Amazon S3 · Supercharge your trading with EAs FxPro Quant Strategy Builder Not a programmer? Not a problem. The FxPro Quant Strategy Builder is a revolutionary new tool, designed

Supercharge your tradingwith EAs

FxPro QuantStrategy BuilderNot a programmer? Not a problem.

The FxPro Quant Strategy Builder is a revolutionary new tool, designed to act as your personal EA Developer!

With FxPro Quant, any trader can build their own Expert Advisors (EAs) using simple drag and drop technology.

Risk Warning: FxPro Group Limited is a holding company that controls FxPro Financial Services Limited. FxPro UK Limited is a direct operating subsidiary of FxPro Financial Services Limited. FxPro Financial Services Limited and FxPro UK Limited do not offer Contracts for Difference to residents of certain jurisdictions such as United States of America and the Islamic Republic of Iran.

FxPro LibraryDownload an EA from

FxPro’s New EA Library todayYour indispensable source of ready-made, back-tested Expert Advisors

If you want to use EAs, but don’t have the time to build your own strategy, FxPro has the solution. We have compiled a library of innovative, effective trading strategies and we have even back-tested them for you.

30+ effective Expert Advisorsbuilt by the FxPro EA Team for you

Extensive libraryof strategies built by experienced EA programmers

Back-test reportsare published alongside the EA in the library

All EAs are back-tested(in-house and from third-party programmers)

Find out more www.FxPro.co.uk

Happy New Year!

The last few weeks seem to have been exceptionally busy with a number of interesting FX conferences and events taking place. We have tried to provide highlights from a few of these in this edition and, given the interest from readers, we plan to expand our coverage of the most important industry meetings and exhibitions as this year progresses.

Once again preparations for regulatory change figure prominently in these pages and we have examined some of the complex new workflows that are associated with connecting trading firms to CCPs, trade repositories and Swap Execution Facilities (SEFs). Our special report examines SEFs in more detail and explores some areas of concern that have be expressed by market participants regarding their operational procedures. We have looked at how recently launched SEFs are expected to compete with each other for liquidity and how they plan to leverage their own proprietary technology and expertise in running electronic marketplaces to meet client demand. Although it’s early days and numerous problems still need to be ironed out - some SEFs for example, are still unable to fulfill some or all of their newly assumed reporting obligations - we believe that SEFs will ultimately prove very beneficial to the structure of OTC Derivatives market by providing maximum choice in trade execution for market participants whilst facilitating increased pre- and post-trade transparency. Later this year we will be re-visiting this topic by exploring how SEF platforms may decide to segment their client offerings by operating separate liquidity pools or for example by instrument (i.e NDFs and options only) and how they are likely adapt to better optimise their services, functionality and product capabilities.

In this edition we also report on how social media is helping to democratise forex trading and make it more accessible to a wider global audience whilst, at the same time, barriers to treating it as a legitimate outlet for communication, are at last being lowered. Social Media presents numerous opportunities for FX providers to educate, communicate, establish trust and interact with clients. Professional traders are also starting to leverage it as an invaluable and essential source of news and market sentiment in their search for alpha generating opportunities. The traditional problem for them however has been too much background noise across the digital airwaves so it’s encouraging to see that steps are being taken to make important and actionable content more obvious and accessible.

As usual we hope you enjoy this edition of the magazine

Charles JagoEditor

Welcome to

Winter 2014

Susan [email protected]

Managing Editor

Charles [email protected]

Editor (FX & Derivatives)

Charles [email protected]

Advertising Manager

Helen [email protected]

Production Manager

Michael [email protected]

Subscriptions Manager

David [email protected]

Features Manager

Larry [email protected]

Photography

John [email protected]

Web Manager

ASP Media LtdSuite 10, 3 Edgar BuildingsGeorge Street, Bath, BA1 2FJUnited KingdomTel: + 44 (0)1208 82 18 02 (switchboard)Tel: + 44 (0)1736 74 11 44 (e-Forex sales & editorial)Fax: + 44 (0)1208 82 18 03

Design and Origination:Phill Zillwood Design [email protected] by Stephens & George Print Group

e-Forex (ISSN 1472-3875)is published quarterly in January, April, July and Octoberwww.e-forex.net

Subscriptions Subscription rates (including postage)UK & Europe: £150 per year Overseas: £175 per yearPlease call our subscription department for further details:

Subscriptions hotline: +44 (0)1736 74 11 44

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

Co

mpa

nie

s in

th

is is

su

e

4 | january 2014 e-FoReX

A

ACI page 38

ADS Securities page 2 and 3

AFME page 104

Aite Group page 91

Ariel Communications page 158

Asirikuy page 168

Azul Systems page 79

B

Barclays page 74

Bloomberg Tradebook page 131

BNP Paribas page 73

BT page 162

C

Caplin Systems page 10

CFTC page 102

Citi Inside Back Cover

CME Group page 95

Colt Technology page 162

Credit Suisse page 122

G

Gold-i page 147

Goldman Sachs page 79

H

Hibernia Networks page 162

Hotspot FX page 61

I

ICAP page 103

IFS Company page 141

Integral page 104

INTL FCStone page 15

K

Kx Systems page 122

L

LMAX Exchange page 5

M

Map.S.Platis page 33

Q

Quantopian page 126

R

R5 FX page 19

S

Saxo Bank page 20

SEC page 60

SGX page 97

Smart Box Capital page 184

Solid Trading page 151

Squared Financial page 47

Standard Chartered page 90

Sucden page 63

SuperDerivatives page 24

Swissquote Bank pages 8 and 9

T

360 Treasury Systems page 92

tradable page 149

TMS Brokers page 11

TMX Atrium page 162

D

Deltix page 121

Devexperts page 143

Digitec page 111

DTCC page 49

Dukascopy Outside Back Cover

E

Eagle Alpha page 58

Etrading Software page 42

eToro page 65

Eurobase page 71

F

FinFx Trading page 45

Forex Time page 179

FXall page 90

FXCM page 180

FXone - Seabury Financial page 132 Solutions LLC

FxPro Inside Front Cover

FXSpotStream page 115

MarketPsych page 60

MarkitSERV page 53

MetaMako page 128

MetaQuotes Software page 77

Monetary Authority of Singapore page 89

N

NanoSpeed page 128

Nexxcom Wireless page 163

Nomura page 92

Nordea page 17

O

OLFA Trade page 13

OneMarketData page 58

One Zero page 145

P

PFSoft page 153

Philip Futures page 39

ProActive Capital page 58

TraderTools page 59

Tradition page 117

Tradologic page 155

Traiana page 105

Twitter page 57

TwoFour page 41

U

UBS Investment bank page 75

V

Valbury Capital page 98

X

Xignite page 119

X Open Hub page 7

X-SGS Team page 135

January 2014

contentsFoRewoRd

36. Bitcoinomania: Hype or Pioneer?Bitcoin has become a popular way to pay for goods and services online and recent headlines have been full of articles and speculation concerning it. Manfred Wiebogen takes a look closer into the first virtual currency.

LeadeR

42. Defining a new standard for client enablement in FXWhilst electronic trading and the associated straight through processing to clear and settle trades, aims to remove costly operational errors, Alex Wolcough outlines why one key aspect, Client Enablement, still remains a potential Achilles Heal.

maRket inFRastRuCtuRe 48. CCPs, TRs and SEFs - solving the puzzle of multi-participant workflows in FXThe connectivity and workflows required for trading FX products will change and become more complex as a result of the new FX clearing and reporting environment. Frances Faulds talks to providers about what’s in store.

soCiaL media

56. Coming of age: Social Media reaches critical mass in FXWith barriers to treating social media as legitimate outlets for communication being lowered across the capital markets, Eva Szalay looks at how these digital channels are being used as tools by FX providers and also as an invaluable and essential source of market news and sentiment for alpha seeking trading firms.

pLatFoRms and FX e-CommeRCe

68. Multi-asset class SBPs - servicing a wider set of client needsCompetition from the ever increasing number of multi-bank platforms and greater diversity from traders is driving banks to re-evaluate and often rebuild their single bank platforms to offer cross-asset class trading functionality. Frances Faulds reports.

the e-FoReX inteRview

80. LMAX Exchange: Aiming high and growing fast – a unique vision for global FXe-Forex talks with David Mercer, CEO of LMAX Exchange, the first FCA authorised and regulated MTF for FX.

Manfred WiebogenForeword

Bitcoinomania

Frances Faulds SBPs

Mulit-asset class

Roger Rutherford

William EssexFX Algorithms

Tactically more proficient

Andy WebbExpert Advisors

Removing the emotion

Alex WolcoughLeader

Client enablement

David MercerLMAX Exchange

The e-Forex Interview

John Miesner The e-Forex Debate

The real benefits of Institutional ECNs and new FX trading venues

Nicholas Pratt Technology Partners

Helping Retail FX brokers

Heather McLean Retail FX

Cutting edge services

Eva SzalaySocial Media

Coming of age in FX

Richard WillshireRegional e-FX Perspective

Asia

Alan F. Schwarz

Dan BarnesCustomised Networks

Low latency FX

David RichSmart Box Capital

Tradertalk

Client enablement in FXDefining a new standard

Forex Expert AdvisorsTaking the emotion out of trading for profit

FX algorithms Easier to use and tactically more proficient

January 2011

contents

6 | january 2014 e-FOREX

REgiOnal e-FX PERsPEctivE

88. Asia Richard Willsher investigates what factors are shaping the foreign exchange market within Asia and what growth in e-FX we can expect to see taking place throughout the region.

sPEcial REPORt

102. Swap Execution Facilities - a difficult birth but a promising future in FX Eva Szalay explores areas of concern that have be expressed by market participants regarding the operational procedures associated with SEFs and how these are being addresses by regulators and the industry.

thE e-FOREX DEBatE

112. Transparency, efficiency and innovation - uncovering the real benefits of Institutional ECNs and new trading venues for the FX buy-side With Roger Rutherford, Chief Operating Officer, ParFX, John Miesner, Managing Director and Head of Sales at Hotspot FX and Alan F. Schwarz, CEO of FXSpotStream LLC.

algORithmic FX tRaDing

122. FX algorithms - now easier to use and tactically much more proficient William Essex investigates the latest developments with FX algorithms including efforts by providers to provide more advanced algorithmic toolsets with new tactical capabilities which although quick and simple to deploy are functionally much more adept than their predecessors.

FX BROkERagE OPERatiOns

136. Technology Partners - helping retail FX brokers to build a more successful businessNicholas Pratt examines the challenges Retail FX brokers are likely to be facing over the next few years and how the industry’s leading technology vendors are helping them to meet them.

148. Outside the box - new thinking in the development of electronic FX brokerage platforms The emergence of more open platforms has led to a step change in the retail FX brokerage market. Nicholas Pratt examines the thinking behind the development of the latest electronic FX brokerage platforms.

nEtwORks, hOsting & cOnnEctivity 160. Building low latency FX trading architectures with customised network solutions For firms trading with high frequency or utilising high speed event driven strategies, low latency is crucial, but with so much in the hands of network providers, what can they fine tune? Dan Barnes investigates.

autOmatED FX tRaDing 168. Forex Expert Advisors - taking the emotion out of trading for profitOne of the many benefits of expert advisors is that they offer traders a disciplined framework within which to operate. However, as Andy Webb explains, they also open the door to other opportunities not economically feasible for a human trader, such as diverse strategy portfolios.

REtail FX tRaDing 176. Pushing the boundaries in retail forex with cutting edge trading servicesHeather McLean discovers how a new breed of retail FX broker is utilising state of the art technology coupled with fully customisable trading platforms to provide powerful suites of online services catering for mobile, automated, social and power traders.

tRaDERtalk 184. Smart Box Capital – leveraging diversification to provide a unique and uncorrelated offering

e-Forex talks with David Rich head of Smart Box Capital’s Managed Accounts platform.

With Swissquote Bank Ltd you trade over 70 products, including emerging markets currencies, commodities like precious metals and crude oil as well as stock indices. Adjust the powerful trading platforms to your own personal or professional trading requirements, take advantage of fair conditions, and get direct, secure access to the forex market.

www.swissquote.com/fx

Swissquote Bank Ltd (“Swissquote”) is a bank licensed in Switzerland under the supervision of the Swiss Financial Market Supervisory Authority (FINMA). The support on which this advertisement is published (such as a newspaper or a magazine) might incidentally be distributed in the USA. Swissquote is not authorized as a bank or broker by any US authority (such as the CFTC or the SEC). The products and services presented in this advertisement are in particular not in-tended to US persons (such as US citizens, US residents or US entities organized or incorporated under the laws of the USA). This advertisement does not constitute an offer, a solicitation or an invitation to US Persons to purchase or sell any banking or fi nancial products or use any banking or fi nancial services. Swissquote does not open any account for US persons. The products and services presented in this advertisement are as a general rule authorized for sale in Switzerland

only. They are not intended for any person/s who, based on their nationality, place of business, domicile or for any other reasons, is/are subject to legal provisions which prohibit foreign fi nancial services providers from engaging in business activities in these jurisdictions, or which prohibit or restrict legal entities or natural persons from accessing websites of foreign fi nancial services providers. FX Transactions with leverage are highly speculative. Trading FX bears high risk and might lead to the loss of your entire deposit. You should carry out FX transactions only if you understand the nature of such FX transactions and the extent of your exposure to risk, and if such FX transactions are suitable for you in light of your circumstances and fi nancial resources. Swissquote neither assesses the suitability of FX transactions nor does it provide investment advice. No information provided by Swissquote must be considered as an offer or a piece of advice.

With Swissquote Bank Ltd you trade over 70 products, including emerging markets currencies, commodities like precious metals and crude oil as well as stock indices. Adjust the powerful trading platforms to your own personal or professional trading requirements, take advantage of fair conditions, and get direct, secure access to the forex market.

www.swissquote.com/fx

Swissquote Bank Ltd (“Swissquote”) is a bank licensed in Switzerland under the supervision of the Swiss Financial Market Supervisory Authority (FINMA). The support on which this advertisement is published (such as a newspaper or a magazine) might incidentally be distributed in the USA. Swissquote is not authorized as a bank or broker by any US authority (such as the CFTC or the SEC). The products and services presented in this advertisement are in particular not in-tended to US persons (such as US citizens, US residents or US entities organized or incorporated under the laws of the USA). This advertisement does not constitute an offer, a solicitation or an invitation to US Persons to purchase or sell any banking or fi nancial products or use any banking or fi nancial services. Swissquote does not open any account for US persons. The products and services presented in this advertisement are as a general rule authorized for sale in Switzerland

only. They are not intended for any person/s who, based on their nationality, place of business, domicile or for any other reasons, is/are subject to legal provisions which prohibit foreign fi nancial services providers from engaging in business activities in these jurisdictions, or which prohibit or restrict legal entities or natural persons from accessing websites of foreign fi nancial services providers. FX Transactions with leverage are highly speculative. Trading FX bears high risk and might lead to the loss of your entire deposit. You should carry out FX transactions only if you understand the nature of such FX transactions and the extent of your exposure to risk, and if such FX transactions are suitable for you in light of your circumstances and fi nancial resources. Swissquote neither assesses the suitability of FX transactions nor does it provide investment advice. No information provided by Swissquote must be considered as an offer or a piece of advice.


Nordea, the largest Scandinavian bank, has agreed to deliver its high quality FX Scandi liquidity to London-based Marex Spectron, one of the world’s largest commodity brokers, via FIX. COO of FX at Marex Spectron Ashraf Agha says: “Nordea has a unique position in the Nordics and is able to provide us with very high quality, streaming liquidity which meets the growing demands of our global client base.”

The e-Consultancy team at Nordea, which worked with Marex Spectron to create the new link, is currently looking to expand Nordea’s FX FIX client base to include a number of global partners.

ADS Securities has announced the official launch of its new trading platform. OREX Optim is the first proprietary multi-asset online trading platform to be commissioned and developed from the Middle East. It represents a multi-million dollar investment in technology which will be accessed by investors from around the world.

Andrew Rossiter, ADS Security CTO, who heads up the OREX Optim team, said: “Advances in technology, predominately driven by the order based (equity) markets are now being adopted by the quote (OTC) market which is changing

Caplin Systems has announced the launch of Caplin Direct. Delivered as a hosted, managed service, Caplin Direct is designed for banks that want a modern FX single-dealer platform, but have previously been held back by the cost and technical challenges involved. Once connected to a trading system it provides an ‘out of the box’ SDP, while providing unlimited scope for branding, customization and extension with unique features and workflows. “We are already in talks with regional banks around

NEW

S

Nordea expands FX FIX client base

ADS Securities launches Multi-Asset Trading Platform

Caplin launches direct FX e-distribution service

the operational structure and functionality of FX platforms. Our new generation platform provides a low latency solution with better fill, tighter spreads and low rejection rates which is what clients are

looking for. Today we are launching the FIX API versions of OREX Optim which will be of great interest to institutional traders from tier 2 banks through to asset managers and hedge funds.”

the world about using the new service,” says Adam Hawley, Commercial Director of Caplin Systems. “The fact that Caplin Direct is built on the same Caplin technology used by Citi, whose Velocity offering was recently voted the world’s top FX single-dealer platform, means that banks can absolutely trust the reliability and security of the technology and rely on us to minimize the time, costs and risks involved in building a high performance single-dealer platform.”

Devexperts, provider of professional trading platforms and market data services, has announced the upcoming launch of the InfoRider desktop platform to deliver real-time information, analytics and news on equities, options, futures and FX markets harnessing the power of company’s state-of-the-art framework of data services and professional desktop technology.InfoRider is essentially integrated with Devexperts dxFeed market data service and provides direct connectivity and consolidated and normalized data feed from all

U.S. equities, options and futures exchanges, major global index providers and FX. Using dxFeed open APIs for data the platform allows for custom integrations and blending into corporate application landscape: major vendor data feeds or custom-developed integrations can be connected to the platform. InfoRider provides the unique ability to go back in time and instantaneously replay the whole market on tick-level from any given moment which is powered by Devexperts dxFeed onDemand cloud technology.

Devexperts introduces InfoRider


NEW

S

The IFS Company has recently launched some new customised MAM and Bridge solutions. To meet increased demand for the integration of different strategies for investment portfolio management, particularly, coverage of MAM solutions for the brokers’ programs, the IFS Company MAM solution now allows users to create a tree-like structure of MAM portfolio where each tree node can be implemented as a partner company and fully automate the process of all fees settlement. Taking into consideration the large number of liquidity providers and forms of cooperation with them, The IFS Company has also developed a unique Bridge solution which allows customers to unify the interaction of two MT4 servers in the ‘Liquidity provider – Consumer’ mode. At the same time this solution simplifies the processes of configuration and deals coverings. The company invites you to join them at IFX Expo, Macau, 21-23 January 2014.

IFS Company launches new MAM and Bridge solutions

After a complete redesign, Solid FX has recently launched their new FX trading platform. The platform offers superior performance, new order types, improved GUI and more innovative features and

services which the company hopes will make it a most attractive FX venue for anyone in the FX Trading domain. Solid FX, which focuses on long-term relationships based around a flexible and transparent

way of working, delivers expertise to optimize the liquidity needs of sell-side firms and has recently seen increasing numbers of banks, brokers and funds choose them as partner.

Solid FX launches new FX trading platform

Why not start by contacting us?Why not start by contacting us?

+41(0)22 535 57 80+41(0)22 535 57 80 www.olfatrade.com

Swiss company Olfa Trade is introducing a brand new feature to its platform. The “Smartpad” for Seamless FX consists of a currency pad coupled with a comprehensive blotter that can be placed anywhere on a trader’s desktop, independently from the platform itself, while staying within the highly secured environment of the platform.

This completely new feature was designed for professional traders using several platforms at the same time and willing to compare rates, trade and monitor their orders and P & L simultaneously on those

TwoFour has added a new sleek HTML User Interface to their FX platform. New and existing clients will benefit from the latest release. TwoFour’s latest order and trade processing solution for brokers, banks and payment companies now also delivers a packaged solution to automate and control the firm’s and client’s business.

TwoFour clients utilize the company’s global real-time solutions to manage deliverable, agency, margin, brokerage and prime of prime businesses for FX, options, futures, metals and money markets. TwoFour gives clients the information they and their clients demand on-line through the TwoFour White label frontend for self-servicing, including dealing, position management, margining, confirming, instructing, searching, reporting and statements.

Olfa Trade introduces Smartpad feature

TwoFour adds new HTML5 UI to latest release

various systems. Traders do not need to have the full platform open on their screens. They simply log

on, extract as many “Smartpads” as needed and place them wherever they wish.


NEW

S

Financial trading software provider, Ariel Communications has developed a range of new apps for the innovative tradable trading platform. The World of FX, Personal Currency Exposure, Order Templator and Trade Notebook are now live. As part of the agreement, Ariel has also been appointed as a Certified App Developer for

tradable and can develop high quality, bespoke apps for brokers across the globe. Simon Cox, CEO of Ariel comments, “With its customisable app based model and App Store ecosystem, tradable is undeniably the leader in open, next generation platforms and we are very excited to be working with them.”

Ariel and tradable team up

Simon Cox

OURSHELFis

SAGGING.

For the third year in a row, the readers of P&L Magazine have named FCStone, LLC as the best non-bank FX Prime Broker.

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 LondonINTL FCStone Markets, LLC INTL FCStone Markets, LLC INTL FCStone Ltd312.780.6857 212.485.3529 [email protected] [email protected] [email protected]

O�-Exchange Currency transactions involve leverage and may not be suitable for all investors. Such transactions are not executed on a regulated market or exchange. We may act as your agent or as principal. In a principal transaction, we act as the buyer when you sell and the seller when you buy and, as a result, our interests may be in con�ict with yours. Your deposits have no regulatory protection. Due to leverage losses greater than you deposit may be experienced. You should fully understand the risks prior to transacting. Futures trading may not be suitable for all investors. The trading of futures and options involves substantial risk of loss and you should fully understand those risks prior to trading. *INTL FCStone Inc. o�ers these services through its a�liated companies. O� exchange foreign currency is o�ered though INTL FCStone Markets, LLC, a Swap Dealer registered with the National Futures Association and INTL FCStone Ltd., which is authorized and regulated by the Financial Conduct Authority. Foreign currency futures and options are cleared at FCStone, LLC; a registered FCM with the National Futures Association. INTL Global Currencies is authorised and regulated by the Financial Conduct Authority the provision of payment services.

that is saturated with generic solutions. The company focused on three aspects which it considered to be paramount qualities for new generation trading platforms to have; enhanced usability, speed, and cutting-edge functionality. “We concentrated on cutting latency and adding an enhanced range of tools for analysis and interactive

trading, but our main focus was design,” said Denis Borisovsky, CEO of PFSOFT. “Now we have a fully unified GUI across all platform components, which we feel will significantly decrease the time needed by brokers to launch.”

Singapore Exchange (SGX) is introducing Asian foreign exchange (FX) futures for deliverable and non-deliverable Asian currencies from 11 November 2013. Futures contracts for six currency pairs, AUD/USD, AUD/JPY, USD/SGD, INR/USD, KRW/USD and KRW/JPY, will be launched initially.

SGX’s introduction of Asian FX futures is in line with global G20 regulatory reforms where all standardised OTC derivative contracts should be traded on exchanges or electronic trading platforms, where appropriate, and cleared through central counterparties. “The trading of Asian FX futures on SGX offers global investors a transparent, margin-efficient and well-regulated marketplace to seamlessly manage their Asian currency risks. We will be adding more currency pairs to our Asian FX suite over the next 12 to 18 months. This comprehensive range of Asian FX futures will contribute towards the continued growth of Singapore’s FX market, which is already the world’s third biggest FX centre,” said Magnus Böcker, CEO of SGX.

PFSOFT has announced a major upgrade to its multi-asset trading platform Protrader. The new release, Protrader 3, is a result of over 24 months of brokerage and end-user analysis in a bid to outpace competition in a market

SGX launches Asian FX futures


NEW

SN

EW

S

2014 will be a big year for Gold-i. Building on its track record of launching ‘industry first’ products, Gold-i has a major product launch planned for this year which will revolutionise its offering to retail and institutional brokers, providing them with even greater flexibility and choice. The Gold-i Matrix will enable a broker to connect to multiple platforms, combine multiple liquidity feeds, offer A / B book management, and integrate with Back Office, Risk Management and CRM solutions. It will have its own Gold-i user interface and will provide graphical and API access to change all parameters. Tom Higgins, CEO of Gold-i says, “The Gold-i Matrix

has been developed in response to client requests for a single solution which provides multiple feeds and enables them to use multiple platforms. The Gold-i Matrix does this and so much more. It involves highly complex technology which we have developed over the last 12 months to provide an easy to use, customisable product. There really is nothing like it on the market. It opens up a wealth of opportunities to brokers and maps onto the future of retail and institutional trading.” More details will follow closer to the launch date but Gold-i is already in discussion with clients and potential clients about how the Gold-i Matrix can benefit their organisation.

Gold-i to introduce major innovation in 2014

PFSOFT launches 3rd generation of Multi-Asset Trading Platform

Tom Higgins

Best Bank in the Nordics and Baltics 2013

TNS TNS Sifo Prospera

Best FX Bank in the Nordics 2013

Nordea’s FIX API lets you access deep Scandie FX liquidity directly from its home markets and comes with easy connectivity, low latency and the security of a globally top credit rated bank.

Looking for a superior FX solution? Discover more at nordeamarkets.com/e-consultancy

Access Scandie liquiditystraight from the Nordics.

Nordea Markets is a leading Nordic liquidity provider in the FX Markets and o� ers its customers the full range of FX products for trading and hedging. Nordea Markets is part of the Nordea Group, which has around 11 million customers, with a large domestic presence in the Nordics and Baltics as well as o� ces in the U.S., Singapore, London, Frankfurt, Luxembourg, China and Russia. Nordea has an AA credit rating and ranks among the top 10 largest universal banks in Europe in terms of total market capitalisation. The Nordea share is listed on the NASDAQ OMX Nordic Exchange in Stockholm, Helsinki and Copenhagen.

nordeamarkets.com/e-consultancy [email protected]

FIX API

130120_annons_a4_globe_final.indd 1 2013-08-30 14:18

Squared Financial has announced plans to launch an enhanced market analysis and social trading services. Their enhanced market analysis page will now include daily technical updates as well as their standard fundamental weekly outlook. There will also be expanded coverage across a number of futures and spot markets. These analyses will provide a professional informative basis for their social trading offerings. Social

TradeCrowd have launched several new features. “Among the many major updates that we have just rolled out, we are proudest of two unique features: Contra Copy and Light Signup,” said CEO Stefan Pajkovic, co-founder of TradeCrowd. “Contra Copy is a unique feature that works opposite of the popular Copy Trade feature,” he explained. “It enables users to counter the trades

or “copy trading” as it is known is potentially the single biggest advancement in self-directed trading and investment since the advent of the ECN. And as with many great innovations enabled by technology, the surrounding noise and confusion complicates the search for real value. The Squared Financial service will help clients find the right system and manage it to their advantage.

of traders that perform less well with certain instruments. Now you can not only copy the good trades of successful traders with Copy Trade, but you can benefit from bad traders by making opposite trades with Contra Copy.” “Light signup feature will give our users the option to sign up through a number of social networks and preview the platform features without forcing them to deposit any money,” said Pajokovic.

Squared Financial launches social trading services

TradeCrowd launches new platform features

Alan F. Schwarz

NEW

S


Sucden Financial (HK) Limited has been granted a Type 3 (leveraged foreign exchange) licence by the Securities and Futures Commission (SFC) in Hong Kong. The new licence enables clients of Sucden Financial (HK) to trade FX directly with its brokerage desk or via one of its electronic trading systems, providing direct access to STP FX, with tight pricing and deep liquidity. The firm also acts as an introducing broker to the parent company, Sucden Financial Limited for its futures and options business and trades bullion directly for clients.

Michael Overlander, CEO of Sucden Financial Limited said, “With a firmly established reputation in the region, the leveraged foreign exchange trading licence demonstrates our commitment to our Hong Kong subsidiary and continued expansion in Asia.”

Sucden Financial (HK) granted Type 3 licence by SFC

Michael Overlander

FXSpotStream LLC, a wholly owned subsidiary of LiquidityMatch LLC, has announced the continued expansion of its service with the addition of Spot Precious Metals price streams and the commencement of client and bank production trading. FXSpotStream’s

liquidity providers are now able to seamlessly stream Spot FX and Spot Precious Metals prices using the same existing connection.

Alan F. Schwarz, CEO, stated: “Having passed the two year anniversary of the company’s formation we have seen the business mature from its original Spot FX API offering with the additions of a desktop application/GUI this past summer and now the streaming of Spot Precious Metals prices to compliment Spot FX. In parallel we expanded the original liquidity provider base and currently have 8 of the leading banks in the market providing liquidity to our clients.”

FXSpotStream adds Spot Precious Metals

CU

RR

EN

CY

CLIP

S

ScandinaviaFinnish and Swedish markets perform well

Nordic-based volume at FinFX increased 15% from the previous quarter (Q2 2013). This phenomenon closely resembles historic Q3 turnover fi gures as evidenced by our statistics in 2012 through 2010. The best performers were Finnish and Swedish markets, which experienced an uptick of 25% and 20% respectively. Our analysts forecast a net gain of 10% from the Nordic clients in Q4 of 2013 as compared to the previous quarter.

Major Q3 news came from Sweden and Denmark whose banks are exploring the option of imposing a

leverage ratio before their European counterparts make any similar commitments. The legislation is also slated to underscore tougher limits on gearing than recommended by the Basel Committee on Banking Supervision.

Eagerness to regulate in areas neglected by the EU is growing among Europe’s richest nations, where record-low interest rates are distorting asset prices. The head of Denmark’s government-appointed crisis commission; Jesper Rangvid, said that a leverage ratio (a measure of capital to assets


Brief news and analysis from around the worldof FX

Latin AmericaMexican Peso could be a star EM currency in 2014

The year 2013 saw dramatic developments in emerging market currencies. They began the year on a relatively stable to strong note against the US dollar after the US Federal Reserve in late 2012 announced a massive new open-ended onslaught of asset purchases. But with signs of a US recovery deepening, Fed chairman Bernanke in late May signalled that the Fed was considering the best timing for beginning to unwind, or taper, its blistering rate of $85 billion per month of asset purchases. This touched off an immediate sharp reversal in the US treasury market, with US yields rising in anticipation of the Fed’s buying drying up later in 2013.

In global markets, and especially for emerging market countries, the rise in US yields and US dollar served as a general squeeze on liquidity amid the worry that easy US dollar funding would dry up. Most emerging market currencies plunged in response, especially for countries that had developed large current account defi cits in recent years after easy liquidity conditions encouraged booming credit

markets in these countries and therefore consumption growth that rapidly outstripped less robust growth in exports. India, Turkey and South Africa are examples of countries that were hardest hit by the “taper threat” from the Fed over the summer.

Mexican Peso vs. other major EM currencies in 2013Since the Fed’s September failure to slow asset purchases, the Mexican peso’s outperformance eased, but has picked up again in most places as the Fed taper threat remains early in 2014 and for the balance of the year. (MXN = Mexican Peso, ZAR = South African Rand, CLP = Chilean Peso, INR = Indian Rupee, BRL = Brazilian Real. Each of the currency pairs indexed to 100 at the beginning of 2013.

Source: Bloomberg and Saxo Bank Strategy &

Research

before they’ve been weighted for risk) would help national regulators catch banks understating loss probabilities. His report, released in September 2013, showed that excessive leverage at Danske Bank A/S almost destabilized the entire Danish economy in 2008.

Stefan Ingves, governor of Sweden’s central bank Riksbank and chairman of the Basel committee added a warning that without leverage requirements, banks are left with too much freedom to lower their

capital base by adjusting risk weights. Though Sweden’s four biggest banks, led by Nordea Bank AB and Svenska Handelsbanken AB (SHBA), are among Europe’s best capitalized, the lenders are highly leveraged.

From a trader’s perspective, the Norwegian krone (NOK)

appreciated towards the tail-end of Q3 from its weakest levels in three years. The Norwegian GDP data indicated a year over year (y/y) growth of about 2% in Q3, which was a bit lower than 2012. The data was in line with the forecast from the Central Bank of Norway (Norges Bank), which is likely to keep rates at their current level.

Conversely, Sweden’s GDP figures were disappointing as the y/y GDP growth was only 0.4 %. Therefore, we estimate that the 2 % inflation

target of Riksbank will not be reached and they are forced to do a repo rate cut on 17 December. Our analysis predicts upside potential for NOK/SEK in early Q4 based on three factors that are: 1) Q3 growth outperformance in Norway compared to Sweden, 2) higher core inflation in Norway and 3) the rate cut by Swedish Riksbank whereas Norges Bank remains unchanged.

Stan Klebaner is Chief Business Development Officer at FinFx Trading Oy

january 2014 e-FOREX | 21

One currency that escaped the worst of the EM weakness was the Mexican peso, where the economic dynamics have diverged from most of its EM peers in recent years. The current account situation did worsen a bit for Mexico over the last year, but is still a relatively modest 2% or so of GDP, a mere fraction of the worst current account offenders like Turkey and South Africa, both at worse than -6% of GDP.

Emerging markets later caught a huge break in September when the Fed failed to reduce asset purchases as was expected due to the worry that the US government shutdown would harm growth and confidence. There may be another round of political wrangling over the budget early next year, but markets will once again be confronted with a reduction of the Fed’s accommodation by the March

meeting of the Fed’s FOMC at the latest.

And when emerging markets are inevitably hit with another round of liquidity worries as the Fed unwinds its policy, the Mexican peso should stand tall versus its emerging market peers, who have a much tougher road ahead in ironing out their imbalances. Adding to the tailwinds for Mexico are its proximity and exposure to the US economy, where the recovery should deepen in the New Year after strong fiscal headwinds in 2013.

Investment flows could also support the peso if the Mexican government’s fiscal reform programme to raise greater tax revenue sees rating agencies upgrading Mexico’s sovereign bonds. Another wildcard that could give Mexico and its currency an

even bigger boost would be the ending of the Pemex monopoly on the country’s energy production sector to attract external companies to launch new large-scale oil exploration. Lawmakers are discussing measures to open up Mexico’s energy industry as 2013 draws to a close.

John. J. Hardy is Head of FX Strategy at Saxo Bank

Relative rates to support NOK/SEK going forward

The Middle East looks to the East and the West

CU

RR

EN

CY

CLIP

S

The most active markets in the Middle East through Q4 have been Gold, USDJPY and GBPUSD. November’s Diwali festival saw Gold buying drop by more than one-third from 2012, according to retail dealers, as a result of the lack of supply caused by the Indian Government’s anti-Gold import rules. However, the continued downtrend in Gold has provided opportunities for the natural buying interest in the Middle East region. Further buying of Gold is expected into the New Year off the back of November’s 5.5 per cent drop in value – the worst single month performance since 1978.

The strength of the USD versus the yen has generated a lot of interest particularly with the move back through the 100.00 level. But it is GBPUSD that has been most active with client trading volumes currently three times that of USDJPY and almost twice as much as Gold. In August, GBPUSD moved above its 40 week moving

average price at 1.5300. Since 2005 breaks of this average have been closely correlated with every bull rally and bear market sell-off. Augusts break signalled a new bull market


Speculation concerning the timing and pace of the tapering of Federal Reserve’s asset purchases programme remains the main theme in global emerging markets. We believe that the end of quantative easing era is closer than the market assumes. Therefore we maintain our bullish call on the dollar. Bearing in mind how severe were the outfl ows of capital from regional bond markets when Ben Bernanke introduced the word “tapering” to investors’ vocabulary, one may expect the outlook for CEE3 currencies to remain extremely bleak.

C&EE With another round of uncertainty over the US budget around the corner, the beginning of 2014 might be gloomy for the zloty and other regional currencies. Obviously the risks are skewed to the downside, yet we represent the view that any major selling pressure will be short lived. First of all, our EMEA risk appetite indicator has recently moved back to neutral levels. Secondly, current levels of EUR/PLN are in accordance with our short term equilibrium models. What is more, the deviation of real effective exchange rate from its’ long term mean hints that none of the CEE3 currencies is prone to severe sell-off due to overvaluation.

In other words, positioning and valuation suggest that regional currencies are less vulnerable than half a year ago. Finally, the macro backdrop became much more

regional currencies less vulnerable than six months ago

Source: CQG

Inc. © 2013 All rights reserved w

orldwide.

in GBPUSD with the majority of regional investor’s backing the continued improvement of the UK economy and buying into the currency. The on-going positive economic data has continued to support bullish sentiment in sterling with investor’s liking the economic data linked to the UK recovery. This view has been further supported by the European Commission who raised their growth forecast for next year to 2.4 per cent making the UK the strongest economy in Europe with over twice the forecast growth of the Eurozone, which is only predicted to grow at 1.1 per cent.

There is still strong interest in sterling from investors, even with the currency increasing significantly at the end of 2013. The expectation is the rally can be further supported into 2014 especially if the US dollar weakens. Many regional commentators are unsure of what

will happen when Janet Yellen takes over the running of the US Federal Reserve (Fed) in January. She is seen as a dove, even more so than Bernanke. Instead of introducing tapering there is a view that she could potentially raise QE to stimulate the economy further and push long term interest rates lower.

The reasoning behind raising QE is that any tapering would almost certainly lead to a stall in the current US economic recovery. The Fed and the Government do not want this and will take all steps to make sure it does not happen. If QE is continued this would put further pressure on the USD in Q1 2014 and maintain the GPBUSD rally to 1.7000 and above.

The move by London to start clearing the RMB is being closely watched. With the Shanghai FTZ and Singapore also announcing

they will become off-shore centres for the renminbi there is a lot of interest in the currency. Regional investors see it as a safe haven which, as it is slowly liberalised, will strengthen against the dollar, so they are looking to include it in their portfolios.

Max Knudsen is Chief Market Strategist at ADS Securities


Central Bank (MNB) will pursue its policy of gradual easing. It is not clear easing bias that threatens the forint the most, but political issues. They remain the main threat for Hungarian currency making it more volatile and vulnerable than the zloty and krona, renowned as the regional safe haven. The latter’s upside potential is obviously limited by the CNB, which started intervening in the FX market and set 27,0 as EUR/CZK target.

