servicesincluding bridging, FIX

integration, training, trade signal development

Business Servicesincluding back-office

operations, hosting and administration services

Trade Execution Servicesincluding virtual dealing desk environments,

prime brokerage and DMA

PRODUCT LAUNCH

PROD

UCT

LAUN

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MetaQuotes trading signals are implemented in MetaTrader 4 and MetaTrader 5 trading platforms as a conventional

function, rather than as a separate application or web site from the remote MetaTrader via MetaQuotes global servers links. Although the signal system itself is based on a fairly complex architecture - this involves a MetaTrader 4 or MetaTrader 5 client terminal, the MQL5.com web site and specially developed MetaTrader Signal Servers - the service is fairly easy to use as traders can work with signals without diverting away from their trading activity.

Subscriber or Provider

According to the developers at MetaQuotes, there are a few million traders who could potentially use the service, either as a signals Subscriber or signals Provider. Any trader can become a Subscriber receiving trading signals or a Provider of such signals. Client terminals act as signal showcases - allowing traders to choose a Provider and the platform where such signals will be executed. Traders register on MQL5.com and specify account data in the terminal to subscribe to available signals of their choice. After specifying the MQL5.com account

Trading signal services are an increasingly popular trend in today’s forex trading environment. They provide a solution for those seeking to diversify their portfolio from just using their own signals or for those who are not willing to invest the time and effort into developing their signal systems. The market already has several solutions that are actively used by traders. Taking this into account, MetaQuotes Software Corp. (developer of the MetaTrader trading platforms) has released its own signals service which promises integrated advantages for the trading systems market.

Trading Signals Service from MetaQuotes Software Corp

>>>


data in MetaTrader 5 terminal, the Subscriber gains access to MQL5 Market where he/she can purchase diff erent trading robots and various bespoke technical indicators.

After connecting the terminal to the web site, the appropriate signal service is chosen from a list. Advanced trading statistics for each Provider help in making an appropriate choice. It should be mentioned here that the service participants do not need to have accounts on the same trade execution (broker) server. A Signals Provider and a Subscriber can be served by completely diff erent brokers.

After clicking “Subscribe”, the appropriate subscription fee will be withdrawn from the subscribers account, and the subscriber immediately starts receiving relevant trading signals, i.e. the Signal Servers start tracking the Provider’s account and then transmit their trading operations to all relevant Subscribers. Since MetaQuotes maintains servers all over the world, a high degree of redundancy and reliability is built into the system.

“Just keep your terminal running to be able to potentially profi t together with your Provider,” says Fivos S. Georgiades from MetaQuotes. He continues by stating that “Future versions of this service will be able to copy the signals to Subscribers’ accounts even if the terminal is disabled. Th is service will make MetaTrader even more popular and open up new opportunities for developers, brokers and subscribers alike.”

MetaTrader Trading Signals are distributed for a fi xed monthly or weekly subscription fee. Developers believe that their solution is transparent and easy to use by both Providers and Subscribers. Th ere are no additional Provider commissions or increasing spreads as in some of the other popular systems for trade copying. MQL5.com from MetaQuotes facilitates payments between Providers and Subscribers, where Subscribers must register to use the service. Traders themselves do not need to deal with Signal Servers.

“It will not be easy to interfere with the Provider’s trading strategy within the system. If a manual intervention is performed by the Subscriber or another party, the accounts will become desynchronized. Th at may lead to severe Subscriber losses, while the signals Provider could still be showing a profi t. We want to protect Subscribers

against that,” - states Gaies Chreis, COO of MetaQuotes Software Corp.

Security

MetaQuotes is also keen to point out the high security levels of their service. Subscribers’ personal details and trading account passwords are not requested, as they are not necessary. On the contrary, Signals Providers are required to log their particulars. Providers do not have to specify Master passwords for their trading accounts inserting only Investor READ ONLY passwords instead. Th erefore, only generated signals will be read rather than the underlying signal code.

Each Provider is required to undergo a one-month probation period and show positive overall trading results before being allowed to off er the service to Subscribers.

Subscribers can choose what portion of their deposit can be used for trading via the service. Th e money management system automatically calculates the deal volumes ratio and rounds it down. One main stated intention of the service is that Subscriber’s deals “should not be worse than Provider’s”. Th is means that Subscriber’s profi t should be equal to or exceed the Provider’s profi t level and losses should also be less or equal to that of the Provider’s.

