e-forex · 2018-04-26 · f or several years we’ve strived to get the message across about what...

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july 2006

transforming global foreign exchange markets

Algorithmic trading in FX - impact on market making banks

FX Transaction Cost Analysis- reality or pipedream?

Regional e-FX perspective- spotlight on the Benelux

FOCUS onFX Order Management - leveraging e-commerce

Algorithmic trading in FX - impact on market making banks

FX Transaction Cost Analysis- reality or pipedream?

Regional e-FX perspective- spotlight on the Benelux

FOCUS onFX Order Management - leveraging e-commerce

For several years we’ve strived to get the message across about what

really differentiates e-Forex magazine from other FX publications.

This is our editorial focus on FX e-commerce technology. We are

convinced of the fundamental role it plays as the glue holding together

the fabric of the FX trading environment and whether our readers are sell-

side or buy-side, wholesale or retail, our mantra has always been the

same: Technology is the key enabler in FX trading. We believe that getting

the e-commerce technology decisions right from the start makes future

business and trading decisions so much easier to deal with.

A few years ago it was perhaps harder to justify that argument when there

were certainly other key, competing issues that needed to be addressed

when it came to adopting e-FX and where technology and levels of

investment required in it were just one of them. But this is no longer the

case. A recent report from ClientKnowledge, a leading market research

firm, suggests that e-FX technology spending by sell-side firms is likely to

nearly double by 2010, much of it driven by the need for IT upgrades

required to meet the challenges of an accelerating e-FX market.

How much of this additional spending will be as a result of the arrival of

Algorithmic trading is probably quite hard to say, but clearly its arrival is

likely to have a major impact on the entire dynamics of the FX market,

and will focus attention on a broad spectrum of FX technology issues.

With the growth of automated trading strategies, FX trading and market

data volumes will rise steeply, placing enormous demands on the

maintenance of very low latency delivery mechanisms and for improved

order routing solutions coupled with better access and connectivity to e-

trading venues and liquidity sources. We can therefore expect to see new

technology topics and ‘buzz’ words that are more familiar to the equities

world becoming commonplace in our own industry. So if you want to

know more about API’s and smart routing technology, or how Ethernet-

based DMA and bandwidth on demand relates to e-FX, we’d suggest you

renew your subscription with us!

As usual we hope you enjoy this edition of the magazine.

Charles Jago

Editor

e-Forex

Summer 2006

welcome to

Susan [email protected] Editor

Charles [email protected] (FX & Derivatives)

Charles [email protected] Manager

Helen [email protected] Manager

Michael [email protected] Manager

Louis [email protected] Manager

Anthony [email protected] Manager

Helen MurrayPhotography

ASP Media LtdSuite 10, 3 Edgar BuildingsGeorge Street, Bath, BA1 2FJUnited KingdomTel: +44 1225 868 947 (switchboard)Tel: +44 1225 868 948 (e-Forex sales & editorial)Fax: +44 1225 868 998

Design and Origination:Phill Zillwood Design [email protected] in the UK by Broglia Press

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

Subscriptions Subscription rates (including postage)UK & Europe: £120 per year Overseas: £150 per yearPlease call our subscription department for further details:

Subscriptions hotline: +44 (0) 1225 868 948

Although every effort has been made to ensure the accuracy ofthe information contained in this publication the publishers canaccept no liabilities for inaccuracies that may appear. The viewsexpressed in this publication are not necessarily those of thepublisher.

The entire contents of e-Forex are protected by copyright and allrights are reserved.

