FX Aggregation – Access to better liquidity and execution

David – does providing state of the art FX Aggregation remain a significant technology challenge? The technical work in dealing with noticeable transport latency differences that still exist between FX trading venues and a lack of messaging standardization must be difficult.

FX Aggregation might be a challenge for smaller vendors or financial firms using an in-house system but to achieve performance and quickly adapt to market changes you must constantly invest time and resources on an Aggregation system. With nearly 20 years’ experience, smartTrade’s provides sophisticated cross-asset Aggregation for banks, brokers, buy side firms and corporates. Having a large customer base enables us to create economies of scale to keep on investing in better infrastructure, in performance optimization and in new features that address the latest market trends.

Lately, we have noticed that liquidity providers (LPs) have started to provide more sophisticated liquidity with different type of streams such as sweepable or full amount. Your Aggregation system needs to evolve rapidly in order to integrate new functionalities such as multi-streams handling, as in the case of LiquidityFX, our FX packaged solution. To conclude your in-house system or your provider’s flexibility is probably your biggest challenge.

In what ways have sell-side firms in particular seen additional benefits from FX Aggregation over the past few years? For one thing, it certainly seems to have enabled many of their sales teams to become more competitive than in the past, but I am sure there are more.

Aggregation is not only about being more competitive, it’s also about helping sell-side firms to support new regulatory requirements. The value-added of Aggregation now becomes obvious when you combine it with other advanced applications such as a Smart Order Routing system (SOR) which allows access to a wide range of execution strategies for external and internal algos, to manage different order types or segment liquidity streams. Or when it gives sell-side firms the ability to further streamline their processes by leveraging a pricing and distribution engine to create liquidity streams and price tiering. This also enables them to add trader and client mark-ups, to enable auto or manual RFQ pricing and to create synthetic instruments. Ultimately, I would say the most benefit sell-side firms can achieve is when they use powerful trading analytics modules, such as smartAnalytics, to discover patterns, trends, and associations they can integrate to improve their execution and to provide their clients with a better service.

How would you describe a comprehensive FX Aggregation solution? What sort of toolsets and functionality should clients expect it to offer?

There are the pre-Aggregation toolsets such as connectivity to your LPs, which need to be easily manageable if your trading strategies change. To achieve the most accurate view of the market, you need ultra-low latency connectivity to your LPs as well as an integrated rate cleansing functionality.
Your Aggregation system needs segmentation capacity into multiple liquidity pools and a personalizable trading graphical user interface. In terms of post-Aggregation, to improve your fill ratio you need to leverage a powerful SOR supporting a wide range of algos and orders types. Additional functionalities such as checks on credit, on LPs, on currencies, on traders are also important to be more transparent.

Recent Deutsche Bank research into the use of Aggregation for FX spot execution concluded that quality is better than quantity when it comes to working with liquidity providers. What are your own views about this and how should trading firms tackle the thorny issue of how many liquidity providers to include in an aggregator and of course which ones to use?

Our clients have many LPs but it doesn’t necessarily mean that they trade with all of them. As LPs connectivity is now commoditized, they keep all those connectors for risk reasons and work only with a few preferred LPs from whom they expect an excellent service. Analytics have a big role to play when it comes to relationships with LPs. Now with big data solutions, such as smartAnalytics, clients can get access to granular trading data analysis and obtain reports on their LPs performance, rejections rate, pricing consistency, last look etc. I would add that the trend is not only observed in Spot FX, many of our clients using Aggregation on other asset classes such as Swap, Forward, and Cryptocurrencies.

There are now a number of well established FX Aggregation solutions available on the market. What factors are important when looking to choose a suitable technology provider and how much weight should be attached to working with firms that embrace best practice guidelines?