MetaQuotes Trading Signals is a newly implemented service with the usual advantages and disadvantages a new service has to off er. However, considering the widespread distribution of MetaTrader 4 and MetaTrader 5 trading terminals, the service should prove to be popular.


PRODUCT LAUNCH

TRADERTALK

Mern Capital: Focused on Applying Systematic Strategies to the World of FX

Daniel, what is your background and how long have you been in the currency trading and investment business? What attracted you to the industry?

I hold a MBA from UCLA and a PhD in economics from Sorbonne University (Paris). My 35 year general management career spans across Hong Kong, Los Angeles and now Geneva where I have lived for the last 20 years. I have traded either personally or professionally options, futures, indexes, stocks and forex. In 2003, I created the Autopilot methodology (a multi-timeframe momentum play) which I licensed in several countries. Exponential Ltd was created in September 2005 in Hong Kong and Geneva, and started marketing the intellectual property developed by Mern Capital - as it became FINMA regulated in October 2010. University training attunes oneself to study abstract concepts and processes and I suppose this is the original infl uence which brought me to the fi nancial arena.

When was Mern Capital founded? Who are the key people involved in the fi rm and what are their main day to day responsibilities?

Mern Capital is a market research partnership focusing on algorithmic trading and portfolio design. It began informally as Exponential Ltd joined forces with two University of Geneva graduates in the fi eld of statistics, maths and market fi nance in order to design and back-test expert trading systems, and combined them into an original trading matrix covering numerous

currency pairs, entry time frames and strategies.After a year or so - in October 2010 - a partnership agreement was drawn up whereby my two partners would be in charge of overseeing trading operations, monitoring performance, ensuring the system’s redundancy and responding to a wide array of real time alerts if need be. Additionally, they would develop new algorithms and beta test them within expert systems to be validated and activated into the matrix. By delegation of Mern Capital, Exponential Ltd is in charge of legal and regulatory aspects, administration, client relations, banking and marketing.

Why did you decide to delegate the management of client accounts to Exponential Limited, which is also based in Switzerland?

By law, a partnership is just a contract between several parties. It is not a corporation and therefore cannot be regulated. In our context, delegating the management of client accounts to Exponential Ltd was a logical move.

What sort of clients and investors are likely to be attracted to your services? What core services do you provide?

Our client base is diverse. Exponential Ltd manages HNWI (High Net Worth Individual) client accounts under a power of attorney and a discretionary management investment agreement. We also have relationships with money managers in several European countries and we provide


e-Forex talks with Daniel Proville, Co-Principal of Mern Capital, a leading research partnership focused on the application of algorithmic trading techniques in the FX market


>>>

Daniel Proville


trading signals to firms or platforms offering a managed account program. Exponential Ltd is a regulated manager and does not hold client funds. We favour managed account set-ups as they address investor’s issues such as profitability, transparency and liquidity in a simple and effective manner.

What investment programs do you offer and how are they tailored to fit differing levels of risk appetite?

Our research efforts resulted in three successive generations of expert systems portfolios. Our latest program is offered in two risk versions (balanced and aggressive) with attractive risk return profiles. Both versions use the same trading engine but with different sizes.

How would you describe your approach to trading and in what ways has your proprietary and systematic methodology been designed to yield a higher level of risk-adjusted performance?

Our systems are CPU intensive as they contain on average more than 1,500 lines of code. It includes the typical components (setup, triggers, filters, risk management, money management, etc.) as well as other proprietary routines. The general concept is the combination of a hyper-diversification of market

exposure via multiple smaller open positions and a probabilistic trading

logic. As we added new currency pairs, new entry time frames

and strategies, we obtained a sort of matrix allowing

calculation of

internal parameters such as correlation, volatility and others. We then worked on the risk reward profile of the composite output of the matrix instead of any individual system performance.

We found that the numerous sets of pairs, time frames and strategies increased our chances of identifying specific configurations exploiting unusual random small patterns or unusual price moves. Using automation, our coverage of scattered market events and anomalies was augmented, as not all sessions, pairs, and trading hours are equally good for trading.

What benefits do you obtain by generating a high number of trades and how do you make use of these?

Typically, numerous open positions (200 to 250 per month) will be allocated a smaller trading size, and therefore a smaller stoploss. A fat tail occurrence is much less likely to affect all of our exposure, and will not become a critical condition. This benefit became obvious during 2011 with events such as Fukushima in February, the market meltdown in summer and the SNB intervention in the fall. Some stops were hit but impact to performance was minimal. Also, one looks at leverage differently when exposure is spread across many open positions rather than just a few. Broadly speaking, the actual leverage is less than the theoretical leverage due to imperfect correlation between pairs and strategies, to long/short offsets and other factors. Consequently, overall risk is lowered.