Companies and organisations in this issue: Godfried De Vidts Hedge Funds & FX

Jeremy SmartAlgorithmic Trading

& banks

S. Keao CaindecNetwork services

Yaacov HeidingsfeldFX Order Management

4 july 2006 e-FOREX

Larry Tabb Transaction Cost Analysis

Sean GilmanDemystifying Algo trading

Andrew YaoEMS versus OMS

Chip LowryThe e-Forex Interview

A

Abn Amro page 93

ACI page 22

ACM Inside

Front Cover

B

Bank of America Outside

Back Cover

Barclays Capital page 30

Baxter Solutions page 17

Bloomberg page 19

BT Radianz page 84

C

Calyon Financial page 6

Chicago Mercantile

Exchange page 38

Citibank page 68

CLS page 65

COESfx page 9

Cognotec page 7

Currenex page 11

D

Danske Bank Inside

Back Cover

DataSynapse page 76

Deutsche Bank page 88

Dexia Bank page 90

Digitec page 14

Dukascopy page 45

E

EBS p 2 & 3

eSignal page 125

Eurobase page 59

F

FIX Protocol Org. page

FlexTrade page 79

FNX page 14

ForexManage page 117

FXall page 23

FXpress page 79

FX Trading page 95

G

GAIN Capital page 75

GFI Group page 70

Greenwich Associates page 30

H

HotspotFX page 13

I

IFX Markets page 67

ING Bank page 91

Integral Development Corp page 15

IT&E Global page 102

ITG page 34

JJacob Fleming page 126

JP Morgan page 8

LLatent Zero page 53

Lava Trading page 96

London Stock Exchange page 56

MMasterfoods page 93

Merrill Lynch

Investment Managers page 12

MIG Investments page 109

Morgan Stanley page 26

NNew York Board of Trade page 80

New York Stock Exchange page 56

Nordea page 29

OOanda page 122

ODL Securities page 101

Option Computers page 63

PPenson Financial Services page 14

Plexus page 34

Portware page 21

PriceWaterhouseCoopers page 91

RRabobank page 35

RBS Financial Markets page 110

Reuters page 6

Russell Currency

Management page 64

SSaxo Bank p 24 & 25

SmartTrade page 37

Societe Generale page 14

SS&C Technologies page 82

Standard Bank page 6

State Street Corporation page 127

Stentra page 106

SuperDerivatives page 72

SWIFT page 65

T360T page 94

Townsend Analytics page 51

Tradermade page 114

TraderTools page 71

TradingScreen page 83

Traiana page 54

TWIST page 94

UUBS page 68

Unimarket page 53

YYipes Enterprise Services page 80 Paddy Osborn

FX Market Data

Art SedighiGrid Computing & FX

Market Making banks &Algorithmic trading

EMS vs. OMS:Key differentiating factors

Social unrest

FX Order Management

contentsjuly 2006

july 2006 e-FOREX 5

Foreword22. Hedge Funds and FX: Will the marriage last?

Godfried De Vidts looks at the impact that the Hedge Fundindustry is having on the FX market.

Features26. Impact on Market Making banks of Algorithmic Trading

in Foreign Exchange

Jeremy Smart examines the key challenges that AlgorithmicFX trading poses for banks and the consequences for thosebanks that fail to embrace the changes required.

30. Marketplace: The battle over e-FX market share: bucking

the trend?

Frances Maguire reports on the continuing battle overmarket share between the banks and the FX portals whichboth claim they are winning.

34. FX Transaction Cost Analysis: Reality or Pipedream?

Larry Tabb outlines why there will be greater pressure ondealers and execution platforms to open their data andgenerate the metrics needed so firms can truly measure theirtrading costs.

38. Industry Report: Reuters and CME launch FXMarketSpace

Heather Maclean talks to Reuters and the Chicago MercantileExchange about the launch of their worldwide electronicforeign exchange marketplace initiative, FXMarketSpace.

42. EMS vs. OMS: Key differentiating factors

Andrew Yao discusses why Execution Management Systemsare likely to play a big role in the FX trading environmentand illustrates how they differ from traditional OMS's.

46. VIEWPOINT

Harpal Sandhu discusses: Heterogeneity in the FX Markets:“One size fits all” doesn’t fit anymore.

48. Demystifying Algorithmic Trading

Sean Gilman explains what algorithmic trading models cando for the FX trader by improving execution performancethrough better order management and strategies that reducemarket impact.

52. Unlocking the nature of FX Algorithms

What types of algorithm are likely to prove popular in the FXenvironment and what hurdles may need to be overcome ifFX algorithms are to take off? Andy Webb investigates.