To sum up, Hungarian forint is supported by the weakest fundamentals and should be perceived as one of the most vulnerable currencies in the emerging markets world amongst TRY or ZAR. Having the growth and monetary policy outlook in mind, the sell off of the zloty in the first months of 2014 will be completely retraced in the remainder of the

year (our 12M target for EUR/PLN is 4,12). The krona will be the most stable, but with persistent threat of deflation creating risk, the CNB may raise its target.

favorable and we assume it will spur capital inflows to the EM equity markets. As the global economy recovers, the growth outlook has been improving in CEE3 economies as well. While we see tentative signs of stabilization in Czech Republic and Hungary, we expect the Polish economy to continue to outperform its peers. Growth bottomed out in the second quarter and we believe the economy will expand by 2,7 percent year on year in 2014. Consumption driven recovery will gradually close the output gap and finally put upward pressure on prices. The local form of forward guidance caps rates markets for now, but the recovery will finally support the zloty.

We expect the National Bank of Poland to (twice) raise rates in the fourth quarter of the next year. At the same time The Hungarian

Bartosz Sawicki is the Head of Research at TMS Brokers.

CLIENT: SUPERDERIVATIVES

JOB NO.: 10109197

SPACE UNIT: PG 4/C (B: 426mm W x 303mm H, T: 420mm W x 297mm H, L: 414mm W x 291mm H)

PUBLICATION: E-FOREX - APRIL 20131 dag hammarskjold plazanew york, ny 10017-2205212.832.3800www.avrettfreeginsberg.com

APPROVED DATE TRAFFIC/PROOF READER PRODUCTION SUPERVISOR DIRECTOR PRINT SERVICES ART DIRECTOR COPYWRITER ACCOUNT EXECUTIVE ACCOUNT SUPERVISOR MANAGEMENT SUPERVISOR CREATIVE DIRECTOR CLIENT

Date Created: 03/12/12 Artist: Mark

Proof: 02 Page: 01

Date Revised: 03/12/12 Artist: MarkPRINTED AT 69.85%

ART FILE NAME MECH SCALE EFFECTIVE RESOLUTION Scene_02_radial_LG.tif 87.9% 301dpi

superderivatives.com

dgx

CLIENT: SUPERDERIVATIVES

JOB NO.: 10109197

SPACE UNIT: PG 4/C (B: 426mm W x 303mm H, T: 420mm W x 297mm H, L: 414mm W x 291mm H)

PUBLICATION: E-FOREX - APRIL 20131 dag hammarskjold plazanew york, ny 10017-2205212.832.3800www.avrettfreeginsberg.com

APPROVED DATE TRAFFIC/PROOF READER PRODUCTION SUPERVISOR DIRECTOR PRINT SERVICES ART DIRECTOR COPYWRITER ACCOUNT EXECUTIVE ACCOUNT SUPERVISOR MANAGEMENT SUPERVISOR CREATIVE DIRECTOR CLIENT

Date Created: 03/12/12 Artist: Mark

Proof: 02 Page: 01

Date Revised: 03/12/12 Artist: MarkPRINTED AT 69.85%

ART FILE NAME MECH SCALE EFFECTIVE RESOLUTION Scene_02_radial_LG.tif 87.9% 301dpi

superderivatives.com

dgx


REC

EN

T E

VEN

T

Forex Magnates London November 2013


I recently had the opportunity to attend for a second year the Forex Magnates London Conference. It was a great event with many international participants in the FX marketplace & a chance to meet, listen & learn about current and future political, economic & financial situations affecting specifically the retail FX market. Topics were varied; however here are some of my impressions of what was being talked about from my notes. The first thing I noticed upon entering was there seemed to be slightly less people than last year though it was still a very bustling place in both the auditorium & the exhibition area. Nationalities were mixed as last time but there seemed to be more Asian, notably sub continent participants than last time whilst from Europe there appeared to be more from the UK and possibly fewer from the US.

Technology TrendsThe first panel session was titled Technological Trends in FX with a number of panelists. Viral Tolat, Chief Technology Officer at EBS started by detailing three things that he had seen spur technological growth:

1) volume growth had spurred technology

2) algotrading & its increase 3) the distribution of FX other than

IDB’s.

Jakub Zablocki, MD at X Open Hub agreed that ‘’...without ‘broker’ technology we would not have the volumes now...’.’ He added

A personal appreciation by Eddie Tofpik, Head of Foreign Exchange ADM Investor Services International Limited.

that this helped spreads narrow as well. Harsha Bhat, CTO at State Street Global Exchange added that volatility was the biggest driver, technology allows new participants as it lowers the cost of entry. John Beckert, MD at First Derivatives spoke of how each of the many firms involved have their strengths & weaknesses. Technology enables scalable growth and it fills the gaps! Andrew Ralich, CEO of OneZero Financial Systems said it was easy to see connectivity nowadays and the question was ‘’How do I look different?’’. John noted that multi-asset technology was beginning to become a race on whom could do what. Viral pointed out that everyone else says that FX was a ‘’...late comer...’’ and that the lack of regulations would inevitably see more being done as oversight. The important areas to him were innovation & multi-asset! Harsha said ‘’..in some areas FX was not the leader!’’ and that it faced ‘’...challenges of fragmentation..’’. Jakub pointed out that the retail area had more demand for multi-asset services and that it was ‘’...easiest to introduce commodity CFDs and then equity CFDs.’’. John added as ‘’... market becomes more exchange like, we’ll see flows in FX pickup.’’. Trevor Young, VP at

OANDA spoke of the growth in FX mobile & social networks and Harsha said that this was something new!

challenge of hfTThe next panel session I found interesting was the HFT Challenge. John Howard, CEO of Automated Trader moderated and he asked the question - what are the key drivers in HFT growth? Graeme Burnett an industry veteran answered first that it was initially a simplistic model with easy entry into the market when HFT really started in 2007/8. Now there were increasing barriers

RECENT EVENTs

Forex Magnates London November 2013

Photographs by Larry Levy


REC

EN

T E

VEN

T

to entry. Jay Hibbin, Commercial Director at MarketPrizm said it was a lack of opportunities in equities in Europe, fragmentation of the market in liquidity which equaled opportunities in arbitrage between liquidity pools. John said to him there were two components - 1) relativity between pools allowing arbitrage & 2) underlying demand for FX as a product (unlike ‘some’ equities). Unlike equities - FX - is a ‘blind spot’ for regulators. Jay said he saw HFT being threatened by the proposed FTT and by politics. Graeme added that HFT was not welcome in the FX arena. LPs provide liquidity but when it suits them. He saw a danger that politicians will hit HFT. John gave the example of PAR-FX who have introduced random ‘sleep’ restrictions on trading. EBS may also and asked ‘’...is this right?’’. Frederic Ponzo, Managing Partner GreySpark Partners pointed out that sell-side firms need assurance that the buy-side is not arbitraging them (which was met with a little laughter). Jay noted that there were enough LP sources & platforms for HFTs and they have multiple strategies. Latency is ‘’...not on its own ‘toxic flow’ ‘’ and delays against toxic flow are predatory. Frederic added that

drive-by-latency arbitrageurs should be welcome as it was ‘’...survival of the fittest!’’. However, there was general agreement to a comment by Graeme that ‘layering’ where orders are resent again & again at the end of the validity period ‘’...should be outlawed!’’ and Frederic added that ‘flash crashes’ are caused by the trade venue(s).

John asked - what latency technologies were there for HFTs? Graeme spoke about the need to analyse the trend in 1 - 2 microseconds to which John asked about the decision latency - the time to process the decision? Jay saw a shift to lower latency by LPs with a ‘’...whole infrastructure...’’ approach. The commoditisation of low latency trading strategies and its outsourcing will see the need for more than just low latency. Graeme spoke about the hardware necessary with upcoming microwave links and/or next generation fibre links. Frederic interjected that ‘’...what we are talking about is optimising the final bit...’’ and gave the example that we were looking at the tyre pressure on a fast sports car rather than looking at it end-to-end. Which would you rather be - fast, safe, whole volume, etc...Jay mentioned

that the whole ‘race to zero’ has become very expensive - ‘’...the gravy train has ended!’’ Firms may not make money out of it, instead they should be looking at the whole cycle of trading rather than the ‘’...nanoseconds!’’. Graeme elaborated about how the move now was away from software and into hardware. ‘’...there are now languages out there that operate sub microsecond.’’. He saw the next thing being the ‘’...real use of big data. Intelligent tools to use big data!’’.

Two sides of The fX coinThe next session I attended was entitled - buy & sell: two sides of the coin in FX! Peter Joseph Garnham of Euromoney asked the first question - how should the buy side embrace FX as an asset class? Mark Suter, Co-Founder of Digital Vega answered first with - narrower spreads! He could get ‘’...0.1 tic bid/offer spread on my iPad!’’. Glenn Stevens, CEO of Gain Capital next answered ‘’...there is a purity in FX markets!’’ as it trades around the world around the clock. Mark added he was ‘’...tired of equity markets saying they were first! We were first there 2000 years ago!’’. Robert Fleischler, MD KCG Hotspot FX next added ‘’...FX is the perfect asset class. The net worth to the system is zero - if the (US) dollar goes up then the other currency goes down!’’ and that ‘’...it is difficult to trade FX... there is no bias!’’. Glenn added ‘’...equity or fixed asset managers are also FX traders.’’ to which Robert added ‘’... the Big Bang in FX was the Euro in 2000!’’.

Peter also asked the question- FX, where now? Mark answered with more EMFX! Robert said with retail, especially the last three months as institutional moves down to retail. Yoav Barnes, MD at Victory FX who had been fairly silent, said China, specifically the retail side and some interest in Africa!

Forex Magnates


RECENT EVENTs

Peter then introduced the next question - a topical and potentially awkward one - fixing! Glenn saw a need for a change in oversight of fixings and as for banks restricting traders in chatrooms ‘’...have fun with that!’’ to general laughter and applause. Mark said he knew of five or six companies working on how to automate a fixing.

efficienT eXecuTionThe final panel session I attended was on how to efficiently execute FX! The first question posed by the moderator Mitch Eagistein, MD of Boston Prime is whether FX is all one market now? Derek Sammann, Senior MD at the CME Group said that added pools of liquidity are welcome. ‘’...FX supports multiple models...’’ but ‘’...not sure that

T+2 trades should be clearable!’’. Mitch asked him if he thought the FX market will continue to be fragmented to which Derek replied that we should let the market make the choice. Innovations as a market make us unique and ‘’...not a fan of regulators forcing choice!’’. James Watson, Head of EMEA at FXall said it was not about our business but about our clients and he did ‘’...not like the negativity associated with fragmentation.’’ and ‘’...the customer s have the choice.’’. There ought to be a ‘’...big ‘get over it’ moment on regulation.’’ from everyone! Harpal Sandhu, President & CEO of Integral added that ‘’FX is an OTC market, it has always been fragmented!’’. The market prefers fragmented or ‘specialised’ offerings and services the way they want to receive it! The

key to making it work is integration but to keep the ‘specialisation’. He doubted regulators will touch it!

Mitch then asked the question as to whether it is possible to automate the LP or even if it is relevant to have a relationship with an LP. David Mercer, Chief Executive of LMAX Exchange stirred up the pot by saying ‘’...not everyone gets the same price!’’. Derek said that technology is a tool to a means to manage a relationship - not the actual management of a relationship. James added that the relationship was the business augmented by technology. Harpal mentioned that it depended on the type of FX business. Solving problems require people. If you’re dealing with the high technology end of the market then that matters. However, there are ‘’hundreds of versions out there...’’. For some high technology brokers they need the technology but for some voice brokers they need good people. Drew Niv, CEO of FXCM added that the business was changing, some still need the ‘high touch’ relationship but retail brokers can change the market. On the other side, LPs become unhappy so we all need to customise. Typically relationships change every six months and that is why it is a human business. The market has to be fragmented as all the market cannot be in the same place.


REC

EN

T E

VEN

T

RMB Trading in London

“When you pour water in a cup, it becomes the cup. When you pour water in a bottle, it becomes the bottle. When you pour water in a teapot, it becomes the teapot. Water can drip and it can crash. Become like water my friend.”This is a quote from Bruce Lee in 1971 – not that life changing until its being quoted by IMF members in reference to the RMB at a livery hall in London right on the Thames. Then it takes on new meaning…..

The City of London has been very very busy with RMB preparations lately. With not less than two high profile events in November , George and David on the plane to China, and the Lord Mayor’s trip to Hong Kong in Jan. There’s something going on…..

If you look at the firepower these events have been mustering you’d be

City & Financial3rd annual conference on the future of RMB in the global markets12 November 2013

City of London Corporation Panel discussion on global RMB developments Friday 22 November

By Jon Vollemaere

excused into thinking that RMB were about to free float in 2014.

Panellists including Eddie Yue (Deputy Chief Executive, HKMA), Wenjian Fang (CEO, Bank of China (UK)) and Chris Salmon (Executive Director, Bank of England) on one panel and Katherine TSANG (Chairperson of Greater China, Standard Chartered); Mr WANG Jianxi (Member of IMF External Audit Committee); John Greenwood OBE (Chief Economist, Invesco) on the next.

Of course the RMB is not about to open up in 2014 – but there has been some intriguing discussion around what needs to happen before, and what affect it will have when it does. One attendee likened this to the fall of the Berlin Wall.In the late 80’s there were many signals that this was a possibility – much speculation as to whether this

would ever happen and how long it would take if if it did and then Bang one morning out of the blue it fell– and everything changed.

The Berlin Wall reunified Germany and paved the way for what would become the Euro, and for all the efforts to break it recently the euro

The City of London has been very very busy with RMB preparations lately.

RMB Trading in London


Volatility and Depreciation in Emerging Market Currencies – Indian rupee

Thursday 3 October 2013

Such were some of the questions asked at Armourers Hall in October at the City of London’s breakfast roundtable discussion around EMFX and in particular Indian Rupee.

The announcement of tapering in the US has affected emerging markets (EM) currencies this year perhaps far more than expected. Whilst the trading of Indian rupee is still a relatively new development across global forex markets, (which may partly explain the mismatch between the volumes quoted in the Indian press and the actual numbers that some institutions are seeing) its movement this year has for some - been very very profitable.

The RBI has expressed strong concern over the spike in speculative trading that has been seen as a result of Rupee volatility and it is unique in that its the only major EM currency ( with the exception of China ) which is traded in larger volumes offshore than onshore . This makes its NDF markets particularly relevant, and a big headache for the RBI.

For developed markets it may still be possible for central banks to intervene with some success. However there are a large number of factors that determine whether there is enough

remains the second most important currency worldwide.

The Great Wall of China, was also built for protection and its safety allowed China to grow 28 fold in the last 35 years. Relaxation of that protection will also no doubt create one of the most dominant currencies of our time.

Its relatively agreed that the PBoC will methodically expand the band. Then slowly reduce its active management intervention away from quantitative to corrective measures to maintain stability.

All in an effort to build an interest rate led economy. Deep enough that the home market is attractive to stop a flood of money out, if and when the RMB goes public.

Then the RMB will be like water my friend.

global market confidence in that institution to intervene. These include the perceived view of the central bank, exchange rate, amount of reserves and how open the country’s capital account is looking. For EMs therefore, central bank intervention is generally not advisable.

Central bank intervention is risky for even developed countries and, for example the Swiss Central Bank recently, it can be a very costly move. Coordinated central bank intervention is the less risky option. ( this proved successful for Japan in 2011) But where does that leave the RBI?

Conceivably, the upcoming BRICS bank, would give EMs such as India more of a chance of successfully introducing intervention as an effective tool.

It would need to be partnered with deep pocket economies, and if that bank were situated in London…. then that might just change the way the market thinks and trades Rupee.

The internationalisation of the rupee is on the RBI’s agenda and there is reason to be hopeful given the new RBI Governor’s positive moves towards internationalisation, however at present they are not in a hurry.

‘Curry in a Hurry’ is an Indian Restaurant on Lexington Avenue in NYC and not a low latency, high frequency trading algo for Rupee….or is it

By Jon Vollemaere


Profit and Loss Conference Singapore

REC

EN

T E

VEN

T

This November’s Profit and Loss Conference in Singapore saw an interesting panel discussion on the electronification of EM currencies or rather the introduction of eEM.

SEF rules and better data are leading the drive to higher e-ratios in emerging market currency markets, but what are the challenges involved in trading NDFs and local currencies online?

This turned into a lively discussion which touched on both the difficulties and therefore opportunities apparent when taking this part of the market electronic.

November 2013

It was agreed that this will happen faster than other parts of the market and has the opportunity to both learn from the mistakes of the past and take the good from other venues and place them in one spot.

The debate on SEF vs NON SEF continued with both London and Singapore potentially benefiting from a trading shift away from the USA, as well as the opportunity offshore US banks have as the possible conduit between the two regime’s. Leading to this year’s word of the day – ‘Bifurcation ‘ or perhaps not just one Liquidity Mirage – but two.

One of the more interesting sources of debate was the question of what defines a market maker ?

Earlier panels had discussed how big banks were now internalizing up to 90% of flow and only going to market when they need too. Whereas Non Bank Market Makers are the complete opposite – often showing prices and inventory with the sole goal of being traded on to complete their position requirements.

The Singapore market has seen the wide spreads in some currencies come in solely in response to bank and non bank electronic pricing and that’s all down to a very small handful of people having a very big affect on that market.

PanelisT 1 “We’ve seen the China market come in from 7-10 pips , to 5, and now sometimes 2- 3”

PanelisT 2 “ Yep – that was me “

The ultimate and somewhat future solution possibly being a mix of traditional bank market making alongside tech led non bank market making. The EM world being such a fragile thin liquidity market as it stands today - the need to separate pools and trading behaviors (in the short run anyway) appears to be the best strategy.

Sometimes the market is like a school yard and you have to keep two kids apart for the greater good – but eventually they do learn to play well together. There is some hope that within the right framework the requirements of both sides will move from a parasitic to a more symbiotic relationship.

Which is certainly grounds for another 18+ letter scrabble winning word we can add to ‘Extraterritoriality’ and ‘Bifurcation’

This November’s Profit and Loss Conference in Singapore saw an interesting panel discussion on the electronification of EM currencies or rather the introduction of eEM.

Profit and Loss Conference Singapore

By Jon Vollemaere


RECENT EVENTs

The Cyprus EMIR Conference 2013 Saturday 30 November 2013


Financial industry professionals, distinguished economists and lawyers from Cyprus and abroad had the opportunity to discuss the new rules introduced by the European Market Infrastructure Regulation (EMIR) which impact a great number of Cypriot investment firms (CIFs). Speakers at the conference included the Honourable Minister of Finance Mr. Harris Georgiades, Chairperson of the Cyprus Securities and Exchange Commission Mrs. Demetra

Kalogirou, and Dr. Stelios Platis, Managing Director of MAP S. Platis and Chairman at the Association of Cyprus International Investment Firms (ACIIF). They all commended the industry for its importance to the Cyprus economy.

The new EU regulation introduces significant changes to the spectrum of counterparties’ obligations relating to transactions in both exchange-traded derivatives (ETD) and over-

the-counter (OTC) derivatives (such as currency derivatives - forex). A key change is that as of February 12, 2014, all concerned counterparties shall be required to submit comprehensive reports on trades in these types of derivatives. Other provisions of the EU regulation pertain to central clearing and risk mitigation.

Attending the conference were more than 200 people, mainly senior-level managers and executives of financial institutions of global reach, as well as people working with ETD and OTC derivatives from Europe, Russia and the Middle East.

Over the last years, and through the constant efforts of MAP S.Platis, Cyprus has successfully built up its status and credibility among foreign investor circles in the investment services field, experiencing considerable growth in the OTC market such as forex and binary options. On behalf of the event’s organisers, Dr. Platis remarked: “The staging of this conference in Cyprus is of paramount importance. It is precisely through such events that we can tangibly boost the comparative advantages of the Cyprus economy in the global financial services industry, thus improving the chances for attracting even greater interest from investors globally.”

In light of recent significant changes in EU regulatory matters, and in a bid to keep all interested and affected parties abreast of developments, MAP S.Platis, the financial services advisory firm, organised an international conference titled “The Cyprus EMIR Conference 2013,” which was held in Limassol on Saturday 30 November 2013.The conference proved to be a great success.

The Cyprus EMIR Conference 2013

REC

EN

T E

VEN

T


RECENT EVENTs


What is a BitCoin?Launched in 2009 by unknown (pseudonym Satoshi Nakamoto) BITCOIN is a form of digital currency produced by people running computers all around the world. The idea behind it was to create an alternative currency, with low costs for transactions, independent of any authority and easy transferable electronically.

Bitcoin has become a popular way to pay for goods and services online and over 12 million are currently circulating on the web. With high volatility their price reacts immediately to any news about virtual currency, with headlines of ‘Bitcoin hits up 107% a week’, or the opposite common throughout the year.

Bitcoin traded below US$ 20 in January, reached US$ 900 with ups and downs by the beginning of November and has exceeded during this period US$ 1,200. In November Bitcoin plunged more than 20% across some exchanges, after the People’s Bank of China banned Financial Institutions from carrying out transactions in this currency. The PBOC stated it isn’t a currency with ‘real meaning’ and doesn’t have the same legal status. Whilst Financial Institutions are barred from handling Bitcoin the public is free to transact at their own risk.

Bitcoinomania: Hype or Pioneer?

FO

REW

OR

D

By M. WiebogenHonorary President ACI The Financial Markets Association

Recent headlines have been full of articles and speculation concerning Bitcoin which caused me to look closer into the fi rst virtual currency.


The currency received additional boost when several entrepreneurs declared they will accept Bitcoin as payment. There is the example of the University of Nicosia announcing to accept Bitcoin for fees and tuitition starting from the spring semester. Another famous example is the Bitcoin ATM operating now in Vancouver as of November. Additional you will find travel agencies, book stores, sandwich shop etc. all of them accepting the BTC. Should you be interested in what being able to buy or where to spend the virtual currency, just check spendbitcoins at the web – you will be surprised at how many BTC-participants there are.

What makes BtC popular?An oft-heard argument amongst investors in Bitcoins

is its independency from any government. During the recent Cyprus Bank crisis depositors were charged to help recover the countries losses costing them huge personal expense. That this could easily be repeated is reflected by an unfortunate public statement by the IMF, that a 10% depositor participation on the European government debts could massively help the weak and heavily indebted countries nurturing fear of another financial crisis ahead and generating growing mistrust. BTC is still however unregulated and decentralized with no central authority/government in control and therefore has no access to your investments in Bitcoin. Neither the FED, nor the ECB, nor any other authority is yet able to supervise virtual currencies.

Bitcoinomania: Hype or Pioneer?

FOREWORD

Bitcoin has become a popular way to pay for goods and services online and over 12 million are currently circulating on the web.


FO

REW

OR

D

hoW BitCoins WorkHailed as the world’s first decentralized digital currency. Bitcoin is also referred to as a new kind of currency (alternative private currency), though in the form of a virtual token rather than a physical coin or banknote.

Whilst the value of a country’s currency is mainly linked to its GDP (its issued currencies net worth and other assets), the value of the Bitcoin is determined only by how much people are willing to exchange for it; or how much trust is given to it as there is no sovereign economic backer.

Without going into the complete formula for Bitcoin. The procedure to process Bitcoin transactions is called ‘mining’, based on sophisticated mathematics incorporating a 64-digit solution.

Each problem solved processes one block of Bitcoins and the miner becomes rewarded with new Bitcoins. So, people receive an incentive to provide computer-processing power to solve the problems. In compensation the difficulty of the mystery is adjusted to ensure at the end a steady stream of about 3,600 new Bitcoins/day.

At the end this implies that the total number of Bitcoins in existence will approach but never exceed 21 million. Today, there are some 12 million Bitcoins in existence.

To receive a Bitcoin a participant must have a Bitcoin address (a string of 27-34 letters and numbers) which is a kind of virtual postbox. Transactions are fully anonymous as there is no registry of these addresses. Addresses are stored in so-called Bitcoin wallets, which serve to manage the savings like anonymous bank accounts.

Bitcoinomania

We have to concede that the conceptual creation of virtual money, its complex mathematical mining and ability to be traded through exchanges is remarkable.


FO

REW

OR

D

Size of the marketFollowing a website statistic (coindesk.com) the Bitcoins market looks surprisingly active. By the end of November (26th) I could identify the following figures:

• Total bitcoins (BTC) 12,039,475 BTC

• Market value on actual prices USD 9,258,476,670 EUR 7,464,474,500

• Daily transactions 75,853

• Transactions per hour 3160

• Bitcoins sent during a day 1,801.210,56 BTC

• Bitcoins sent avg. per hour 75,050,44 BTC

ConCluSionAlthough initially distrusted the currency is starting to generate enthusiasm. Outside of traditional and regulated channels it has been used to transfer funds and to enter into speculative investment opportunities. Some participants believe in the future it will become a fully adopted and fully-fledged currency. But public opinion is divided. The innovator of Bitcoin probably had in mind creating a fully independent and unregulated tool.

I predict that, as soon as Bitcoin becomes widely recognized we shall see governmental intervention. In any case, we have to concede that the conceptual creation of virtual money, its complex mathematical mining and ability to be traded through exchanges is remarkable.

It looks like being a brilliant idea for specific activities, which compels future close observation.

Pro’s• Enthusiasm for Bitcoin is driven

by a distrust of state-issued currency

• It is an alternative private currency

• New corporate currency• It is a remarkable concept

and may very well have a future role in stabilizing either governments or allowing Corporates to stabilize their own positions in rough waters

• One of the key drivers of adoption has been the general publics’ diminished faith in the basic soundness and credibility of key pillars of the financial system

• The Bitcoin’s string of digits are an important foundation and its introduction of a new form into the payment channel can serve to bring more transparency

• Important to be mindful that currency serves beyond that medium of exchange, which extends to store of value and unit of account

• Currently traded on approximately 80 exchanges in over 20 countries

• Wider use of Bitcoins could theoretically lead towards creation of the first global currency

• Probably it costs a lot more effort and time to produce a Bitcoin than it does to produce an additional Dollar

Con’s• Looks like a speculation and

possible scam• Typical pyramid scheme that

everyone is willing to buy into• It is a speculative derivate with

no underlying asset • Risk that governments will want

to shut it down• A currency is only worth what it

can be redeemed for• A value of a currency is derived

from gold/silver (in the old days) and/or from a country’s GDP and other asset

• The BTC spot price appears to be pure supply and demand

• If a Bitcoin is not pegged to something it will stay an instrument of auction

• The introduction of a new currency into this global system without proper oversight and regulation can increase risk which might end in global implications

• Without regulation, fluctuations in value could run wild

• One fundamental problem is that the algorithm limits the number of BTCs to about 21 million (fortunately a BTC can be subdivided to eight decimals)

• Different types of currency end with fiat currencies

• Bitcoins are absolutely a Ponzi scheme

• Tulip bubble 1637/Amsterdam• Value generated by a computer

is not true value

Some market viewsThe recognized volatility at the Bitcoin market reflects essential uncertainty on the one hand about how regulators may decide in the future but also by the divided public on how to assess the virtual currency. Looking around on the internet and following some forums I could detect these various opinions:

Bitcoinomania

New York | Boston | London | White Plains


LEA

DER


Before a dealer can trade with its client on an electronic platform, whether it is a Single Dealer Platform or one of the Multibank ECNs, there is a whole process of client on-boarding and client enablement that needs to be completed.

Client enablement: What is the problem?Client on-boarding focuses on the contractual relationship, ensuring

that the various checks for Anti-Money Laundering and Know Your Client are completed and contracts are signed, while client enablement focuses on the day-to-day commercial relationship and how it gets reflected on the electronic trading platforms that clients use to trade with dealers.

Client enablement centres on the answers to questions such as “What am I willing to trade with my client? How good a client are they, so what pricing stream should I put them on? Which funds do they trade for, so I know which accounts I need to map their trades to? Who is the sales coverage for this client? Do I want to be trading with this client right now?”

These represent significantly important pieces of information that need to be communicated with the ECNs and, in some cases, need to effected immediately (e.g. suspend this client now!). However today, dealers and the Multibank

ECNs rely on highly diverse and unsophisticated mechanisms to control enablement:

• At worst, this communication is managed through email: someone at the bank needs to write the enablement instructions and someone at the ECN needs to read it before entering the data into the trading platform.

• At best, the ECNs offer an administration interface to allow the dealers to manage client enablement. However, these administration portals have little in common and often identify the same key parameters (e.g. Buy Side Client or Fund) in very different ways.

Given that many of the FX dealers trade through a number of different multibank portals as well as their

Defining a new standard for client enablement in FX

The accuracy and speed of electronic trading in OTC markets has been one of the key aspects that continue to drive its growth and the move to have more instruments traded electronically has been supported by legislation such as Dodd-Frank and the next round of Market in Financial Instrument Directive (MiFID). However, as Alex Wolcough outlines in this article, whilst electronic trading, and the associated straight through processing to clear and settle trades, aims to remove costly operational errors, one key aspect remains as a potential Achilles Heal: Client Enablement.

LEADER

Alex Wolcough


own single dealer platforms at the same time, this process if often laborious, and the risk of getting this enablement activity wrong is significant. Sales Desks often delegate management of these platforms to their client on-boarding teams in an effort to get this work done quickly and correctly. Even with experienced teams, errors do happen which can result in impact on the business. Here are a couple of examples:

• Account Mapping Errors: Mapping client funds to internal dealer accounts represent a significant overhead as some large clients have accounts that can number in the thousands. Getting this wrong can result in STP breaks which will require effort to fix or to unwind the trade

• Price Tiering Errors: Allocating a client to the wrong pricing stream can work two ways. Putting a client on a better pricing level than intended, can mean a loss of margin. On the other hand, putting a client on a worse pricing level, could result in a loss of business, as they get better prices elsewhere.

Even after the initial enablement is done, dealers constantly look to optimise their relationships with their clients, so having a clear view of these permissions and associated pricing configuration before deciding what to change (e.g. better pricing or adding more instrument types) is essential.

With no standard enablement report, just understanding which clients a dealer has enabled on each

platform and identifying the case where the same client (and fund) comes through multiple channels, is an onerous task in itself. Some banks do maintain an internal record of what they have enabled but there is no guarantee that this remains in synch with the ECNs (funds change, traders move, etc. in addition to the errors mentioned before).

a better WayDriven by the challenges above, some of the key industry participants have decided to do something about this by working together to define a new standard for client enablement.

The global FX business has already seen how standardised messaging protocols have benefited the industry through its adoption of FIX as the de-facto trading protocol standard. It has significantly speeded up the process of connecting dealers to clients and dealers to ECNs, which


LEA

DER

Model of the e-relationship

Source: Etrading Software

Even after the initial enablement is done, dealers constantly look to optimise their relationships with their clients…

has facilitated wide-spread e-trading connectivity at relatively low cost.

In the same way, the Trading Enablement Standardisation Initiative (TESI), made up from a number of key global banks and supported by Etrading Software, is working to establish a global standard for client enablement. The initiative has already successfully designed and implemented the standard for Fixed Income instruments and is now working with the FX community to enhance the standard for FX Spot, Forward, Swaps, FX Options, NDFs and Precious Metals.

A key part of the process already completed was to understand how the issues differed from the Fixed Income community and then to work with each of the ECNs to learn about their enablement workflows, the information they needed to enable clients and the information they store on clients. The TESI Technical Working Group, which also includes the main multibank ECNs, then worked with the FIX Trading Community to enhance their protocol to support FX enablement which will allow the dealers to manage their clients through same computer based API, regardless of which ECNs they connect to.

An early win for the dealers when the API is adopted, will be a standard report that will give a comprehensive view of clients and the platforms that they are permissioned on. As part of its mission, the Technical Working Group is also tasked at looking for a standard way to identify client firms and their funds that can be used across ECNs and Single Dealer Platforms.

Real benefitsWhere the real power of such an API lies, is in the ability for dealers to integrate their own client permissioning databases directly with the ECNs and to respond to requests from buy-side firms to enable new funds or to add instruments in real-time. Activities such as changing pricing stream, mapping accounts, enabling new asset classes or even suspending a client can be done once within a dealer system and the message proliferated directly to all relevant ECNs automatically using a standard protocol.

With much tighter integration between the ECNs and Dealers, not only can the bank’s permissioning databases be integrated but also, more importantly, Customer Relationship Management (CRM) systems, allowing Sales Desks to

focus on optimising the electronic relationships they hold with their clients in real-time and respond the circumstances quickly. Dealers could in effect, be able to manage “straight through enablement” directly from their CRM systems, potentially speeding up enablement significantly. Alongside competitive pricing, speed of enablement and on-boarding continues to be an important factor for clients.

PRogRess to dateAs previously mentioned, TESI has already completed the standard for Fixed Income with interfaces agreed for both a file based and FIX based approach. Many of the D2C ECNs are already offering the protocol today or will soon adopt in 2014.

As for progress within the Foreign Exchange space, the TESI Technical Working Group has not only created the core enablement requirements and workflows for both FX Liquidity providers and Prime Brokerage, they have also worked with the FIX Trading Community to create a set of recommended practices for FIX based enablement.

As ever, the real success for the initiative will not be in creating the standard but in the global adoption of the protocol. So the TESI members will continue to work with the ECNs to ensure the protocol gets properly implemented and ensure that banks are supported through the integration process. Once a critical mass of the Multibank ECNs takes on the protocol, the initiative members expect that other venues will quickly follow and any new venue that might come about due to the next round of regulation have a standard ready and waiting for them.

Further ahead, the Trading Enablement Standardisation Initiative will also look extend support of the protocol to other asset classes as well as enablement further downstream.

LEADER



LEA

DER

www.squaredfinancial.com+ 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

offers ECN-style trading across a broad mix of Bank and non-Bank liquidity pools. The advantage for clients is simply the best price and highest quality of execution for each specific

trading style and strategy. The result is a stable and professional service which is optimised for you, the client.

New Market Research Facility coming 2014, register your interest now on www.squaredfinancial.com


Ma

Rk

Et In

FR

as

tR

uc

tu

RE


The addition of trading on Swap Execution Facilities (SEFs), possible central clearing for some instruments, and reporting of all trades to the newly established trade repositories means that not only the connectivity requirements to trade FX have become more complex, but also that the workflows will need to be re-evaluated for any possible impact.

While the new connectivity is fairly straight-forward and can either be built in-house or outsourced to a third party middleware provider, dealing with the added complexity to the workflow is quite a challenge. It requires sourcing the correct trade data, at the right time, managing the new reporting codes and identifiers and dealing with the status and messages coming back from the CCPs and trade repositories. Banks will need new exception management workflows to handle incoming messages from trade repositories and CCPs and in

some cases a new internal workflow will be needed to receive automatic updates of reported trades, which is likely to impact existing trading systems.

Trading on SEFs in the US, which for the FX market means non-deliverable forwards, went live in October. ESMA has announced and approved the first four trade repositories under EMEA – DTCC, Regis-TR, UnaVista (the London Stock Exchange) and KDPW in Poland, and it is understood at least another two are to come. So far, there are just five CCPs on the horizon for FX – the CME Group, LCH.Clearnet, Hong Kong Exchange and Singapore Exchange, with Nasdaq expected to unveil its offering in the near future, but this too could increase.

Extra complExityThe DTCC Derivatives Repository Limited (DDRL) applied for approval as a trade repository under ESMA in March

CCPs, TRs and SEFs solving the puzzle of multi-participant workflows in FX

The connectivity and workflows required for trading FX products will change and become more complex as a result of the new FX clearing and reporting environment. Frances Faulds talks to providers about what’s in store.

MaRkEt InFRastRuctuRE


2013, on the first day on which an application could be made. Stewart Macbeth, Chief Product Development Officer of DTCC Deriv/SERV and CEO of DDRL, says that the introduction of an FX trade repository will have a significant impact on FX workflow processes for some time as the firms work on enriching trade messages with the information needed to fulfil the reporting requirements.

The main requirements are the need to attach a common trade identifier to trades and agreeing the details of the trade to be reported. Furthermore, there are some detailed fields that are quite difficult for counterparties to populate in an identical way because they are not pure economic fields as such. These include execution time and confirmation time. In terms of the product description field, Macbeth says the lack of codified standards means that currently participants are using different descriptions.

While trade associations are still talking to ESMA about including existing product standards and product taxonomy as part of the reporting requirements nothing has been approved yet. Macbeth adds that the sooner these standards are agreed, the sooner market participants can adopt them. Testing has begun in Europe and reporting across a broad group of fields and jurisdictions will go live on 12 February 2014, but there is still a level of ambiguity around reporting. In the US, Macbeth says there is a greater level of codified reporting for FX products. Reporting for FX has begun in Japan and Australia, and Singapore is expected to go live in 2014 for FX.

Macbeth says: “Reporting is adding to the operational challenges faced by firms because it is a new requirement. There are third party vendors that are offering delegated reporting, however, that still means the information will need to be retrieved from the systems, enriched and transformed before it is submitted to the trade repository.”

He adds that for firms that connect directly to the trade repository, submitting the data to the trade repository with a common identifier will be key. “Firms have to think about slightly different workflows to establish these trade identifiers and communicate the trade details ahead of reporting to a trade repository,” he says. For those connecting indirectly, Macbeth says that there are potentially going to be different services offered by banks to their customers, so

understanding those and how they can prepare to overcome the technical challenges will be crucial.

Macbeth also says that some of the larger funds and large corporates have made moves to connect directly to the repository. He believes the recent approval of trade repositories created a new flurry of activity and he also expects more buy-side firms to connect directly to DTCC.

The FX industry will have at least four trade repositories to choose from. Firms need to understand the business models of each and choose the trade repository that offers economies of scale, provides choice when it comes to reporting and connectivity options, taking into account the volume of derivatives traded, and has no hidden costs.

Macbeth is confident that DTCC has future-proofed its trade repository and can easily expand the data coverage it has and tweak the processes further down the line as the learning curve develops. He says: “We will most likely understand more, over time, about how we can extend our software to hold more reference data so customers will not need to report every data item on every change. Once we understand which data they have most trouble with that model will optimise.”

“I think we will find ourselves optimising what we do alongside the delegated reporting offerings from banks and I am sure we will work out how best we change our processes to align with those.”