How does Risk Management influence and shape your overall investment philosophy and in what ways does your use of multiple systems, time frames and trading sizes add to the effectiveness of overall risk control?

We fully automated the back office in the sense that we run peripheral systems to monitor the trading systems. For example, we run a tick by tick comparative analysis of spreads, which alerts us to execution problems, sensitivity to spread issues,

TRADERTALK


random variations affecting performance. We compare the feed quality of providers and negotiate accordingly.

When looking at drawdowns, we use the most severe measure which is the intra trade drawdown, not the daily, weekly or monthly setting. We do not stop at communicating a dry number such as X %, but study the worst 5 or 10 drawdowns in duration and amplitude and look at their shape and the power of the following run-ups. If the account balance surges up powerfully after a drawdown, then this is a sign of good health. Reporting drawdown in this format reveals rather more than just a static figure.

In what fundamental ways do you think your systematic investment approach to trading differs from other money managers, some of whom use discretionary trading techniques?

We don’t need to spend much time on emotions and how they affect trading performance. I shall refer you to the seminal work of Roland Barach (Mindtraps) and the abundant subsequent literature. I do realize that there are top performing non systematic CTA’s, but they are few and far between. Discretionary trading may have deep historical roots dating back to the early days before modern technology, but when it comes to monitoring so many pairs, time frames and strategies around the clock, acting on a signal in a timely and sustainable fashion, I fail to see the human advantage in terms or risk and cost, and I prefer to replace words like intuition or insight by probability and confidence intervals.

The fact is that a powerful machine can monitor many systems with many currencies with a high degree of reliability (if programmed correctly of course) and there is simply no way a human being can monitor that much data on a 24x6 basis.

To what extent have you developed research agendas and analytical programmes to help improve the design of new trading strategies and to maintain the performance of your trading engine?

Active expert systems in our portfolios are monitored continuously. We use many measures of risk or performance (average pips per trade, Sortino and MAR ratios, % win, win/loss, profit factor, net pips, VaR, etc.).

Before we dismiss a system due to its individual performance, we look at the way it benefits the overall matrix. It might be less profitable but cover a unique and specific occurrence (combination of currency pair, timeframe and strategy) and thus bring in a profit not obtainable otherwise.

Candidate systems are in the sidelines in beta test waiting to be validated and included into the mix. So we deal with these trade-offs and the systems come and go as a result of this quality control.

Additionally, we carefully monitor trade execution (spreads, swaps and slippage) and fragment our orders into smaller bits in order to get a better price. As trading sizes grow, you need to look more closely at order books, liquidity pools and providers, etc.

How do you go about back-testing your trading systems and signals to confirm that your strategies will perform as required?

Initially, we performed a 10 year back-test using a classic walk forward methodology. We also use live data to conduct Monte Carlo type simulations on a regular basis.

>>>Mern Capital: Focused on Applying Systematic Strategies to the World of FX


How frequently do you fine tune your proprietary algorithms and what steps do you take to ensure that your trade execution pathways are continually optimized to reduce latency and better meet your investment objectives?

Latency is not a critical variable in our process. Our systems have nothing to do with high frequency trading, scalping, grid trading, etc. The average time in trade is about 24 hours. We consider mostly daily volatility and focus on entry and exit prices rather than order book timing.

In terms of review process and fine tuning, selecting monthly or quarterly time intervals seems rather arbitrary, and we prefer to rely on statistical and real time alerts generated by the back-office. Various issues are flagged by the monitoring systems, signalled and logged, and we then investigate the matter. Several times a month, we have a performance audit and make sure everything is proceeding as planned.

How have you managed to configure your trend and range strategies to gain better entry and exit prices?

That is a key point which I unfortunately cannot describe as it is proprietary. I can confirm we researched this issue thoroughly and are happy with the results. For the benefit of your readers, I shall mention one of our routines which is the coding of dynamic stoploss and takeprofit levels. Just imagine opposite trailing stops moving these levels, as opposed to fixed values entered upon entry. There were significant improvements in profit factors due to this adjustment.

What about money management?

