Market Intelligence


David Vincent, CEO, smartTrade Technologies, explains how currency investors can leverage technology to optimise their trading operations and meet the regulatory obligations.
How can currency investors optimise their access to FX liquidity?
The most significant change in the FX market in recent times has been the increased diversification of sources of liquidity. In the past it was sufficient for currency investors to have access to a very small number of liquidity providers, usually banks, in order to meet all of their requirements. Liquidity is now spread more widely amongst new trading venues and new liquidity sources, such as non-bank liquidity providers. It has also become shallower due to regulatory, credit issues and competition.

There is a real need in the market for currency investors to optimise their access to liquidity as a consequence. This can be achieved by leveraging technology.

Successful trading, with a low latency execution speed, cannot be achieved manually. This is why currency investors need to adopt advanced algorithmic smart order routing. Technology providers, such as smartTrade, provide out-of-the-box strategies including sophisticated sets of execution rules to decide which trading venue(s) or liquidity provider(s) is/are optimal for trade execution.

Advanced smart order routing, is not enough as investors also need to incorporate big data analysis. By using big data analysis, currency investors can achieve a 360 degree view across their liquidity and the way it is provided to them.

This combination of smart order routing and big data analytics gives investors an intelligently automated method to find the liquidity provider that is best adapted for them based on certain parameters, such as market impact, slippage, and rejection rate.

What factors should investors take into account when connecting to a trading venue?
First, investors must consider which liquidity providers are operating on the venue and whether they match their risk appetite. Investors must also question whether the trading venue adds anything new to their existing range of liquidity sources. If an investor connects to too many trading venues, their flows are going to be much more complicated to manage and the relationship with each liquidity provider will be diluted. There must be added value in connecting to a new liquidity source.

Investors must also take into account the fees charged by the trading venue. Some venues do not charge liquidity providers whilst others do, and this will be reflected in the spread that they will receive. It is worth noting that some technology providers also charge liquidity providers whereas others such as smartTrade do not and that will also have impact on price seen.

Additionally, they have to consider the range of trading options possible on a particular venue, for example, whether there is ‘last look’ on certain prices. Spreads tend to be tighter with ‘last look’, and even firm pricing venues can give rejections when the price moves suddenly. That is why it is important to understand the behaviour of a trading venue.

Finally, the venue location is an important consideration on the trading venue choice. The distance to the venue may create an issue by adding latency to trading operations leading to slippage and rejections.

Why are pre-trade analytics and transaction cost analysis (TCA) increasingly important for currency investors?
Investors often focus on spread and depth when looking at the FX market, but the cost of executing a trade – for example in terms of slippage, rejection, and market impact – can often be far more important.

Pre-trade analytics and TCA provided by companies such as smartTrade allow investors to fine tune their execution strategies allowing them to maximise price improvement, monitor general liquidity provider performance and reduce the increased cost of trading from slippage.

Without the insight offered by advanced pre-trade analytics and TCA capabilities, incorporating artificial intelligence and machine learning, investors are almost trading in the dark and hoping for the best.
Historically, this advanced level of fine tuning was not always a key focus, but as the FX market has become more competitive, every area of profit and loss improvement must be considered.

How can currency investors ensure transparency in their trading operation in order to satisfy regulatory concerns?
The only way to do that is to rely on a very strong technology backbone, which has been designed to meet regulatory requirements, such as our LiquidityFX and smartAnalytics products.  This gives investors the capability to prove best execution, giving them the capability to capture all the different ticks of data during the trade process and during execution.

This is important as MiFID II comes into operation, as investors will need to be able to explain at the microsecond level what happened to each of their orders and trades. Investors need to be able to capture all the market data, and when they have that stored and secured in one place, they can write all the reports they need be compliant with the regulations.