In Europe, firms will always have the choice of trade repository. In the US, where the customer does not have connectivity to a trade repository, the SEF will select a repository and report the trades. In Europe, as both parties have to report the trade, to a certain extent the trade repository will have to compare and match

CCPs, TRs and SEFs

Ma

Rk

Et In

FR

as

tR

uc

tu

RE

Stewart Macbeth

“Reporting is adding to the operational challenges faced by firms because it is a new requirement. There are third party vendors that are offering delegated reporting, however, that still means the information will need to be retrieved from the systems, enriched and transformed before it is submitted to the trade repository.”


the trades. Macbeth also adds that where the two counterparties go to two different trade repositories there will be a reconciliation process between the two repositories. He says that this is why there is so much focus on trying to agree trades before reporting takes place, if not, reports will start to diverge. “Some of the more complex fields, such as confirmation time, execution time and the product descriptions, which are text-based, have the potential to show up as different.”

cliEnt clEaringSteve French, Director, Product Marketing at Traiana says that the new regulations will bring client clearing, as opposed to interdealer clearing, to the FX market for the first time and will prompt a need to classify clients as there will be more types of participants connecting to clearing in different ways. As there are many banks that will not become direct members of a clearing house, they will need to become clients of a clearing member

creating a new clearing client type alongside the pure buy-side clients. French says: “This adds a new layer of complexity as some banks will have to change their flows to connect to clearing members and they will effectively look like clients. This connectivity for a non-clearing bank will look very like our existing clients for FX prime brokerage.”

He says the workflows will vary depending of whether it is an interdealer trade, either between two clearers, a clearing bank with a third party clearing member, or two third party clearing members.

As a result, it is not just the buy-side that will have to change their


Banks need a partner with three key assets: flexible technology, comprehensive regulatory

knowledge and deep integration expertise

Steve French

“Clients should be able to reach as many clearing houses and as many FCMs as possible through a single point – they should have the freedom of choice of clearers, clearing houses and trade repositories and flexibility of integration to the platform. ”


workflows in the light of the new regulations affecting FX. Some banks are set-up to do ‘give-up’ trades only, and executing banks, that face clients, have also added complexity to deal with in allocations as well as the receipt and processing of split shakes.

According to French, the new regulatory requirements bring with them complexity of client types, or participants, and their interaction with clearing members as well as the need to connect to CCPs, either in multiple jurisdictions or which have differing workflows, matching capabilities and APIs. Furthermore, for reporting, French says participants do not want to have to send the same trade multiple times for clearing, credit checks, and reporting in different jurisdictions.

French stresses that SEFs are highly involved in reporting as well as clearing. SEFs need to look at how they will fulfil their clearing and reporting connectivity and,

more importantly, once a SEF is up and running certain reporting mandates have got to be fulfilled. He says: “SEFs have got a crucial role in passing the appropriate trade identifiers to enable the counterparties to the trade to fulfil their own reporting obligations.”

minimal impactTraiana has tried to make the changes needed as painless as possible for existing participants. He says clients connected to the Traiana infrastructure will see a minimal impact in order to fulfil their clearing and reporting requirements through the ability to enrich trades with both static data, and the generation of the appropriate identifiers, and through the dynamic routing to the appropriate clearing houses.

For the banks, French says Traiana is trying to leverage existing Harmony connectivity, which has been there for a number of ‘give-up’ banks for many years, and offers the option to re-use that existing connectivity and for Traiana to change the look of the trades, to make them look like client trades, for the non-clearing banks.

He says: “Many banks looked at reporting even though there was a wide belief that a clearing mandate would come in before reporting. Under both Dodd-Frank and EMIR, reporting is actually coming in before the clearing mandate.”

The EMIR deadline for reporting of February 2014 made many banks revisit what they did in order to comply with the Dodd-Frank reporting requirements and take a fresh look at how they could invest in more flexible system connectivity as there are other jurisdictions on the horizon as well.

CCPs, TRs and SEFs

Ma

Rk

Et In

FR

as

tR

uc

tu

RE

The introduction of an FX trade repository will have a significant impact

on FX workflow processes for some time

Keith Tippell

“It’s a story of ongoing changes and an ever increasing number of end points (CCPs and repositories) along with a greater number of participants who either need to take part in the workflow or see the results. ”


Using Harmony, Traiana is enhancing on-boarding capabilities with a ‘self-service’ solution so Traiana can on-board clients on behalf of reporting parties or clients contracted directly with Traiana. He says: “We do a one-time static data on-boarding where we hold that data within Harmony and then any subsequent trade can be enriched with that static data before submission to the specific trade repository.”

As Traiana supports all FX products, French says there would be no additional workflow or additional connectivity needed to turn any of these trades into cleared trades in the future, if further regulation is made. Going forward, he believes clients are now looking for diversification, better use of margin and better offsetting and are looking to use more prime brokers. For this reason, he predicts, the industry may see less trades across a greater number of prime brokers in order to get this diversification.

He says: “Clients should be able to reach as many clearing houses and as many FCMs as possible through a single point – they should have the freedom of choice of clearers, clearing houses and trade repositories and flexibility of integration to the platform. They should not be forced down a single protocol for that connectivity across the different jurisdictions.”

EconomiEs of scalEMiddleware specialist, MarkitSERV has worked with the major clearing market participants for three years to build functionality that can be

leveraged to support the clearing requirements of Dodd-Frank and EMIR and the firm is monitoring developments carefully to see if there are any further modifications required. For reporting, MarkitSERV will assist clients in complying with the new requirements and where it makes sense, bringing the clearing and reporting functionality closer together.

Keith Tippell, Managing Director of MarkitSERV FX, says “It’s a story of ongoing changes and an ever increasing number of end points (CCPs and repositories) along with a greater number of participants who either need to take part in the workflow or see the results. With four FX CCPs live and more to launch, five to ten repositories at steady state and up to eight entities involved in a SEF executed clearing FX transaction, there is a lot of connectivity required which can be very expensive if you build it all yourself. And this is exactly what our clients are asking us to focus on – building middleware to bring all this together, gaining economies of scale, by building once and managing the ongoing change of each piece of end point connectivity in one place. As part of this work we also drive standardisation, based on industry design/consensus, to the workflows.”

MarkitSERV has invested heavily in building a future-proofed FX clearing connectivity and workflow platform. This platform has been live since 2011 and now connects most of the major dealers with up to four FX CCPs, supports client clearing and manages clearing broker / FCM ‘take-up’ workflow.

Tippell adds: “We have partnered with SWIFT and Misys to give market participants more choice in how they connect into the workflows. We have leveraged three years’ worth of work on clearing to help build out our SEF connectivity


Patrick Philpott

“If a liquidity provider provides liquidity to a SEF then they must enable all participants on the platform to trade with them – in effect this means the dealer to client relationship cannot be maintained on a SEF - the only trading protocol allowed is an all to all protocol.”

product, FXWEB, which offers regulatory reporting and clearing solutions to SEFs, along with voice affirmation for voice brokers. This service has been live since early October with a significant number of FX SEFs. MarkitSERV is also heavily focused on SEF confirmations and all the challenges around regulatory reporting including UTI pairing and exchange.”

changEd workflowDealHub provides connectivity, trading, trade processing and business intelligence solutions to global financial markets, including all of the world’s largest FX banks. Patrick Philpott, President, DealHub US says that the introduction of SEFs for trading of required products and the introduction of CCPs for mandatory clearing will impact both the reporting workflow and the end-to-end trading workflow. “Where the SEF is part of a pre-existing trading venue, as is primarily the case in FX, physical connectivity for STP remains the same, however, the message payload varies depending on whether the trade is SEF eligible or not – this creates complexity and requires updates to existing systems by market participants.”

“Specifically, the SEF is responsible for generation of the USI and for the initial trade reporting for SEF executed trades – this is a change to currently implemented reporting workflows at SD/MSP banks. The USI must now be consumed rather than generated and the initial reporting needs to be suppressed by the SD/MSP (although continuation data reporting is still done by the SD/MSP).”

In terms of trading workflow, the need for trade certainty prior to execution means a new pre-trade

credit check is required for SEF executed trades. For prime brokers this means new requests from SEFs for credit checks. When a prime brokerage client wants to trade on the platform, the prime broker needs to respond in real-time before the trade is executed on the SEF platform. Philpott says that trades executed on the SEF are also legally confirmed once done so this also impacts the FX confirmation workflow process.

Furthermore, according to Philpott, a recent advisory from the CFTC


Ma

Rk

Et In

FR

as

tR

uc

tu

RE

CCPs, TRs and SEFs


flexible script driven rules engine and API interfaces to TRs and CCPs. This way, as the rules continue to evolve or are clarified, the flexible rule set can be easily configured to implement changes. Philpott says: “We also built a comprehensive dashboard that gives a real-time overview of all activity in real-time along with a 10 year archive that helps firms to manage the complete workflow in real-time and to comply with record keeping requirements including the ability to reconstruct the trade lifecycle of individual deals by maintaining linkage between the pre-trade price negotiation, the execution and the post-trade activity for the trade.”

dElEgation challEngEsThe requirement for both parties to report to the TR without duplication presents challenges for FX since there is no central clearing in place for FX instruments. At some point in the workflow, the parties need to agree and/or exchange the UTI for the trade prior to reporting to the TR. This could occur during the trade recap, via an allege message from the TR or at confirmation.

Says Philpott: “Delegated reporting requires the reporting party to maintain counterparty static for its clients as some of the information required on the trade report is not available at the point of execution.”

He adds that collateral information will also need to be reported under EMIR and is generally held in separate systems at firms so this needs to be gathered and integrated into the reporting suite, and for banks that opt to use a counterparty or third party for delegated reporting, the bank is under the obligation to reconcile their trades against the TR or possibly multiple TRs.

Unlike Dodd Frank reporting, there is no concept of a reporting party where one party generates the USI and communicates it to the other

party, according to Philpott. “Where parties have an obligation to report in the US, the USI could be used as the UTI. In terms of generating the UTI, firms could use the FX Cash Rule or the Option Seller Rule to determine which party generates the UTI. Alternatively firms will agree bilaterally on which party always generates the UTI.” For delegated reporting, additional static data is held for each counterparty and used in combination with rules to complete the counterparty part of EMIR reporting.

DealHub is currently working on data transformation and routing changes for integration to multiple CCPs and TRs, changes to credit management systems for pre-trade credit checking, new dashboard monitoring systems and changes to reconciliation systems. Work is also being done for generation and exchange of UTIs and counterparty static data for EMIR reporting.

Philpott summarises by commenting that “In this environment, with challenging deadlines, fast evolving rules and flexible interpretations, banks need a partner with three key assets: flexible technology, comprehensive regulatory knowledge and deep integration expertise. It is this combination that will ensure banks are able to build the connectivity and workflows they need to be certain of meeting regulatory obligations on time, while minimising the impact on their core systems and processes.”


regarding the provision of open access to all SEF participants also has a significant impact on trading platforms and their enablement functionality. He says: “If a liquidity provider provides liquidity to a SEF then they must enable all participants on the platform to trade with them – in effect this means the dealer to client relationship cannot be maintained on a SEF - the only trading protocol allowed is an all to all protocol.”

Another significant workflow impacted by SEF rules is the treatment of trades that fail to clear for any reason other than operational issues – the void ‘ab initio’ rule means that such trades can be done again on the same terms or one of the counterparties may choose to walk away from the trade if they are no longer in the money based on the original trade terms.

prE-tradE chEcksIn terms of connectivity, Philpott says that firms need to have pre-trade credit checking connectivity in place as well as SEF, CCP and TR connectivity. While this physical connectivity needs to be set up and maintained, the real challenge is managing the routing rules, monitoring trade lifecycle status, responding to client and regulator queries and dealing with exceptions.

“To keep on top of this challenge, banks need to implement flexible, easy to manage routing rules and create dashboards that provide a homogenous view, in real-time, of all client and firm trading activity. The status of each trade across multiple venues, CCPs and TRs must be clearly shown so that any exceptions or issues are immediately addressed to ensure continued compliance with all execution, clearing and reporting rules,” he adds.

To this end, DealHub’s approach from the outset has been to provide a local repository along with a

“While this physical connectivity needs to be set up and maintained, the real challenge is managing the routing rules, monitoring

trade lifecycle status, responding to client and

regulator queries and dealing with exceptions.”


SO

CIA

L M

ED

IA


Only seven-years after its creation, Twitter now carries more than 500 million messages daily about people’s feelings, opinions and observations. Interpreting and datafying these personal and slang-ridden titbits represents the new frontier for big data processing companies. The idea of turning text into data is well-established in trading already, with machine-readable news feeds churning information into trading algorithms. Just like then, the buy-side and sophisticated hedge funds and algorithmic trading fi rms are pioneering the adoption process in their hunt for alpha.

Coming of ageSocial Media reaches critical mass in FX

With barriers to treating social media as legitimate outlets for communication now being lowered across the capital markets, Eva Szalay looks at how these digital channels are being used as tools for FX providers to educate, communicate, establish trust and attract new customers, and also as an invaluable and essential source of news and market sentiment for currency trading fi rms who are looking alpha generating opportunities.

SOCIAL MEDIA

Eva Szalay


The Time is nowLouis Lovas, director of solutions at OneMarketData, has recently authored a survey looking at market participant’s attitudes to the trading uses of social media in which he says: “Leveraging Twitter or other social media sources for economic and company information for actionable insight has piqued beyond mere curiosity. The idea of trading based on non-traditional information is also not new by any means. What is changing is the concrete evidence of the correlation between the financial markets and the global psyche, a pulse on business as represented through social media.”

Evidence is now building that firms reluctant to incorporate social media into their activities are at risk of being left behind. A number of recent events demonstrated that reacting quickly to sites such as Twitter can mean the difference between a trading strategy being successful or not.

In today’s lighting fast markets microseconds can make a difference, and minutes are a long time. Established news outlets such as Bloomberg, Dow Jones and Reuters have long been relied upon for breaking news stories that can have a price impact on stocks, currencies and other trading instruments.

Emmett Kilduff, CEO of Eagle Alpha, a company that collects alpha-generating insights for the web (see box at end of this article) says breaking news often appear on Twitter and other social media sites before journalists publish them. The company cites a recent example of this was a tweet from a South African TV station stating that a union member at mining company Lonmin had been shot. The company’s stocks dropped 2% on the day, but only after a newswire published the story 7 minutes later.

There is huge poTenTial for growThJeff Ransom, chief executive officer of ProActive Capital says: “I wholeheartedly believe that the role social media plays in financial markets is only in its nascent stages and it will continue to grow without question.” He continues: “There are great data mining opportunities in social media and as the younger generation that is used to digital and social media comes through the social stigma associated with using these sites will disappear.”

The volume of data available on social media websites is astonishing and the potential uses of this new, interactive and entity-based information are extraordinary. In a book called Big Data, Viktor Mayer-

Schonenberger and Kenneth Cukier highlighted the potential predictive power of social media information but note that such uses are still at an embryonic stage.

To illustrate the potential, the authors refer to Facebook, the company that datafied personal relationships and created a so-called social graph that has formally turned existing interpersonal links into data.

Based on the number of users, the resulting social graph describes more than 10 percent of the world’s total population in a data format. The company had 1 billion users interconnected through over 100 billion friendships in 2012.

The potential for using such vast amount of data in financial markets is taking a firm hold as evidence gathers that social media information could have stronger predictive powers than traditional media for longer horizon strategies.

Lovas mentions this in his survey: “At a recent tradeshow in Chicago, Quantitative Analyst Rochester Cahan from Deutsche Bank outlined his own research into the impact of news and social media on markets. Rochester draws a clear distinction between the influence of news - which is mostly factual reporting of quarterly earnings, and social media information – which are opinions, commentary and customer feedback on a company’s products and overall stature. Interestingly, his research indicates social media information has “twice the predictive power” over news for longer horizon strategies. Not all that surprising when you consider the shifting of public mood or psyche as depicted in Twitter content. That insidious behaviour is more analogous to steering an ocean liner, it moves and responds rather slowly.”

In financial markets the trading use of Twitter is mostly limited to stock

Coming of age – Social Media reaches critical mass in FX

Louis Lovas

“What is changing is the concrete evidence of the correlation between the financial markets and the global psyche, a pulse on business as represented through social media.”

SO

CIA

L M

ED

IA

More clarity, more transparency... more Alpha.

Fully-hosted, SaaS FX... l Liquidity Aggregationl Pricing Engine l White-Labellingl Order ManagementONLY at TraderTools.

Now with enhanced

White Label White Label White Label functionality! functionality! functionality!

TraderTools FX trading platform

Email: [email protected] Web: www.tradertools.com


markets, as tweeters feedback on a product can be used to predict movements in the company’s shares. Research and consulting firm MarketPsych analyses datafied Twitter messages as signalsfor investment decisions in theequities markets.

MarketPsych has since teamed up with Thomson Reuters to provide sentiment-based indices derived from social media data. These sentiment feeds are in turn plugged in to quantitative trading models and used as inputs for making investment decisions.

“Social media is definitely going to be part of trading as an input for quantitative or algorithmic strategies. The first asset class is going to be equities because of the strong connection between what people talk about and the stock price. (eg TESLA),” Lovas says. “Social media has created a little cottage industry in analytics, and we are trying to distil social media content into sentiment data. It’s very difficult because of slang and emoticons. You don’t have that problem in news stories or publications,” Lovas adds.

SEC approval a big booStThe announcement of the Securities and Exchange Commission in April to allow companies to announce earnings and other materially relevant information on social media channels is set to boost uptake.

“The SEC announcement gave people a sense of comfort that social media is OK. This means that the role of social media will definitely grow.” ProActive CEO Ramson says. “Our services enable clients to use a single, technology platform that can push out their corporate news and engage with the millions on Facebook, Twitter, LinkedIn, and many more. More recently, ProActive has been utilizing newer platforms such as StockR and BoardVote that both have growing investor interest.

“The Proactive Capital team understands the needs and responsibilities of publicly traded companies because we’ve managed them, worked for them, and have in-depth knowledge of the financial markets, and advising our clients on the proper way of interacting with the investment community. I truly believe that digital and social media is the way of the future and it is vindicating to see our regulators agree,” Ramson adds.

inStitutional tradErS arE Still CautiouSBut OneMarketData’s survey suggests that while interest in adopting social media for trading purposes is high, so is caution. More than half of respondents said that social media creates opportunities for capturing alpha on a daily basis, and 85.5% said they believe social media offers faster news dissemination and analysis than traditional media outlets.


SO

CIA

L M

ED

IA

Source: OneMarketData

Americas +1 212 209 1420 Europe +44 (0) 20 7997 7800Asia +65 6538 1489 Email [email protected]

KCG | Connecting Investors and Markets Worldwide

KCG’s Award-Winning FX Marketplace

© 2013 KCG Holdings, Inc. All rights reserved. KCG Hotspot FX LLC is an indirect wholly-owned subsidiary of

KCG Holdings, Inc. For additional information about KCG Holdings, Inc. (NYSE Euronext: KCG), please visit www.kcg.com.

Your Source for Alternative Liquidity

KCG Hotspot brings together innovative technology and a diverse client base to create an optimal trading environment with deep and unique liquidity - that you won’t find anywhere else.

To experience the Hotspot difference, visit www.kcghotspot.com.


However, only 18.2% of those asked said they were using social media data to inform their trading decisions and 46.3% said they don’t plan to use social media in trading decisions.

There are a number of factors that have held up the more wide-spread use of social media in recent years, but signs are accumulating that the use of social media data could surge exponentially as regulators and the industry work their way through resolving problems.

Kilduff says of the current state of social media in the FX markets: “When it comes to social media being treated as a credible source, there are more sceptics than adopters across the market. In part, this is driven by strict compliance laws that mean the majority of the Wall Street cannot access social media,” Eagle Alpha has developed a tool to overcome this problem, launching a service called Social Sonar. (see box at the end of this article) “Analysis of sites such

as Twitter is only part of a much bigger picture, the entire web is full of information that could provide fresh investment advice if analysed correctly from CEO blogs and to employee forums. That’s why we launched Eagle Alpha as we see the potential in online information for investors and traders,” Kilduff adds.

Ransom agrees that choosing credible sources on social media sites is paramount. “Social media is a vehicle for people to express opinions and it’s great that you can do things like crowd sourcing but the difficulty is identifying the most credible sources on these sites. You can’t ask whether social media is credible or not, the questions is more about whether you can you select your sources well.”

Banks are slow to get with the flowCompliance issues and the fear of backlash from a badly thought out strategy (A large American bank recently provided an unwitting and cringe-worthy demonstration of the perils of social media misuse.) are also impeding growth and uptake on the institutional side.“What banks can do right now is using social media to grow their profiles by distributing macro ideas and some research on social media channels. That would only make them look better,” Ramson reckons.

Banks are also slow off the mark to utilise social media as a channel to connect with clients more deeply, says Jon Vollemaere, co-founder of LetstalkFX.com. He adds: “There is too much red tape. But the one that does will grab some market share. Customers don’t want to read a 16 page PDF, they just want the headline and will read/click into the reasons if intrigued. Easy to do and yet not one of the big banks are doing it.”


SO

CIA

L M

ED

IA

Jeff Ramson

“The SEC announcement gave people a sense of comfort that social media is OK. This means that the role of social media will definitely grow.”


But large sell-side participants are turning to service providers like Eagle Apha for the best way to dip their toes into the social media space. Kilduff says: “More and more sell-side firms are turning their attention to new tools that bring previously unmonitored information into play. A number of firms are currently using our own technology which not only provides them

online intelligence on currencies compliantly and efficiently, but also enables market participants to react before their competitors through unique analysis.”

Foreign exchange is catching up, slowlyJon Vollemaere highlights the difference between social media in its raw form and in a data form: “Is

social media treated as a legitimate source of information in FX? Social media: No. Social media data: Yes. Particularly in the hedge fund space, news and research, and in the news-based trading arena. A CME floor traders look at 3 screens, CME data, Bloomberg and Twitter.”

“It’s certainly being used as a trading advantage by the clever shops - if they don’t like to talk about it. You know they’re making money using it,” he adds.

The reason why equities markets are more ahead with utilising social media in trading strategies is the fact that opinions expressed on these sites are very entity specific. Currencies on the other hand are affected by a large number of different factors and trading is decentralised.

Kilduff says: “When it comes to forex, the value of currencies can be determined by so many different factors, from interest rates to broad economic trends. Information on these topics is being published online all the time but with a seemingly never ending amount of relevant information out there, the challenge is finding it. This is why, tools that enable firms to filter credible online data from general online traffic are vital. That’s how you turn online information into a legitimate source of information in the FX markets.”

Lovas says he doesn’t expect wide-spread adoption of social media as an input into FX trading decisions just yet, although he admits that with advances in turning tweets into sentiment data, “Social media is very directed at an entity level and that will make it harder to use in currency markets. There are so many inputs and influences to the price of currencies, much more than a listed stock. I don’t think it’s going to happen in 2014 but after that all bets are off.”


SO

CIA

L M

ED

IA

Source: OneMarketData

The most prominent way social media has changed FX trading is the possibility for big name investors to communicate messages to a much wider audience.

“Whether looking to access information through social media or more broadly across the Web, organisations need to use a combination of technology and expert human curation to source new insights. Recently, we spotted a really interesting tweet by U.S fund manager Bill Gross that led to the Mexican Peso gaining 0.60 per cent,” notes Kilduff.

A tweet from a well-established investor can also have an effect on how traders view future price moves, especially in retail currency trading where traders can decide to follow the strategy and go short or long on certain pairs because a well-respected investor said they are doing the same.

“There’s a guy in India with 2,000 auto trade followers on his account. Depending on the time of day and

on the currency, that’s almost market moving in itself,” says Vollemaere.

social media democratising Fx tradingEagle Alpha’s Kilduff says: “With the explosion of information on the web investors are missing out on crucial data if they rely on traditional sources. Therefore, as well as sourcing the latest opinions from sell-side currency research, investors should be considering the views of anyone who has an informed and potentially influential opinion on what affects currency markets. Previously, you had to rely on heads of currency desks for this key information, but we are now tapping into other sources of information to enable the buy-side to make smarter long-term investment decisions.”

Alon Levitan, Head of Product Marketing at eToro agrees with a definitive yes. “Social media has started the revolution, and eToro has taken it to financial services. eToro’s

model is based on transparency, simplicity, sharing and copying, low cost and very low minimal investment thresholds is driving the democratization of the financial markets, making investment appealing to an audience that would have otherwise shied away.”

social media and the retail market“Retail currency traders use it as a desktop tool, watching Twitter and responding to those tweets in his own brain. The buy-side and quants are one step ahead as they are looking for alpha whilst cutting costs so they are looking for any edge.” Says Lovas, adding: “When a big name makes an announcement on Twitter it’s a big deal. Instead of telling a small number of people about a strategy, they announce it to billions. It’s a huge difference.”Retail traders also benefit from a growing number of community tools that utilise social media for trading purposes. Vollemaere says: “In most technology advances retail players are the clear leaders. They all tweet out data and trade ideas to customers and the customers can not only reply but talk amongst themselves. eToro is now using Twitter as their distribution network. A gamble on the diffusion side


SOCIAL MEDIA

Jon Vollemaere

“It’s certainly being used as a trading advantage by the clever shops - if they don’t like to talk about it. You know they’re making money using it,”


but a huge boost on customer acquisition.”

The boost is clearly visible. eToro now has more than 3 million users and it is fast approaching its 100 millionth trade. Levitan at eToro says: “The old way of investing in the financial markets is in decline – the general public is looking for new ways to access the markets and that’s exactly what online, social trading communities offer.”

Levitan adds: “eToro is unlocking and democratising the financial markets. We have removed the barriers to entry for investing, making investment accessible to all individuals. Anyone with as little as $50, can invest, trade and copy through eToro. We have learned along the way that people who harness the power of our social

network and copy other traders are more profitable than those who go solo – that’s one of the huge benefits of eToro’s social investment community.”

“We aren’t a retail broker in

the typical sense; we are a social investment

network helping retail investors get the most out of the markets by combining investment with social concepts. When people join our community, we encourage them to share and copy trades, we are combining investment with social concepts. Our network is about transparency – every percentage made or lost is visible to the entire community. We also have blogs and forums with educational materials and part of those are written by people from our community. The combination of these enables our members to learn how to make

better investments. Our social investment model also makes investment more lucrative. People who harness the power of our social network and copy other traders are more profitable than those who go it alone. Data from our community shows that copy trading is 30% more profitable – this data also appears in a research conducted with MIT labs.”

Buy-side participants are ahead oF the gameSome buy-side participants, especially technologically sophisticated hedge funds, are ahead of the curve and utilize social media in their trading strategies.

Vollemaere says: “Smart buy-siders are already using social media for trading. Until now the only way to gauge reaction was price and volume. Now you have access to real time reaction, and more importantly, its length of affect. That is how long will it take for that news to be digested and lose its value. Picking the contrary move after the news effect is much easier.”


SO

CIA

L M

ED

IA

Emmett Kilduff

“When it comes to forex, the value of currencies can be determined by so many different factors, from interest rates to broad economic trends. This is why, tools that enable firms to filter credible online data from general online traffic are vital.”

Alon Levitan

“The old way of investing in the financial markets is in decline – the general public is looking for new ways to access the markets and that’s exactly what online, social trading communities offer.”


Other buy-side participants are subject to stringent compliance rules that have hindered the take up of social media for trading. But now, there are tools available to close the gap.

Kilduff says: “The vast majority of buy-side participants do not have the ability to access social media

due to compliance restrictions. That said, the buy-side cannot afford to ignore the online world as it is full of information that could provide fresh investment insights if analysed correctly. This is why we have developed a number of tools which enable the buy-side to source investment intelligence from web in a compliant friendly manner.

One of these tools is our Global Macro service, from which investors can access bespoke and exclusive information on macro trends to support long-term investment strategies.”

The future for social media in financial markets is not only bright, it is also right now.

SOCIAL MEDIA

Eagle Apha is the company that developed the world’s first compliance-friendly channel to access Twitter and allow traders at banks to leverage a host of untapped alpha-generating information. The service is called Social Sonar and it’s designed to overcome the compliance-hurdles associated with accessing Twitter efficiently in the trading environment, thereby allowing access to the most relevant insights in the market.

Social Sonar channels alpha-generating tweets to traders, asset managers, retail investors and corporates, providing unique insights to inform investment strategies. Using technology and a large team of research analysts, Social Sonar builds lists of the most influential people to follow and allows users to custom build specific lists in areas of interest.

The company says Social Sonar allows traders to get news faster than the market, and even information that other market participants may miss out on. Sometimes the difference between profit and loss can depend on minuscule differences in the information dissemination process, a race in which Twitter can allow traders an edge.

“Twitter is full of alpha-generating potential,” says Emmett Kilduff, CEO and founder, Eagle Alpha. “Currently this potential is masked by excessive white noise, inefficiencies in accessing relevant tweets and compliance concerns. Social Sonar changes all that. It provides alpha-generating insights direct to traders and investors in a convenient, controlled and auditable fashion.”

Unearthing relevant data is becoming increasingly difficult with some 135,000 new Twitter users each day. The service aims to overcome this difficulty by allowing

users to access validated lists, both pre-built and bespoke.

These lists include a wide-range of professionals commenting on market-relevant events, from UK CEOs to US Congressman and commentators. Eagle Apha says this approach enables investors to identify news before the market as well as other relevant insights from Twitter.

James MacLachlan, Senior Trader, CF Global adds his take on Social Sonar in the press release of the service launch: “From game-changing CEO opinions to instant reaction around key financial news and company reporting, Social Sonar is an essential addition to the run of the mill industry newswire services and gagged sell-side analysts.”

The service is available for hedge funds, corporates and retail investors, and all other market participants that seek an investment edge in the hunt for alpha in a fully-compliant way. Social Sonar is read-only and provides clear records and audit trails to meet all compliance requirements. Market participants are increasingly aware of the alpha-generation possibilities provided by Twitter, highlighted by a number of recent examples.

One such example was a tweet on 11th July 2013 that broke the news that Grayling was calling in the Serious Fraud Office to look into G4S because it had refused to cooperate with a voluntary forensic audit. Shares in GS4 dropped 7% when the first official press report was published by a newswire, 32 minutes later.

Evidence is stacking up that market participants can no longer ignore the role of social media and social media data in their search for alpha.

Social Sonar


While the jury may be still out on whether multi-asset class trading platforms are set to become a reality, or even if they are needed, many would agree that the days of siloed businesses and incompatible

systems are numbered. Trading more than one asset class from a single trading system is not new, and has been in practice, in Europe at least, since the late 1990’s. The ability to offer trading across the asset classes

Multi-asset class SBPs servicing a wider set of client needs

Competition from the ever increasing number of multi-bank platforms and greater diversity from traders is driving banks to re-evaluate and often rebuild their single bank platforms to offer cross-asset class trading functionality. Frances Faulds reports.

FX

E-C

OM

MER

CE a

nd

PLaTFO

RM

S

By Frances Faulds


from a single screen is giving banks an opportunity to provide their clients with added value through a more comprehensive view into the market, greater visibility of their core trading activities and greater assurance of best execution, while bringing the banks new revenue streams and increased ‘stickiness’ in the face of fast growing competition from the growing number of e-trading platforms.

While some banks have or are in the process of rebuilding their single bank platforms, others are looking at merging the information and services both within and across asset classes and combining elements such as pricing, trading, research and

technical analysis to deliver a more powerful and integrated trading environment catering for a wider set of clients with differing needs.

One recent entire rebuild has come from BNP Paribas, which launched CORTEX FX in March 2012. Luke Waddington, Global co-head of Electronic Markets for Fixed Income at BNP Paribas in London, believes being a recent entrant to the market gives BNP Paribas the last mover advantage: “We approached the build of CORTEX by having a digital strategy and unlike the build of a traditional single dealer platform, this strategy gave us ‘a container’ to offer our services into. This allows us to easily and cohesively distribute all

of our services, whether across asset class or at any point in the trade lifecycle.”

WorkfloW over WindoWsFor Waddington, the linchpin of the strategy is focus on workflows rather than windows. Too often banks attempt to scale their electronic offerings by creating new systems as additions to the current offerings; BNP Paribas believe a strategy linking the relevant parts of the existing solutions is preferable to creating yet more systems for clients to use. “We could have gone down the old route of building a big window of a single dealer platform in the traditional sense but we would have been stuck in a

FX E-COMMERCE and PLaTFORMS


very inflexible path, which cannot be easily adapted to accommodate the fast moving markets and flux created by regulatory change.”

The ability to trade across the different asset classes from a single platform brings many benefits, such as having a single point of access for best execution and being able to maximise trading and margin efficiencies. “It is not about what we want to do but what the clients want to use the platform for,” says Waddington. “At one extreme of the spectrum are the specialist clients who are just looking for a specialist FX or rates service, but at the other end of the spectrum are more general clients who want to have one place to do all their business. By having various workflows, we can offer a highly personalised suite of services to match client needs across the whole spectrum of front to back office needs.”

Waddington adds that the other asset classes FX clients want access to vary from client to client. Some are looking for other less vanilla products

in FX, some are looking for other cash products, such as bonds or futures, and others are looking for differ variations for hedging requirements of interest rate swaps or cross currency swaps. He says: “Rather than trying to work out the packages we are making everything available to enable the client to package up their requirements themselves.”

Waddington says BNP Paribas is well-positioned to cater for this growing demand for cross-asset trading because its platform is the youngest technology from a major Institutional bank and at its heart it has been built to evolve quickly. Often he hears from clients that BNP Paribas releasing incremental change every 3 weeks puts them ahead of the competition, where 2 or 3 releases per year are the norm. He believes strongly in the economies of scale: the underlying technology which generates each service should only be built once, and then distributed through many different channels, “There are certain distinct services specific to different assets, like pricing, but something like a blotter service should be built once and used many times. This is how you start to build a synergy in terms of investment in technology,” he adds.

The FX market is going through a period of unprecedented regulatory change but for Waddington, with the flexible workflows built into CORTEX, a regulatory change is simply another workflow, yet

another opportunity. He says: “So if we are going into a SEF environment, we can take and represent that SEF as a workflow to the client: rather than rebuild we can just rewire the workflow.”

CORTEX offers clients all common instruments in spot, swaps and forwards but has a particularly strong presence in local markets offerings and FX options, plus a highly-praised algorithmic execution product in CORTEX iX. Services beyond execution only are widely available across multiple asset classes, with examples in their award winning Global Markets research platform and deep post-execution automation and reporting.

While Waddington says that the demand is less for multi-asset platforms but for multiple services and more specialisation. “Clients don’t necessarily want a complete multi-asset platform but they want to be able to build and configure their own framework to suit their

Multi-asset class SBPs

FX

E-C

OM

MER

CE a

nd

PLaTFO

RM

S

Luke Waddington

“It is not about what we want to do but what the clients want to use the platform for,”

David Woolcock

“Clients have found electronic execution of FX to be remarkably efficient, bringing straight through processing, and they are now beginning to demand the same facilities in other asset classes.”


business needs; BNP Paribas are well aligned to offer this now. We don’t do a product-push model; we have designed a product-pull model depending on their needs,” he adds.

Single log-inMeanwhile, other players are also building on the efficiencies gained from access to additional asset classes from a single portal. BARX was launched more than ten years ago and the core FX platform includes money market and rates products as well as precious metals with execution in cash and derivative instruments.

With the dominance of multi-dealer platforms in the fixed income market, many of the single bank platforms have grown up out of FX, which is split more evenly between the large single bank platforms, like BARX, and the multi-dealer platforms.

Marek Robertson, Director, Global head of eFX Sales at Barclays says that its electronic platform delivery is central to its franchise and Barclays has built its platforms to be multi-asset for efficiency. He says: “If a client is a generalist operating in multiple product areas, for example, FX and money markets, then there is a clear user experience benefit to log-in to one screen to access a range of products from a large provider like Barclays.”

Barclays Live features all of the bank’s research content and analysis tools and is delivered both over the internet and within the BARX execution platform, through a single sign-on process. He says: “We aim to make the range of unique Barclays content available through a range of channels from desktop to mobile.”

Robertson acknowledges that incoming regulations are encouraging electronic trading through the mandates to centrally clear OTC trades and to trade on SEFs. This is moving clients towards electronic execution, with the associated benefits of transparency, efficiency and smooth processing of transactions. Separately, in line with this, Barclays’ prime brokerage business has built a common platform for OTC clearing across rates, credit, commodities and FX with the associated messaging and reporting layers.

Robertson says that the main difference between the single bank and multi-dealer platforms is that in the single bank environment the bank can afford to develop and experiment with new ideas based on the feedback from clients on a much shorter timeframe than a multi-

dealer platform, which needs to get agreement from multiple dealers to support any new product.

One such example of this has been the development of BARX Gator, which aggregates external order-driven markets to bring together interbank market liquidity from multiple venues and combine it with the BARX PowerFill orderbook and Barclays’ own liquidity. Operating on a fee basis, clients can choose to pass block trades straight into the public markets and, Robertson says, this has enabled Barclays to add a range of new algo order types, which complement its existing algo execution suite released four years ago. He adds: “We are constantly pushing out products, responding to client feedback, and delivering a much deeper offering within the FX asset class than multi-dealer platforms can hope to achieve.”


FX

E-C

OM

MER

CE a

nd

PLaTFO

RM

S

Clients don’t necessarily want a complete multi-asset platform but they want to be able to build and configure

their own framework to suit their business needs


GrowinG demandIT providers to the banking industry are already building sophisticated cross-asset trading tools ahead of the demand they see growing. Eurobase’s Siena e-Solution and Siena Rate Manager Products have been built to handle cross-asset input. David Woolcock, Global Head of Sales & Business Development at Eurobase Banking Solutions, a global provider of eTrading and treasury management solutions, says that there has been a shift in the way banks are organising themselves and there is a growing demand for multi-asset trading capabilities. He says: “FX, derivatives, options, NDFs and commodities such as bullion and metals are being more closely aligned. It began with FX and precious metals, which have always been traded together, and now other commodities are being included in the business line. This is naturally reflected in the single bank platform needing to handle those instruments.”

With the new regulatory requirements coming in Woolcock says that banks

are adding clearing and SEF-trading capabilities for NDF’s although, further down the line, banks are also already looking at adding FX option offerings to their platforms. He says: “Such developments for the single bank platform tend to be client-driven so the FX option offerings are request-for-quote mechanisms, where clients can request a price, get the price back, with the ability to do some basic delta hedge calculations on that.”