54. CASE STUDY

Outlining how Traiana Harmony is expanding its marketfootprint with FX Options STP.

56. Algorithmic trading: Social unrest in the making?

Carl Martin examines the potential that Algorithmic tradinghas to change markets and society as we currently know it.

60. Implementing real-time controls over Algorithmic FX

trading models

We go behind the scenes at Volume Bank to see how oneimaginary bank is coping with its first Algorithmic tradingmodel deployment.

64. CASE STUDY:

e-Forex talks with Michael DuCharme, who works in the FXdepartment of the Russell Currency Management Group.

68. The option to go exotic

Frances Maguire looks at why, just two years since the firstelectronic options facilities began appearing, the banks nowbelieve the time is right for more exotic options to beexecuted online.

72. THE e-FOREX SURGERY

Using options for more effective hedging of corporatecurrency exposure

76. Introduction to Grid Computing: The reason behind the

insanity

Art Sedighi sheds some light on the applications of GridComputing in the FX trading market.

80. Innovation in Network Services – Giving customers

control of their online FX trading environment

S. Keao Caindec outlines how innovation in network serviceswill keep pace with the significant changes in the flow oftrades that the eFX market is likely to experience.

88. PRODUCT SPOTLIGHT

Laddered Pricing: a powerful client facing tool.

90. REGIONAL e-FX PERSPECTIVE: The Benelux Region

Heather McLean examines e-FX within the region.

96. CASE STUDY

e-Forex talks with David Ogg, CEO of LavaFX, about hiscompany’s plans for a new Interbank FX trading system.

114. Flexible delivery of FX market data & technical analysis

Paddy Osborn analyses the pros and cons of servicedistribution and examines developments that will shape thefuture delivery of FX market data and technical analysis.

118. PRODUCT LAUNCH

e-Forex highlights the new wireless FX platform from Saxo Bank.

120: TRADERS WORKSHOP

Harnessing e-tools in Trend analysis, by Patrick Kinsel

122. LOG-OFF

The real price is the (which?) spread, by Michael Stumm.

FOCUS: Leveraging e-commerce

for FX Order Management

98. FX Order Management: Let the games begin!

Yaacov Heidingsfeld looks at why institutions looking to growtransaction volumes and profitability should examine thebenefits of a commercially-available FX Global Order Book.

102. FX Limit Order Management – A significant service

differentiator for the FX business-line

John C. Groetch discusses the complexities that need to beaddressed by a modern order monitoring application andsome of the advantages of enhancing the capabilities of FXorder management platforms.

106. e-FX - a catalyst for improving Global Order

Management

Jon Martin examines the business case for e-FX Ordermanagement and outlines why an integrated e-FX OrderManagement capability creates pressure on optimisingefficiencies within the sales and trading lines.

110. FORUM: FX Order Management: meeting the growing

needs of clients

With FXall and the Royal Bank of Scotland.

The e-Forex Interview

127. With Chip Lowry, head of Global Link, Europe, at State Street.

news Currenex launches CXSmartOrder™ Currenex, Inc. has introduced CX SmartOrder™, an FX tradingplatform that allows traders to leverage algorithmic trading models,manage orders, and reduce market impact. This stand-alone platformruns on a trader’s own computer and includes standard tradingmodels as well as a secure environment for Tick by Tick processing ofa client’s custom algorithms. The platform aggregates liquidity fromdiverse sources and displays it in an easy to use format.

CX SmartOrder™ offers the trader complete control over tradingmodels and tactics, with the flexibility to revise strategies swiftlyand implement new trading models on the fly. The systemaggregates liquidity pools and allows traders to intelligently routeorders for lowest cost execution factoring both market rate andexecution costs. Order routing technologies ensures optimal orderexecution with minimal market impact.

Calyon Financial launchesnew FX platformCalyon Financial has announced the launch of its new online foreignexchange trading platform, Calyon Financial FX Edge. The newplatform will provide customers with access to streaming liquiditysupplied from the world's leading foreign exchange institutions.

