FX Liquidity to Diversify

Terry Flanagan

For an institutional market participant in need of a foreign exchange trading counterparty, Wall Street’s so-called Bulge Bracket historically has been the go-to phone call.

That dynamic is changing amid market fragmentation and the rise of screen-based trading, and in coming years liquidity increasingly will be found in nontraditional sources.

“A lot will come from outside the sell side or the top five banks,” said Tod Van Name, global head of FX and commodities electronic trading at Bloomberg LP. “It’s going to be more common to see large money managers  with a lot of wood to chop in the currency space, acting as market makers. The market is becoming less  dealer-to-client and more all-to-all.”

The massive FX market — turnover in which is estimated at $5.3 trillion per day — is expanding the products that can be traded electronically, from spot to forwards, NDFs and options.  “The bottom line for all counterparties is that they’re moving away from trading that they used to do on the phone,” Van Name told Markets Media. “They’re looking for efficiency and best execution.

“Companies want not only best price, but also  best procedure, which makes the whole process more efficient,” Van Name continued. “This does two important things: it reduces operational risk and it reduces cost.”

Tod Van Name, Bloomberg LP

Tod Van Name, Bloomberg LP

The evolving market structure in FX has ratcheted up competition among electronic trading platforms, such as FXAll, FXConnect, FXGo, 360T, Hotspot, and FastMatch. There has been consolidation in the space, which is expected to continue as platform operators seek to deepen their offerings.

“The platforms that are going to be successful are those that can provide a complete, end-to-end solution,” Van Name said. “That means everything from pre-trade analysis to all the features that more firms are demanding, such as staging,  netting, allocations, confirmation, matching and settlement.”

“How you do that in a regulated environment is equally important, starting  with Dodd-Frank in the U.S., some firms have to trade on a venue that is (Swap Execution Facility)-compliant, and in Europe we’re beginning the transition to Multi-lateral Trading Facilities under MIFID.” he added. “Providing existing execution services while introducing a new regulatory framework will require considerable business logic and innovative technology. Making all of this happen without having to learn a whole new process or incurring expensive changes in infrastructure is going to be an industry challenge.”

With regard to the end-user FX trading desk, Van Name said Straight-Through Processing (STP), in which an executed trade automatically flows to a blotter and on to back office support  has become the norm for many  buy-side clients, with room for improvement in emerging-market regions such as Asia and Eastern Europe.

The bar will continue to move higher. “A lot of the things that are considered ‘nice to have’ now, are going to be expected in terms of deliverables,” Van Name said. “As we move toward a more regulated environment, particularly if we ever get a mandate for NDFs (non-deliverable forwards) to be cleared and then traded on either SEFs or MTFs (multilateral trading facilities), that’s going to have a big impact on the marketplace and it’s going to change the way that liquidity is provided.”

Feature image by Freshidea/Dollar Photo Club

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