For Woolcock, these regulatory requirements are in some ways prompting the further

electronification of FX, and the other areas that sit within the same business area of the bank. “Regulatory drivers have meant that NDF’s are more likely to be traded electronically now than over the phone; NDF’s might have been an instrument where banks still had a fair amount of phone-traffic. With options, while the requirements may still be some way off, banks are seeing a demand to be able to trade FX options electronically,” he says.

Woolcock says that the natural fit between FX and commodities is down to the fact that some interest rate derivatives and other instruments are more likely to become more widely exchange-traded.

He says that banks are looking to expand their existing use of


FX

E-C

OM

MER

CE a

nd

PLaTFO

RM

S

Marek Robertson

“We are constantly pushing out products, responding to client feedback, and delivering a much deeper offering within the FX asset class than multi-dealer platforms can hope to achieve.”

Banks need to concentrate on their business drivers in the voice-market and come up with easily adaptable platforms

that can reflect what their clients demand of them


technology to encompass more of the asset classes. He believes there are quite a few banks that do not yet offer the tools for trading FX and commodities electronically and they are now looking to extend the reach of their single bank platforms to encompass all OTC trading in the Fixed Income, Currency and Commodities combined.

“As markets become more transparent and margins shrink, banks are looking for more efficient execution vehicles to expand the capabilities of existing electronic tools, rather than trying to amalgamate two tools together to replace phone trading,” Woolcock adds.

For FX options he says the key driver for this is the attraction of being able to delta-hedge options within the same application, but for the other markets, such as precious metals and commodities, the availability of them on the single bank platform is simply an evolution of the market, driven by client demand, more than banks trying to convert clients from the phone to electronic trading. “Clients have found electronic execution of FX to be remarkably efficient, bringing straight through processing, and they are now beginning to demand the same facilities in other asset classes,” he adds.

Woolcock says there has always been a mindset that other asset

classes will move to electronic pricing and execution as the market moves forward and where certain core interbank markets have been more driven by voice execution they have to become electronic first and FX options is a classic case for this. FX options have always been a hybrid market that has been primarily voice-executed but it is very difficult to provide electronic execution unless there is an electronic marketplace on which to base pricing so there has been an investment in tools by banks for the delivery of electronic pricing to their clients.

In order to future-proof their single bank platforms Woolcock believes


FX

E-C

OM

MER

CE a

nd

PLaTFO

RM

S

The ability to offer trading across the asset classes from a single screen is giving banks an opportunity to provide their clients with added value through a more comprehensive view into the market

banks need to go for solutions that exhibit the ability to be multi-asset class at their core, and can price electronically, and bring them on in phases so they do not have to bolt on additional capability at a later stage.

The e-trading market is complex and Woolcock believes that differentiating single bank platform offerings comes down to delivering what clients need. He says: “I don’t see the landscape being any more competitive than it was with voice-execution – customers have always had multiple banks to choose from. Banks need to concentrate on their business drivers in the voice-market and come up with easily adaptable platforms that can reflect what their clients demand of them.”

EfficiEncy of ExEcutionThe recent regulatory push for products to be traded on exchanges or SEFs where possible and requiring

certain OTC products to be centrally cleared is starting to blur the lines between exchange-traded and OTC – another reason why silos need to be broken down. Tom Robinson, Managing Director, Global Head – eFX Sales at Goldman Sachs says that adding other asset classes to its single bank platform, Marquee Trader, gives clients greater visibility and efficiency of execution.

However, he says, it is still undecided whether the industry is moving to a fully cross-asset execution model. “There is definitely more demand for cross-asset execution and this demand is getting stronger and stronger.” But while he thinks that commodities are a natural fit alongside FX, rates and credit are usually traded by different teams on the buy-side.

Robinson says: “Many banks remain siloed so creating a truly cross-asset platform is a real challenge. At Goldman Sachs we have listened to clients’ demands and Marquee Trader now offers FX, cash and derivatives products, commodities, US Treasuries and ETFs. Without doubt a merging of OTC and exchange-traded platforms is getting closer.”

It is clear that a concerted effort is being made to develop and innovate within the single bank platform. It is an extremely competitive space but the quality of innovation within the single bank platforms is impressive. Robinson says: “Work includes improving the depth of the content, developing execution tools and algorithm trading as well as giving

firm liquidity in less liquid products, for example vanilla and exotic options, emerging markets, and precious and base metals.”

The market is rapidly evolving due to client demand for more advanced execution tools, better pre- and post-trade analysis as well as cross-asset execution capability.

Robinson says: “The main advantage of a single bank platform is that it is completely configurable, in every way, so that as the markets evolve, pricing and content evolve, the single bank platform is the most bespoke product we can give to clients. The interest in multi-asset class trading is definitely there, and demand is growing. At Goldman Sachs, how we allocate resources is extremely important so listening to clients and building what will help them in their day-to-day business is paramount and one of these areas is without doubt the ability to trade cross-asset.”

conclusionThe move to electronic trading has been both an enabler and a reason for needing to trade across asset classes. Apart from the obvious need to use different instruments for hedging from those just traded, and the possible arbitrage opportunities, the growing number of electronic trading platforms in use, the need for greater straight through processing and execution efficiency has given rise to a greater focus on transaction costs and return on technology investment.

The build once/roll-out-to-many attitude that pervades the banking IT world today, and the need to use existing infrastructures, means that while specialisation can still be tailored for, the underlying technology needs to be consistent and compatible with other solutions across the enterprise. Single bank platforms no longer refer to trading in a single asset class.

Tom Robinson

“The main advantage of a single bank platform is that it is completely configurable, in every way, so that as the markets evolve, pricing and content evolve, the single bank platform is the most bespoke product we can give to clients.”



When ultra-low latency Java is essential to trading success

Learn how Zing can give you a competitive edge www.azulsystems.com/low-latency-java

AzulZing ®

Azul Zing® delivers Unstoppable Java: unmatched performance and ultra-low latency for all of your trading needs

Azul Systems, 1173 Borregas Ave., Sunnyvale, CA 94089-1306 USA | + 1.650.230.6500 | www.azulsystems.com

The New JVM Performance Standard

•Predictable no-pause performance

•Certainty of execution

•Eliminate tail risk of out-of-memory crashes

•No coding changes required

•No risk trial

Re-launched in 2011, LMAX Exchange may be a new kid on the FX block but its timing could well be perfect. Global trading volumes have been growing continuously for a decade despite the crisis and so has electronic trading. September 2013 research from Aite Group, entitled Electronic FX Market 2013: Ready for a Revolution, estimated that by the end of 2013, electronic platforms would account for 70% of all trading carried out in the global foreign exchange market. Against this background two other factors are playing a significant role.

Firstly, post-crisis regulation is pushing hard against traditional OTC trading in favour of more transparent market places. While all trading methods, from traditional

voice to the latest, low latency technologies, are all still current depending on client preference and currency pair, the trend towards exchange style execution looks inexorable. Second, the competitive landscape is changing dramatically and the once fairly well-defined demarcation between interbank and client-to-dealer markets no longer exists. Traditional interbank venues, such as EBS and Reuters, are facing direct competition from client-to-dealer platforms and increasing dealing banks’ unhappiness with the participation of API-driven automated trading firms on these venues.

Against this background, the arrival of LMAX Exchange looks prescient. Its trading volumes are rocketing month by month, as we shall hear from

David Mercer. Moreover its fixed costs and product lead time to market are both low enough to be able to keep competition at bay. The time for LMAX Exchange looks to have come.

David, you have more than 20 years’ experience in the derivatives industry and an extensive expertise in the leveraged FX business. Do you think it’s now harder to be a successful pioneer and achieve lasting change in today’s highly competitive and relatively mature capital markets than it was when you first started out?

I think it’s much easier now and more exciting. There has been a massive evolution in technology, the products traded and the accessibility

With David Mercer at LMAX Exchange Aiming high and growing fast - a unique vision for global FX

e-Forex talks with David Mercer, CEO of LMAX Exchange, the first FCA authorised and regulated MTF for FX.

Th

e e

-Fo

rex

In

Ter

vIe

w

80 | january 2014 e-Forex

january 2014 e-Forex | 81

The e-Forex InTervIew


to a wider audience. I used to have about eight screens on my desk, which cost a fortune to access a pretty simple market. Now you can get that on a web user interface (UI). I can remember sitting in a dealing room where the price of seat was $1m. Now you can access the market for the price of an Internet connection. That’s hugely powerful and very exciting.

People talk about regulatory change but that has always been there and, in any case, we believe in regulated markets. They bring about fairness and greater access for everyone.

I think it’s a fantastic time for everyone. The democratisation, that the Internet has brought, has opened the market up to places like India and all the emerging markets and, of course, everyone else on the street. Previously, they would have had to have called their bank or their

broker. So, I think there are huge opportunities now and it’s a very exciting time to be a pioneer.

Why are you such a passionate advocate of the “exchange model” and how would you describe the vision and ambition of LMAX Exchange for changing the way FX trading has traditionally been undertaken?

The real passion is to deliver market access to a wider community. In terms of the exchange model I am very happy if everyone at LMAX Exchange is called an exchange evangelist. That means that we believe in the equality and consistency of execution that you get from an exchange trading model.

I’m not on a crusade to change FX and I’m not critical of the FX industry. It has evolved to where it’s got to. There are now more

products traded and volumes have gone up five-fold in the last 15 years, reaching an estimated $5 trillion daily in 2013. So there is space for new players to bring something new, but all clients should expect ease of access and quality and consistency of execution in all financial products. We believe one of those products is spot FX and that this is the best way to trade full stop. We’ll see in the future whether we’re right or not. There is certainly room for us in the FX industry.

LMAX Exchange is well known for being very technology-focused. Why did you choose to make such a large investment in this area and what advantages does the scalability of your technology give you?

We did the heavy technology lifting, so that our partners don’t

With David Mercer at LMAX Exchange

Th

e e

-Fo

rex

In

Ter

vIe

w


To give you some numbers, at the beginning of 2013 we could process 5,000 orders per second. Now we can process 20,000 orders per second, so we have increased our capacity four fold this year. Our goal over the next six months is to increase this to 100,000 orders per second. There’s a lot of discussion in the FX market about speed and for us it is about message throughput. The more messages we can handle the more it allows our liquidity providers to price accurately at all times and it allows our buy-side clients to more often hit the price they seek.

Part of your technology has been open sourced, what impact is this having on the growth and success of your business?

This is hard to measure. But looking at it holistically, you want to have some fun, make some money and, hopefully, give something back. That’s part of our mind set here and part of the reason for open sourcing.

Now there are three recipients of this, our liquidity providers –

banks and non-banks, clients and then there are existing and future employees. So there is a proof to the banks and other liquidity providers that our technology is good. If you want to see that it’s good, just have a look at it. And just to endorse this, there are about ten banks that now use our open technology, so effectively we have given them some software for free.

Likewise some of the more techy clients, who like to build software and develop algorithms themselves, are also using our open source technology. This is because it enables them to process more messages more quickly.

Thirdly, it’s very hard to attract quality technology staff throughout the industry now. And not all of them are totally motivated by money. With technologists it’s more about problem solving and finding elegant solutions. For existing employees it’s great that they can show peers within the industry what they’ve created. I’ve recruited double-digit numbers of people


have to. Whether you’re a bank or a proprietary trading firm you can connect very easily to us. We invested up front in a matching engine that can accommodate up to 100 fold what we currently do in trades.

You have to do that because events can mean that volumes can shoot up to very large levels at any time and it’s no good for a client if, say, the Fed chairman or Mr. Draghi says something and you can’t cope with the volume. You’ve got to build for the peaks. At the same time if you do the investment up front it gives you the opportunity to expand more.

By investing heavily in a matching engine and exchange over the last three to five years we’ve been able to launch two new exchanges in the last six months. If you wanted to set up a new one now from scratch it would probably mean a 12 to 24 month lead-time.



Th

e e

-Fo

rex

In

Ter

vIe

w

who’ve approached us, because they learnt about us through our open source technology.

You have said in the past that “LMAX Exchange is a transparent and well-policed environment.” What did you mean by that?

Every marketplace needs some rules. And I don’t mean just capital markets. I look at E-Bay or Amazon and like them we have rules in place. We have a published rulebook, logged with the Financial Conduct Authority and available on-line to anyone.

The way I look at markets is like a game of football. It’s fun for everyone, but if there is one guy going round kicking everyone – it’s not fun anymore. It’s no good for

the spectators and no good for the participants. So you have this idea of yellow cards and red cards, so that no one can spoil the game.

In the FX market there are certain styles of trading that don’t benefit the marketplace and don’t serve any commercial value to us, as a venue. News traders for example, who only trade on news and probably trade quite rarely. I don’t think there is much value from people who only trade in that style though it must be said that we tend to do the most volume around news events, US non-farm payroll for example. I think that most venues should discourage news traders.

Likewise, there has been an evolution in the marketplace of people who look for arbitrage – technology arbitrage between

different platforms. There is not much point in hitting banks on this venue or that venue because you have a minor technology advantage. We discourage that and we feel that there is an obligation in all venues to discourage that.

It’s about KYC. We know our clients and we speak to them. We ask them to fill out a simple questionnaire. And 99.95% of our clients are open and get on and trade. Every once in a while someone comes along and says “this is the way we trade,” and we say “well, this is probably not the best place for you.”

What markets and instruments are now available to trade on LMAX Exchange and what type of traders and investors are increasingly being drawn to its trading services?



Today we offer 62 currency pairs, precious metals including palladium, gold and silver. We offer commodities including spot oil and all of the major indices. We are always looking to add more. We recently added platinum and palladium for example.

In terms of clients we are largely in the institutional space with a B-to-B model rather than B-to-C. Our main client segments are Broker Dealers, who may offer our products to their retail client base in other jurisdictions; followed by Money Managers, who may manage smaller accounts; the third segment is Proprietary Trading Firms.

We have some legacy retail business with a minimum account size of $10,000 for professional traders and high net worth individuals. We

expect to gain larger institutions in due course, but stay with our three main segments in the years ahead.

What range of access channels has LMAX Exchange made available to ensure that it offers the widest possible pathways to its services?

We offer access through Web GUI, full suite of mobile apps, FIX and API (.Net, Java). We also cover a range of languages. We want to be platform and market connection agnostic. We are always open to new methods of connection, if that is what clients want.

We operate a market place and we offer a fast, robust, reliable matching engine that we’ve invested time, effort and money in. We grant some of our clients technology that

they can use for their clients and we don’t make markets. Ours is a simple model and we need to stay agnostic about how people connect to us.

What steps have you taken over the last year or so to expand the LMAX Exchange user base, and has uptake amongst specific client groups been as you expected?

We are constantly aiming to widen our geographic distribution. We are always looking to get our message and our offering out there and we want people to add us to the venues that they trade on.

So far we offer 13 languages and have clients in 73 countries. We are looking to reach across all segments from funds to professional traders.



Th

e e

-Fo

rex

In

Ter

vIe

w

Can you tell us a little more about the recently launched LMAX InterBank and LMAX Institutional? What was the rationale for creating these venues?

LMAX InterBank and LMAX Institutional are the two execution venues we’ve launched this year. Once we established the technology they were quite quick to launch. LMAX InterBank was a natural evolution for us. We already had banking partners streaming prices into us, so it made sense to have a bank-only matching engine, even if it is a competitive space. It was relatively cheap to launch and we are gaining traction with 18 of the world’s top 20 banks connected and 12 of them actively trading. We feel positive about the traction and the feedback we’re getting. We’re still small, doing just a few hundred million every day but the volumes are increasing month-by-month. I expect this venue to really come to life in the latter half of 2014.

In what ways does your trading model promote firmer liquidity in the order book and improved execution for participants?

Our order book offers streaming firm limit order liquidity from top tier financial institutions. What you see elsewhere across the industry is what I term an “indicative price,” – “last look” in other words. Our venue has no last look as standard.

Every offer in the book is a firm order that can be accessed by all participants. The price you see is the price you get. You get quality of execution that’s still unique for spot FX, but has existed for a long time in other asset classes.

Do you view increased regulation across the capital markets as a burden that has to be managed or as an opportunity for fast growing, regulated trading venues like LMAX Exchange?

Regulation is a good thing and it gives all market users, whether it’s a professional trader or an asset manager, a reason to have confidence in the prices they receive and in the way transactions are executed. This in turn will promote further liquidity. Regulatory changes, and there are inevitably some that we don’t feel happy about, generally bring improvements. Dodd Frank is obviously an important one for us and we will get on and do whatever it requires of us.

Is there anything else that LMAX Exchange is looking to do to facilitate a more transparent FX marketplace?

While LMAX Exchange does not offer transaction cost analysis (TCA), we offer open market access and we are happy to share our data and place it

“Every once in a while someone comes along and says “this is the way we trade,” and we say “well, this is probably not the best place for you.””



to our existing one in the Equinix data centre in LD4. We have plans to open between one and four sales and distribution offices in 2014.

Ultimately, how will you judge whether you have succeeded at LMAX Exchange and achieved everything you set out to do with the company?

Our key performance indicators are linked to the interests of our stakeholders. Obviously we want to gain more customers and increase the flow through our venues and we believe this will happen if we have happy liquidity providers, clients, shareholders and staff.

Of course, we are playing to win and we want to be the leading FX venue within three years. Our volumes have grown at over 60%

alongside that from other sources. This enables buy-side clients for example to do their own TCA. They have full transparency so there’s not really much more we can do.

In general it is fair to say that there is likely to be more transparency in the FX market in the future and we are among the leaders in this. Everyone who trades on LMAX Exchange abides by the rules and they are free to check on our transparency.

What plans do you have for increasing the global footprint of LMAX Exchange over the next few years and how big a driver for your business is geography likely to become in the future?

We expect to add matching engine locations in North America and Asia

quarterly compounded for the last nine quarters (or since the re-launch of LMAX Exchange in Q3’11). Based on our calculations of the addressable spot FX market, our recent volumes give us 1-2% market share.

But the key thing is that we aim to make more dollars per million traded than our competitors. While our competitors are making roughly $3/million traded we make $15/million. Ours may fall in due course but because we have lower marginal costs to scale we have ample room to be profitable, as our volumes increase. Suffice to say, we are very excited about the future and that LMAX Exchange is leading the move to exchange trading which regulation is bringing about.

There is no doubt that the LMAX Exchange star is rising, but its market share is still small. The history of markets and technologies is littered with ventures that failed to fulfil their potential and with consolidations among players that could not establish themselves as the standard.

However, the LMAX Exchange offering appears to meet many of the requirements of the FX market at this point in history. And each new crisis and alleged malpractice in financial markets does tend to wrest influence from traditional methods of transacting, in favour of tighter governance and greater transparency.

FX is the most liquid market and, in the major currency pairs, among the most competitive that there is. The LMAX Exchange looks to have made remarkable inroads already and, led by David Mercer, it is certainly aiming high and growing fast. The next two years will show us whether LMAX Exchange can become the transaction venue of choice; its timing could hardly have been more fortuitous.


Regional e-FX perspective on

Dodd Frank, RMB and Mrs. Watanabe: Richard Willshire reveals how all signs point to a great leap forward for e-trading in Asia’s foreign exchange market, where regulation, trade in renminbi and the Japanese retail sector are the outstanding features in the landscape.

By Richard Willsher

REg

iOn

al e

-FX

PER

sPEc

tiv

E

AsiA


The preliminary results of the 2013 BIS Triennial Central Bank Survey of turnover in foreign exchange markets published in September show that daily volume in April last year in the three principal Asian centres of Hong Kong, Singapore and Tokyo amounted to USD1,032 bn per day. This was up more than a quarter on the same measure three years earlier. Together they account for 15.4% of global daily turnover, marginally less than the 16.2% in 2010 but the total was larger. Moreover the BIS findings are regarded as conservative by market commentators who say that they do not fully take account of internal netting by banks and broker dealers. The actual figure could be significantly higher.

Furthermore these BIS numbers take into account spot transactions, outright forwards, currency swaps and FX options but not futures. The change in the make up of instruments traded, and we look at this later, is showing a significant shift. For example CME, which offers 61 futures contracts and 31 options out of its Singapore exchange says that its turnover in Asia has risen by 30% in Asia over the last year, albeit from a low base. Change in Asia’s FX market is happening rapidly and nowhere more so than in Singapore.

SingaporeThe Monetary Authority of Singapore has been quick to seize on the BIS triennial statistics as

proof of Singapore’s emergence as the region’s leading FX hub. “Our growing strength in foreign exchange is a key complement to the development of capital market and asset management activities,” stated Jacqueline Loh, deputy managing director at the Monetary Authority of Singapore. “It will also better position our financial center to serve the investment and risk management needs of financial institutions and corporates throughout Asia.”

Singapore overtook Tokyo in April 2013 as the transacting 5.7% of daily global turnover worth USD383 bn versus the Japanese capital’s corresponding 5.6% and USD374 billion. But, as Ms. Loh highlights, the overall numbers are only one measure of Singapore’s growth.

“Growth is the result of a combination of several factors,” agrees Aiyana Currie, UBS’s Singapore-based executive director and head of FX e-commerce sales for Asia Pacific. “Singapore has become the Asia sell-side hub for trading FX, with firms moving offices from home locations in Australia, Japan, and Hong Kong as well as from smaller centres to centralise trading operations in Singapore. Further momentum has come from an expansion in the alpha-generating community trading FX from Asia as a whole, with many players coming to Singapore. At the same time, locally-based hedge funds as well as institutional and

Market 2010 volume

2010 global %

2013 volume

2013 global %

Hong Kong SAR

238 4.7 275 4.1

Japan 312 6.2 374 5.6

Singapore 266 5.3 383 5.7

Total 816 16.2 1,032 15.4

Courtesy of Bank of International Settlements: Triennial Central Bank Survey 2013. Net-gross basis, daily averages in April, in billions of USD and percentages



corporate investors are opening Asia-based offices in Singapore. Over the last few years, there has also been a trend for former night-desks in the US to relocate to trade Asia in an Asian time zone.”

Interestingly, one of those night desk shifts has been the Swiss central bank that has chosen Singapore as its Far Eastern location from which to assist its exchange rate control policy.

“MAS and the Singapore Government is very focused on creating employment and the result is a great environment for firms to be located,” enthuses Chris Knight, head of e-trading (East), FXRC at Standard Chartered Bank. “Singapore has a rapidly growing wealth management sector being serviced locally. Regional banks are getting stronger and winning more market share as they do not have to deal with some of the balance sheet constraints of the western banks.”

Javier Paz, senior Analyst at research and advisory group Aite adds, “What makes Singapore unique is its location. It is effectively positioning itself as the Geneva of Asia where a lot of wealth is stored. It has great links with London and Luxembourg and it has prudent regulation to support that. Overall it inspires confidence of many nations in the region who feel comfortable with doing business there. There is significant exchange activity and the infrastructure, there is no doubt that it has become one of the primary hubs for its region.”

TokyoAlthough Singapore’s growth as an FX trading centre is impressive, Tokyo’s role in the region should not be understated.

In terms of infrastructure, Tokyo is Asia’s main connectivity centre. Its powerful TY3 data centre is used by 13 of the leading global banks and

more than a dozen high frequency traders are located there, as is EBS’ matching engine. It is the place to be for ultra low latency and it is a single hop, in terms of data transmission, from there to either London or New York. Furthermore, while the recent jump in growth of retail trading volumes in Tokyo has been phenomenal (see panel), Japanese economic policy dubbed “Abenomics” has also stimulated activity across the financial markets in a major way, including FX. Jonathan Woodward, head of Asia Pacific at Thomson Reuters owned FXall points out that trading by the major Japanese funds and banks is highly electronic and it may not be as inaccessible as some in the market suggest. “Japan has a USD5 tr pension market,” he says. “About 50 fund managers there have been trading electronically for about the last 10 years. Many of these fund managers are now using FXall solutions. And some of the global players are using FXall to trade in Japan and other Asian centres as well.”

Buy Side demandWhile buy-side demand for FX services was, in the past, driven by import / export business and transacted OTC, often by voice, the market has moved on considerably in the last decade. Since then trading has shifted to e-platforms.

“It could be argued that the independent brokers and ECNs were key in developing the sector, with constantly evolving platforms and online services, highly competitive pricing and access to a wide range of products,” says Mark Hanney, CEO at Valbury Capital, the London based broker with strong links to Asian clients. “This functionality has increasingly impacted on the corporate

Regional e-FX perspective on Asia

REg

iOn

al e

-FX

PER

sPEc

tiv

E

Aiyana Currie

“Singapore has become the Asia sell-side hub for trading FX…”

market – perhaps in a not dissimilar way to the iPhone impacting on Blackberry’s business email dominance. Competition amongst ECNs and single dealer platforms has shifted liquidity into more exotic pairs in search of alpha making opportunities. At the same time these platforms are now starting to offer aggregated feeds for not only spot, but forwards, NDFs, options and swaps.”

At UBS, Aiyana Currie stresses the importance of segmenting clients. “While each client is unique, buy-side players tend to fall into three broad categories

which helps us cater to their specific requirements: FX alpha-seeking clients typically macro funds or proprietary trading firms; banks or brokers executing on behalf of their clients; and companies or non-bank institutions funding or hedging other assets. However, there has been a spike in demand for electronic execution facilities from all three groups.”

Currie notes that many buy-side clients are seeking to “reward a smaller number of sell-side relationships” which has tended to draw them to single-bank platforms from which they



Japan’s retail boom“We’ve seen a huge jump in retail trading activity starting in December 2012,” says Aite’s Javier Paz who has studied the Japanese retail market in detail. “This continued at a high rate throughout the first two quarters of 2013. And when I say “jump” I mean a more or less doubling of volume as compared to the first half of 2012. Although this is true of retail, we have also seen a corresponding increase in spot trading volumes on the institutional trading side and from corporates as well. It appears that they also wanted to trade off the back of Abenomics – though we can’t be sure.”

Paz goes on explain that about 90% of trades on the retail side are in EUR/YEN and USD/YEN with something of the order of USD150 bn per day being traded. Brokers such as GMO Click Securities, DMM Securities, IS Holdings are major facilitators of this trade and report volumes as large as many ECNs in the west. “That is remarkable. But a good deal of the trade is netted internally, buyers against sellers. So when BIS reports, it is based on the net figures provided by dealers and there is a whole lot of trading that never sees the interbank market,” adds Paz.

FXall’s Jonathan Woodward says that the fluctuation in the Yen has created great opportunities for retail traders.

Noriyuki Fujita, senior consultant at Nomura’s FX Department in Tokyo notes that the Japanese retail FX market grew dramatically in line with the recent Yen depreciation but he says that price competition has become more intense among brokers. “We expect more non-Japanese companies to enter the market in the near future.”

Suffice to say Japanese retail traders, often pictured as home-based “Mrs. Watanabes” are reckoned to account for the bulk of retail trading in Asia. This may change however with the growing wealth of Asia’s middle class, the wider availability of electronic trading across all countries in the region and the spread of Japan retail brokers’ influence into other geographical markets in due course.


may access research and, at the same time, speak to key contacts.

“While some firms have adopted a multi-dealer venue, in many cases, they continue to place a high premium on the bank relationship and openly share market-share data with us, which has the mutual benefit of improved spreads and increased share for the sell-side firms who provide additional services beyond price.”

The counter argument suggests that market participants want choice of execution. “While asset managers have been electronic for some time there is growth [in electronic trading] now among the corporates who have traditionally traded on the phone with the bank that provides their funding,” says FXall’s Jonathan Woodward. “They are learning that the FX flow can be separated from the funding requirement. Corporates are keen to get better pricing and STP. By 2017 there will be as many corporates in Asia with annual

revenues of over USD250m as there are in the US. They are also catching up with the US in the USD10 bn plus turnover category, according to Boston Consulting Group. Across the board, there is a lot of wealth being created in Asia, and this is increasing the demand for electronic trading. Hedge funds tend to work with their prime brokers and retail flow is all electronic because of the need to keep a tight control of their positions and get in and out of the market quickly.”

This view seems to be supported by Nomura’s Noriyuki Fujita. “A lot of foreign banks have provided their FX platforms to major institutional clients in the past and ECNs also showed good penetration. Corporate clients were not regular users of e-platforms due to limited FX requirements. Some ECNs faced latency issues with retail FX brokers this year and lost market shares. Instead we have observed more asset managers shifting to ECNs in light of multi-bank pricing.”

Similarly regulation is driving change both to electronic trading and to multibank offering. “We welcome regulation because we are well prepared for it having our roots in corporate Germany in the early 2000s,” says Simon Winn head of sales Asia at multibank platform 360T. “Regulation is going to push more people towards competitive pricing. People will, I think, move away from single bank platforms. I see potential for consolidation

among the five or six main players. I think that five years from now this will be down to three or four multibank platforms.”

What becomes clear the more single banks and multibank facility providers you speak to, is how difficult is to make money and sustain a business long term off the back of spot and forward volume. Spreads have tightened, the entire FX scene in Asia has become highly competitive and it is specialised and value added services where margin is best available.

new and SpecialiSed ServiceSThe multibank platforms have been leaders in supplying pre- and post trade services. The products are not new, at least not in the west, but as FXall’s Jonathan Woodward points out, Far Eastern corporates have been slower to adopt them and in many parts of Asia they are still using fax and e-mail for their post trade settlement and accounting activities.

Simon Winn of 360T sums up the situation, “I don’t think you can sell


REg

iOn

al e

-FX

PER

sPEc

tiv

E

Chris Knight

“The knock-on impacts of the Dodd Frank swap execution facilities in 2013 and Europe’s MifID II rules coming in over 2014/15 will push the Asian markets to go electronic…”

Javier Paz

“Singapore is effectively positioning itself as the Geneva of Asia where a lot of wealth is stored…”



94| january 2014 e-FOREX

a platform purely on spot foreign exchange any more.”

“In our conversations with clients we prioritise NDFs, Swaps and Options over Spot FX as this is where we believe we can add most value. A large amount of the time we spend with clients is in a consultancy style of role. We offer guidance as to what the next steps could be for a client to help them advance along the evolutionary curve of e-FX. This is very much a one way street as client’s progress gradually up it and almost never come back down it. It’s a KYC situation where you need to know who your clients are, where they are at and where do they want to go to within the eFX world. Our aim is to help smooth the journey and add value to the client. This can range from simple STP for spot traders to our “staging area” solution for Asset Managers enabling pre trade allocation and netting of block trades to reduce transactional costs. The post trade data we provide to both market takers and market makers is second to none as we realise that high quality MIS and TCA are increasingly important for both sides of a trade.”

Against this background regional banks in particular face the problem of keeping pace with the technology needed to provide full STP and also to stay abreast of regulatory changes.

“In Asia new reporting regimes are about to begin,” says Jonathan Woodward. “Reporting in Malaysia will begin on 9 January and in Hong Kong some time in Q1 2014. Some banks are in fact already reporting. It will be challenging for banks and buy-side firms to keep up with what is going on, and to establish the connectivity to the different reporting infrastructures. Additionally, market participants may have to report to more than one regulator if they are a foreign owned entity operating in a different market. Providers like FXall can help them with regulatory compliance by reporting trades on their behalf.

On the product side the road ahead points to more synthetic products and towards tech-driven capabilities. “Automated and algorithmic FX trading as well as FX Prime brokerage services are all growing in popularity across the FX markets,” according to Joseph Ng, Head for FX at Phillip Futures in Singapore. “The popularity of automated FX can be attributed to the increasing attractiveness of strategy-based platforms such Meta Trader4, which allows retail clients to participate in systematic trading. With growing sophistication of clients, we see algo/automated trading helping to increase trading volumes across Asia. FX Prime services which allow institutions to link up with one another, and financial institutions to be connected to one another, creates an eco-community among

financial institutions of various sizes, letting them assess one another’s liquidity. Again, this eco-system could create opportunities for growth in terms of FX volume.”

This view is echoed by Mark Hanney at Valbury Capital. “The ECNs and e-platforms now routinely offer electronic execution of forwards, NDFs and swaps. In addition to this we have seen a requirement for single API feeds that cover CFDs, indices and commodities to complement their existing FX offering. Guaranteed transaction and reduction of counterparty exposures are also key drivers for investors transferring FX business to exchanges. The demise of MF Global had a particular impact in this respect andthis trend is likely to continue, as regulatory pressure mounts for FX business to become more transparent.” regulaTion driving changeEveryone who spoke to us for this article mentioned how important regulation is becoming in shaping the future of FX in Asia, as in every other geography.

“Regulators want a centrally cleared market to regulate because in the absence of that they haven’t the ability to oversee the OTC environment.” That is how Aite’s Javier Paz summarises the post-crisis regulatory imperative though he has reservations about how far regulatory inroads into OTC trading have reached. He continues, “On the one side the BIS finds that OTC grew from 2010 to 2013 by more than $1 trillion in daily volume. On exchange grew from something like $5 - $15 bn and now stands at $170 bn. So you can see while regulation may have an impact going forward, the market is quite content on the OTC side. And if we look at the on-exchange trading in well-established markets like equities, trading in dark pools is not


REg

iOn

al e

-FX

PER

sPEc

tiv

E

Jonathan Woodward

“Corporates are learning that the FX flow can be separated from the funding requirement…”

No one offers you more ways to efficiently manage your risk and capital than CME Group.

• Access a deep, global and increasingly diverse FX liquidity pool

• Trade 73 futures and 31 options spanning 22 currencies

• Clear 12 OTC NDF currency pairs and 26 Cash-Settled Forwards

There’s never been a better time to participate in the world’s largest regulated FX marketplace. Learn more at www.cmegroup.com/fx

$140

120

100

80

60

40

20

0

2003

Val

ue

in B

illio

ns

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 YTD

$112 BillionCME Group FX Average Daily Notional Value

FX Options Volume

UP 48% year over year

85% executed electronically

Open Interest

$256 Billion

Clearly. A TREND WORTH FOLLOWING.

This communication does not constitute a Prospectus, nor is it a recommendation to buy, sell or retain any specific investment or to utilise or refrain from utilising any particular service. This commu nication is for the exclusive use of Eligible Counterparties and Professional Clients only and must not be relied upon by Private Clients who should take independent financial advice. Chicago Mercantile Exchange Inc. is a Recognised Overseas Clearing House (ROCH) recognised by the Bank of England. Chicago Mercantile Exchange Inc., Board of Trade of the City of Chicago and the New York Mercantile Exchange are Recognised Overseas Investment Exchanges (ROIEÕs) recognised by the Financial Conduct Authority.Issued by CME Marketing Europe Limited. CME Marketing Europe Limited (FRN: 220523) is authorised and regulated by the Financial Conduct Authority in the United Kingdom.CME Group is a trademark of CME Group Inc. The Globe logo, CME, Chicago Mercantile Exchange and Globex are trademarks of Chicago Mercantile Exchange Inc. CBOT and Chicago Board of Trade are trademarks of the Board of Trade of the City of Chicago. NYMEX, New York Mercantile Exchange and ClearPort are trademarks of New York Mercantile Exchange Inc. COMEX is a trademark of Commodity Exchange Inc. Copyright © 2013 CME Group. All rights reserved.

*Volume and Open Interest figures are based on notional values as of October 31, 2013


falling but it is actually increasing. The exchanges meanwhile are fighting back to get traders to send more traffic their way.”

He goes on, “The overall trend is to move to electronic from voice although there are periods of high volatility in the market when voice does have a place in the market. So it has not gone altogether. Right

now regulators and the press are looking at how voice might have played a role in the fixing scandals, so that is not a good omen for voice either. In addition internal compliance may push for more oversight, which may have an effect on voice. There are new exchanges like LMAX and CME in Asia. The current fix scandal gives more ammunition to those who feel single

dealer platforms do not provide the best value.”

Unsurprisingly perhaps, though for capital efficiency reasons rather than those of transactional cost, CME Group’s Derek Sammann, senior managing director, FX, metals and options solutions, sees exchange trading as the road ahead. “Migration to on exchange is already happening. We have overtaken ICAP’s EBS platform in terms of average daily turnover and this is being driven by market expectations of Dodd Frank, EMIR and Basle III. Basle III probably has the biggest potential impact in terms of product choice because capital charges and margin requirements in terms of market-traded derivatives are more beneficial than cleared products, which, in turn, are more efficient than bi-lateral products. So from what we know so far, trading FX OTC bilaterally is going to get very expensive. You can reduce the capital expense firstly by clearing it and then reduce it again by trading it on exchange.”


REg

iOn

al e

-FX

PER

sPEc

tiv

E

Japan Retail FX: Average Daily Trading Volume, Q4 2008 to Q1 2013 (Daily volume by quarter and major currency pair in US$billions)

Sour

ce: A

ITE

Gro

up

At Standard Chartered, Chris Knight also sees regulation as applying significant pressure. “The knock-on impacts of the Dodd Frank swap execution facilities in 2013 and Europe’s MifID II rules coming in over 2014/15 will push the Asian markets to go electronic. As the large US and European liquidity providers become required to execute trades electronically, it will also lead to a standardisation of hedging instruments. The next big change will also be an increase in NDF clearing once the US starts the ball rolling by mandating it for all US parties.” But perhaps the biggest change in regulation and which, for Asian markets, is the elephant in every dealing room and on every platform, is a relaxation of rules rather than additional constraint; it is the steady liberalisation of the renminbi. RMB and the futuReSimon Winn of 360T provides some context, “If you look at the trade backed volumes of USDJPY versus the total FX transactions then you are looking at a ratio of less than 1%. If you apply the same ratio to the RMB then we have got a huge market waiting to open up.” Winn

describes the manner in which RMB internationalisation has so far been handled as “extremely professional” and, of course, no one knows when, and even if, full convertibility of the RMB will be achieved.

Nonetheless competition is already hot to become a force in the offshore trading of the currency of the world’s most populous nation. On 8th October 2013 the bank-owned communications network SWIFT announced that RMB is now “the 8th most traded currency in the world… overtaking the Swedish

Krona, The Korean Won and the Russian Rouble.

Right now CNH’s natural home is Hong Kong and no one knows whether Shanghai might become the Chinese currency’s chief trading hub, should full liberalisation come to pass. Meanwhile Singapore is making its position clear. “As an international trading and financial centre, Singapore will seek to support the growth of a resilient offshore renminbi market in the Asia region,” said Tharman Shanmugaratnam, chairman of the Monetary Authority of Singapore (MAS) speaking at a conference in Singapore. “Singapore can leverage on its strengths as a

Regional e-FX PeRsPective

january 2014 e-FoReX | 99

Derek Sammann

“Migration to on-exchange is already happening...”