For trades executed via the platform, Calyon Financial serves ascounterpart to both the customer and the liquidity providers. Thisallows customer trades to remain anonymous to the market,ensuring pricing neutrality. Calyon Financial FX Edge providesstreaming spot prices in all major currencies and gives traders theability to use a "one-click" browser-based system for fast marketaccess. The platform features the ability for traders to customizecurrency pairs and settings, set ticket size limits, and configure thetrade blotter to maximize efficiency.

6 july 2006 e-FOREX

Standard Bank goes livewith RET-AD Reuters has won a significant contract with Standard Bank of SouthAfrica to provide electronic trading technology. The deal follows acompetitive review and makes Standard Bank the first SouthAfrican bank to make use of Reuters electronic trading technologyto power its foreign exchange e-commerce trading platform for itscorporate customers.

Standard Bank’s eMarketTrader, as the new service is known, wentlive recently. It will allow corporate customers to access and tradeon real-time, executable foreign exchange prices by accessing anystandard internet browser. Standard Bank will launch initially inSouth Africa, with plans to make Reuters Electronic Trading –Automated Dealing the bank’s global electronic trading platform.

Andrew Banhidi joins FXall asvolumes hit record levelsFXall has appointed Andrew Banhidi as Chief Technology Officer.Based in New York, he is responsible for overall technology strategy,system architecture and development, engineering, productionservices and quality assurance.

Banhidi has more than 15 years experience in electronic trading, most recently as ChiefTechnology Officer of equitiesexecution venue Instinet, wherehe led the development anddeployment of the firm'ssuccessful trading and tradeprocessing systems. Theappointment comes as FXallannounces its highest-evervolumes. The first quarter of2006 was the busiest in FXall’shistory, with total volumes of $2.1 trillion, up 35% on Q1 2005. Dailytrading also reached record levels, breaking through $54 billion in April.

Andrew Banhidi

news JPMorgan launches two newcomponents to its TreasuryOnline platformJPMorgan has released the latest version of its Treasury Online (ToL)platform now enabling Cash Flow forecasting, FX exposure "Risk"analysis along with the FX trading functionality.

ToL enables a corporation to gain control of the subsidiary dealingprocess, identify, measure, evaluate and hedge FX risk. Furthermoreit will allow them to manage current and forecasted multi-currencycash flows. ToL provides full reporting and analytics to enable theTreasury to hedge its FX risk according to company policy with thegoal of eliminating P&L surprises. It replaces error-prone manualprocesses and can track all user and subsidiary actions includingexposures. JPMorgan provides fully integrated innovative solutions,combining speed of execution and straight-through-processing (STP).

8 july 2006 e-FOREX

Bloomberg offers multi-assetclass trading toolBloomberg has released a new function for cross-asset-classtrading, called the “Bloomberg Currency Balances Blotter” on pageFXBB. As a user trades equities over the Bloomberg Equity OrderRouting or Tradebook execution venues, any foreign currencyexposures arising from that trading are automatically captured onFXBB for real-time monitoring and risk management.

Users simply click on a balance on FXBB to trade out the FXexposure with any of the banks providing FX liquidity onBloomberg. Alternatively, users can set FXBB to automaticallytrade out the FX with their panel of banks as exposures arise, basedon a variety of user-determined rules. FXBB also has a FIX API forcustomers to upload exposures from their own Order Managementor Treasury Management Systems.

A strong month for CMEEuroFXCME foreign exchange products in May averaged a record 501,000contracts per day, reflecting notional value of $63.6 billion, up 69percent compared with the year-ago period. In May, electronicforeign exchange products increased 90 percent to average a record451,000 contracts per day compared with the same period last year.

CME Euro FX futures reached a monthly average daily volumerecord of 204,000 with a notional value of $34.2 billion. CME offersthe largest regulated FX trading complex in the world. Last yearover 84 million FX contracts with a notional value of over $10.2trillion traded at CME.

Barclays Capital launches e-trading of vanilla FX options in Asia.Barclays Capital has launched electronic trading of vanilla FXoptions in Asia. The service is part of its proprietary platform, BARXfor FX Trading. BARX for FX Trading offers live two-way streamingtradable prices of FX options across 17 currency pairs, fromovernight to 1 year, withauto quoting in up to EUR100m in major currencies.