We are keenly aware of the critical importance of money management and carefully studied the works of scholars such as Van Tharp, Ryan Jones and Ralph Vince. Our routines modify the trading size as a function of equity, buffering the decline and accelerating the run-up.

We had to customize the code since we are working with the composite of a matrix output, not a single position.

Can you share with us one feature of your methodology which significantly improved your process?

Sure. We all want top of book pricing and best fills for a given size. Unfortunately, spreads deteriorate as the trading size increases. So, the best practice is to stay in the lower pricing bands. To address this issue, we have integrated random “fragmenters” into our systems.

These routines randomly split the trading size into smaller fragments while also selecting random time intervals between split orders. The full size eventually gets executed, in a lower band, at a better price, and is virtually impossible to “read” by a third party.

Please give us a few statistics about your latest portfolio?

Here is a brief report by the numbers:

Trading engine:MQL expert systems: 35Currency pairs: 12Time frames: 4Strategies: 4

Average trades per month: between 200 and 250Average time in trade (hrs): 24Sharpe ratio > 4.0Sortino ratio > 8.5MAR ratio (trade to trade) > 6.1% Win: 78.6%Win/loss ratio: 0.33Profit factor > 1.19Slippage: positive

risk versions:Balanced program: trading size: 0.34 standard lot per US$ 100,000 AUM, average leverage: 1.5, maximum drawdown (intratrade): 6%.

Aggressive program: trading size: 0.68 standard lot per US$ 100,000 AUM, average leverage: 3, maximum drawdown (intratrade): 12%.

How did Mern Capital perform during the financial crisis and in what ways did your investment approach shield you from the worst effects?

Actually, 2011 was our first full live year and a banner year at that. The three sigma events which occurred (the Fukushima catastrophe, the market melt-down in July-August and the SNB intervention) did not impact our operations significantly nor prevented us from achieving a very attractive end of year return. To be fair, I must say that the model did not perform so well in the low volatility environment during the first part of 2012, with static ranges and a general

TRADERTALK


lack of trends. Th e bright side is that the third generation issue which kicked in around June shows great potential and is making new highs (more than a thousand closed trades in six months resulting in a MAR ratio higher than 5).

You present your methodology as decorrelated. Can you elaborate?

Well, we are currently watching an uncertainty game played between the forces of behavioural fi nance, the school of fundamentals and market manipulation. Th e background is globalisation, systemic risk/counter party risk, fat tail events, massive redemptions, the invisible hand and, clearly, many other disruptive factors.

We feel that in this context, the traditional benefi ts of a classic mix diversifi cation have been dramatically reduced and so a forex component can eff ectively spread the risk and help mitigate the lack of visibility. Without discussing coeffi cients and the nature of correlation, let’s just say that the foreign exchange market is a valid asset class, that it is very liquid with fewer gaps and that many small spot positions managed together within a matrix stand a higher statistical chance to produce a stable outcome in various intermediate strength scenarii. What electronic trading platforms do you fi nd most appropriate to use and what factors infl uenced your choice? How did you go about building your trading desk IT infrastructure and was the trading software and connectivity technology provided by third party vendors?

We tried a few solutions without success, namely Easy language, Java, C++, before fi nally selecting the Metaquotes MT4 software. We are well aware this is a retail solution that comes with a few drawbacks. However, we re-coded a few features, and can tell

you today that we are quite satisfi ed with our choice in terms of stability and functionality after having processed more than 10,000 trades with it over the last 22 months. We either connect directly or via a bridge to partners who use the API FIX standard.

On the logistics front, our servers are hosted in a state of the art Tier 3+ Swiss data center boasting all the modern bells and whistles. Th ere, we enjoy high CPU capacity, system redundancy and institutional level connectivity. Our sessions with the servers are based on a VPN SSL protocol.

You have mentioned using the Metaquotes/MT4 software. Can you describe its advantages?

Many operators focus on speed, latency and the capacity to push through zillions of orders. Th is is not our game as our approach is based on hyper diversifi cation and probabilistic outcomes within daily volatility. Pre MT4, we considered various platforms such as TradeStation/EasyLanguage and some Java based systems.

>>>Mern Capital: Focused on Applying Systematic Strategies to the World of FX


In the development stage, we found that various flaws, bugs or structural constraints impaired the performance beyond an acceptable level. There was better compatibility between the MT4 platform functionalities and our process, even though the platform was retail oriented. We found that once several internal commands were recoded, the result was quite adequate for our specific need.