RMB as world payments currency

Source: SWIFT W

atchSource: SW

IFT Watch

key wholesale funding centre to increase liquidity and circulation of renminbi in Asia – it has traditionally supported the liquidity of the Asian markets and can partner China in creating sustainable offshore use of renminbi,” he said.

The prospect of RMB liberalisation has resulted in a number of major international banks and service providers offering advice and on-shore and offshore RMB services already. These include HSBC, Standard Chartered and RBS among others. Aite’s Javier Paz says that China may become a major retail market in five to ten years. “The appetite exists but what needs to happen is an acceleration in liberalisation and a welcome to volatility in exchange rates. We expect that EUR / RMB and YEN / RMB will develop into major traded currency pairs.” He adds a note of caution however, “The dollar is more worrying for China and its officials. Much of the wealth that they have amassed over the last years is in US Treasuries and they have a vested interest in not seeing that decrease.”

As a footnote to this, Jonathan Woodward’s view is that there

is going to be a great deal of new business done in CNH in the meantime but that there will also be many Chinese wanting to invest outside China. “A lot of the regional banks are looking to expand, across Asia and globally. And that includes the Chinese banks and they are looking for partners to help them do that.” FX is nothing if not a two way street.

Retail fXWhat the liberalisation of the RMB might in due course do for retail FX trading is an intriguing prospect. What if trading FX became as popular in the People’s Republic as it is in Japan?

Meanwhile the Japanese broking houses are already stretching their operations beyond the coasts of their own home market. Some are looking to access Malaysia and Indonesia where onshore FX trading is not permitted but where electronic trading through offshore based brokers is active. In addition,

in both Hong Kong and Macau, the Japanese firms have also been reaching out to find local partners who wish to add retail FX trading to their offering. Javier Paz adds, “We may see interesting developments there but I have to say, Korea for example is a case in point, regulatory controls keep the market from growing as big as could be. The rules put a lid on speculation in Korea. It is early days. However there is a growing crop of Asia firms, from Monex to GMO, CCC (City Credit Capital) out of the UK. There are a number of firms who are seeking to raise awareness of FX regardless of the regulations. This will provide an impetus for growth in the region after Tokyo.”

OutlOOkLooking forward then, there are a number prospective avenues for the growth for FX trading in general. In all of them e-trading seems to be the only way to go, other than for those increasingly rare occasions when a one-to-one client-bank or client-broker conversation may provide better value or greater

100 | january 2014 e-FoReX


Reg

ion

al e

-FX

PeR

sPec

tiv

e

Simon Winn

“I don’t think you can sell a platform purely on spot foreign exchange any more.”

understanding of the opportunity than that available on-line.

Regulation is a major driver. Each successive move in regulation out of Europe or the USA brings a corresponding response from the Asian centres of Singapore, Tokyo and Hong Kong. It seems unlikely that there will be any scope for regulatory arbitrage once EMIR, Dodd Frank, Basle III and other post crisis regulation comes into full effect, although regulatory progress seems at times both glacial and uncertain. This has not however daunted those in the fund management, wealth management and hedge fund sectors from Europe and North America from taking advantage of the initiatives put in place by the Singapore and Hong Kong authorities to encourage financial sector firms and businesses serving those firms from setting up there.

Yet there may be new players that will arise from the Asian markets themselves. Javier Paz believes that there may be scope for a Singapore

or Tokyo based multidealer platform to develop. “It would be a firm or market that understands the unique requirements and workflows of the region,” he surmises. “I think it is only a matter of time before this takes place.”

The future of the RMB remains an unknown but the direction and the pace of liberalisation has been set by the new Chinese administration. Its move to set up free zones onshore to encourage financial sector firms to trade there is widely seen as a significant step towards the development of Chinese onshore financial centres. While foreign exchange transactions involving buying or selling currencies other than RMB remain tightly controlled, the RMB itself is being promoted as a currency to do business in, and which can form part of the currency management and planning of international companies’ treasury operations. Small step though it may sound, this move could well be a significant one along the path of liberalisation.

Mass MaRket fX in asiaMeanwhile the availability of cheap, easy-to-use electronic platforms and the massive growth of retail trading in Japan are setting a course for mass market FX to develop.

Research carried out by Homi Kharas of Brookings Institution, the Washington based think tank, concludes that by 2030, just 16 years from now, the global middle

class will number 4.9 billion people and 64% of these people will be located in Asia where they will have vast disposable income.

“A great deal of wealth will need to be managed by funds - fixed income funds, equity funds and so forth,” argues FXall’s Woodward. Inevitably this will be invested in assets outside their native geography and currency, requiring a foreign exchange component.

Whether that wealth derives from Indonesia, Malaysia, Vietnam, Thailand or indeed the People’s Republic of China, its fungibility suggests that it will gravitate to financial hubs that are open, politically stable, are efficient and are on the mainline in terms of communications with the global financial market place. Singapore is positioning itself in the sweet spot where these features intersect. No wonder then that it is attracting such a lot of financial market activity at this time and that it is rapidly growing its share of global e-FX activity at the heart of Asia.

Joseph Ng

With growing sophistication of clients, we see algorithmic and automated trading helping to increase trading volumes across Asia.

Mark Hanney

“It could be argued that the independent brokers and ECNs were key in developing the sector, with constantly evolving platforms and online services, highly competitive pricing and access to a wide range of products…”

january 2014 e-FoReX | 101

Regional e-FX PeRsPective


In the world of derivatives trading, 2013 will likely be remembered as the year of confusion, mad scrambling and anxious waits. Yet, as the end of the year approaches the trading landscape for non-deliverable forwards and options in foreign exchange looks like time has been rolled back several years. The lengthy process of consultation and rule-making finally came to an end in May this year when the Commodities and Futures Trading Commission issued its final rules on trading on Swap Execution Facilities (SEFs) and gave market participants until October to register and comply with the legislation. The credit and rates industry has been preparing for becoming SEFs for years, as it was clear from the original intention of the G-20 to make those instruments cleared and more transparent.

But currencies were left outside of clearing requirements apart from options and non-deliverable forwards, in which clearing is not expected to start until 2014 and 2016 respectively, making FX options and NDFs permitted instruments.

The currencies industry was confident that this meant there

was no need to rush with getting ready to become a SEF until when mandatory clearing in these products begins. Alas, with the final rules, this all changed.

The noTorious FooTnoTe 88 and iTs aFTermaThFootnote 88 is reportedly an afterthought that CFTC Chairman and his team wrote in the early hours just before the release of the final rules. It was meant to be little more than an afterthought, but in the end, Footnote 88 stunned the industry and threw it into a turmoil.

The now-infamous footnote required all multiple to multiple

dealers to register as SEFs, even those that only offer still permitted products such as NDFs and options. The CFTC issued a time-limited relief letter expiring 29 November, but the rush to meet deadlines has created operational difficulties that need ironing out.

“It is worth noting that the FX industry is still operating under the CFTC’s relief for FX confirmation and reporting requirements until November 29. The central issue is that bilaterally traded FX contracts are flexible and bespoke, which creates significant challenges for the implementation of a uniform and standardized legal confirmation

Swap Execution Facilities a difficult birth but a promising future in FX

Eva Szalay sets out to explore areas of concern that have be expressed by market participants regarding the operational procedures associated with SEFs and how these are being addresses by regulators and the industry.

SpEc

ial R

EpO

Rt


process,” says Paul Tivnann, global head of foreign exchange and commodities electronic trading at Bloomberg. “The lack of explicit rule-based guidance from the CFTC on this subject causes uncertainty and that can impact SEF activity, as participants require absolute legal certainty to execute.”

“Footnote 88 took a bilateral market and put it on an exchange without a clearer. There is no credit hub in place and that greatly reduces pre-trade clearing certainty,” says Chris Ferreri Head of Ecommerce at ICAP. “The buy-side needs not just liquidity but certainty of execution and at the moment SEFs don’t

provide that.”So far 17 trading venues applied for a SEF status, and 15 of those have been granted either temporary or permanent status as a swap execution facility. Both the sell-side and the buy-side now faces a raft of operational issues, and as the buy-side is not yet mandated to trade on SEFs, most trading migrated back to voice traders and single-dealer platforms.

“It’s like FX was hit in a drive-by shooting,” says the head of FX operations at a large bank. To many, it certainly feels like it has. Non-deliverable forwards and options account for less than 10%

of the $5.3 trillion FX market, and more than 40% of NDFs and 24% of options are already traded on or through multiple-to-multiple electronic trading systems.

sTern words To regulaTorsTrading platforms have been working towards guidelines for months before the final rules came out and their timeframe was based on a longer timeline, in line with expectations for when central clearing commences.

“Rates and credit has been preparing for the switch to SEFs but FX and commodities had only a 120 days, that in reality was only 90

SpEcial REpORt


days because of the 30 day approval period, and systems are just not ready,” Ferreri says.

In the end, the rush to meet the October deadline proved pointless. The CFTC extended the time-limited relief until 29 November after stern words from the industry.

Market participants say that the raft of unaddressed issues and the insufficient timeframe has resulted in reduced legal certainty and liquidity, reduced price transparency, lower quality of reporting and a reluctance to clear FX products voluntarily, and thereby it is inconsistent with the regulatory objectives of the Dodd-Frank Act.

One issue is the amount and expense of legal work that needs to be completed before registering as a SEF-compliant trading

participant. Clients need to sign separate agreements with each swap execution facility, even if they already have agreements in place with a particular trading venue. Aside from the workload associated with signing up for the more than ten separate platforms, each with differently worded rulebooks, the level of uncertainty means that rulebooks are constantly changing.

seF rulebooks noT ready To “go-live”“For the FX asset class alone, there are at least twelve SEFs offering FX products. These SEF rulebooks remain in a state of flux as SEFs continue to revise them to address regulatory requirements which continue to evolve,” writes James Kemp, Managing Director of the AFME’s Global Foreign Exchange Division, in a letter to the CFTC that is thought to be behind the regulator’s decision to push the relief period back to the end of November.Adding to the paperwork, each SEF operates by their own set of rules and have their own legal agreements that client’s lawyers have to trawl through, making the signing up process a very costly exercise and incentivising clients to

put off these agreements for as long as they can.

“Multiple-to-multiple platforms are legally required to be SEFs but clients don’t have to trade on SEFs yet. Clearing not yet being mandated is a huge issue and regulators haven’t even proposed clearing rules for FX. The sooner the rules are ready the better for everyone,” notes Vikas Srivastava, CEO, Integral SEF (ISEF™)and head of business development at Integral Development Corp.

us persons and The liquidiTy spliTSome multiple-to-multiple platforms are switching off US-based customers, including overseas branches of US banks, because they have no intention of registering as a SEF. US persons subject to the Dodd-Frank Act are not allowed to trade on venues not registered as SEFs.

Market participants fear that liquidity will be split between the US

Swap Execution Facilities – a difficult birth but a promising future in FX

SpEc

ial R

EpO

Rt

James Kemp

“In contrast to the practices developed and implemented by market participants over the past fifteen years to provide legal certainty and reduce legal and credit risk associated with trading NDFs and Options by establishing and incorporating into their confirmations pre-agreed standard trade terms, nearly all SEFs have not yet incorporated these essential terms into their confirmation processes.”

Paul Tivnann

“The central issue is that bilaterally traded FX contracts are flexible and bespoke, which creates significant challenges for the implementation of a uniform and standardized legal confirmation process,”


and other regions, which will create problems. Firstly, platforms that have registered as SEFs need to identify all the customers who might be subject to the requirements.

Trading platform 360T warned clients on its website: “360T is pro-actively engaging with its clients to ensure they have completed the appropriate documentation to allow them to trade on the Swap Execution Facility (“SEF”). This being said, 360T is equally aware that the Dodd Frank Act and CFTC SEF rules have significant exterritorial reach and, as such, we realise that we may not have identified all clients who could potentially be required to trade via our SEF. Please note that once a client is considered by 360T to be SEF relevant, users can only trade NDF, NDS and FX Options on the SEF. U.S. clients and

entities trading with U.S. clients will be blocked from trading these instruments if not enabled on the SEF.”

But the split in liquidity will likely cause more problems than just operational headaches. “Market separation between US and non-US entities can lead to a bifurcation of the market, affecting underlying liquidity and, in turn, causing spreads to widen,” Tivnann says.

Some US banks established fully independent operations in Europe to avoid missing out on trading opportunities on non-SEF venues.


SpEc

ial R

EpO

Rt

…the insufficient timeframe has resulted in reduced legal certainty

Vikas Srivastava

“For SEFs, one major issue is how they can serve banks and brokers at the same time as serving customers.”


But the impact of the liquidity split will be profound and may lead to problems in the future.

LegaL issuesThe reluctance of clients to get on board has also stunted banks’ willingness to make markets on regulated platforms, and instead conduct these flows as bilateral trades either through voice brokers or on their own single dealer platforms.

But paperwork is not the only issue. There is a lack of clarity on the issue of reporting and confirmation responsibilities, the role of prime brokers in a SEF environment, a lack of industry-wide protocol for handling execution agreements and also the ability of technology to handle the raft of new requirements.

The allocation of reporting and confirmation responsibilities is causing a real headache for dealers, who fear the new rules could increase the risk associated with trades. Until now, counterparties have traditionally been responsible for providing trade confirmations, but under the new rules SEFs are mandated to provide trade confirmations instead of counterparties. Industry participants are worried that this will weaken the legal underpinnings of a so-far robust system used off-SEFs.

“In contrast to the practices developed and implemented by market participants over the past fifteen years to provide legal certainty and reduce legal and credit risk associated with trading NDFs and Options by establishing and incorporating into their confirmations pre-agreed standard trade terms, nearly all SEFs have not yet incorporated these essential terms into their confirmation processes. This has created a

situation in which transactions in these products on SEFs are without the same robust legal underpinnings as an NDF or Option traded off-SEF.” Kemp adds.

This is a huge operational burden for SEFs as they not only don’t have the relevant information, but they are not certain what capacities they need to collate the required information.

“The SEF confirmation is just a receipt, a confirmation that the transaction took place. The legally binding ISDA agreements provide much more, such as jurisdiction of liquidation and other details of what happens when a trade goes wrong. What’s happening now is that SEFs are not only service providers but also regulators at the same time and that’s a difficult balance to get right,” Ferreri says.

Since the 2 October it has become the responsibility of SEFs to provide unique swap identifiers to counterparties so that they can fulfil their own reporting duties. SEFs also need to perform trade submissions of real time economic data.

Risk of duaL RepoRting SEFs are worried that the confirmations they can send now might not be compliant as the CFTC’s rules are yet to be clarified on the issue. Until that happens, confusion will continue to reign on who should be confirming trades and whether the confirmations are compliant with the law.

“Many SEFs are still unable to fulfill some or all of their newly assumed reporting obligations, including the

SpEcial REpORt

Market participants fear that liquidity will be split between the US and other regions, which will create problems

SEFs are not only service providers but also regulators at the same time and that’s a difficult balance to get right


reporting of price-forming terms of transactions such as “indication of collateralization” and “intended for clearing”,” Kemp says.

These omissions have led to a decline in reported data quality since rules came into effect 2 October and may have resulted in negative implications for swap dealers and major swap participants in their obligations for swap transactions reported by the SEFs.

For this, Kemp blames insufficient time for market participants to prepare, in the wake of footnote 88. For clients, this new requirement is a nightmare, as the CFTC says that SEF confirmation will supersede existing bilateral arrangements, potentially meaning that clients miss out on privately negotiated terms and lose out.

In general, SEFs only have access to dynamic trade details, but not

underlying netting, credit or other agreements between counterparties. There is a danger that these bilateral trade terms and legal agreements could become meaningless.

These master agreements are well-established industry terms and conditions that address the risk of potential market and sovereign events which could disrupt the value or settlement of emerging markets currencies underlying NDFs.

“These terms, whether standard or bespoke, are an essential part of the overall risk component of the NDF transaction and it would be disruptive to the marketplace if these terms are compromised simply through the execution of the NDF transaction on a SEF platform,” Kemp says.

estabLished pLatfoRms have an advantageThe issue of what happens if there is a technology glitch in

the confirmation process is also unresolved. Two banks trading through a broker could find themselves in a situation where the broker’s confirmation is incorrect, but as the broker is not liable one of the counterparties would have to obey the faulty confirmation nevertheless.

This increases the risks associated with trading due to potential mistakes and the lack of a resolution framework.

“The manual input trade recap with voice brokers will now be deemed a confirmation superseding all previous agreements under the transaction confirmation requirement (“TCR”) within Commission regulation 37.6(b), subjects participants to greater operational risk of errors,” Kemp’s letter says.

In this uncertain environment established platforms have an advantage.


SpEc

ial R

EpO

Rt


“FX swaps and forwards were explicitly exempt from SEF trading requirements by the US Treasury. As far as NDFs and options are concerned, in the absence of central clearing or execution mandates, SEF activity in ‘permitted swaps’ is a natural progression of existing electronic trading practices. As a result, electronic trading platforms with established liquidity and a mature client base have a clear advantage to facilitate trading in ‘permitted’ FX swaps,” Tivnann says. “In terms of differentiation, SEFs with multi-asset coverage offer significant operational efficiencies to customers with broad underlying exposures. In addition, execution is the culmination of a decision process, so platforms that aid all aspects of a customer’s workflow, such as idea generation, valuation, execution and risk management, provide significant client value.”

“Bloomberg has been providing derivative trading platforms for over a decade, so operating a multi-asset class SEF, integrated with the data, news and analytics of the Bloomberg Professional service, was a natural progression for us,” he adds.

Ferreri agrees: “Clients tell us that they find trading with us comforting, because they know we are an established player. You don’t want to trade with someone who might not exist tomorrow.”

pRime bRokeRageAnother unresolved issue is that of the role of prime brokers. In FX, prime brokers play a central role in allowing a growing segment of the market to participate in trading.

Prime brokerage uses a credit intermediation model where a trade executed by the prime broker is a trade between the dealer and the prime broker, unlike in direct execution where the trade is executed between two principals.

The prime broker has an offsetting trade with the prime brokerage client, but the client doesn’t act as principle to the trade it entrusted to its prime broker. Under current rules, SEFs don’t distinguish between direct execution and prime brokerage execution. Currently around 30% of FX NDF arrangements and 10% of FX options contracts are dealt through prime brokers, which means that the lack of differentiation would impact not only prime brokerage business models but the overall liquidity of a market that relies heavily on these participants.

opeRationaL modeLsAside from operational challenges, SEFs need to decide on their operational model. In a shock announcement CFTC Chairman Gary Gensler told participants at an industry conference that SEFs will have to move to an all-to-all model. In clarifying the “impartial access” rule, platforms that operate a request-for-quote system will have to change their models to all-to-all, impacting on the three largest operators, MarketAccess, Tradeweb and Bloomberg.

“What they are doing right now is a violation of Dodd-Frank and our rules,” he said at an event in New York. “They need to come into compliance,” he said. The limits at Tradeweb, MarketAxess and Bloomberg LP give an advantage to the dealers who created the swaps market in the 1980s, Gensler said. “They’re trying to keep exclusive to the dealers.”

But Bloomberg says the reality is that in absence of clearing the

all-to-all model won’t work. “ A mixture of operational models are currently offered, including request-for-quote (RFQ) and order-book-style platforms. However, in the absence of mandatory clearing, which would be required to set-up a true ‘all-to-all’ order book model, the predominant mechanism for trading FX swaps remains RFQ,” Tivnann notes.

Some market participants think that the all-to-all model provides an opportunity for brokers like ICAP to increase their market share.

“The all-to-all requirement does provide an opportunity for brokers to get a bigger share of buy-side’s business. Incumbents have an advantage and there are concerns that newcomers could start a race to the bottom in execution fees that could create problems later. All these rule have been written in a zero-rate environment and no one knows what will happen when rates rise,” Ferreri says.

SpEcial REpORt

Chris Ferreri

“Rates and credit has been preparing for the switch to SEFs but FX and commodities had only a 120 days, that in reality was only 90 days because of the 30 day approval period, and systems are just not ready.”


Most platforms expected the move to an all-to-all model, but just not quite so soon. This shift will be a sea-change for the industry, as dealers could lose their ability to pick and choose which asset manager they show prices to.

Under the current guidance big buy-side firms will be able to trade with each other, cutting out dealers. But as the guidance is widely expected to apply to interdealer brokers as well, the change could be even bigger as the current two-tier system of interdealer and dealer-to-client could eventually vanish.

But the approach also presents problems, as market makers might be reluctant to post prices in such an environment, especially if this means they have to compete with nimble hedge funds, which could negatively


SpEc

ial R

EpO

Rt

impact liquidity on SEFs. “For SEFs, one major issue is how they can serve banks and brokers at the same time as serving customers,” says Srivastava.

technoLogy conceRnsTechnology is also struggling to cope with the volume of work required. SEFs had just a few months to iron out kinks and make their infrastructure compliant with new rules. At the same time, the buy-side is worried about how the existing clearing infrastructures will have to be changed and about the number of on-boarding and coding processes that are needed to connect to a large number of SEFs. Sell-side firms need to choose between developing proprietary technology or white-labelling. Srivastava says: “Because of the

complexity of the rules white labelling is a compelling proposition. Building a new SEF involves a lot of resources and operational work and it’s not always worth it to do it in-house.”

While Tivnann notes that: “Any SEF is free to use proprietary technology, components and infrastructure it finds useful internally. However, instrument standardization and impartial SEF access rules, recently reiterated by the CFTC, are likely to mean external interfaces are standardized in order to facilitate streamlined access and interoperability of SEFs with clearing houses, FCMs, ISVs, etc.”

singLe-deaLeR pLatfoRms enjoy a boostThe complexity arising from balancing different customer needs will likely

Technology is also struggling to cope with the volume of work required

FX updates with high performanceVarious interfaces with automated streaming ratesSeamless integration of trading rooms in different locationsEffective control of prices

THE RATE ENGINE FOR FX AND MM

Find out more? www.digitec.de [email protected]

TIME TO LIVE

WATCHLISTS

AMOUNTS

EONIA

OIS

SPREAD MANAGEMENT

TURN DATES

SKEWING FED DATES

PLAUSIBILITY CHECKS

FUTURE EQUIVALENCE

HIERACHY OF FEEDS

FX FORWARDS

RATE COMPARISON

CORRECT HOLIDAYS

EXPORT THROTTLING

24-HOUR OPERATION

FWD FWD RATES

HISTORIC ROLLOVER

SUSPEND BUTTON

IMPLIED BASIS

PAR FORWARD

YIELD CURVES

MM FUTURES

lead to strong customer-oriented segmentation amongst SEFs. But for now, NDFs as FX options are allowed to be executed under any operational model, including the use of single -dealer platforms that are enjoying a boost from the uncertainty and difficulties surrounding SEFs.

“The irony of Footnote 88 is that single-dealer platforms have enjoyed a boost since the rules came in. It has delayed the start of SEF trading rather then launched it,” Ferreri says.

A new report by research firms Greenwich Associates concluded that the shift to single-dealer platforms could trigger consolidation amongst multi-dealer platforms. The report says that global trading volume on multi-dealer platforms climbed to 44% last year up from 38% in 2007 as single-dealer

volume dropped to 42% from 49% during the same period.

The biggest beneficiary of increased multi-dealer platform volumes until Footnote 88 was FXall with 29% market penetration followed by 360T with 18% and Bloomberg with 17%. The trend towards multi-dealer systems could however now could come to a temporary halt.

“Regulations requiring multi-dealer platforms to register as SEFs may drive more trading volume to single-dealer platforms in the near term as clients look to minimize the impact of new regulations on their trading process,” the report states.

the futuRe stiLL Looks bRight Despite the difficult birth, the future of SEFs in FX looks promising.

Market participants agree that once operational issues are ironed out, SEFs will make trading more transparent and efficient.

“An efficient marketplace offers transparency coupled with a choice of execution venues. If SEFs can offer these components they will be deemed a success,” Tivnann says.

Ferreri and Srivastava agree that eventually SEFs-trading will lead to a more efficient market place. Srivastava says: “SEFs will make trading more efficient and transparent once they are properly implemented and operational issues are resolved.”

For now, the industry is working full-steam to work out operational kinks and while a fully-operational market is some way off, it is certainly in the future.

FX updates with high performanceVarious interfaces with automated streaming ratesSeamless integration of trading rooms in different locationsEffective control of prices

THE RATE ENGINE FOR FX AND MM

Find out more? www.digitec.de [email protected]

TIME TO LIVE

WATCHLISTS

AMOUNTS

EONIA

OIS

SPREAD MANAGEMENT

TURN DATES

SKEWING FED DATES

PLAUSIBILITY CHECKS

FUTURE EQUIVALENCE

HIERACHY OF FEEDS

FX FORWARDS

RATE COMPARISON

CORRECT HOLIDAYS

EXPORT THROTTLING

24-HOUR OPERATION

FWD FWD RATES

HISTORIC ROLLOVER

SUSPEND BUTTON

IMPLIED BASIS

PAR FORWARD

YIELD CURVES

MM FUTURES

SpEcial REpORt


uncovering the real benefits of Institutional ECNs and new trading venues for the FX buy-side

Transparency, efficiency and innovation

With Roger Rutherford, Chief Operating Officer, ParFX, John Miesner, Managing Director and Head of Sales at KCG Hotspot

and Alan F. Schwarz, CEO of FXSpotStream LLC.

The e-Forex Debate

e-F

OR

EX

: D

EB

ATE


Do you agree with some commentators who believe the ability of many FX market participants to manage risk via electronic platforms has been degraded over the last few years and is therefore not as effective as they would wish?

RR: The global FX market ecology will always be in a constant state of flux and it is incumbent on everyone to keep pace with the changes. As the ecology evolves, market participants have to amend the way they execute and manage risk across all outlets, including electronic trading platforms. Developments over the past few years – such as the opening up of those platforms to different market segments, underpinned by low latency technology and the proliferation of market data products – is clearly causing concern. Hence the market’s push for greater equality and fairness, the core tenets of ParFX.

JM: No, I believe that the industry has developed very effective risk management tools that address the challenges posed by a fragmented market structure and specifically the managing of credit in that environment. Prime Brokers have been instrumental in working with the venues to implement these changes. A great example of this is the “kill switch” infrastructure now in place as well and on-going enhancement to further enhance the ability to manage risk.

AS: The ability for FX market participants to manage and mitigate risk is a by-product of the nature of the liquidity and the nature of the transparency in a given venue. Although there are now many tools available such as OMS and EMS to assist in the risk management effort, the nature of the liquidity and transparency has become such that it has impacted the FX market participant’s ability to manage risk. Venues that offer greater transparency and access to real

liquidity allow both buy and sell side counterparties in a given venue to manage their risk appropriately.

What do you see as the main drivers which have encouraged providers to create more transparent environments that clients can trade into with trust?

RR: Market commentators have recently been discussing why banks are internalising more of their flow, impacting volumes on electronic trading platforms. It is clear from these discussions that trust is being eroded and the trading experience of interacting with these platforms is degrading to a level that is not profitable or sustainable. This is why we see banks reducing their volumes on these platforms and warehousing that risk. The ParFX model is built on trust. By creating a transparent, fair market where there is intent to trade, you could argue bank internalisation could reduce.

JM: From the onset, Hotspot has been at the forefront of marketplace transparency providing real-time and historical data to clients showing full depth of book while maintaining client anonymity. We routinely work with all of our clients to optimize their experience on the platform. Hotspot’s ability to customize the user experience and tailor liquidity to suit their needs has allowed us to build trust and respond quickly to client needs.

AS: We see a desire by counterparties to get back to the basics of trading as one of the main drivers that has encouraged the creation of more transparent trading environments. As a result, we see growth in venues, such as FXSpotStream, that allow participants to exchange risk based on real liquidity, on which they can conduct business in a fully disclosed transparent manner and at the same time preserve and grow the bilateral trading relationship.


ThE e-FOREX DEBATE

Roger Rutherford

John Miesner

Alan F. Schwarz


In what ways has the arrival of new trading venues lowered the barriers to entry for a wider variety of buyside firms looking to access the FX markets?

RR: By providing improved, more cost-effective technology and standardisation of processes and protocols (FIX, for example) – and, by dint of their differentiated business models, by offering a choice in what is very much a buyers’ market.

JM: I am not sure it has. The proliferation of new venues has not in any way changed the process by which firms access the broader market. Regardless of the number of venues, clients will still need to have an account with a prime broker or secondary prime broker, and the account opening process still requires the same KYC as it has over the past few years. In fact, it has probably become more difficult for buyside firms to navigate the number of available platforms

and sift through which venues have adequate liquidity to meet their needs. Until there is greater transparency from all venues as to their trading volumes, this will continue to be a challenge for prospective clients.

AS: The arrival of new trading venues has increased the choices for buy side firms looking to access the market. New venues offering different trading options with different pricing models have made it easier for buy side firms to access the market. Competition between venues has reduced costs and newer/better more accessible functionality has reduced go live times.

What issues have traditionally influenced a buy-side firms choice of FX trading venue and how do you think this may be changing as the global FX market grows and evolves?

JM: That depends on the buy side clients liquidity needs and how they

choose to interact with venues. Hotspot FX gives full order capability to all buy side clients, thus enabling them to retain a good amount of spread retention. All clients are able to act in a passive and/or aggressive capacity at any time as their needs dictate. Additionally, buy side clients can access alternative liquidity that they will not typically get from other venues.

AS: Cost, pricing, time to market, reliability, and transparency have traditionally been the primary influences for buy side firms when choosing a trading venue and those are all areas that differentiate FXSpotStream’s no fee service from other venues in the market. We think all those factors will continue to remain important. Buy side firms will seek out FX trading venues that can create efficiencies, offer access to better pricing, reduce/eliminate transaction costs and that can minimize the go live time while providing a stable venue for trading.

Is the application of technology, for example to develop new matching methodologies or pricing mechanisms, the most effective solution for creating more fairness and transparency within electronic marketplaces for FX?

RR: Technology absolutely has a role to play. ParFX’s unique matching mechanism, for example, really does level the playing field by making it impossible to gain advantage by any means. Much better to prevent the crime than allowing the crime to occur then applying the rule or law.

JM: Applying technology to create a better marketplace is something that Hotspot has done since it was launched and continues to do to this day. Several years ago, Hotspot introduced new technology that allowed for customization around client requirements, allowing us to


e-F

OR

EX

: D

EB

ATE

“By creating a transparent, fair market where there is intent to

trade, you could argue bank internalisation could reduce.”

Roger Rutherford

A No Cost Multibank Spot FX and Precious Metals Aggregation Service

No Fee Service • Connect and Trade with Multiple Banks via a Single API

or GUI • Trade in a Bilateral Fully Disclosed Transparent Manner • Reduce

Line and Maintenance Costs of Multiple APIs • Dedicated Price Streams

Try something new: [email protected] for more information:

www.fxspotstream.com


deploy multiple market structures to different client segments all while remaining completely open with the client and providing a fair and satisfying experience. Technology has made this possible and at Hotspot it is a constant process of always making improvements for the benefit of our clients. In the end it’s all about the ability to meet the needs of each client which from our experience is very hard to meet through a one-size-fits-all approach to market structure.

AS: The application of technology certainly plays a role in creating more fairness and transparency within FX electronic marketplaces. But, technology is only one component. Venues tend to overlook the importance of the relationship with the client and support provided to clients relying instead on technology as the sole value proposition. Ensuring the client is properly supported is key to any venue’s success and having and maintaining a relationship with the client is key. Clients need to have trust in the venue they are trading on and that trust is, in part, the by-product of a fair and transparent marketplace.

How hard is it or buyside firms to determine the relative merits of cost reduction versus execution efficiency when it comes to assessing the benefits of FX trading venues and is making this key judgement more important for some client sectors rather than others?

JM: For all clients, the key most important factor to evaluate when looking at trading venues is the ability to get your trade done in the most efficient manner possible with little to no slippage. This can only be achieved when there is an adequate pool of liquidity available to absorb the client’s interest. Furthermore, the ability to act in a passive capacity with exposure to a large pool of participants provides the opportunity

for tremendous cost savings for a client. These factors far outweigh the cost structure or commission structure that a particular venue may have. If you can’t get your trade done, it really doesn’t matter if the brokerage cost may have been $1 per million less than at another venue where you were able to get your trade filled.

AS: The judgement of the cost reduction versus execution efficiency question differs between client sectors. Some clients are more sensitive to costs based on their trading style and others are more sensitive to managing and exchanging risk. Ultimately, however, all venues need to ensure that the client can easily understand the costs incurred, the nature of the liquidity available and the manner in which execution takes place in the given venue. Transparency again comes into play. Of course, the advantage and benefit of trading

via a service like FXSpotStream that doesn’t charge any commissions versus a platform that does is fairly obvious and clients can then concentrate on execution efficiency.

In what ways can platforms which provide deeper STP and increased functionality across the entire trade lifecycle deliver a more powerful value proposition?

JM: In the current state of the FX market for any platform to succeed it must be tightly integrated with STP processes and be able to deliver data and trade information to support the entire trade life cycle. Platforms that are not able to deliver in this area will not be able to survive in the long run.

AS: The more functionality and trade processing support a venue can offer its clients the stronger the value proposition for the client. But,


e-F

OR

EX

: D

EB

ATE

“In the current state of the FX market for any

platform to succeed it must be tightly integrated with STP

processes and be able to deliver data and trade information to

support the entire trade life cycle.”

John Miesner

Introducing a completely new approach to spot FX trading. ParFX, designed by the market, for the market. Pure functionality, pure practicality, pure strength. Discover more – contact our sales team today. e: [email protected] t: +44 (0)20 7198 1575

Pure functionality.A simple, practical and versatile solution. ParFX - a pure everyday essential for FX trading.


clients need to assess the cost of the enhanced functionality in a given venue since added functionality comes at a price in terms of the cost of execution and the price at which the execution takes place. Clients need to determine functionality that is critical to the seamless execution and functionality that adds cost but no value.

What opportunities exist for platforms and trading venues to differentiate themselves by helping buyside clients to meet the growing challenges of Best Execution as well as new regulatory obligations involving clearing and reporting?

RR: As it is already doing for the sell-side, ParFX will deliver a fair trading environment for best execution for the buy-side. The guiding principles of fairness and transparency that apply to the sell-side will apply equally to the buy-side. With Prime Brokers’ control of their clients increasingly under the microscope,

ParFX Prime will be both different and relevant and provide enhanced, more elegant controls, such as net rather than gross credit and control switch, as well as full disclosure of both the EB and Prime Client name post-trade.

JM: Hotspot specializes in tailoring liquidity for both buy- and sell- side clients to create an optimized trading environment where all participants can have a positive experience. The system is built on a flexible foundation that allows us to provide this unique and valuable service, something not all venues can do.

AS: Venues that can provide clients the tools required to satisfy best execution and other regulatory obligations fill a need and, therefore, can differentiate themselves from the competition. Clients tend to migrate towards trading venues that provide the easiest, most seamless and headache free experience. If a client can press a button and know that a

deal is done, confirmed, cleared and reported they will continue to use that venue. That venue will have an advantage over those that can’t or can only supply part of the solution. Do you think innovation in the business models of FX trading platforms has now reached a limit and is unlikely be furthered anymore by altering the way dealing rules are written?

RR: The FX market and its participants will continue to evolve and innovate. ParFX is an example where true innovation was achieved at a far more fundamental level than rewriting the rule book.

JM: No I don’t think so. FX is always evolving and Hotspot has been no different. Our marketplace today is very different and much more sophisticated than the one that was launched over 10 years ago, we fully expect to continue to adapt and introduce new innovations to meet the ever changing needs of a diverse global client base. It is a process that is never complete and if you think that you have the perfect model for the market, you will quickly become bypassed by others.

AS: Innovation in the business models of FX trading platforms have come a long way in the last 10 years. FXSpotStream, for example, was created and evolved from the belief that the market was looking for something different; a venue that was transparent, offered no fee trading and that preserved the bilateral trading relationship. We expect the market and venues in the market will continue to evolve and innovate.

Do you believe the popularity of disclosed relationship-based FX trading will continue to grow in the future as electronic FX execution spreads further around the world?


e-F

OR

EX

: D

EB

ATE

“..we see growth in venues that allow participants to exchange risk based on real

liquidity, on which they can conduct business in a fully disclosed

transparent manner and at the same time preserve and grow the

bilateral trading relationship.”

Alan F. Schwarz

Real-Time Historical Latest Tick-by-Tick

Cross Rates • • • •

Cross Rates Bid/Ask Prices • • • •

Official Cross Rates •

Historical Averages for Cross Rates •

First, Last, High, Low Prices •

Currency Forward Rates •

Currency Conversion • •

Charts of Daily Cross Rates •

Key Features• Real-timebidaskcurrencyFXexchange

ratequotes

• ForexexchangeratesinLondontimeandGMT

• Tick-by-tickforexratesforspecifictimeperiods

• Latestcrossratesbybridgingmajorcurrencies(USD,EUR,GBP,CHF)

• Currencyconverterutilityforconversionusing

real-timeorhistoricalrates

• Historicalcurrencyexchangeratesincludingofficialcrossrates

• Currencyratechartsforembeddinginwebsitesandapps

• Real-timecurrencyforwardratesformajorpairs

XigniteCurrenciesReal-TimeandHistoricalCurrencyExchangeRatesformorethan140globalcurrenciesEasilyembedreal-timeFXratesdataintomobileapps,spreadsheets,websites,orcorporateapplications

www.xignite.com/product/forex/


RR: The network model of disclosed relationship-based trading will continue to grow. We must remember, though, that this model is completely different from the centralised markets for trading which are mechanisms for price discovery. Network models can only price their relationships effectively if they have a trusted source of price discovery and a trusted ecology to offset the associated client risk. They go hand in hand.

JM: Yes. In fact, over the last several years, we have seen an increase in the desire by clients to trade with each other on the Hotspot platform on a more disclosed basis. Within our marketplace we have many clients trading within disclosed pools or even on a direct point-to-point basis with one specific liquidity provider, leveraging Hotspot connectivity and technology.

AS: Yes, we see the popularity of disclosed relationships continuing to grow and we see that in the growth experienced by FXSpotStream, which has recently celebrated the 2nd anniversary of the company’s formation. There has been a shift in disclosed versus non disclosed trading and we expect the interest in transparency and the ability to exchange real risk will apply just the same as markets evolve in other parts of the world. Of course, there’s a place for non-disclosed trading between market participants so we certainly see both models remaining part of the trading options available and demanded by the market.