When it comes to selecting one Aggregation provider, we see that clients assess three things: experience, solidity, and services. The experience and the reputation are key selection factors as clients want to make sure the selected provider will be able to deliver the solution on time. The solidity is very important too, because clients want to be assured that the selected company is strong enough to partner with them in the long term. And of course, they assess the solution and the services and how they match with their needs and their future requirements. There are also other factors such as the pricing model. We also noticed that best practices guidance has been very helpful to our clients when it came to implementing MiFID II for example and we are committed to helping them again with the Global Code of Conduct.

Aggregator technology is designed to improve execution by consolidating liquidity – in the a form of bid and ask prices and amounts – from multiple sources into a single unified order book. As each client is different how do you go about designing an optimal system to meet their own specific needs? Execution objectives and trading styles are naturally not the same for everyone.

Our clients’ execution objectives and trading style vary a lot as we work with banks, brokers, buy-side firms, and corporates. But we provide them with the same set of tools which have some customizable features according to their needs. The LiquidityFX aggregator is cross-asset and supports a combination of currencies, order types and price tiering. The user interface can be tailored to individual trader’s needs thanks to a handful of widgets that can display information ranging from market widgets that can display analytics, videos, news or social media feeds. With our highly scalable, low-latency pricing and distribution engine, our clients can create and assign custom liquidity and are able to control and distribute streaming prices to their clients. They can assign custom liquidity profiles to individual clients and distribute via API or White Labelled HTML5.

Why do think there is growing interest in more packaged solutions incorporating liquidity Aggregation and smart order routing systems and what benefits does this have?

Why shouldn’t it be packaged? Now Aggregation and SOR have become a commodity. The key benefits of a packaged solution are the time to market, stability and of course cost cutting. We bring our clients to production in a few days with our LiquidityFX solution and host it for them. The major benefit to using our packaged solutions is around risk. Sell-Side firms can control their risk by managing their positions and capturing profitable trades. With our risk management system, clients can configure hedging rules or use our out-of-the-box auto-hedging of client trades to manage positions and skew, or check their net open position. They can use our fully integrated margin credit extension to allow their end clients to trade larger amounts, leveraging their cash margin, monitoring and managing risk coverage in real time.

Many FX market participants are now taking a more quantitative, data-driven approach to trading that involves in-depth discussions about the spread, market impact, reject rates and consistency of pricing. In what ways have you addressed these developments in the construction of smartTrade’s own liquidity management system?

We have been applying this approach for many years. LiquidityFX allows our clients to set-up automatic or manual adjustments on their LPs or currency pairs. This enable clients to receive liquidity that reflects the true cost of trading in the market so consequently their SOR will be more efficient. They can do so directly from our Aggregation system and using our ReST API.

What about upgrading an existing FX Aggregation solution. Is it best to work with an existing? setup or start again with a completely new solution and, if so, how difficult is that in terms of cost, speed, and integration with existing trading systems?

It depends on how flexible your Aggregation system is, if you can easily integrate other needed FX functionalities and if it complies with actual and upcoming regulations. Our LiquidityFX solution is very easy to integrate and can be deployed very quickly. Many of our new clients came to us wanting to replace their legacy vendor platforms because of their lack of flexibility. Onboarding clients is a very straightforward and quick process for us. The other advantage of working with a provider like us, is that we constantly enrich our Aggregation system with new functionalities to ensure our offering stays ahead in term of performance, speed and user-friendliness.

In this edition of e-Forex, we are exploring how MiFID II and the FX Global Code will encourage the emergence of a new way of doing business between sell-side and buy-side firms. In what ways do think the new regulatory environment will also impact on the demand for FX Aggregation services and the way the technology will be engineered and deployed in the future?

More control, more sophisticated solutions and more data crunching for a fairer and a more transparent FX market are what MiFID II and the Global Code of Conduct are leading to. Today solutions such as our smartAnalytics product, with advanced trading analytics, attract sell-sides and buy-sides in need of real-time and historical dashboards and reports and to help them with TCA and regulatory compliance. The FX market will go a step further and participants will incorporate machine learning and algorithmic trading techniques into their FX execution strategy, something I believe will become ever more prevalent in the industry. Aggregation is not the game changer anymore, it’s all the other functionalities around it.