We can confirm with our experience MT4’s capacity of dealing with large expert systems (around 1,500 lines of code) and portfolios of around 40 systems. Its stability (having closed more than 12,000 trades over the last 23 months, in all sorts of market conditions across trading sessions and 21 currency pairs) has proved excellent. We do use electronic bridges to access the widespread API FIX protocol and we do not feel that migrating to a C++/Csharp coding environment at this time would significantly improve the liquidity, slippage or general performance of our operation, as the cost/benefit of a conversion of systems and back office is questionable.

What do the logistics of a fully automated trading firm look like?

Well, we have uploaded our entire process, not just the trading systems and their platform. So, we have also hosted in the same place our back office, our databases as well as a comprehensive set of real time alerts

such as ping checks, broker disconnects, excessive leverage, missing stoploss orders, etc. Three people are on call, equipped with secure links to the servers. In practice, we had only one real emergency in two years. This arrangement not only works very well, but is also quite cost effective. You would have to be a medium size bank in order to obtain the same level of security and system redundancy. Research wise, we use a distributed topology,

which optimizes staff schedules and productivity. As most clients reside overseas or conduct business remotely, we just keep a small office for administrative duties.

In what ways has technology made your business more sustainable and increased trading and investment opportunities for the firm within the FX market?

We are benefiting from convergence. Modern trading platforms, better coding routines, streamlined executions, increased broker competition, lower commissions, improved access to liquidity pools and increased stability - all these factors contribute in one way or another to our success. This type of fully automated operation was simply not possible just few years ago unless you were a major bank ready to invest millions per year in the technology alone.

TRADERTALK

Live Performance since June 2012

>>>

“Let’s just say that the foreign exchange market is a valid asset class, that it is very liquid with fewer gaps and that many small spot positions managed together within a matrix stand a higher statistical

chance to produce a stable outcome in various intermediate strength scenarii.”

What new strategies and products have you been exploring as part of your continuing efforts to widen the range of currency investment solutions and customized services you make available to clients?

For 2013, our trading programs will be complemented by a bond component, investing the portion of capital not used by margin. This will enhance the overall performance and add another dimension. Of course, there is an interest risk to take into account, but we will hedge the currency risk through manual long term spot positions. We have looked at gold and some futures, but did not find enough potential so far to bring a new product to market.

More generally, we anticipate that China’s upcoming power play will jumpstart new FX flow and liquidity pools in Asia and create new, attractive opportunities. We look forward to applying our models in these markets and have pre-positioned ourselves in Asia thanks to our Hong Kong presence.

Looking ahead, where do you see the main challenges facing Mern Capital as you seek new ways for capturing and exploiting systematic investment opportunities with currencies?

This is probably the most interesting and difficult question. It seems we have reached a technical vantage point after all these trades in spite of our young age. We now have stable technology and logistics and we can focus our energies on business development and new AUM.

We anticipate however that at some point in time, we shall face a new challenge with the liquidity limits of our model. When we approach it across trading sessions around the world, the constraints will start impacting our performance, incrementally at the beginning, and thereafter significantly. We are preparing for this by developing the tools and techniques we need in order to circumvent the limit or at least reduce its effect. Let me close by saying that this problem will be a nice problem to have. For further details please contact [email protected]

TRADERTALK

How do you see the future of FX broking? FX broking has developed to a very diverse andsophisticated level, with clients continuallydemanding more from their providers. The ability tooffer both online and offline trading facilities such asdesk dealing, is becoming more and more importantto clients as they seek a complete trading service viaone provider. Despite extreme market volatility inrecent times, algorithmic trading strategies continueto do well – on both the buy and sell side – and Ithink fund managers and investors will continue toenhance or add these strategies to their investmentmix. Therefore algorithmic trading as an executionand risk management tool will continue to evolve.Clients are also becoming more selective in terms ofthe provider and the product they use, so a regulatedenvironment has and will continue to play animportant role.

Is market growth slowing now? Which regionsand markets are driving the future growth of buyside FX? Despite less available liquidity and fewerparticipants in the market, recent FX volumesannounced show that FX volumes continue to rise,albeit at a much slower rate than in previous years.Statistics produced by the UK’s Foreign ExchangeJoint Standing Committee show that overalltrading volumes for 2008 increased by 21% withspot trading up by 40% to $182 billion. Similarstatistics in the US show an overall increase ofalmost 9% with spot trading increasing by 27%with Singapore and Canada following the patternof falling swaps and options but rising spot. Soalthough the market conditions may be difficult atthe moment, FX still continues to grow.