Is it truly possible to ever fully align the interests of FX marketplaces with their users?

JM: No platform can be everything for everyone. For most clients, the key is determining what factors are most important to them: liquidity, price, spread, participants, rules, etc and then finding the venue that can best meet their requirements.

Our aim is to create an environment where we can bring buyers and sellers together and both walk away happy and come back to trade again. This is achieved through open communication with our clients and a constant process of working to enhance the experience of all parties on the platform.

AS: The foreign exchange market functions properly when users have interests that are generally aligned with other market participants. One of the main reasons foreign exchange trading, as an asset class, has succeeded has been the broad diversity and make-up of the participants. But with that diversity there will always be an entity not able to maximize potential. Increases in transparency and speed of information have made it easier for all participants to use and to obtain the tools to access the market for their own needs.

Have we now reached a turning point in the way buyside clients are likely to engage electronically with the FX market in the future?

RR: At ParFX we have yet to meet anyone who disagrees with our philosophy of equality and fairness, and that includes the buy-side.

The people we speak to say they have trading strategies that will be effective in a fair and equal market and that they have nothing to hide. The fact that they are embracing our fully transparent model is, to me, a turning point.

JM: It is an exciting time to be in the FX market. There are huge opportunities out there as more segments of the buy-side take a more active view of their FX trading, usually leading them to electronic venues. There is still more education that needs to be done for the Asset Manager community, for example, but the rest of the market has embraced electronic trading and has not looked back.

AS: Clients are always seeking new ways to engage the market. They have embraced the technological advances and will continue to do so. In 2000 the first live streaming internet based interface was introduced. Clients were lining up even though the quickest delivery available was via a 14.4k modem. Now you’re looking at micro second delivery speed and access via any number of devices. Clients will always be looking for an edge in trading, so when the latest advance is released they will utilize it.


e-F

OR

EX

: D

EB

ATE

Deltix Cloud Services, DCS, our cloud-based quantitative research and trading service, provides on-demand access to QuantOffi ce, Deltix’s institutional grade award-winning research software bundled with historical market data and supplemental research data. With DCS, you have immediate access to:

QuantOffi ce DCS Edition: The most advanced strategy development and back-testing platform commercially available

Includes high-end analytics, mathematical, statistical and technical indicator libraries

Historical price data from leading data vendors provided as 10 second and 1 minute enhanced bars (bars enriched with additional statistics derived from underlying tick data) for:

FX US Futures (currency, commodity, energy, rates, index) US Equities (S&P500 stocks) US ETFs

Additional data sources: Corporate actions Economic calendar Sentiment factors

Deltix Developer Network (DDN): On-line documentation, Q&A forum and sample trading strategies

DELTIX CLOUDSERVICES

www.deltixlab.com

DELTIX’s Award Winning Quantitative Research Platform is Now Available Bundled with Historical Market Data

USE PROMO CODE EFX_100 AT

https://dcs.deltixlab.com/subscribe

TRY DCS FOR FREE


Sometimes, the most effective way to address a complex question is to start with an easy question. Why do we use algorithms at all, for FX trading and/or execution? Back in the early days (April 2007), Chris Marsh, head of AES Europe, Credit Suisse, said: “There is a mirage of liquidity and you actually face a fragmented, illiquid and opaque trading arena.” Marsh was describing the FX market at the launch of the Advanced Execution Services (AES) FX-algo suite. More recently (December 2013), Simon Garland, chief strategist at Kx Systems, said: “The FX market is still very complicated, very tricky. There aren’t just a few places where you can go to check on liquidity. You have to be all over the shop.” Garland was also arguing for FX algos as an antidote to complexity.

Plus ça change, plus c’est la même chose, as they say at FX trading desks everywhere. Algos haven’t so far changed the FX market to the extent that, say, algos’n’HFT have changed the game in equities and regulation has changed everything “all over the shop”. But they’re good (and fast) at finding liquidity despite fragmentation, opacity, scarcity and “trickiness” in general. The FX market may be too big to change, but algos make it more manageable, and as a result, their use is now widespread and still increasing – read Sang Lee, managing partner, Aite Group, presenting his company’s Global FX Market Update 2013 in e-Forex, October 2013.

Isn’t that enough of an answer to the initial question? Today, just like seven-ish years ago, we’re using

William Essex investigates the latest developments with FX algorithms including efforts by providers to develop more advanced algorithmic toolsets with new tactical capabilities that although quick and simple to deploy are functionally much more adept than their predecessors

Alg

OR

ith

mic

FX

tR

Ad

ing

William Essex

FX algorithms now easier to use and tactically much more proficient


AlgORithmic FX tRAding


FX algos because they’re effective against complexity. The FX market is now 60% electronic (Aite Group), and yet it is as refreshingly tricky as it ever was (Simon Garland). Algos give us a whole extra set of measures for addressing trickiness.

No, that isn’t enough. Not if we want to understand what’s happening now. It’s all true, but it doesn’t give us the whole story. FX algos are increasingly addressing another set of requirements, alongside the whole “defrag-the-market” thing, and this second set looks far more likely to determine our future experience of FX, regardless of whether or not the market itself – the underlying swirl of venues and more or less negotiable currency units – ever becomes more amenable to our activities.

The complicaTions of simpliciTyWhat’s curious here is that the “why” of algo usage doesn’t tally with the recent evolution of FX algos. We’re facing up to complexity – and yes, you’re right; finding elusive liquidity does remain

a central issue - but the builders of today’s FX algos seem to be far more concerned to emphasise simplicity of use coupled with transparency, accessibility, ease of control, et cetera. We’re in the business of making money, and yet we seem to be more concerned with “user-friendliness” and all the qualities associated with it, than with straightforward liquidity optimisation. FX algos are becoming so very effectively user-centric these days – to the extent that, if we look at the steps FX-algo providers have been taking to make the workings of their algorithms more transparent – and their specific design objectives easier to understand – it’s tempting to conclude that much of the time, the best case for using an algo in this market is pretty much that it’s easier than not using an algo.

Regulation is part of the answer, of course. Transparency is key. Being seen to have achieved “best-enough” execution, with a clear audit trail up to and away from the transaction, is (almost?) as important as actually achieving a good execution. Asif Razaq, global head of FX algo execution at BNP Paribas, describes the dilemma of choice facing would-be transactors, along with a solution to the issue that he has under development. Razaq says: “A lot of potential clients are coming across the same problem. They’re trying to decide, within their own organisations, when they should use an execution algorithm and when they shouldn’t.”

Getting the “How do we transact this?” question right can be as much an issue as optimising the transaction itself. Razaq continues: “So we’ve been building an automated liquidity consultant, the iX Workbench. The client logs in, enters the details of an order, and

FX algorithms

Alg

OR

ith

mic

FX

tR

Ad

ing

the Workbench presents various different solutions on how they can execute that order – not necessarily all using algorithms.” [Razaq was speaking ahead of a projected launch of the iX Workbench in Q1 2014.] Expressing a similar interest in keeping the trader informed in real time, Gary Stone, Chief Strategy Officer, Bloomberg Tradebook, says: “We’re providing ad hoc reports that describe how the trader is interacting with the market. We can chart those interactions using visualisation tools. That gives traders more control. Transparency breeds trust, and trust breeds more usage.”

What’s best for FX order-execution? Most of the time, at the point of execution, the answer is likely to combine simplicity with transparency. Not a crash course in how to use an unfamiliar techno-solution. “What we’ve found is that clients really have a simple requirement when they want to execute FX. They want to execute in the most efficient way, and they want to do it with a minimum of market impact,” says Razaq. Clients are less concerned, Razaq continues, with such details as whether they use a TWAP, a VWAP or, say, an iceberg. They want to get the job done.

But what this can mean is that a more complex ‘menu’ of tactical details – you want a VWAP with that? – can become a barrier to algo adoption. Give the prospective algo user too much detail on how the engine works, as it were, and you might both lose sight of the fact that you’re describing a simple tool. “One of the things we want to do is simplify the whole process of choosing an execution algorithm and deciding when to use it,” Razaq says.

And the way to do that is not to “burden” the client with too much of the technical stuff at the outset. “We’ve simplified the whole

Gary Stone

“Transparency breeds trust, and trust breeds more usage.”


selection process by only offering two algorithms,” says Razaq, going on to describe the Chameleon and the Viper algorithms; the former for the client who has time to manage his order through the market and the latter for the client who has to get in and out of the market

quickly. Neither is difficult to choose to use; the choice is all about the client’s objectives rather than the algo’s qualities. But note that this is all about simplicity at the point of access rather than through the life-cycle of a transaction. Razaq goes on to describe a set of tools designed to enable clients to interact with their chosen algos in real time. “As well as the user being able to tweak the algo mid-execution, the algo is also communicating back to the user, to say, my view of the market was this, but it’s now changed to this, because the market’s changed. The client can then make a judgement call,” says Razaq.

GeTTinG enGaGed To your alGoAn algo that talks back – useful. This ties in with another trend – towards engagement – that characterises FX-algo development today – algos in particular but other components as well that effectively work with their users. The quasi-paradox here is that the easy point of access draws the client into an ongoing tactical


Algos are such well-adjusted machines that they work well with humans

Simon Garland

“The FX market is still very complicated, very tricky. There aren’t just a few places where you can go to check on liquidity”


FX algorithms

Alg

OR

ith

mic

FX

tR

Ad

ing

dialogue that has the potential to be anything other than simple. When Deutsche Bank launched the Autobahn Mobile app in the Apple Store in mid-2013, the significant point wasn’t just that the smartphone in your pocket now gave you “a virtual seat on Deutsche Bank’s trading floor,” to quote Zar Amrolia, Co Head of Fixed Income and Currencies at Deutsche Bank, speaking at the time, but that the new app could deliver the “constant flow of analytics” (Amrolia) that you would need to run a portfolio, plus (let’s assume; we’re talking about telephony here) Apple-delivered ready access to voice-trading functionality (if you’ll pardon the technical term for the voice on the other end of the phone).

Another of Aite Group’s findings was that there’s a lot more retail FX trading going on. John Fawcett, founder and CEO of Quantopian, “the world’s first algorithmic trading platform in your browser,” has spoken in these pages (notably in eForex, April 2013) of the significant proportion of Quantopian members who are either professionals or otherwise sophisticated investors, and even without the explicit BYOD (bring your own device) movement, we can guess that many of the retail FX traders found by Aite Group will be familiar with the insides of real as FX is an extremely well as virtual trading floors – they’ve left jackets hanging on the backs of those chairs, even if they’ve gone home to spend the weekend being retail people. Even so, five minutes on LinkedIn will confirm the impression that some, ah, interesting new people are getting into algorithmic trading of FX.

Key point is, FX is at least as much a necessary medium of exchange for global commercial (and other) activity as it is, in our terms, an asset class. This is why it’s such fun, frankly. Such a multiplicity of counterparties, imperatives, objectives … so many different factors impacting on price movements. Algos simplify access to FX; many algos are themselves relatively simple; new players are finding the combination of algos and FX compelling. The market itself may be too big to change, but FX algos make it more accessible as well as more manageable, and support – here’s the finest paradox – high-touch, voice-enabled relationship-based service provision. Algos are such well-adjusted machines that they work well with humans.

Let’s dig deeper into this. We are seeing the development of more advanced algorithmic FX trading toolsets with new functionality and tactical capabilities that are both functionally much more

“Back on 7th November, the euro broke its 50-day moving average. When that happens, typically you have a bunch of down days and then you look for a counter-trend rally. FX is an extremely technical market, and the correlation between FX and technical patterns is extremely high, so I always look at FX very technically.”

“When the market breaks through a 50-day moving average, one of the things it has to do is go back and revisit, as though the market is asking, should a trader really have broken through? Once support becomes resistance, a traders wants to know whether that really is resistance; was the market wrong to break it? So, on 7th November there was the break, and then over the next two weeks, there was the counter-trend rally back towards the 50-day moving average, and it got there on 20th November.

“Let’s say that you came in on the 20th. You’re looking at the fact that you’re testing the 50-day moving average, what are you going to do? You’ve got to make a decision as a trader. Do you think the market’s going to fail here, or continue trending higher? Do you think it’s going to reject the proposition that the 50-day moving average is the resistance level?

A day in the life of an algoGary Stone, Chief Strategy Officer, Bloomberg Tradebook, gives us a masterclass in handling a trend reversal.


adept than their predecessors, and quick and simple to deploy. We are seeing increased sophistication in the development and deployment of FX algos, and yet we can also see that those algos are playing a significant role in opening the FX market to a wider range of participants. There’s a kind of beauty in this. “We hope you will use Quantopian to create algorithms that fund your children’s education, provide for a dignified retirement, and insulate you from the shocks of our increasingly volatile world,” said John Fawcett at the launch of Quantopian.

How do we square these various circles, and what are the implications of all this for the future?

Tomorrow’s alGos TodayTo continue by picking up a contribution from the retail end of the market, a certain Captain Obvious recently posted this question on an online discussion about FX. “If algos were so sophisticated and brilliant why would they need to be faster than the competition?” The online answer, briefly summarised, was that algos are simple but used in devious ways by clever people. Another possible answer might just be that the simple virtues endure. Simon Garland says: “For us, the advantage of FX algos is still speed. Being able to go and look in so many places – what’s the price here, what’s the price there? Being able to skim all over the place very quickly, over so many venues.”

Speed is also a key metric for best execution, and there’s a level at which it’s the language of


As well as the user being able to tweak the algo mid-execution, the algo is also communicating back to the user

Sanjay Shah

“If you’re able to process a large amount of data very fast, but there’s an outage of a few seconds after a few hours, that could negate any gains that you might have made up to that point.”


competition. Garland continues: “You still have to have the low-latency infrastructure because other people have it as well. You’ve got to have it and someone’s got to be fastest.” Yes, but fastest at what? Dave Snowdon, co-CTO at Metamako, which has just launched its ultra-low-latency “intelligent switch”, MetaConnect, says: “We’re reaching the point where speed doesn’t matter anymore.” It doesn’t matter anymore– this is a co-CTO who’s just launched a switch capable of sub-4 nanosecond latency – because it isn’t really there anymore in any meaningful way. Snowdon says: “The best exchange is an instantaneous exchange. That’s also the fairest exchange.”

Well, yes. But surely algos, along with high-frequency trading, are bringing latency back? Simon Garland says: “Data volumes have been growing quite rapidly in the recent past. That’s HFT doing its usual magic. There’s far more stuff to be looking at.” By trading, you generate data. By trading a lot, you generate a lot of data. More traders, more trading, more data to trade, yada, yada, virtuous circle. As they say at FX trading desks everywhere. Sanjay Shah, CTO, NanoSpeed, who has developed an FPGA-based trading gateway (“sub-half microsecond wire-to-wire latency”) from an idea first applied to keeping the Airbus A350 range of aircraft in the sky, says: “If you think in terms of tick to trade, market data to trading message, there is an arms race to get your order in first.”

Shah, who discloses that he is working on an FPGA-based FX-algo trading solution for a global bank, is keen to emphasise the (“sub-microsecond, or nanosecond”) speed that an FPGA/algo set-up enables, but there is a broader point to be made about capacity. Shah says: “There are three important factors. Speed is important, but so is the amount of data that can be processed per millisecond. The third is the robustness of the solution. If you’re able to process a large amount of data very fast, but there’s an outage of a few seconds after a few hours, that could negate any gains that you might have made up to that point. Robustness will become more and more important.” Shah suggests that outages of seconds, even minutes, are becoming more frequent.

Invited to address a similar question – what next, after speed? – Dave Snowdon says: “The other important factor is determinism. It’s getting the speed right every time. You need to get it consistent. Traders need to understand what’s going through the device. If there’s an algo in a black box, being aware of what’s going on is essential for the

FX algorithms

Alg

OR

ith

mic

FX

tR

Ad

ing

“The easier way of looking at it is that the 50-day moving average is going to prevail – the market’s going to fail. As a trader, you want to sell into strength. There are two ways that a trader can do this. First is to ladder in. Sell a little if the market goes up; sell a little more if the market goes up again. If the market starts to slip, a trader don’t want to chase it down but wants to follow it so that if there are mini-counter-trend rallies, people will act on his market.

“There’s an algo that can do this for you, but first, here’s the trade. 1.3543 was the 50-day moving average. 1.3585 was the old high back from 1st November after we broke down through the 50-day moving average on 7th November. A trader had those key levels in mind. The trade is to test the 50-day moving average. So the traders is going to start selling from 1.3540 with a stop above 1.3590, looking for a failure of the moving average at 1.3543. Their ultimate target is, if we break that the traders thinks we’re going to go all the way back to 1.3220. That’s a set-up that a trader might have in his mind from a technical reading of the market.

“The algo is called Reserve Scaleback. What you do is, first you put in how much you want to sell and set an initial floor limit for when you want to stop selling. Then you preset how much to sell at each increment, with a scale amount for how far you want to go and wait for the market to come to you. A trader might put in to sell at 10 pips above where they last sold, say, and get filled at that and then again 10 higher. If the market starts to comedown, they can set a maximum trail – if they are 20 Pips above the market, they want to come down and rejoin the offer.”

“If a trader is trading FX as an asset class, they can set up the algo and watch it. They are not sitting there microscopically focused on their order and how they are engaged. They can move back a level and get perspective. They can get a better feel for the market and know that the market is going to take care of itself. Traders can get myopic; this enables them to get the bigger picture.”

A day in the life of an algo (cont)


trader.” The Metamako switch, MetaConnect, is “intelligent” in that it’s packet-aware – in the sense that it includes monitoring functionality whereby the trader can watch its performance without damaging that performance. Snowdon also waxes lyrical on the subject of FPGAs in general.

In passing, it is ever so slightly disconcerting that after years of discussing latency, and getting straight the proper terms for ever-smaller fractions of seconds – after all those years we’re moving from speed to making sure that the system doesn’t fall down every few hours. We can’t seriously be back to talking about redundancies, power cuts, guys in hard hats digging up the cables in the street outside? Can we? Might as well serve a breakfast of dodgy prawn sandwiches to the human traders just as the market opens. Or put out traps for millennium bugs.

The more positive spin on the whole robustness issue is to flip it over and look at the positive side. Today’s

algos engage with the user, giving real-time feedback on the market and order progress. There’s a self-aware switch on the market. The black boxes are beginning to be built with observation windows in the side. Algorithmic solutions in general are being designed to give control back to clients who might have regulatory and compliance reasons for wanting to take back ownership of their order flow and the prices they get – but who might also have an intelligently self-interested wish not only to make money, but also to understand how they’re doing it. So let’s drill down into this.

look ouT for Grand TransacTion alGo five?As the discussion above about “speed and after” suggests, current development is as much focused on what happens around the algo, on the monitoring and reporting and surrounding structure, as it is on the algo itself.

There’s a sense that an FX algo has to be a “team player” almost, in a team made up of – let’s use the term just this once – thinking machines as well as intelligent human beings. Asif Razaq says: “We still provide voice trading; we still provide electronic risk-transfer services. I’m not a believer that execution algos are going to replace existing methods, but I do believe that algos are going to become much more widely used.” Used as part of the mix, that is.


Asif Razaq

“What we’ve found is that clients really have a simple requirement when they want to execute FX. They want to execute in the most efficient way, and they want to do it with a minimum of market impact.”

There’s a sense that an FX algo has to be a “team player” in a team made up of thinking machines as well as intelligent human beings

Asif Razaq

“What we’ve found is that clients really have a simple requirement when they want to execute FX. They want to execute in the most efficient way, and they want to do it with a minimum of market impact.”


In a team, each member plays to his/her/its strengths. Gary Stone says: “In the development of more advanced FX-trading toolsets, we’ve allowed a lot of customisation that provides the traders with advice as to how the order should behave given the macro-environment conditions. Then you have the smart order router [SOR] which is customised based on the microstructure of the liquidity conditions.” Bloomberg Tradebook’s latest SOR incorporates an on-screen tool where Execution Consultants can work with traders to customise the experience to both currency and trader with the capacity to auto-correct according to market conditions. Stone says: “It doesn’t replace the trader, but it tries to clone the trader’s innate response in certain scenarios. It takes the trader’s decision-making process and automates it so that the trader can concentrate on strategy and where he can add value.”

There’s creativity in this, as well. Discussing product development, Razaq says: “We were even joking about taking trading keypads away

from our spot traders and giving them Xbox keypads instead.” Get ready for FX: The Game. Razaq also talks about “one-click trading” for users who want to preconfigure one or more orders for later execution – a neat way of stepping around the whole speed issue, but also an echo of, say, Amazon’s approach to online shopping. This is democratisation indeed. FX in general, and FX algos in particular,

are opening up to a much wider market – retail, institutional, corporate and occasionally eccentric – and developers are reflecting this. How will this affect the FX market? Maybe we should be wary of the newcomers. Trader and fund manager Tony Manso says: “One thing I have found in my years of trading, after having met many different traders - there’s someone out there who is making money by using a strategy that you are certain cannot work.”

On a keypad that your children handle better than you do?

FX algorithms

Alg

OR

ith

mic

FX

tR

Ad

ing

Dave Snowdon

“The best exchange is an instantaneous exchange. That’s also the fairest exchange.”

FX algos in particular, are opening up to a much wider market – retail, institutional, corporate and occasionally eccentric

WHERE PRIVACY MEETSLIQUIDITYGET CONNECTED TO FX TRADING

>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>

Bloomberg Tradebook connects you—with full anonymity—to some of the deepest and highest quality liquidity in FX trading. Sophisticated algorithms and innovative order types let you implement complex strategies accurately and quickly. Connect seamlessly with our Bloomberg Professional® service platform to streamline your workfl ow and back-offi ce solutions.

Visit TBHF <GO> or bloombergtradebook.com/fx to request a demo.

©2013 Bloomberg L.P. All rights reserved. 51275700 0213 This communication is directed only to market professionals who are eligible to be customers of the relevant Bloomberg Tradebook entity. Please visit http://www.bloombergtradebook.com/pdfs/disclaimer.pdf for more information and a list of Tradebook affiliates involved with Bloomberg Tradebook products in applicable jurisdictions. Nothing in this document constitutes anoffer or a solicitation of an offer to buy or sell a security or financial instrument or investment advice or recommendation of a security or financial instrument. Bloomberg Tradebook believes the information herein was obtained from reliable sources but does not guarantee its accuracy.


Seabury Financial Solutions planning to make FXone the liquidity aggregation solution of choice for buy-side and sell-side FX institutions including retail FX brokers.

e-Forex talks with Rosario M. Ingargiola, President and Chief Executive Offi cer of FXone Seabury Financial Solutions (SFS), about how his technology team has been quietly building out a complete vertically integrated stack of FX trading solutions for handling virtually any buy-side or sell-side use case, and what plans he has for the future.

Rosario M. Ingargiola

PR

OV

IDER

PR

OFIL

E


PROVIDER PROFILE

Rosario, you were the founder of FXone, which was acquired last year by Seabury Group, the global advisory and investment banking organisation, in order to expand its fi nancial services offering SFS. What are the main business activities of SFS and what types of client does the company provide services for?

Yes, that’s correct, I left my prior institutional algo trading software fi rm and formed FXone almost two years ago, and one year later Seabury Group acquired FXone, rolling it into a subsidiary SFS which I now head up. Seabury Group as a fi rm has been very successful acquiring technology enabled businesses that create recurring revenue streams, and there are a number of synergies with FX trading technology. My mandate at SFS is to create the incumbent total FX trading solution provider that should be thought of as the next-generation Currenex or Integral, so we are serving primarily institutional sell-side and buy-side fi rms.

Virtually all of SFS’s staff are senior software engineers with extensive electronic trading expertise. Over the last 12 months we have been in stealth mode, quietly completing our offering, which of course is now centered around Liquidity Aggregation and Smart Order Routing (SOR).

Can you tell us about the depth of your new total solution, what does the product suite consist of?

Well it is quite broad now, we have the following a la cart menu:

• GUI with advanced dealing rates panel, full blotter and spreadsheet based custom analytics and automated trading

• Liquidity Aggregation and Smart Order Router (SOR)• Order and Execution Management System (OMS/EMS)• Execution Algorithm Library for advanced trade execution needs• Risk Management and auto hedging for B-Book fl ows• Tick Database for capturing and archiving each client’s unique pricing

with full market depth granularity and serving up the data on demand • Matching Engine for internal crossing within a client organization • Market Simulator for real-time simulation of trading against a Live FIX

data session• Algo Framework for insertion of alpha trading, execution, pricing and

other algorithms into the C++ core• APIs in native TCP/IP, as well as C++, Java, .NET and Python for accessing

all real-time and historical data, trading functionality as well as full OMS/EMS data

• FIX Receivor API for connecting FIX data and trading sessions to FXone Liquidity Aggregation

It’s clear with this new product suite that Prime Brokers are an ideal client, how do you differentiate compared to other liquidity aggregation providers?

FXone has many very important USPs that any PB, PoP, retail broker or even buy-side customers should know about:

• We do not charge any fees to the liquidity providers…nothing more to say here

• We will improve upon existing dollars per million fees charged by other aggregators

• We have web based credit control and liquidity management tools for PB Admins to set NOP and other risk limits as well as markups per user, per currency…PBs and LPs that need credit control tools can now create custom liquidity pools for each client using our lower cost structure instead of ECNs and other solutions PoPs

• Our OMS/EMS APIs let you give your API traders much more than just a FIX API, it gives them full access to real-time order and position state information, P/L, and a long list of other real-time data items that they will have to develop themselves if you provide only a FIX API

• Our Tick Database adds tremendous value to each customer and can be used via a direct API for many analytics and application initiatives.

• Our Execution Algos lets customers use Stop, Limit, Market Limit and other order types without putting resting orders in a book visible to others

• We are part of the EBS Certifi ed Aggregation Partner Program, and embrace the best practices they require of their partners.

• For clients or their end-user clients with institutional volume levels, we routinely enhance the product offering, from GUI level features to custom execution algorithms, quickly and without cost

There are so many click trade GUIs out there, how does FXone differentiate?

We were fortunate to work with a market leading LP in the context of a white label and the result was a dealing rates panel that is highly customizable with advanced features such as dealable VWAP market depth buckets, check box access to execution algorithms and many other valuable features to simplify trading. The GUI in this configuration is great for white labelling to sit on any single LP’s prices or aggregated prices using our liquidity aggregation or another provider.

The GUI of course still has the spreadsheet based automated trading capability. Also, if the client wishes, the multi-counterparty GUI can be provided to end-users and they can have a dealing rates panel for each LP in the liquidity aggregator as well as a dealing rates panel for the aggregated prices and they can explicitly deal with any LP or the aggregate. Same goes for automated trading.

The FXone platform has multi-asset capabilities. Are you planning to integrate any further instruments over the coming months?

Yes. We already support CFDs and spot metals, but at the request of several large clients we will be adding forwards, swaps and NDFs as well as futures and options.

What is your commercial model, and how do clients deploy the solution?

The commercial model is a very simple dollars per million charge, as agreed, with an objective of lowering

the cost of liquidity aggregation over other existing or proposed solutions and with no fees paid by LPs. There are no set-up or other out of pocket costs, no integration costs for new FIX data and trading connections or post-trade connections, and no long term commitments.

Clients can choose fully managed deployment in the multi-tenant colo environments we provide in NY4 or LD4, dedicated infrastructure we can provide in NY4 or LD4 at cost, or they can choose to deploy on their own infrastructure and manage it themselves.

Do you run a centralized order book model or otherwise facilitate customers trading with each other?

No, we do not. Each end-user client organization essentially receives a Virtual Private ECN with FXone’s liquidity aggregation and SOR. All trades are done directly with the underlying LPs in the pool. We are however integrating our new Matching Engine to optionally support internalization within a client firm before routing out to the market.

How is system implemented and what is the performance?

The current GUI is C#/.NET which runs on Windows, and can be collocated with the Linux solution for high performance use cases. We have begun implementing an OS neutral web based GUI as well for the click traders. The entire mission

critical server side software core and other stand-alone products, such as the Tick Database, are implemented in C++ on Linux, and we are currently working on a port to SmartOS for our high-frequency trading use cases. The Web Admin, Monitoring and other parts of the solution utilizing a web server are implemented in Java. We are still organizing formal benchmark testing for throughput, latencies and load, so I can’t provide official numbers yet, but I would say we expect to be the highest performance off-the-shelf solution on the market.

What is the big push next year?

Besides rolling out our total solution with several PBs in January, we plan to make a big push around Execution

Algorithms and Transaction Cost Analysis (TCA). We recently started staffing up our office in London, and we have hired a senior Head of Algorithmic Execution and TCA who previously held senior roles at

Deutsche Bank and Merrill Lynch in charge of the same. We believe that we will be able to provide market leading execution algos with reports to quantify the results. Our Tick Database and Market Simulator and other recent additions to the product line up make it possible to do this development well.

How can traders and their brokers learn more about SFS and what’s the easiest ways for them to contact your customer services team?

The best thing to do is to contact institutional sales via [email protected] and request a personalized demo in our New York or London offices, or online, followed by free demo access to the FXone platform.

Seabury Financial Solutions


“Besides rolling out our total solution with several PBs in January, we plan to make a

big push around Execution Algorithms and Transaction Cost Analysis (TCA).”


FX

BR

Ok

ER

ag

E O

pER

atiO

ns


When it comes to considering the question of whether to outsource certain functions or to retain them in-house, Tom Higgins, chief executive of Gold-i has an unequivocal answer for any retail brokers pondering the issue.

“They should look to outsource as much as possible,” he says. “Whatever you can get from a vendor, you should get from a vendor because otherwise you are spending your internal resource on developing something that you can buy in. This applies to both

the mundane office management systems like email and web pages all the way through to your trading, back office and CRM systems. If you have a specialist service, then you should find a specialist vendor but if it is something that you consider extremely specialist, then that process is probably a good candidate for being retained in-house because it is an area where you will be adding value by developing it yourself rather than just incurring cost.”

Customised outsourCingOne barrier to outsourcing has traditionally been the idea that it is harder to differentiate your service offering if so much of it is outsourced but, says Higgins, it is increasingly possible to buy in services that help to differentiate by providing a lot of customisation for brokers. “For example, we can link the platform to their CRM system to

Technology Partners helping retail FX brokers to build a more successful business

Nicholas Pratt examines the challenges Retail FX brokers are likely to be facing over the next few years and how the industry’s leading technology vendors are helping them to meet them.

FX BROkERagE OpERatiOns


allow brokers to form a really clear view of their clients’ activity.”

The number one criteria in selecting an outsourcing provider is a willingness and ability to work with that vendor, says Higgins. “The technology may be terrific but if the vendor is never available to talk to, that is a show-stopper. For the vendor, you must realise that the client is depending on you because you form a key part of their business. They have to treat you as a true partner and not just another supplier in order to get the most benefit from what is a much more strategic relationship.”

The existing players in the liquidity management space for example, are becoming more sophisticated, says Higgins. “In 2014 we will be launching our Gold-i Matrix liquidity management system which users operate themselves, can take in liquidity from various providers and repackage that liquidity to their own clients. Some of the larger brokers have realised that it is better to sell liquidity to smaller brokers and have fewer client relationships to manage. In order to do this though, they will need a liquidity management system that allows them to manage the liquidity flow, the STP and the collateral status of all of their omnibus account members.”

He continues,“The move to A-book and agency trading has been happening continually over the last five years amongst almost all brokers. Pretty much everybody will have connections to outside liquidity providers so they can A-book some trades if they want to. Interestingly, the bigger players seem to be

reverting back to a hybrid model. Previously they were able to enjoy high profits from B-Book trading but at the same time were exposed to massive risk. Then they switched to A-book trading to reduce this risk and ended up with reduced profits. Now many of the larger retail brokers have realised the benefit of developing a hybrid model and analysing the profit and loss of individual clients which allows them to maximise profit across both models. Consequently, at Gold-i we have spent a lot of time putting this capability into our Matrix platform and our MT4 bridge service.”

The technology to manage both A and B-Book trading will become more accessible to smaller brokers in the future, says Higgins. For example, Gold-i has recently collaborated with Ariel Communications to integrate with its iTrade risk management system to provide an out-of-the-box risk management system for brokers trading both A and B Book.

strategiC allianCesThese strategic alliances between vendors has been commonplace in the institutional world, from where Higgins has come, whereas in the retail FX trading world the traditional approach from vendors is to try and do everything themselves. “I don’t think that is a healthy model. You cannot be the best at everything so you should stick to what you do best and then integrate with other vendors who are the best in their field so that the sum of the parts equals more than their individual value,” he says.

One of the technology challenges facing the medium and small brokers who want to sell their own liquidity and take on a prime broker and liquidity provider status is that they lack the technology to do that, says Higgins. “This is why our Matrix product is of so much interest to these brokers. There is

Technology Partners

FX

BR

Ok

ER

ag

E O

pER

atiO

ns

Tom Higgins

“Brokers have to treat their vendor as a true partner and not just another supplier in order to get the most benefit from what is a much more strategic relationship.”


also an increasing volume in retail FX. There are few new entrants in terms of brokers. Instead there is consolidation and the existing players are getting larger.”

“Furthermore, activity in the market tends to come in peaks and troughs, where there are long periods of quietness followed by hives of activity. That creates a technology strain. You need much more capacity to manage the peaks. So we have been working with the brokers on things like server splitting, intelligent price throttling so that you are filtering out unnecessary price takes.”

One of the consequences of consolidation and growth in the retail broker space has been the influx of staff from the institutional side and this has helped to instil a more sophisticated attitude to technology, says Higgins. “Many of the staff from an institutional background have brought that technology approach and attitude with them. For example, they are looking to use the same kind of data warehousing and analysis of trading behaviour that they have been used to on the institutional side. And they are more open to the idea of outsourcing.”

teChnology eCosystemThe rapid growth of FX market participants, both traders and brokers, has spawned an ecosystem of 3rd party technology solutions for a wide range of industry challenges, says Andrew Ralich, chief executive of One Zero. From front-end platforms, to bridging solutions, to back-end liquidity management systems, there are a wide variety of “out of the box” solutions which offer brokers ways to accelerate their time to market, or consolidate aspects of their business.

“A broker’s best option for evaluating insourcing versus outsourcing technology is to

ask themselves a simple set of questions: If I were to do this in house, how could I do it better than available solutions? Do the long term cost savings of taking on this initiative myself outweigh the risks of failure and time resource burden needed to build and maintain this technology? Will the out of the box solution provide the flexibility I need to differentiate my solution from other brokers?”, states Ralich.

“It’s often the case that for marketing, client facing aspects of the business, a personal touch from a broker can make a big difference, while back-end solutions such as bridging and aggregation systems are best left to established, proven technology focused firms.”

It is often a broker’s instinct to look to one simple metric in evaluating a technology solution: cost, says


In deciding whether to outsource or not, the key factor is the broker’s business model and what they perceive to be their unique selling points such as the user experience


Ralich. “For certain projects, those with a very specific design and set of functionality, this is fine. For solutions that are more customized to a broker and must adapt over time, such as a risk management system, it is also important to consider the flexibility of a solution, the relationship between the broker and technology provider and the ability for that relationship and system to scale. A technology provider must be poised to adapt to the needs of the broker, including functionality expansion as the brokers need changes, the ability to handle a variety of liquidity options and a support team capable of handling the needs of a growing brokerage firm.”

tier one liquidityAn increasingly important property of the services provided by technology vendors to retail brokers is the ability to source and access tier one liquidity more easily, says Ralich. “Many of the technology companies who made their name in Retail FX solutions for OMS (such as the leading MT4 Bridge providers) are now providing additional functionality that offer the same scale and flexibility needed to succeed in retail with the institutional quality features generally seen in more generalized institutional grade systems.”

New tools are also emerging to help retail FX brokers to tackle the complexities of moving from market making to agency trading as favoured by an increasing number of firms, says Ralich. “These new tools help ease the transition into A-Book including both execution optimizations to limit impact on client trading behaviors and reporting systems to help the broker

track profit and loss under this new revenue model.”

And there are also a growing number of tools available to give brokers more insight into clients’ trading behavior and to improve conversion and retention rates, says Ralich. “Profiling tools are now a standard in Retail FX reporting packages, allowing brokers to automate complex profiling activities which previously were done manually or via outsourcing. These advanced tools allow brokers to get ahead of predatory clients, reach out to struggling clients and tailor liquidity specific to different types of trading behavior for the ever evolving Retail FX user base.”

As for the technology challenges that are likely to confront retail FX brokers over the next few years, Ralich sees three general trends. “Brokers will need to continue to adapt their existing topology to increasing complex regulatory requirements, new asset classes and an increased demand from

the trading community for open architectures.”

Coming to maturityOf the several factors that influence the decision of a retail FX broker to outsource, the maturity of the outsourcer as well as the outsourcing industry itself is one of the most important, says Stanislav Stoyar, vice president of FX products for Devexperts. “Ten years ago there was no choice of third party technologies and brokers developed almost everything in-house. Those brokers who started back then still heavily rely on and invest into their own technologies.”

“These days there is no lack of third party solutions for any aspect of the brokerage business. And there is no lack of brokers of all sizes and types. So the main decision factor for smaller firms would be the differentiator: what makes the broker unique, what is so special about the broker that is going to attract clients.”

There are several more specific attributes that Stolyar feels are important in a technology provider. “We believe in long-term relationships between technology provider and broker. An ability to adapt, customize and optimize a technical solution to the needs of a particular broker is the key attribute. Of course this ability has to be backed by the robustness, flexibility and proven success records of the core underlying technologies.”

There are several companies providing aggregation technology with established technology and business relationships with tier one providers to enable retail FX brokers to access tier one liquidity as well helping brokers tackle the complexities of moving towards A-book and agency trading, says Stolyar.

“It is important for a broker to use the core technology that

Technology Partners

FX

BR

Ok

ER

ag

E O

pER

atiO

ns

“These days there is no lack of third party solutions for any aspect of the brokerage business.”

Stanislav Stolyar


is designed to support various execution methods, i.e. A and B books, STP and post-trade risk offsetting. Technology should not lock the broker to just STP or just B-book execution. It is the business that makes this decision and the platform has to be prepared for it.”