The functionality includeslive streaming 2-wayprices in single options or2-leg strategies, and the ability to price eitherNew York or Tokyo cut.Barclays Capital plans to add more currencypairs, including emergingmarket currencies, raiseauto-quoting levels, andadd higher tenors in thenear future.

news Turkcell rolls outSuperDerivativesSuperDerivatives® has licensed its SD-FX™ foreign exchange pricing

system to leading Turkish mobile phone company Turkcell. Turkcell,which is the only Turkish company with a dual listing on

the New York Stock Exchange, says it usesSD-FX for its currency hedging andrisk management purposes.

“SD-FX allows us to checkmarket prices for all theoptions we want to use before approaching our counterparty banks.It really speeds up the process of pricing and then transacting ourhedging strategies,” says Murat Erden, head of treasury at Turkcell.“SD-FX is extremely flexible and it has all of the type of structures wemake use of, such as dual currency deposits. It has also injectedtransparency into the options market and played a significant role inhelping a domestic market develop in Turkey,” concludes Erden.

Cognotec launchesRealStream™Cognotec has announced the launch of its new, next generationsolutions platform, Cognotec RealStream™. Based on new, leading-edge technology, the first phase of Cognotec RealStream presentsCognotec RealStream-Margin, an integrated web-based solutiondesigned for banks looking to target the increasing growth in flowsoriginating from investors actively trading FX as an asset class.

Developed over the last 14 months with a focus on speed ofexecution, scalability and functionality, Cognotec RealStream-Margin incorporates the latest collateral management capabilities toenable banks to effectively deliver a professional client tradingsolution. End-user clients will experience a comprehensive tradingsuite combining executable streaming rates and order managementwith full portfolio analysis capabilities providing up-to-the-secondmarket values of positions and P&L.

10 july 2006 e-FOREX

New banks join RTFXReuters have announced that Deutsche Bank, Dexia, HSBC andSociété Générale are the latest banks to go live on Reuters Tradingfor Foreign Exchange. In addition, Citigroup became the newestbank to commit to the service and plans to go live in Q3. Thesemajor FX banks add further weight to the dealer to customerforeign exchange trading service.

Reuters Trading for Foreign Exchange (RTFX) allows banks and theircustomers to trade foreign exchange from their Reuters desktop. Thelaunch by this latest round of price makers brings banks, corporateand other financial participants around the world the ability to quicklyand securely execute spot and forward FX and manage post tradeprocessing through a single sign-on, utilising Reuters global desktopfootprint in the FX marketplace. RTFX has the support of 21 pricemakers and over 500 price takers from around the world.

Traiana tops $52 Billion indaily volume with HarmonyTraiana, Inc. has announced that its Harmony service exceeded $52billion in volume in a single day on May 17, 2006 and also recentlyrecorded its one-millionth give-up since being launched less thantwo years ago. These milestones were achieved during a period ofongoing, accelerating growth for Harmony in all key categories.

“As the strong value of theTraiana Harmony propositionhas been established andproven, we’re seeing severalsources of significant growth,including increasing volumefrom existing customers, newrelationships with extremehigh-volume participants,steadily increasing ECN flowand growing interest anddemand from hedge fundcustomers,” said Traiana CEOand co-founder Gil Mandelzis.Traiana Harmony provides asecure, scalable service to efficiently manage the give-up processbetween prime brokers, executing banks and ECNs. It transformsthe transmission of trade data, streamlining tri-party processes andreplacing costly, time-consuming and error-prone data entry.

Gil Mandelzis

news

State Street provides FXworkflow solution to MLIMState Street has developed a comprehensive foreign exchangeexecution management workflow solution via its Global Link®network for Merrill Lynch Investment Managers (MLIM) based inLondon. Using Global Link’s FX Connect execution platform, theworkflow solution fully integrates with MLIM’s current processes. Itallows MLIM’s equities business to aggregate multiple sources of FXrequirements, view associated compliance requirements, trade withmultiple counter-parties, and access reporting capabilities all througha single platform.