How is the market changing? How do you see theFX market forging ahead in the next two to threeyears? In the current economic climate it is difficult topredict what the market will be like in two or threeyears time. However for 2009 I would say that wewill see a ‘back to basics’ approach where investorswill think more about what they are investing inand will stay much closer to their investments. Thiswill benefit the FX and commodities marketbecause of the simplicity of the underlying assets:vanilla and low-complexity products will becomemore popular with clients and investors, as well ascorporates for hedging. As cost and efficiencycontinue to remain a focus, the role of technologywill be essential in 2009 and the challenge for banksand providers will be to deliver superior productsand service with competitive pricing that meet theneeds of clients. Squared Financial is well placed tobuild on its current success and our offeringcontinues to evolve in tune with our clients needs.

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130-134 SFSL Site Inspection 16/12/10 15:58 Page 5

� ese are the important trends in Retail FX as I see them.

1. Retail is not retail anymore! � is can best be shown if I run through some stats. Ten years ago Retail FX did not really exist. � e retail market is now 350 billion a day and up to 11% of total daily turnover. We’re impressed that up to 60% of Interbank FX trading is electronically executed. But more than 90% of retail � ows are electronic. Close to 40% of trading volume in spot FX is attributed to High Frequency trading. But more than 60% of retail � ow is high frequency / algo traded.

What does this mean for platform builders and users? It means today, everybody has something they can learn from retail FX. But who and what has retail learned from? Ladies and Gentlemen, I’m afraid to say that it’s gambling technology. “What happens in Vegas, does not necessarily stay in Vegas anymore”.

Retail isn’t Retail anymore!

The retail market is in a constant state of change and no single trend is dictating the future. Instead, a combination of macro economic, market structure, regulatory, and technology trends work together to ultimately shape the future of the market.

Jon Vollemaere

By Jon Vollemaere, Co-Founder, LetsTalkFX

“Vegas, does not necessarilystay in Vegas anymore”

january 2013 e-FOaREX | 167

>>>

The difference between online gambling and online trading has blurred. We are now seeing many companies utilizing gambling technology in their trading systems. From Platform coding to risk management, trading strategies to marketing models. All learnt from the gambling industry. One thing is for sure. If we think our trading technology is cutting edge, it’s nothing compared to what they’ve got in Vegas, Macau or Malta.

2. Increasing numbers of Interbank traders are moving into Retail FX, but why? Is it because they pay more? (No bank bonus issues here) Is it because retail FX has seen five- fold growth? Is it because 30 Cyprus based brokers all trade through London? Or, is it because it is still the fastest moving part of the market. And, where significant platform changes are happening?

Take a look on LinkedIn and see who now works in retail? I ask myself the question. Is it any wonder that retail brokers are calling themselves banks? Because they are starting to act like them. Market Making, Internalizing flow, trading with and against the clients. The average retail broker does more flow than your average sized bank. But how do they manage to do this? Because the dumb money is getting smarter.

3. Once upon a time, retail traders would fund an account burn it all and blow up. And, that was the business model of many retail brokers. Those days have long gone. Today, retail clients have very sophisticated trading platforms, advanced trading techniques, managed accounts, follow the leader programs, and you can buy a momentum model on Ebay. Dumb money is not only getting smarter it is also making money. Which means retail traders can afford very sophisticated “weapons of mass destruction”. The man in the street now has more trading firepower than you do.

A final thoughtRetail does $350 Billion a day so ask yourselves an old question? Is it better to be a big fish in a small pond or a small fish in a big pond, or a shark pretending to look like a school of goldfish? As I mentioned earlier, retail contributes up to 11% of the daily flow, maybe more. What is unknown is how much of that is phantom liquidity and how much the retail guys suck out of the system at important times? An unfortunate result of the dumb money getting smarter is sometimes it’s their fault when good liquidity turns bad. How does good Liquidity become bad Liquidity? When a customer gets slippage. So who is to blame?

Is it because the customer is sending “Toxic” orders? Is it because the broker is B-booking them? Is it because the bank is gaming the broker? Is it because the broker doesn’t have the tools to manage toxic flow? Is it because the bank only wants soft customers? Is it because the retail customer maybe doesn’t really understand that, in this market, relationships still matter.

Often the problem is all of the above. But it’s the platform that gets the blame. Now ask yourself one simple question. When was the last time anybody got positive slippage?

“When was the last time somebody got positive slippage?”


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