When it comes to the new challenges facing retail FX brokers and the ways that technology providers can help them, compliance continues to be omnipresent, says Stolyar. “Also there are a number of 3rd party platforms with nice looking web and mobile front-tends, which are very tempting to offer to retail clients. Consolidating these under one umbrella with the transaction data sourced from all of these platforms however, is becoming a challenge. It means that flexible multi-asset back-office platforms will be needed.”

Hybrid solutionsThere therefore seems to be three options for FX brokers. They can keep all of their operations in-house but that can cost a lot. Retail traders are more demanding, they require better technology and the cost of that is going up. They can go for a white label approach but that gives them little flexibility. So many will favour a hybrid solution that enables them to use all the services of a vendor but with the flexibility of the cloud and the ability to choose their own liquidity providers, that is the trade-off.

Technology Partners

FX

BR

Ok

ER

ag

E O

pER

atiO

ns

“A lot of brokers think that the more liquidity providers they have, the better, but that is not always the case. Having two or three good providers can be a much better approach.”

Jakub Zablocki

It is often a broker’s instinct to look to one simple metric in evaluating a technology solution: cost


Another issue for brokers is whether to choose A-book or B-book trading. “The A-Broker model was profitable back in 2012 when the market was relatively flat but in 2013 the FX market has been more profitable, so we are seeing more demand for a hybrid model where there is an intelligent use of flow and some of the exposure will be kept on their own order book to boost profitability,” says Zablocki. “Historically keeping your own book for retail flow when there are high levels of volatility is a more profitable approach and vice versa. It is not easy to predict which way the market will go but being able to retain the ability to keep part of the flow on a B-book basis, with exposure limits in place, helps makes the business more profitable.”

Customer ConversionZablocki also sees extremely high growth in the number of brokers looking to improve customer conversion and retention rates. Key to meeting this objective has been

the use of social trading whereby brokers can offer trading advice in real-time to retail traders. “With our X Open Hub environment we try to integrate these kind of services.”

Zablocki sees two big challenges facing retail brokers in the future. “The first is latency. Spreads are so narrow that latency plays a big part, even in the retail market. Traditionally, firms have looked to use data centres co-located in London and New York where most FX trading takes place. But in the retail market, the trading activity is a lot more spread out with an increasing amount being done in Asia. So for brokers it can be a challenge to co-locate in places other than London or New York. We are seeing a lot more of the liquidity providers and FX portals provide co-location in Asia – for example, Currenex has co-located in Japan and a number of others have co-located in Hong Kong.”The other challenge will be legal and regulatory. “So far the retail FX market has not been too affected by new regulations, but in 2014, EMIR rules that the capital markets will require every trade to be reported to a central trade repository and for more trades to be cleared through a central counterparty. I think these rules will also be applied to the retail market in time,” says Zablocki.

Adding vAlue“Some brokers consider that running all of their IT in-house gives them control and adds significant value to their business,” says Simon Cox, chief executive of Ariel Communications. “The majority though are happy to focus on other aspects of their business

like sales and marketing and risk management and outsource the development of the platform because it reduces their cost, reduces their operational risk and also gives them access to specialist knowledge.”

In deciding whether to outsource or not, the key factor is the broker’s business model and what they perceive to be their unique selling points such as the user experience. However owning your own platform is not the only way for brokers to control their user experience, says Cox. “Previously platforms may have been more uniform but now there is the opportunity to differentiate. If you are trading online, 90% of the experience will be through the front-end which with today’s third-party platforms are highly configurable. And for those brokers that are determined to build their own front-end, we can provide an API for them to connect to the platform.”

If retail brokers should decide to outsource the development of their platform, there are various attributes they should look for says Cox, such as a customer focus, a high level of service and a 24 hour helpdesk. “They need to be professional and responsive.”

vendor CollAborAtionBut while professionalism and responsiveness are necessities in any service, one new attribute that vendors have had to develop is the ability to collaborate with other vendors in the market, says Cox. “Retail brokers are increasingly looking to buy best of breed services from multiple vendors and then looking for someone to piece it all together for them. The majority do not have IT development teams so they need someone to oversee all the integration work and to act as the single point of contact.”

Cox believes it is important for technology providers to build

Technology Partners

FX

BR

Ok

ER

ag

E O

pER

atiO

ns

Andrew Ralich

“Brokers will need to adapt their existing topology to increasing complex regulatory requirements, new asset classes and an increased demand for open architectures.”

relationships with their peers and have some experience of integrating with other technologies. “I think the days of offering one system that does it all from front to back, without the the vendor having to speak to anyone else are long gone,” he says. “In order for brokers to really get the benefit of taking technology from multiple vendors it is important to have a single point of contact for the integration or if something goes wrong. We feel we have the relationships with other vendors and the experience of integrations to fulfil that role.”

One of the challenges for technology vendors is that they are having to cater for multiple platforms for each broker they service, says Cox. “As brokers continue to acquire, they will look to run multiple platforms to attract a wider client base. Consequently they will seek tighter integration, so that they can offer, for example, a shared wallet across all the various platforms that can be accessed at

the front-end. In conjunction with Gold-i, we have an MT4 based service that provides consolidated risk management across multiple platforms.”

Life is becoming easierFortunately as more challenges emerge for retail FX brokers requiring more complex technology, the level of technology awareness among retail FX brokers is increasing, making life easier for the vendors. This is evident in the way systems are developing to offer both A-Book and B-Book trading, states Cox, “Ariel started as a market making system but we have now developed the capability for

Technology Partners

FX

Br

ok

er

ag

e o

per

atio

ns

The big data revolution has increased the need for historic and real time data on client behaviour that can be used to retain and convert clients with targeted marketing.

Simon Cox

“The big data revolution has increased the need for historic and real time data on client behaviour that can be used to retain and convert clients with targeted marketing.

agency trading. It is about having a configurable system because brokers are so much more informed about technology and they know what they want in terms of functionality and workflow. So our solutions are that much better because the brokers are much more aware of technology.”

Another important technology trend that is influencing the retail FX market is big data, says Cox. “The big data revolution has increased the need for historic and real time data on client behaviour that can be used to retain and convert clients with targeted marketing. Real time dashboards can also be used to increase operational efficiency. We offer a data warehouse service. It is an interesting space. It comes down to who has the ability to run that process on behalf of the broker. It is another example of vendors working closer together to offer vendors an integrated service.”

146 | january 2014 e-ForeX

Tom Higgins CEO of Gold-i

Tom Higgins, CEO of Gold-i comments, “We know it’s important to give brokers a wide choice – even though most brokers normally want to connect to just one or two LPs. Gold-i provides advice on which ones are most appropriate for their specific needs.”

According to Gold-i, when it comes to liquidity, the top five areas which retail brokers need to consider are:

Facilitating low latency connectivity between a broker’s trading infrastructure and liquidity sources is highly complex. You cannot simply plug a Liquidity Provider into a

trading system because neither end will be compatible with the other. The integration requires detailed customisation and extensive testing – areas of expertise which Gold-i excels in.

Tom Higgins continues, “Multi asset liquidity is even harder to integrate than FX, due to different global standards, different trading attributes and different trading venues. As the global market leader in multi-asset retail trading systems integration, we have now integrated with nearly 50 technologies at LPs and partners, and each has been very different. It is a full-time job just keeping the integrations up to date as LPs change their systems regularly. We offer 24 hour support to ensure that all our clients have access to specialist help whenever they need it, whichever time zone they are operating in.”

Five areas to consider when selecting a Liquidity ProviderThe super low latency Gold-i Gate Bridge connects to more Liquidity Providers than any other Bridge connecting to MetaTrader. But with such a choice of liquidity on offer, how does a broker know which is best for their client needs?

SPON

SORE

D ST

ATEM

ENT

For more information visit www.gold-i.com. To request a free trial of the Gold-i

Gate Bridge, contact [email protected]

• Spreads – Having tight spreads and deep pools of liquidity help brokers to lower trading costs and improve their competitiveness.

• Instruments – Don’t just focus on FX. Brokers should look at opportunities which will enable them to broaden their offering to clients, either now or in the future. Gold-i specialises in multi-asset product integration and has integrated FX, CFDs, Equities, Futures, Indices and Commodities all through Liquidity Bridges and all on a single platform.

• Latency – Speed is vitally important in order to minimise slippage. Select a super low

latency bridge to connect the liquidity provider to the trading platform. The competitively priced Gold-i Gate Bridge takes only a few milliseconds to process a client order and can process more trades in one second than MetaTrader.

• Flexibility – Make sure your Liquidity Bridge can be customised to meet your needs and gives you access to market leading trade execution and risk management tools.

• Support – Minimise downtime by selecting a Liquidity Bridge provider who can offer 24x7 service. When selecting your technology providers, remember that it’s easier to partner with a single vendor such as Gold-i who can help you in all areas of liquidity, back office, CRM and risk management than to select multiple vendors which can end up being more difficult to manage, more costly and more unstable.



Retail FX traders are a growing community as are the numerous service providers that recognise a lucrative marketplace when they see one. Consequently there has been a noticeable increase in the sophistication of services available

to retail FX traders, especially in terms of the electronic FX brokerage platforms.

Democracy in the marketTechnology, as ever, has been a great leveler and helped to democratise

the FX market and reduce the gap between the institutional and retail sides of the market as well as the large, established service providers and the start-up developers. And one technology trend that has been instrumental in this process has been the emergence of more open platforms.

One of the vendors at the forefront of this trend has been Tradable, which describes itself as an app-based trading platform available to banks and brokers that enables users to design their own tools

Outside the box new thinking in the development of electronic FX brokerage platforms

The emergence of more open platforms has led to a step change in the retail FX brokerage market. Nicholas Pratt examines the thinking behind the development of the latest electronic FX brokerage platforms.

FX

BR

Ok

ER

ag

E O

pER

atiO

ns

Nicholas Pratt


and services. “By using open platforms, developers are able to distribute their products and reach several brokers at once,” says Jannick Malling, chief executive and co-founder of Tradable. “This has meant there are an increasing number of products that are developed by start-ups rather than big brokers or the in-house departments of big banks.”

There is also a massive benefit from open platforms for the retail brokers says Malling. “They are able

to benefit from innovation which they have not had to generate

themselves. The traditional approach to new product development for the large

brokers with their own in-house IT development teams has been

relatively arduous, starting with the identification of a product need and a target client followed by the allocation of the required capital to build the platform and then the time spent integrating it with third party systems. That entire innovation process becomes automated with open platforms. You can rely on a third party ecosystem to develop whatever tools you want for all of the different client groups that you have.”

The impact of an automated innovation process is being felt now and is not simply a theory says Malling. “The movement started at our firm twelve months ago so it is still a new development but I think in 2014 it will enter a penetration

state where it becomes a strategic differentiator because if you don’t automate your innovation process and decrease your costs, then you will have to reach out to developers in a fragmented way and I don’t think there is any way that any one individual can compete with the masses.”

The first adopters of new technology are often the larger players in the market and this is no different in the case of Tradable. Its first major client was the Monex Group in Japan which launched Tradable to its 1,300,000 retail clients in May 2013 and Gain Capital which announced plans to launch Tradable in North America through its FOREX.com retail broker division back in September. By 2014 Malling expects third party open platforms to be more readily adopted by mainstream retail FX brokers.

This should therefore mean a proliferation of many more smaller service providers and technology developers rather than a handful of established vendors that dominate the market, as is so often the case in financial services technology.

“It is one of the most difficult industries for a new firm to sell to because if you are not regulated, then you are not able to bring on

board retail clients so you have to team up with a broker who can then offer the technology through their license and that whole process is a barrier to entry. So now that barrier is effectively being removed, we expect to see a lot more new players in the market.”

Open platforms have also been able to cater for the increasingly complex demands of multi-asset class brokers that are so prevalent in today’s retail markets, says Malling. “The multi-asset class market is exactly what the open platforms are best suited to. Ten years ago, every trader, retail and professional, was happy with a system that had some charts and a stream of prices but that is no longer the case. There are different needs based on clients’ experience levels, trading philosophy and preference. The best way to cater for that is with an open platform where you can pick and choose what functionality you need rather than trying cram all possible functionality into one platform.


Jannick Malling

“That entire innovation process becomes automated with open platforms. You can rely on a third party ecosystem to develop whatever tools you want for all of the different client groups that you have,”


This is the way the smart phone or digital music industries developed and I expect the FX retail market to develop in the same way.”

next generation traDingAnother area of technology development in retail FX concerns the growth of so-called next generation trading capabilities – social, mobile and robotic trading. “When one looks at the development of mainstream technology, it started off with social networks, then it became increasingly mobile and now we have entered an app area. The next phase will involve big data. I think the trading industry has developed along the same lines. Social trading is quite well established with people trading on Twitter and there are a number of well-established providers in this space.”

Mobile trading is an interesting market that is becoming more established but the statistics suggest that both adoption and usage varies from broker to broker, says Malling.

“A lot of providers have built mobile trading applications but adoption is only somewhere around 20%. And of that 20%, the vast majority are using them to check the marker and only a minority (20%) are using them for trading. Even then they are using it for closing their positions rather than execution. So I think

that suggests that mobile trading is not an alternative to desktop trading, it is merely an add-on for using on the move and no-one is going to be using their mobiles to write execution algorithms.”

Increased speed and reduced latency have been aspirations for traders for some time and there is always room for further improvements, however most retail FX trading systems have been operating at a sub 100 or 200 millisecond level for some time now, says Malling. “A lot of effort was made some years ago to reduce

Outside the box

FX

BR

Ok

ER

ag

E O

pER

atiO

ns

“Cloud services and outsourcing are not hugely popular at the moment, but they will be increasingly popular because they reduce costs significantly.”

Jakub Zablocki

the number of hops involved in the execution process with colocation and that brought down the level of latency quite dramatically to a point where it is generally acceptable to most retail traders. Beyond that it is a discussion as to what still constitutes a retail trader if their trading behaviour requires latency below the 100 millisecond level.”

In 2014 Tradable will be focusing on developing its cloud capabilities as Malling thinks this remotely, hosted, centralised and light infrastructure will be the model of the future for retail FX broker platforms. “It provides economies of scale and becomes cheaper for everyone involved and cheaper to cross-connect within a shared data centre. It also provides a

better service to the client so I don’t see any reason not to move to this model. Along with the automation of the innovation process, it is a model that allows brokers to focus on their clients rather than IT development and administration.”

“Brokers are facing a lot of increased costs through regulation

Outside the box

The platform has been developed entirely in-house, something which bucks the recent trend among brokers to outsource technology development. “We wanted to own our technology and benefit from the flexibility that gives us,” says Andrew Rossiter. “We are not encumbered with a number of legacy systems and we do not have the same large compliance burden faced by other firms.”

The platform also has a multi-asset capability that covers FX, exchange-based instruments, futures, options and equities. “The multi-asset capability is important for managing both risk and the use of collateral across all asset classes.”

The plan, says Rossiter, is to keep adding asset classes – RFQ-based products, derivatives and over-the-counter instrument – as well as clients. “We will be in aggressive spending phase for the next two years. We are fortunate in that we are not tied to a budget cycle and it is the view of the shareholders that the platform is an important part of the business.”

Another objective with the new platform was to reduce latency in sending out prices to clients and in receiving their orders and ADS uses data centres co-located by the major liquidity providers it works with. It has also invested in smart order routing for

different order types as well as providing algorithms through a built-in scripting capability that enables clients to develop their own algortihms. “It is a platform with the same kind of sophistication as tier one platform,” says Rossiter.

In terms of FX, ADS Securities also plans to develop a market making capability through its new platform. “We plan to have our own pricing,” says Rossiter. “By the middle of next year we can offer market making as part of an aggregated flow and then be able to provide it as a separate flow.”

Building a cross-asset class offering for the Middle EastMiddle East-based FX broker ADS Securities has recently gone live with its multi-asset, online trading platform OREX Optim. The platform was two years in development and, following a soft launch back in may has now completed six months of testing.

FX

Br

ok

er

ag

e o

per

atio

ns

152 | january 2014 e-ForeX


and this is one area they can reduce their costs and still maintain a good service offering. A lot of brokers talk about the cost of client acquisition but there are also considerable costs in buying or developing the kind of technology solutions needed to service existing clients and engender loyalty,” he says.

Wider range of optionsPerhaps the importance of open platforms in the retail FX brokerage market is best encapsulated by the recent decision of X Financial Solutions to change its trading name to that of its flagship product, X Open Hub – a decision that was in part made to emphasise the open nature of a platform available to banks, brokers and liquidity providers alike.

According to X Open Hub’s Managing Director Jakub Zablocki, the emergence of more open platforms has been hugely beneficial to market participants in terms of giving them far more options when considering the purchase of a platform and far

more regular developments in the functionality of these platforms. “In the past, the retail broker platform market was dominated by one player – MetaTrader – when the only technology development would be every three years when a new version of MetaTrader was released. Now with more open platforms and third party providers we are seeing new releases and developments every month.”

But while more frequent and fertile development is a feature of the open platforms, robustness and availability are still prized properties for participants. X Open Hub interviewed over 300 retail brokers and traders and the most important property of a platform for them was its stability. “So it is important to provide all the multi-asset functionality, without sacrificing the overall stability of the platform,” says Zablocki. “That is the challenge for vendors. You can add all of these new features, instruments and asset classes but if the platform crashes, then it is of little use.”

Another challenge for platform developers, albeit one that is more opportune is to help retail brokers cater for the demands from more ambitious retail trades for sophisticated trading capabilities while at the same time recognising their relatively limited budgets and resources. For example, Zablocki is seeing much more interest in automatic trading in the retail market and brokers are looking to add this capability but many of them do not have a lot of platforms available to them to build this capability.

“They do not all have access to a trading server. Social trading is also

integral but it is only used in small volumes at the moment and isn’t big enough to be a completely separate trading segment. I don’t think retail traders are looking for it to be just an add-on, they want something more that allows them to trade their own liquidity. We will have to see how this develops in the future.”

Retail traders are also becoming more demanding in terms of low latency, which is an issue for an increasing number of them, so there is a need for more co-location but most retail traders do not have the resources to set up their own co-located servers or trading engines, says Zablocki. “This is where cloud servers can play a role. Traders in both the retail and institutional space are becoming more familiar with and more confident in using cloud services. It is a case of taking it step by step. Cloud services and outsourcing are not hugely popular at the moment but they will become increasingly popular because they significantly reduce costs. And when you consider that retail traders are becoming more sophisticated and demanding lower latency and greater efficiency then brokers will have to turn to outsourcing providers that can offer 24 hour support so they do not have to spend the money on administration servers.”

“The market has become extremely competitive and there is a need to offer retail traders a very stable infrastructure but also one with enough flexibility for new features to be added. Doing that on your own will be extremely expensive for brokers so they really should consider outsourcing and doing more in the cloud.”

the latency questionWhen it comes to assessing the steps taken by technology vendors to improve the speed and low latency capabilities of the trading platforms made available to retail

Outside the box

FX

BR

Ok

ER

ag

E O

pER

atiO

ns

Olivier Virzi

“It is difficult to say if high speed trading has led the path to faster technologies or if these technologies have made high speed trading possible.”


brokers, the debate as to what came first – the technology or traders seeking the higher speeds – is a complex one, although it is abundantly clear how successful the technology has been in meeting the subsequent demands of the more sophisticated traders – even in the retail market.

“It is actually quite difficult to say if high speed trading has led the path to faster technologies or if these technologies have made high speed trading possible,” says Olivier Virzi, chief executive of Olfa Trade. “What is certain though, is that networks and wiring technologies evolution have dramatically lowered execution time, almost annihilated it.

Distance is still a latency factor of course, but it can be quite easily dampened by choosing to work with platforms hosted in the right co-locations, as close as possible from the flow source such as the LD4, NY4 or TY3 in London, New York and Tokyo respectively – the three biggest centres for FX trading.

“The democratisation of cross connections between trading solutions and liquidity providers leaves no room for slowdown to

exist anymore,” says Virzi. “From a software point of view, frameworks allowing the use of distributed cache systems in order to avoid IO access, coupled with GPU access, allow for the most sophisticated and effective execution.”

ExErcising cautionThe arrival of open platforms that encourage third-party developers

Outside the box

FX

BR

Ok

ER

ag

E O

pER

atiO

ns

“Now that margins in the FX industry are under pressure, nobody can warrant expensive and lengthy implementation processes anymore.”

Frank Van Zegveld


to build and deploy new trading applications has been the clearest trend in the evolution of the retail FX brokerage platform market. And while this has increased the amount of tools available to retail FX traders, they should exercise some caution in terms of how effective the relatively untested tools will be, says Frank van Zegveld, head of business development, Solid Trading.

“At first glance this seems to be a great development – higher speed of innovation cheap and easy access to new tools, supply and demand driven by end users. Unfortunately, this is absolutely no guarantee that the applications will be of a high standard. There will be a lot of poorly maintained applications or applications that actually contribute nothing. This can be compared to

the trend seen on mobile devices: an explosion of easily accessible applications through stores or portals, of which only a very small percentage makes a significant impact.”

Customers are also becoming more discerning and more demanding in terms of the speed of trading and the amount of latency incurred, says van Zegveld. “Nowadays, it’s more or less required to have your trading platform operate without any signs of latency – the competition is fierce in this regard. This encompasses not only the actual matching engine, but also covers the entire (hardware) infrastructure. Therefore we have recently upgraded our complete landscape in the Equinix facilities in London (LD4) & New York (NY5) and recently launched our completely new FX trading platform. Superior performance, a robust, modular and highly extensible technology base: the Solid FX trading platform provides ultra-high-speed access to a vast pool of FX liquidity.”

Van Zegveld agrees that clients are increasingly attracted to platforms with minimal infrastructure because of the low cost and simple implementation. “Now that margins in the FX industry are under pressure, nobody can warrant expensive and lengthy implementation processes anymore. In our opinion this lengthy process is also no longer necessary. Time to market is one of our crucial unique selling points. Being able to respond quickly and efficiently to client needs is not easy and requires a flexible platform architecture. With the advent of HTML5 and other new technologies, we have created a unique toolset which enables us to deliver new solutions quicker and more efficient than ever.”


Both established and start-up brokers can use technology to help them stand out in the retail FX market. Working with the right technology partner can signifi cantly enhance a broker’s offering and in turn, help them to grow their client base and their market reputation. There are three key elements for brokers to consider when looking at technology options:

1. Tailored front-end: Brokers need to work with companies that have dedicated web front-end and mobile resource teams. Together they can develop unique graphical interfaces that allow the broker complete control over the look and feel of the trading experience. Branding and functionality must echo the broker’s own brand and values. The resulting unique front end platform should be tailored to meet the needs of the broker’s customer base, both now and in the future.

2. Multi-Platform: The broker must be able to offer multiple platforms such as iTrade, tradable, MT4, and binary options. This allows them to service a broader customer base and attract more clients. They should expect their technology provider to provide tight front-end integration between platforms, with functionality such as single sign-

on and shared trading resources wallet becoming more common. Ariel can also provide aggregated real-time P&L, exposure monitoring and management across multiple platforms with products such as the Ariel Gold-i Risk Suite which means that, for the fi rst time, Ariel’s advanced Dealer Suite tools are available to brokers without them having to deploy the full iTrade trading platform.

3. Innovation: Brokers need to offer new and innovative features and functionality to continually engage traders, advance the trading experience and retain trader interest and loyalty. Traders expect a full mobile trading experience and the ability to trade multiple assets from a single account.

They are looking for innovations such as the ability to customise the front end GUI and the freedom to create multiple layouts to serve their trading preferences, together with tightly integrated technical analysis functions and trade through charts.

The ability to offer high levels of customer support can no longer be seen as a differentiator. Brokers must look to use technology to help them stand out from their peers, enabling them to deliver the right data in the right format to the right people in their organisations.

Ariel Communications is one of the most established retail technology providers in the industry, having been a leader in spread betting and foreign exchange software systems since 1995. Its UK-based team of in-house developers and UX designers offer tailored and innovative solutions for exceptional differentiation. The company provides fi nancial institutions of all sizes with everything from individual software components to entire trading platforms. These are available as ‘turnkey’, stand alone or seamlessly integrated within a customer’s existing infrastructure. With Ariel’s heritage and specialist in-house team, the company has remained at the forefront of the industry in terms of providing cutting edge technology, from innovative mobile trading apps to fully-integrated back-offi ce solutions. They are ideally positioned to help brokers achieve the necessary differentiation which will give them a competitive edge.

For further information, visit www.arielcommunications.com

How can FX Brokers differentiate themselves in a crowded market?

By Simon Cox, CEO of Ariel Communications.

How can FX Brokers differentiate themselves in a crowded market?

Simon Cox


YOUR DETAILS (All information is kept confidential)

Name Job title

Company

Address

City Post/Zip Code

Country

Telephone Fax

E:mail

PRICE (tick the relevant box) Your subscription will commence with the next issue unless otherwise requested.

1 Year (4 editions) at £150 or £175 Rest of World

2 Years (8 editions) at £250 or £300 Rest of World

QUANTITY REQUIRED Discounts are offered for 3 or more subscriptions.

Please Fax a separate list of names & addresses. TOTAL PAYMENT

PAYMENT OPTIONS (please tick where relevant and follow the instructions)

CREDIT/DEBIT CARD

Mastercard Visa American Express Debit card

Card Number:

Expiry Date: /

CHEQUE make payable to ASP Media Ltd (please print name on the back of the cheque)

Post to Subs Dept: ASP Media Ltd., Suite 10, 3 Edgar Buildings, George St. Bath, BA1 2FJ, UK

BANK TRANSFER Please contact us on + 44 (0)1736 74 11 44 to arrange this.

NB. Payment must be received before subscription can commence. Please send me an invoice for my records

This subscription is for me personally a company

VAT number (Required for European Community based companies only)

Signed: Date:

Name in capitals:

PLEASE FAX THIS FORM BACK TO:

+ 44 1208 821 803THANK YOU

*On receipt of payment you will be sent a Username and Password for the registered section of the e-Forex website

SUBSCRIPTIONREQUEST

Subscribers receive 4 printed copies of the magazine each year together with free unlimitedaccess to the registered section of the e-Forex website (www.e-forex.net) *

✁

183 Subscriptions Ad_Sub Form 13/12/2013 15:12 Page 1


Building low latency FX trading architectures with customised network solutions For firms trading with high-frequency or utilising high-speed event driven strategies, low latency is crucial, but with so much in the hands of network providers, what can they fine tune? Dan Barnes investigates

NEtw

OR

ks

, H

Os

tiN

g &

CO

NN

EC

tiv

ity

By Dan Barnes


NEtwORks, HOstiNg & CONNECtivity


FX trading firms increasingly need low-latency access to data and execution. Rather than relying on the plain vanilla network offerings, some are taking network control into their own hands, or seeking expert customisation.

“Some true high frequency FX traders have begun to dip their toe into the market,” says Joe Hilt, vice president sales and marketing for North America at Hibernia Networks. “We are seeing more and more algorithmic trading in FX. The momentum is starting to build. These customers have expertise that is not only in the finance arena. They are experts at running networks, and most build the actual networks themselves. In some cases where speed is not the absolute goal, they are less likely to build the network and will seek a carrier or service provider to outsource their network. These providers help them to deliver protection on their routes between a couple of points or to hand over their entire network and allow

someone else to handle and monitor their gear for them.”

Many big institutions are changing their approach to infrastructure. Where a few years ago the standard approach was to work in-house, with large, capable teams, the model offers little flexibility on cost and as budget pressures mount that changes the dynamic in the market, which means that that approach is less favoured.

“Typically now, firms are dealing with infrastructure providers such as BT. We look at how we can customise what we do and wrap a solution around their business problems,” says Mark Akass, chief technology officer at BT Radianz. “That is a change in behaviour as well as a change in execution. We have to get fairly intimate to do that effectively.”

The path of maturity in FX differs to that of other asset classes as there are a limited number of centralised places to trade, when compared with equities and derivatives trading. In FX trading there is a diaspora of buyers and sellers, so the first problem firms face is that they need to be ‘everywhere’ in a sense.

“You do see community effects taking place, which helps,” says Hugh Cumberland, solution manager at Colt Technology Services. “There are loads of different liquidity centres. Players

and firms have to interconnect at data centres, which provides a good low-latency service for firms that are co-located there.”

Akass says, “The clustering of clients into large data centres allows the network provider to adapt cloud and network solutions. Instead of having separate wires into different buildings, you can put network switching fabrics into that building, with high capacity in and out. You can then provide local switching within the building to all of the participants. You get a concentration of clients because the capacity in and out of those datacentres tends to be pretty high; that is where you start getting into the fibre path and the 40-100 gbps pipe. That is where scalability hits today, it is providing capacity with diversity and resilience.”

“The bulk of the liquidity is in the LD4, NY4 and TY3 data centres,” says Emmanuel Carjat, managing director of TMX Atrium, “however some very large players are still calculating prices

NEtw

OR

ks

, H

Os

tiN

g &

CO

NN

EC

tiv

ity

Building low latency FX trading architectures with customised network solutions

Joe Hilt

“We are seeing more and more algorithmic trading in FX. The momentum is starting to build. These customers have expertise that is not only in the finance arena. They are experts at running networks.”

Hugh Cumberland

“The rule of thumb we see for deterministic low latency is that it is somewhere between 2-4 times slower than ultra-low latency.”


outside of those locations which creates a potential distortion of price formation,” he states.

“Although the majority of trading may be done in the location you are in, if you don’t have your pricing engine hooked up at one of those other locations you have to go to your pricing engine and back,” he says. “It is also the case that those external locations are not very well connected to the rest of the world. If you were to track latency on a map, with the amount of latency based on the scale of the map, it would look extremely distorted due

to the big players. That is changing, a number of our clients are moving their engines into our environment at those locations. Once at those locations, they are one step away from those liquidity providers in LD4, NY4 and TY3.”

GettinG the network riGhtFor the client, determining the right level of service is the starting point, including the latency required, the range of contact points needed, reliability requirements and of course, cost.

“Are you looking for low deterministic latency or ultra-low latency?” asks Cumberland. “The rule of thumb we see for deterministic low latency is that it is somewhere between 2-4 times slower than ultra-low latency. It varies on a whole load of factors including distance etc. Our deterministic low latency around Europe is somewhere between 10-20 milliseconds, and for a lot of people that is plenty fast enough, but the questions is, is it deterministic enough? There are layer-three network designs that would not be deterministic, they might be ten milliseconds one minute and fifty milliseconds the next, like the public internet.”

Effective connectivity can involve many different technology layers and counterparties, which an FX trader has to take into account when customising their network, says Carjat.

“You don’t just have electronic communication networks (ECNs), you also have single bank portals, which, depending upon how you are trading, you may also want to access. The single bank portal is another layer of the network which often is not very optimised. First generation extranets have been around for quite some time, they do provide a lot of connectivity, but

NEtw

OR

ks

, H

Os

tiN

g &

CO

NN

EC

tiv

ity


Mark Akass

“The clustering of clients into large data centres allows the network provider to adapt cloud and network solutions,”

are not as optimised as the new generation of extranets.”

For trading across long distances, firms also need to look at the major cable providers to ensure they have selected the fastest route. Hibernia’s biggest project at present is a new transatlantic cable, called ‘Project Express’, due to be finished in September 2014. It is expected to have a significant latency decrease, roughly 10% lower latency on a fibre by fibre basis.

“The decrease is really a result of the route,” says Hilt. “Most of the transatlantic cables in the past were built for diversity into shallow water and the objective is to get your cable from shallow water to deep water as fast as possible. That is for two reasons. The first is that in a shallow-water environment you need to double armour the cable, so providing security on it is more difficult and also for cost. When you are double armouring the cable and digging it into the surface it is definitely more difficult. Cables typically leave Long Island and head

south before they start to move up north. If you flew on an aeroplane from New York you would fly out of Halifax, Nova Scotia and then over into the UK.”

He continues, “We will be staying in shallow water, spending extra money to trench our cable in across to the Flemish cap in that region then into the UK. From a route perspective it works and we added a few things to make sure the cable could not be duplicated, and we will be the fastest.”

the Global netThese macro network concerns are crucial as sophisticated trading strategies grow in developing markets, increasing the need for low latency connectivity. Colt has seen an increase in demand from these markets, particularly in Asia Pacific.

“This is a demand we expect to be associated more with foreign exchange than with equities and derivatives as an asset class,” says Cumberland, “HFT continues in the listed derivatives and equity market but as the competition increases and as strategies get worn out HFT firms or shops with similar strategies look for new markets and asset classes.”

Akass says that firms have to identify their network partners with these concerns in mind, taking on board the reach and reliability of service in addition to the ability to deliver low-latency trading.

“The market is very global, so the ability to execute consistent solutions with a scalable, global foot print, I think, is a necessity. What we can deliver in London we can deliver to pretty much to any key market around the world. In addition to experience you have the technology spectrum, are you a one trick pony connecting data centres or cities together? Or can you provide a range of solutions appropriate to the business?Some of our clients

“If you take advantage of it, microwave or millimetre wave once in the air are moving at the actual speed of light, just shy of what it would be in a vacuum,”

Jay Lawrence



For trading across long distances, firms also need to look at the major cable providers to ensure they have selected the fastest route


at the low end might only want 10 meg but at the high end they might want ten gig. It’s about providing a range of solutions at a cost effective scalable model. Service operations and quality are key. Plugging it in and doing the plumbing is one part of the problem, but keeping it operating to a high standard, keeping the capacity running to the right level, having that level of investment and aggregation of client demand to justify that becomes quite critical.”

Hibernia also tries to control distance as much as possible, as that controls latency more than any other factor.

“We always look at how many fibre miles we can take off,” says Hilt.

“We also build cables for diversity purposes, so with things like Hurricane Sandy, that really affected a lot of cable in the New York and New Jersey area but Hibernia’s was one of the only ones not in threat because it leads from Halifax, Nova Scotia. We route our customers across eight different cables in the Atlantic, two of our own, and six others, such as AC1, so we give our customers not only a financial advantage through speed but also resilience through diversity.”

SpeedinG aheadWith a network in place, the trader has to determine the best ways to reduce latency. Cumberland says that Colt has seen that there is a point which is reached where

lower latency offerings can only be achieved with a move from fibre to microwave.

“That is an expensive exercise but once Pandora’s box has opened you have no choice,” he says. “If you are first in to a new strategy, asset class or venue you have the luxury for a brief period of time. You are making profit based on being first to market. Once you are competing with other firms it becomes a race to the bottom. Our flagship microwave route is Basildon to Frankfurt and it is a very successful venture for us. However microwave technology will be restricted to the few routes where you can justify the investment. There is no long term certainty in these investments, a

NEtw

OR

ks

, H

Os

tiN

g &

CO

NN

EC

tiv

ity


…there is a point which is reached where lower latency offerings can only be achieved with a move from fibre to microwave.

business opportunity might be 12-24 months.”

“Fibre is a good medium but the physics of fibre has two things working against it,” says Jay Lawrence, CEO at Nexxcom, a microwave radio specialist. “Firstly there is latency inherent in the medium. Light has to travel through a physical medium of glass which is like trying to drink syrup. Secondly, by default you can’t always get the straightest line with fibre because you have things in the way so it is not the most efficient route. As an alternative to that we are using microwave architecture and we have used a unique radio engines.”

There are a range of model that allow the use of microwave says Cumberland, which avoid the risks of signal disruption halting trading.

“Some customers use microwave in conjunction with fibre and prioritise some data to go via microwave,” he says. “If you connect two centres

with microwave and the customer has colo in both then you can use the microwave to synchronise rather than send huge amounts of data.”

Lawrence explains that Nexcomm provides a holistic service which includes designing the engines to fit a particular level of performance, which is hard for trading firms to do.

“A lot of folks have tried to buy boxes off the shelf, some have tried to retrofit boxes, but it hasn’t worked the way they hoped, as they try to stretch them to the edge of performance which affects reliability,” Lawrence says. “We design an engine to fit in the car to perform the way you want it and some of those key principles include being standards oriented, so all of our networks hand off either at a multiple fast ethernet or a gigabit Ethernet. That means you are not doing things to the data stream that are atypical or off standard, an important efficiency component in low latency. Our perpetual joke is that we don’t molest our bits.”

Science and fictionEvery time a signal processing event takes place inside an architecture, the transmission is slowed down. To avoid that there needs to be low noise inside of the system itself and in the radio itself.

“To keep noise to a minimum you don’t want to be stretching those engines to the extreme because when you stretch to the far end you either get distortion from turning the power up all the way or you get noise from going the absolute maximum distance and something in the environment can get in the way,” Lawrence says.

By putting the architecture together in a simple fashion without stretching anything, microwave can offer a very straight line, with a more efficient signal transmission than in fibre.

“If you take advantage of it, microwave or millimetre wave once in the air are moving at the actual speed of light, just shy of what it would be in a vacuum,” says Lawrence. “You get a benefit of a 30% premium and then you can get other pickups by having a more efficient path and by minimising the amount of signal processing you have to have by having a well architected network.”

Cumberland believes that while valuable, microwave will only happen on routes where there is the most traffic and opportunity, and where firms have the greatest belief that an opportunity will be longer term.

“There is speculation about lasers and free space optics but the reality is the demand for broad bandwidth, ultra-low and deterministic low latency will persist,” he says. “The great thing about fibre is if you have a 10 gig connection you can flood it with every price from every asset class. If you have a much narrower microwave connection, maybe 10 meg, then you have to be much more careful, so have to be smarter about how to use the connection.”

SummaryHigh performance FX trading firms looking for access gateways to global currency trading venues and exchanges are now able to leverage the benefits of a new generation of tailored network solutions which are designed to reduce latency and which can deliver scalable on-demand connectivity, guaranteed network availability, security, fiber diversity and redundancy. So as the saying goes, they have never had it so good.



“If you were to track latency on a map, with the amount of latency based on the scale of the map, it would look extremely distorted due to the big players.”

Emmanuel Carjat


AU

TO

MATED

FX

TR

AD

ING


For any trader looking to automate their trading, one of the first questions is what type of expert advisor (EA) or trading model to chose? That can depend upon any one of several factors including available trading capital, risk appetite and previous manual trading experience.

Daniel Fernandez of Asirikuy, sees two broad groups here. “It mainly depends on whether they are looking at short-term or long-term profit objectives,” says Fernandez. “That in turn usually depends a lot on their available capital and their experience. Those with less trading capital tend to look for high gains over shorter periods at higher risk, while those with more money tend to do the opposite.”

