FX Trading: What is the State of the Art?

Terry Flanagan
This entry is part 1 in the series FX Trading Platforms: Beyond Execution


Foreign-exchange trading has come a long way in the past couple decades.

The first novelty was electronic FX trading platforms matching trades that historically had been done over the phone. Next, the execution of those trades improved as liquidity deepened and technology advanced. Most recently, platform enhancements have been more holistic, both over the full FX trade lifecycle, plus in the incorporation of other asset classes.

“In short, being able to apply pre-trade analytics, smart netting and smart order routing logic into a multi-asset execution platform is what I would consider to be the current state of the art in FX execution,” said Chris Matsko, head of FX trading services at Portware.

Years ago, over-the-counter FX markets had been considered the ‘wild west’ of trading, Matsko noted, as picking up the phone to do a trade resulted in a wide range of outcomes, and  transparency and efficiency were in short supply. E-trading raised the bar on the quality of experience buyers and sellers could expect, and the bar continues to ascend.

Indeed, as financial markets have become increasingly globalized, large asset managers regularly trade securities across borders, which necessitates the buying and selling of currencies to open and close positions. Some buy-side shops also trade FX as part of global macro and other speculative strategies.

Chris Matsko, Portware

Chris Matsko, Portware

We’ve seen that evolution take the next logical step into the multi-asset landscape whereby the equity, fixed income and FX desks can all harmonize under one uniform platform,” Matsko told Markets Media. “It makes good sense to offer access to many liquidity pools across asset classes from one platform, whether it’s hitting an equity dark pool within Liquidnet or filling fixed income trades in MarketAxess. Giving the trading desk access to these venues as well as all of their OTC FX liquidity in one place is very empowering.”

“At the end of the day, a trading desk could have eight platforms for all of the traded asset classes, with each platform requiring its own real estate and log-in details which the traders then need to manage on a regular basis,” Matsko continued. “That has been the marketplace across assets for a number of years.”

The core point-and-click functionality hasn’t changed much since electronic FX trading first arrived on the scene, according to Mark Dumolien, head of FX E-trading at Wells Fargo in San Francisco.

“The changes that we are seeing — and introducing — are around more advanced order capabilities, and allowing customers to better execute larger orders,” said Dumolien, whose desk trades mostly on behalf of non-financial corporations with FX needs rather than financial firms who trade currencies for profit.

“In the past customers would call and ask for prices on large transactions. That has transitioned over to electronic, and instead of one large transaction, they can split the order up into maybe 10 lots and do it quickly,” Dumolien added. “We’re starting to offer customers the ability to use advanced orders to better execute that business.”

Many facets of today’s cutting edge in FX trading have been ported from equities. These include pre-trade analytics, deploying smart order routing for automated execution with single banks, custodians or through automated Request-for-Quote (RFQ) and algorithmic channels.

Said Matsko, “Setting up smart order routing parameters and having orders execute in an automated fashion, without human interaction, is one aspect of the state-of-the-art in FX trading and one where we expect to see a large pickup in the coming years, especially since artificial intelligence is now beginning to find space on trading desks for other asset classes.”

Matsko explained that complimentary to the SOR component is an ‘Auto-RFQ’ functionality that is based on the incumbent RFQ or RFS (request for stream) execution methods. “Traditional RFQ users click a button and they get a two-minute stream; they click another button to execute against that stream,” he said. “Auto-RFQ simply takes the button clicks and decision making aspect away from the trader and executes against a pre-set number of parameters.”

Featured image by Julien Eichinger/Dollar Photo Club

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