The reasoning behind this is typically associated with the way in which those

two categories of strategy tend to perform. Longer term strategies, such as trend following over days/weeks/months, can often exhibit poor short term performance because their trading logic easily results in them being “whipsawed” during range bound periods. The trend following advisor or model gives an entry signal, only for the pair to reverse short term and stop the trade out, a process which then repeats. This to and fro erosion of capital can often happen over a protracted period with long term trend following systems, resulting in extensive drawdown periods. “Well capitalised and experienced traders are better-placed to tolerate these drawdowns than those with more limited resources,” says Fernandez. “They will be thinking in terms of annual profits as opposed to less well-capitalised short-term traders, who will be using strategies such as scalping and focusing on weekly or perhaps at most monthly profits.”

In the institutional space, other factors can play a part in choice of strategy type. “Our clients usually have a good idea of what works in general terms from what their professional peer group is doing, and will try and capture that in a way that works for them” says Rosario Ingargiola, CEO of FXone (Seabury Financial Solutions LLC, which is a subsidiary of the i-bank Seabury Group). “There’s usually a significant statistical or technical component to that, but the trade holding period can vary significantly. Another point to bear in mind

Forex Expert Advisors taking the emotion out of trading for profit

One of the many benefits of expert advisors (and trading models more generally) is that they offer traders a disciplined framework within which to operate. For those who find the emotional pressures of discretionary trading an issue, they are therefore a valuable solution. However, as Andy Webb explains, they also open the door to other opportunities not economically feasible for a human trader, such as diverse strategy portfolios.

AUTOMATED FX TRADING

Andy Webb


is that their strategy selection may be influenced by their institutional investors. If those investors regard a particular strategy type as especially attractive at present then that is likely to have some bearing on managers’ choices.”

Pick’n’MixWhile some traders switch to using EAs because they have problems with self-discipline when trading manually, others are looking for strategy diversification and so are not necessarily looking for just a single type of model. “There comes a point where a human trader simply cannot physically monitor and execute multiple strategies simultaneously,” says Oleg Kovalichin, Software Developer/MT4 Support at FxPro UK Ltd. “Automation is a solution to that problem.”

Apart from the ergonomic benefits, this approach allows the blending of different types of EA into a portfolio in order to collectively smooth the trader’s equity curve and minimise drawdown periods. This may involve a mixture of very different logic

types, including trend following, scalping and statistical arbitrage.

configuring EAsFor vendors looking to sell EAs to relatively inexperienced traders, there is clearly logic in minimising the number of configuration parameters to avoid confusing the customer or running the risk of them putting together a disastrous and illogical parameter combination. According to Kovalichin, this isn’t necessarily the case in practice. “Those for sale on the market tend to have a lot of configurations options,” he says. “That is also the case among our most successful clients who tend to have either developed their own EAs or paid someone to write the code on their behalf.”

When it comes to the parameters traders wish to configure, Kovalichin sees a clear trend. “Money management configuration options tend to be the things traders are most concerned about,” he says. “Then after that come things like any indicators in the model, such as the length of an RSI or stochastic.”

oPtiMisAtion: usE And AbusEOptimisation is a technique that can readily be abused (with expensive consequences) when it comes to EAs and trading models. This has been especially common among retail traders both in terms of their EAs and those they might buy. It is all too easy to select a small recent block of price data, find the set of parameters that made the greatest profit in that period, and then immediately apply

those with dire consequences in live trading. By the same token, some unscrupulous vendors will publish regular “updates” or “upgrades” to their EAs that are simply the most recent curve fitting of the market that flatters their EAs’ historical performance.

“For these vendors the primary motivation is the sale and not the long-term stability of the client,” says Kovalichin. “By contrast, we are looking for a long-term relationship and so we use optimisation as a tool for discovering long term performance stability rather than just the most recent curve fit profitability. Our developers will therefore be conducting both in and out of sample testing, bootstrapping, plus testing with random data to ensure that stability.” In the professional arena there is already a good understanding of the perils of abusing optimisation. “Our institutional clients certainly understand the limitations of optimisation and back testing,” says Ingargiola. “So they tend to do small-scale live trading on a walk forward basis with real money and use that as a basis for fine tuning the parameters that they will use for full production.”

Forex Expert Advisors

AU

TO

MATED

FX

TR

AD

ING

Oleg Kovalichin

“Money management configuration options tend to be the things traders are most concerned about,”

Daniel Fernandez

“It’s not uncommon to see professional discretionary traders using scripts to supplement their trading,”

ProfitAbility PArAMEtErs: A cornucoPiA of PossibilitiEs At their most basic level, profitability parameters can be nothing more than two monetary values: “profit target X dollars, stop loss Y dollars”. On the one hand, this could be regarded as a relatively lazy approach. On the other, one could argue that this is a much better way to judge a strategy in terms of strict accuracy performance - e.g. if the profit target is larger than the stop loss and the strategy is still correct more than 50% of the time.

While this approach is still quite commonplace, Kovalichin also highlights another trend in this area. “Trailing stops have become increasingly fashionable lately,” he says. “This spares traders from having to decide how much profit to take, though some won’t rely only on this. They may have a succession of increasing fixed dollar value targets but with the final exit of the last tranche of a position being determined by the trailing stop.”

Fernandez sees the whole question of profitability parameters as essentially a conflict between what is the best thing to do and what is the easiest. “You might know that a particular model worked well historically using a stop based, for example, on a percentage of average true range,” he says. “However I have noticed that what is best from a historical perspective is often worst from a psychological perspective. People usually want something that is easy psychologically, such as a break even stop, that prevents existing unrealised profits from being lost. In a sense, this is a form of psychological insurance but one that incurs the insurance premium of making less profit in the long-term.”

In the institutional market, Ingargiola notes a more sophisticated approach. “Our clients tend to look at statistical measures of what is

likely to be achievable given certain metrics around market data,” he remarks. “While their strategy might target a robust profit/loss ratio, their profitability parameters are likely to be based upon anticipated price action derived from empirical research and real-world experience.”

scriPts And EAsWhile EAs can deliver the full automated trading experience, scripts are an invaluable tool when it comes to maximising their performance as well as acting as support functions. “It’s not uncommon to see professional discretionary traders using scripts to supplement their trading,” says Fernandez. “For example, they may use a script to give them proprietary resistance and support levels while a trade is open.”Scripts can also be invaluable as an overlay for controlling a portfolio of diverse trading models, such as preventing account overexposure. This is the approach taken by FxPro’s SuperTrader which uses scripts

for selecting and controlling the deployment of multiple EAs. “It can look at all the available EAs, work out the correlation among them and estimate the best way in which they can be combined,” says Kovalichin.

FXone also facilitates a portfolio approach to strategies. “In FXone you can have multiple strategies running and tag them individually,” says Ingargiola. “You can then use these tags to filter all the real-time feedback loop values you are receiving to extract strategy-specific information and then base further actions on that.”

tyPEs of EA: froM chAlk to chEEsE And bAck AgAinThe EA market has evolved to the point where there are strategies available based upon a wide variety of methodologies: trend following, scalping, statistical arbitrage, artificial intelligence, patterns (including Japanese candlesticks), point and figure and Market Profile - to name but a few.


AUTOMATED FX TRADING

There comes a point where a human trader simply cannot physically monitor and execute multiple

strategies simultaneously


But in practice the range of EAs used by the majority of retail market participants is relatively narrow and the choices broadly fall into either scalping/reversal strategies (commonly used in conjunction with Martingales for position sizing) or trend following. In the institutional space, the picture is rather different. “The majority of what we see is statistical and mean reverting in nature,” says Ingargiola. “Almost all of that activity is at the higher-frequency end of the spectrum, so most participants are holding their positions for minutes or at most an hour.”

Fernandez points up an interesting aspect of retail traders’ choices of strategy type: “I would say it is very

cyclical in nature and people are primarily just interested in what is working now.” Therefore when a market is low volatility and ranging, scalping strategies start to work, so traders switch to them - especially since trend following systems will (as mentioned earlier) be experiencing “whipsaws” and drawdowns in these conditions. However, as the market changes and starts to trend again, these traders experience severe drawdowns - especially since many of them will be using higher leverage and/or Martingales. According to Fernandez, those with sufficient capital still left will then switch back over to trend following systems, until the market regime cycle repeats again.

AccEssing nEw EAsThe options available to traders for accessing new expert advisors continue to expand. Historically the three choices were: build your own, hire a programmer to code it for you, or buy an off the shelf EA. However, there are currently a number of additional alternatives. For instance, traders can now subscribe to EA signal services, which they can then automatically execute.

There is also a growing trend among EA developers to lease rather than

sell complete EAs. Unlike the signal services, this gives traders the ability to adjust the parameters of the EA to suit their preferences. Fernandez sees this move towards EA leasing as encouraging. “The use of a subscription based model means that the EA developer has a motivation to show more long term commitment,” he says.

Another development has been the emergence of drag and drop programming tools, such as FxPro Quant, that spare traders from either having to learn how to program or having to outsource their programming. While the latter approach has the benefit of speed, it has the downside of having to reveal the business logic of a proposed EA to the developer, which is a risk that drag and drop tools have now to some extent negated.

While the majority of institutional traders will be building their own strategies rather than buying/leasing EAs/signals, there is still demand for easy access to external data and signals. “Some of our clients use us purely for trade execution because they want a low latency, highly threaded solution,” says Ingargiola. “However they are using external sources to generate their signals and so require a means of connecting them to our platform. We have therefore built an API which can accommodate a whole range of inputs, including the output from a custom web scraping tool that we have built for one client.”

conclusionThe good news for traders of all types is that the high level of interest is driving a continuous and rapid evolution of both new EAs and the ways in which they can be delivered/developed. As a result, the speed with which any trader - irrespective of experience and expertise - can be up and running continues to decline, while the range and sophistication of available EAs continues to increase.

Forex Expert Advisors

AU

TO

MATED

FX

TR

AD

ING

This to and fro erosion of capital can often happen over a protracted period with long term trend following systems, resulting in extensive drawdown periods.

Rosario Ingargiola

“Our clients usually have a good idea of what works in general terms from what their professional peer group is doing, and will try and capture that in a way that works for them.”


Trading Signals have now been launched in MetaQuotes’ MetaTrader 4 and MetaTrader 5. The Trading Signals Service is built into the MetaTrader Client Terminals, which is the working area for traders. When MetaQuotes launched the Trading Signals Service many traders did not hesitate to get instant access to the service. Now it has become regarded as a standard option that should be offered to traders automatically.

Easy to usEFor traders, the Trading Signals Service is an easy to use feature that allows them to succeed in their trading, even when they cannot trade by themselves.

For instance, if a trader is unable to trade under normal circumstances, or if they are inexperienced in trading, they can choose another successful trader, known as a Trading Signal Provider, and copy their trades.

All of this is performed in the MetaTrader 4 or MetaTrader 5 trading terminals. In the trading terminal the trader is given a list of providers, full details and history on any given signal, plus the trader can subscribe to signals.

Subscribers need to put two things in place in order to use the service: they need to launch the trading terminal on MetaTrader 4 or MetaTrader 5, which should

The MetaTrader Signal Service

MetaQuotes has launched its new Trading Signals Service, which enables traders to copy the trades of others and earn money even when they are unable to trade themselves. The company developed its new Trading Signals Service thanks to unprecedented customer demand for such a solution on its trading platforms. Both brokers and traders requested social trading functions that would give traders the ability to copy the trading operations of other traders.

PR

Od

uc

t l

au

nc

h


be online to be able to replicate providers’ trading operations; and they need to have a MQL5.com account, as this site is the core of the service and it provides the authorisation for subscriptions control and the payment system. If a trader wants to subscribe to a paid signal, they should have the corresponding amount of credits on their MQL5.com account, even though the majority of signals in the service are free.

BrokEr indEpEndEntImportantly, the MetaQuotes Trading Signals Service is broker independent;

this means the subscriber or provider has no need to contact a broker, sign any agreements, or create special trading accounts to use this service. Moreover, both subscriber and provider can work with different brokers with no further arrangement needed.

As for brokers on the trader server side, they can establish the service simply by enabling or disabling signals; they just turn the signals on and give traders the opportunity to make their money work.

Trading Signal Provider’s are carefully

checked by MetaQuotes and when they are verified, they are given the right to provide signals on MQL5.com. After that the Trading Signal Provider can register a signal in the Trading Signals Service. If the signal is free, it is available for subscription instantly. If it is a paid signal, it goes through a one month test period, during which it must perform at least five trades with no large drawdowns. Paid signals become available for subscription only if all of these criteria are met.

This exciting new service is provided by MetaQuotes.

PROduct launch


It is all about pushing boundaries with cutting edge trading services, says Marc Spaelti, first vice president and chief operating officer for the RM and brokerage department at Dukascopy Bank. He comments that this trend is a consequence of the evolution of the consumer IT industry in the past decade, and that it is now a necessity to provide an up to date brokerage to be able to serve that demand, or lose customers.

Spaelti explains: “The number of persons that are trading online

is constantly increasing. They use mobile phones, tablets and computers to communicate and receive information. E-commerce is simply responding to an increase in demand to access online trading accounts through different means. Clients want to trade or check their account now, no matter the means. Limiting that access means that you limit the prospects you can reach.”

George Stylianou, chief marketing officer, ForexTime (FXTM), comments that since the

Pushing the boundaries in retail forex with cutting edge trading services

The fast growing retail forex market is hungry for technology to fuel the needs of smart and increasingly savvy investors who are looking for trading opportunities and the quickest ways to execute them. In response to this powerful demand, Heather McLean discovers how a new breed of retail FX broker is utilising state of the art technology coupled with fully customisable trading platforms to provide powerful suites of online services catering for mobile, automated, social and power traders.

RETA

IL F

X T

RA

DIN

G

Heather McLean


introduction of social trading, there has been a revolution in the way people trade. Historically, the core trading audience was split between experienced traders and novice traders looking to learn.

Now, Stylianou says things are changing: “With the arrival of social trading, forex has been opened up to a whole new audience consisting of individual investors who are either too busy to study the market and make their own trades or who haven’t yet developed advanced trading skills. By allowing traders

to follow and copy those trades executed by more experienced investors, we have now multiplied the target audience of prospective traders.”

Accessing reseArch And AnAlyticsWith the deployment of mobile and social investment technologies in retail FX, brokers now need to consider new ways for providing research and analytical tools to their clients rather than just utilising traditional methods. This includes through their trading platforms,

websites, TV channels and email. Ryan Nettles, director of FX services at Swissquote Bank says that, “As more traders are using mobile phones and social media for accessing market information, brokers are targeting these venues to get their research and analytical tools to their clients. At Swissquote, traders can still access our research and analytical tools from our website, trading platforms, TV and email, but now our clients can also find this information from our multiple mobile applications, through social media sites including

RETAIL FX TRADING


Twitter and Facebook, as well as third party trading venues such as Bloomberg.”

Some brokers are also providing access gateways to institutional grade research and analytical toolsets for their retail investors and traders that previously was never available. Spaelti comments: “Access to institutional grade research is an added value that is often very expensive to implement for a general retail audience. Restrictions on redistribution or copyrights may render it impossible. At Dukascopy we have put in place our own team of analysts that produce proprietary information, fit for redistribution,” Spaelti adds. “Using modern ways of communicating the various products, clients have a wide choice of what to receive and how to access the information, for example by receiving reports by email, SMS alert messages, and our own FX spider that detects news and articles on selective subjects or key

words or in discussion topics on our community pages.”

tAilored trAding experienceA few brokers have focused on providing a more tailored trading experience for their clients, designed to meet their specific investment objectives and trading styles. Nettles comments that brokers are providing this tailored trading by offering multiple trading technologies and increasing functionality on their trading platforms. “At Swissquote, we provide four different trading platforms as well as seven mobile and tablet applications,” he explains. “Each technology offers a multitude of functionalities. This allows our clients the flexibility to choose the platform which suits their personal investment objectives and unique trading styles.”

Tailored trading experiences are becoming more attractive for brokers’ clients. Stylianou comments that ForexTime was founded to offer a fresh and dynamic approach to trading. He says the company’s rapid international growth has

been fuelled by the recognition of the benefits it offers through its regionally tailored solutions.

Stylianou adds: “One of the first regionally tailored products we launched earlier this year was our true Amanah account, the first Shariah-compliant account to be certified by leading Islamic scholars. This account follows the principles of Musharakah, a collaboration whereby profits and losses are shared. With ForexTime’s true Amanah account all Riba (interest) charges and rollover fees are cancelled.”

“We are also seeing growing interest in our new Cent account which gives clients the opportunity to trade currencies and precious metals with under a dollar, whilst still enjoying leverage of up to 1:1000, low spreads and instant execution,” continues Stylianou. “The Cent account addresses some of the criticism surrounding demo accounts, such as that traders using demo accounts do not behave entirely as they would if they were investing ‘real money’. By trading with Cent accounts you can get a real feel of the market while only trading small amounts of money. They are the perfect introduction to forex and allow traders to get a real feel of forex trading before upgrading to a more advanced account type.”


RETA

IL F

X T

RA

DIN

G

Marc Spaelti

“It’s the capacity to take care of clients and to follow up on their specific needs that counts. It is very often the small detail or attention a client receives that counts most. This requires an ability to think like the client.”

Yet Spaelti comments that when dealing with retail clients, you must also opt to increase efficiencies. “Tailormade solutions are generally expensive and if applied to a small group of clients, not necessarily cost efficient, at least in our business environment,” he notes. “The key is to use a global approach that allows the greatest number of individual client choices. We provide the client with a gateway, to which he can connect using his method of choice. While we do offer our own end product, any third party software can connect to our price stream and send trade requests.”

Fighting latency For Faster tradesLeading brokers are also taking steps to specifically combat latency, so they can provide their clients with the fastest possible trading environment. Nettles states that a fast trading environment is a key factor in online FX trading. “At Swissquote, our systems are monitored 24 hours a day and are under constant inspection in order to provide the best service level to our clients wherever they trade using our technologies.”

Stylianou notes: “By collaborating with third party liquidity providers, ForexTime has been able to combat latency and provide our clients with faster execution and better rates. This is one of the hidden benefits that this approach offers clients; the client never sees this complex technological infrastructure,


RETAIL FX TRADING

George Stylianou

“Forex is a global industry so all brokers need to balance the strategic need to address client needs on a multinational scale while balancing regional and cultural needs.”

With the deployment of mobile and

social investment technologies in retail

FX, brokers now need to consider new ways for providing research

and analytical tools to their clients rather

than just utilising traditional methods


however it is critical to ensuring they receive the most competitive rates and fast execution.”

While Spaelti comments: “Reducing client latency is usually done by moving servers closer to your clients and by moving one’s own server closer to the location of the interbank price feed. However, latency issues are often overrated; scalping strategies achieve higher advantages by paying attention to slippage during peak times than worrying about latency in an oscillating market. We have also noticed that providers have invested recently to protect themselves when short term volatility soars, by updating their price even faster.”

aligning interests with clients needsAligning their interests with

those of their customers is now differentiating many brokers from others, comments Stylianou: “Forex is a global industry so all brokers need to balance the strategic need to address client needs on a multinational scale while balancing regional and cultural needs. ForexTime has developed a range of products and services that meet this dilemma, such as the true Amanah account. These products and services are globally available but localised and tailored to the needs of the trader. Using this approach we put the trader and the trading experience first while still competing on a global stage.”

Nettles adds: “Brokers are aligning their interests with those of their customers by offering many

investment and trading products as well as tools to make informed decisions. At Swissquote, clients have a huge range of financial products to invest and trade in and we also provide portfolio analysers and other analytical toolsets to help our clients be successful.”

access to more marketsSome brokers are positioning themselves as one-stop-shops to meet increasing demand from investors for access to a wider range of markets, such as CFDs, binaries, and commodities. ForexTime is one of those brokers, claims Stylianou. “In less than one year since launching, we have expanded ForexTime’s offering to include seven account types to suit traders of all levels of experience, partnered


RETA

IL F

X T

RA

DIN

G


with a wide variety of financial instruments including over 60 currency pairs, CFDs, futures, ETFs, precious metals and commodities,” he says.

Yet Stylianou states it is more vital to concentrate on the underlying technology, and not be carried away with trying to offer a plethora of services: “It is a logical assumption that the more financial instruments offered by a broker, the larger their target audience is and thus it makes good business sense for a broker to offer a range of options including currencies, CFDs and commodities. The essentials a forex broker must offer include a reliable trading platform, such as MetaTrader,

and a standard account on MT4. These are the bread and butter of what we do and anything on top of that is what sets a broker apart and expands their target market.”

Innovating products and servicesInnovation with their product and customer service offerings in order to deliver a more compelling value proposition is also a top concern for increasing numbers of brokers. Stylianou states that the future of forex trading is undoubtedly on mobile devices. He comments: “In the coming years I believe the de facto platform will be the seven inch mobile smartphones. As the technology improves on these devices and people’s behaviour changes. We are already seeing people trading while they are commuting to work, during their lunch break or even when they are at home with their family. Brokers will have to work hard to be responsive to the growing needs of traders.”

“ForexTime is aware that people want to get more out of their trading in less time, so everything we do is aimed at making the trading experience faster and more efficient. Traders want to open the platform, tap a button, make their trade and carry on with their day. The more simplified the workflow from a technological viewpoint, the more convenient trading on the go is for our clients,” Stylianou comments.

Nettles remarks that Swissquote also takes innovation very seriously. He says: “We are constantly analysing all financial product trends and pro-actively implement our customers’ needs on our trading platforms. In

2013, for example, we launched 11 new markets across commodities and NDFs on our FX trading platforms.”

While Spaelti states that some brokers think cleverly about clients, treating them as individuals rather than a mass. “It’s the capacity to take care of clients and to follow up on their specific needs that counts,” he says. “It is very often the small detail or attention a client receives that counts most. This requires an ability to think like the client. In the retail world we face a variety of cultural differences; we employ account officers from all corners of the globe to respond proactively to these individual needs.”

“Surrounding one’s product offering with external providers further increases the client’s fidelity to his broker. Using our opensource gateway, a variety of added value services have mushroomed,” Spaelti concludes.

RETAIL FX TRADING

Ryan Nettles

“As more traders are using mobile phones and social media for accessing market information, brokers are targeting these venues to get their research and analytical tools to their clients.”


David, how long have you been in the Investment Management business and what attracted you to the industry?

I entered the industry in August 1999. My career has been entirely on the buy side of hedge funds and trading. One of the attractive aspects that brought me to this industry was the scalability of success - if you do a good job and produce positive returns for your investors you have the ability to grow a business to large scales. A second aspect was the constant flow of trading opportunities. Trading is a tough business, but essentially any day the markets are open there is an opportunity to profit from market opportunities and inefficiencies. The markets constantly evolve demanding rigorous R+D but many of the core skill sets to trading and research remain the same and it’s about finding the new opportunities and inefficiencies. A third aspect that attracts me to this work is the ability to easily measure performance and value to clients. This aspect on the one hand can create significant amounts of stress but on the other hand it is easy to know if one is doing a good job or not. Many people are turned off by

the significant level of pressure and find it too much. However, when a trader does not need to worry about keeping others happy, but only on producing cash flow from trading, he can focus on what matters – producing profits which is an advantage I give our traders every day allowing them to excel in their field and which is satisfying in an un-measurable way.

When did Smart Box Capital commence operations and what services does the company provide?

Smart Box Capital was founded in 2008 and launched in 2009 with the aim of providing a platform for emerging traders (Traders with less than 100MM USD Assets Under Management) to source capital and for investors to have a tier 1 structure hosting the emerging talent they are looking for. With top class providers such as Credit Suisse (Custodian) Citibank and Newedge (Brokers) and an annual audit by KPMG, SBC provides investors with a secure environment to invest through as well as access to untapped emerging talent. Besides the funds currently on offer SBC also offers a managed accounts platform

Smart Box Capital leveraging diversification to provide a unique and uncorrelated offering.

e-Forex talks with David Rich head of Smart Box Capital’s Managed Accounts platform. Smart Box Capital is a research driven investment manager which, utilizing systematic trading programs, aims to deliver uncorrelated superior returns in all market conditions.

TR

AD

ER

TA

LK


TRADERTALK

David Rich


that gives smaller traders the ability to setup and generate their own track record which can later be rolled into a fund if need be or continue to run as a managed program. Though the number of traders constantly changes there are currently 8 trading teams under the managed program and 2 trading teams in the fund.

Today SBC has evolved into a breeding ground and capital source for emerging managers and offers a complete service from setup, through capital raising and complete administration and day to day operations with the aim of allowing traders to focus on generating alpha, which is a big enough challenge, without the hassle of setting up and running a full blown investment management operation.

Who are the key people involved in the firm and what are their main day to day responsibilities?

The firm was founded by Hadar Swersky who still runs it and is assisted by a team of investment and administration professionals who have made Smart Box Capital into such a success. The Chief

Economist is Mike Astrachan, formerly the Chief Economist of Olympia and York, Senior Analyst at Merrill Lynch and Economist at the Federal Reserve Bank of New York, who has been accurately predicting world macro events for the past 35 years, predictions that have in turn generated billions of USD in profits.

His successful forecasts have been published by Merrill Lynch, Dow Jones, Reuters, Barron’s and other leading publications around the world. Manager selection and risk is run by myself. I specialise in emerging managers, especially in the quantitative space, with a focus on low volatility strategies that are scalable. The core managers I like to work with have 5-10 years’ experience working for other firms in a trading or senior research capacity, have gained valuable experience, learnt from mistakes and are now ready for the spotlight of managing institutional capital with its demanding requirements.

Can you tell us a little about your Smart Box Capital’s Managed Accounts platform and what are its primary objectives?

Smart Box Capital

TR

AD

ER

TA

LK

“Much of our work is in the Behavioral

Finance space, where we try and analyze

how other intelligent investors with

unique information are reacting to the

market and where we might have an edge in measuring their trading behavior.”

Hadar Swersky

The Managed Accounts platform was founded in 2011 in order to provide investors with a diverse portfolio of strategy types managed by traders with institutional trading backgrounds coupled with tier 1 infrastructure and risk management usually only offered in a pooled vehicle structure. Our portfolio of strategies are developed and managed by managers with strong academic backgrounds in mathematics and computer science. These traders after school and / or serving in Israeli military elite intelligence units and have then gone on to work for global investment firms in NYC, London, Paris and upon return to Israel wanted to continue working in trading and alternative asset management but could not

find appropriate institutional level opportunities. Our goal is to harness this talent pool into producing low volatility strategies that cater to the needs of institutional investors while providing the highest level of efficiency and transparency. The end result is a pool of independent strategies managed by “off the radar” talented managers within a transparent, liquid managed account setting.

What are the advantages of emerging managers and how does it benefit investors?

Investing with emerging managers has pros and cons. Smart Box Capital works with its managers to accentuate the pros and mitigate the

cons to produce more value for our investors. Some of the advantages are certain market inefficiencies which have a small profit capacity due to lack of liquidity in their specific marketplace. In these cases the larger funds will often not take advantage of the profit opportunity as it does not produce enough overall revenues to satisfy the needs of a multi-billion dollar fund. Meanwhile the smaller, nimbler manager with only $10-100m in AUM will aim to take advantage of these smaller opportunities as it can be a meaningful profit source to its smaller investor base.

Emerging managers can further provide more access and transparency to investors.

TRADERTALK


They are, for example, often willing to work harder per client and satisfy their requests for information and even provide bespoke strategies. Many large and well established managers will provide only minimal transparency and risky redemption terms. Negative aspects of an emerging manager are tighter budgets to create a solid infrastructure and the need for the manager to focus on the business (capital raising, office management, legal / compliance) which can drain the manager’s time from the core business of research and trading. This is one of “the” aspects that Smart Box tackles to minimize the workload on the manager’s end, except of course core R+D and

trading, to a minimum. Ideally we like to provide an easy environment for managers to come work on research and trading without any other burdens other than good risk management.

What do you consider to be the key strengths, expertise and operational advantages of Smart Box Capital?

When you look at SBC’s offering the strengths and advantages differ for traders and for investors. While capital raising is important most successful traders have a couple of “friendly” investors that are prepared to back them which is normally enough to setup and start generating

a track record however we find that traders that have worked for a small fund or prop shop have no knowledge with regards to the setup and operations which can be both tricky and costly especially as they start to navigate the professional web of lawyers, accountants and administrators not to mention brokerage accounts, credit risk calls and a host of other issues. SBC provides a “turn key” solution right up to the fund’s ISIN number and funded trading account leaving the traders free to focus on making money for their investors. For investors, SBC provides a transparent and liquid structure with the highest level of third party supervision which has become a prerequisite


Smart Box Capital

TR

AD

ER

TA

LK

TRADERTALK


post Madoff. An additional bonus for investors is the introduction to pre-vetted traders that would not be “discovered” or “investable” without the help of SBC.

What instruments do you trade and what characteristics are you looking for in an asset class?

We trade only liquid assets classes as that allows for effective risk management. Furthermore, in a post 2008 credit crisis where many alternatives financial products were not properly valuated within mark-to-market accounting it was hard for investors to know with 100% accuracy what their account valuations were or get their money

back even when willing to accept major losses. Therefore, in order to remain fully transparent and liquid for our investors we stick to liquid asset classes only: long / short US equity, futures and spot FX and so on. This means we miss out on certain asset classes that can produce outsized returns (for example distressed debt) but we prefer to provide our investors with the safety of near cash level liquidity. This also produces an easier risk management environment for our risk management team as all our trades have a clearly defined set of risk / return parameters and pricing/valuation.

What style of trading do you undertake to execute your strategies and do you have any particular preference for specific trading time horizons, such as short, medium or long term?

Our main focus is on low volatility strategies that are liquid. Theoretically we should be agnostic to strategy types but we tend to prefer un-leveraged FX and market neutral US equity and if not market neutral then low directional exposure as measured by cash or beta. Many of our strategies use

computer science and statistical testing to enhance their research and in some cases the trading execution is automatic. We do not take a view where we only invest in 100% auto-execution or only 100% discretionary managers – rather we view computers as a tool traders use at their discretion to enhance R+D and execution. Many of our strategies are 80% or more auto execution with manager override and discretion when needed to lower risk. While others utilize computer science to create screening tools for trading ideas.

Regarding time horizons, we tend to prefer shorter-term strategies; some as short as intra-day and the longest strategy holding positions for 3-4 months. The preference of shorter term, especially with early stage managers, is that it produces a larger amount of measureable data points (trades) within a shorter time frame which gives us the framework to do rigorous analysis on our performance assumptions. All managers and strategies have ups and downs and we aim to dynamically assess the performance and monitor whether we are on track or not. The longer the holding period of a strategy the more time it takes to measure the

We trade only liquid assets classes as that allows for effective risk management.


significance of the performance and the alpha produced by the manager. Many longer term strategies can take 9-12 months before enough data has been amassed in order to make a concrete decision about the strategy and its performance – which is a risk we try to avoid.

How do you go about back-testing your proprietary trading systems and signals to confirm that your strategies will perform as required and will remain relevant to the long term trading goals and performance criteria of the firm?Back testing is a tool to be used carefully, as “curve fitting” can create a false sense of security. We first prefer strategies with logical trading rules based on sound financial and trading principles while statistical testing is only used to confirm or deny the strategy’s underlying logic.

Generally, strategies look at multiple data sets: fundamental, economical and technical analysis.

Much of our work is in the Behavioral Finance space, where we try and analyze how other intelligent investors with unique information are reacting to the market and where we might have an edge in measuring their trading behavior. When we back-test we use in-sample data sets and then test our results against out-of-sample data sets and on other asset classes.

What Money and Risk Management models have you developed and how do you apply them with respect to different portfolios, strategies and individual client needs?

Risk management is the core of our entire operations; we focus on a few key aspects:

• Low position concentration, for many of our strategies its lower than 3% of capital per position

• Low directional exposure, usually +/- 10% per strategy

• Liquid asset classes only – real valuations at all times and available liquidation if needed

• Diversification of uncorrelated strategy types, each looking to extract a different inefficiency from the market

To what extent have you developed research agendas and analytical programs to help improve the design of new investment strategies and the ongoing enhancement of your existing investment processes?

Our research agenda is dictated by demand from the market place which in our case represents mainly institutional investors. Since our risk / reward profile is in the low directional low volatility scope of investing, we focus our R+D on those types of strategies. We stick to liquid only strategies but are willing to entertain any strategy type that has a logical financial concept and sound trading rules. In the past we have even invested in strategies that we know will have a defined life span, for example leveraged ETF arbitrage when we believed the time was right for such a product/theme. These ETFs were rebalanced daily by the market makers and that rebalancing process was inefficient, especially in higher volatility markets. As long as the volatility in the market was above average and the brokers allowed for leveraged trading in these products then a low risk profit opportunity existed. We were willing to invest in this, even though we knew we only had a short window of profitability (in this case it was 3 years) as the strategy further enhanced our diversification.

Smart Box Capital

TR

AD

ER

TA

LK

We like strategies that have a simple logic

and reasonable long term profit

expectation.

What sort of electronic trading platforms does Smart Box Capital find most appropriate to use and what factors influenced that choice?

Having a variety of traders means SBC uses a wide variety of the available trading systems and platforms out here. From PATS and Trading Technologies for futures, through Currenex, Bloomberg, DB Autobhan and EBS for currencies and a host of other platforms for equities and other non-traditional products.

How did you go about building your trading desk IT infrastructure? For example, did you make use of third party algorithm, software, IT and connectivity specialists etc.?

All of the SBC traders are connected directly to the broker with whom

they work and have setup their own connectivity to maximize their trading strategy. Each connection is approved and monitored by SBC’s risk team through traders are encouraged to work directly with the brokers to avoid delays and misunderstanding.

What new strategies and products has Smart Box Capital been exploring as part of your continuing efforts to innovate, differentiate yourselves from competitors and broaden investment opportunities for clients?

In view of our tight risk management rules and desire to produce low volatility returns for our investors, we are expanding further in the short term in futures & FX trading. Some of the work is event driven, news based strategies, while others are purely quantitative and require auto-

execution. We avoid high frequency trading where the R+D can be costly and the “shelf life” of a strategy can be very short due to the evolution of the markets and its micro-structure which high frequency trading tends to look to exploit. We like strategies that have a simple logic and reasonable long term profit expectation. Another area of expansion is in long / short US equity strategies that have found unique inefficiencies. Within the L/S US equity space we are also looking to deploy small parts of our R+D budget towards strategies with a higher return profile but usually that means it also comes with more risk. We do this as a result of feedback from existing and potential investors of what’s needed for their investment portfolio.

Smart Box Capital also operates a Multi Manager Program. Who is this aimed at and what services does it provide?

The multi-manager program is geared for institutional investors or family offices who want access to a customized portfolio of strategies within a managed account structure with its above mentioned benefits. The institutional investor can choose a basket of independent strategies that best meet their risk / reward profile. We allow our investors to choose which of our sub-strategies best meet their needs and allocate their capital selectively to the most suitable strategies. An additional benefit that is inherent in a managed account structure is the possibility to deploy to single strategies at a level which is below the broker’s required minimum, which can often be $5m+, meaning access is granted to smaller investors rather than being limited to very wealthy and institutional investors. Our investors here are mainly small-medium size institutions and family offices that are focused on tight risk management and require liquid investments yet many times

TRADERTALK


Ariel Zviely


do not meet the minimal allocation requirements per singe managers in other formats.

What are the constituents of your Multi Manager Program’s Eco System and what benefits does it offer for managers?

Making consistent returns is hard enough for any trader and our structure allows first and foremost for traders to “discard” all aspects that are not related to the actual R&D and trading and know that they are taken care of with the highest level of transparency and professionalism. Our managers usually have a mathematical or computer science education, have then worked for 5-10 years in global firms and have then decided to launch their own strategy and want research independence and peace of mind with regards to all operational aspects. Under the SBC umbrella they enjoy the ability to focus on R+D and all business, marketing and operational aspects are handled by us. SBCs operational team handles all day to day aspects that are not related to the actual trading and managers are given access to Tier 1

providers which would not accept small managers under their regular conditions but do so under Smart Box Capital’s umbrella. The traders often manage one large account and the brokers and software split the trades between the various Single Managed Accounts allowing

the trader to focus what they are best at: R+D and generating alpha.

Looking ahead, what are your plans for growing the business and making Smart Box Capital investment expertise available to a wider and more diverse mix of investors?

Smart Box Capital is now expanding its operations to work with multiple executing and prime brokers, making it easier for institutional investors who prefer to keep their capital within their prime broker structure and to invest with us. Technological and software advances have made managing multiple brokerage accounts much easier including pari-pasu trading and back office management that have semi-automated processes. We are focusing our distribution efforts through partnerships with prime brokers who have their existing clientele and want to improve their offerings to these investors, especially investors who prefer cash-like liquidity and require low volatility returns.

Smart Box Capital

TR

AD

ER

TA

LK

Many of our strategies are 80% or more

auto execution with manager override and

discretion when needed to lower risk. While others utilize computer science to create

screening tools for trading ideas.

The information and materials contained in these pages, and the terms, conditions, and descriptions that appear, are subject to change. Not all products and services are available in all geographic areas. Your eligibility for particular products and services is subject to fi nal determination by Citi and/or its affi liates. Any unauthorised use, duplication or disclosure is prohibited by law and may result in prosecution. Citibank, N.A. is incorporated with limited liability under the National Bank Act of the U.S.A. and has its head offi ce at 399 Park Avenue, New York, NY 10043, U.S.A. Citibank International plc is registered in the UK at Citigroup Centre, Canada Square, Canary Wharf, London E14 5LB, and is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. Ultimately owned by Citigroup Inc. © 2014 Citibank, N.A. All rights reserved. Citi and Arc Design is aservice mark of Citigroup Inc., used and registered throughout the world.

USA: +1 888 294 0950 | EMEA: +44 800 048 8218 | Asia: +65 3158 0260Email: [email protected]

>> www.citifxtradestream.com

» Designed for brokers and managers trading on margin

» Liquidity sourced from Citi and other top-tier market-makers

» Your funds held with Citi

CitiFX® TradeStream

Now mid-sized institutions can access aggregated liquidity directly from Citi

Documents

Amazon S3 · Supercharge your trading with EAs FxPro Quant Strategy Builder Not a programmer? Not a problem. The FxPro Quant Strategy Builder is a revolutionary new tool, designed