“This collaboration with MLIM isa next step in the evolution offoreign exchange solutions,” saidSimon Wilson-Taylor, managingdirector and worldwide head ofGlobal Link for State Street. “Astransparency and compliancerequirements become more timeconsuming, a flexible and full-service solution that spansmultiple trading processessignificantly increases tradingefficiencies.”

ForexManage announces newOnline Dealing functionalitiesForexManage have announced several enhancements to its alreadyvery rich java-base dealer screens.The Margin Monitor now benefitssubstantial drill down to client data, both for real-time revaluation ofthe FX and Option positions but also justification of the margincalculations and exposures. The position Keeper allows the trader tonot only see his own market exposure, but also with a click, see theconstituent client transactions that make up that exposure. Availablefor FX and Options, it is an invaluable tool for not only counter-partyposition management but also ‘B’ book accounting.

“The Order pad now has many additional features including thecentral ‘market level’ dashboard” says Andrew Gibson, sales managerat ForexManage, “and we are consistently delivering excellentmodules to satisfy customer demand across our suite of FX products”


ING launches financialmarkets portalING has established an internet portal to offer clients a single entrypoint for all FM-related internet applications. It incorporates thetransactional engine ING Trade which offers clients the ability to buyand sell foreign currencies and transact money-market deals quicklyand easily. “In the past six months, we have increased dailytransactions via the site considerably,” says Bas van Rhijn, GlobalHead of Sales Financial Markets. “I’m optimistic about continualimprovement.”

The portal also includes an FM product library where basicderivative strategies are explained as well as a global list of allcontacts and a link to ING research. Other functionalities(transactional mark to mark, primary book building functionality andstructured products) will soon be added. The portal can be found at:www.ingfinancialmarkets.com.

eSignal 8.0 offers morecontent for Forex traderseSignal’s quality data now includes HotSpot FX Institutional and Retailin addition to GTIS and Tullett & Tokyo Liberty. With 200 global bankand broker contributors and spot rates for more than 100 currencies,as well as precious metals, cross and forward rates, eSignal’s data andcharting packages are ideal for Forex traders. Streaming, real-timequotes and news, plus Forex Market Depth with the ability to view thebest bid / ask by Forex contributor, as well as powerful technicalanalysis and back testing, round out eSignal’s offering.

Tracking contributors’ rates is easy with eSignal 8.0’s ability todisplay GTIS Forex data by contributor. In addition, simple Forexspreads can be entered directly into a chart.

Simon Wilson-Taylor

news Eurobase launches Siena e-Trading solutions Eurobase Banking Solutions has launched its four e-Tradingmodules designed to provide banks with the tools to maximiserevenue generation from customers and branches. These modules,Siena e-Trader, Siena XML Gateway, Siena Rate Manager and SienaLimits System can be used together as one all-encompassing unitor combined with existing in-house solutions to provide best-of-breed functionality and connectivity both to multi-bank portals andthe banks’ own trading platforms.

The new product suite means that banks can now trade in a widervariety of products then ever before and obtain the widest range ofprices – from just a single screen and without having to introducenew systems. It is also very fast – completing transactions in amarket-leading 6 to 60 milliseconds rather than up to 400milliseconds using other systems.

Penson Canada selects FNXSolutions for FX TradingFNX Solutions has announced that Penson Financial Services Canadahas chosen the Sierra ASP solution to support its FX trading and backoffice operations in Canada and the U.S. FNX, through its web-basedSierra ASP software, will provide real-time straight throughprocessing, real-time margin utilization and position management forPenson Canada and its clients. Utilizing FNX’s proprietarymiddleware platform, SierraLink™, Penson Canada will interface inreal-time with a variety of electronic trading platforms, achieving aseamless, automated and integrated processing environment.

Electronically executed transactions and phone orders will both beconsolidated in real-time on the Sierra ASP platform. Furthermore,Penson Canada will enhance its customer service by deliveringelectronic statements to clients detailing all transactions, marginutilization and P&L.


SGFXTrade goes 24/7Société Générale’s proprietary Forex and Money Markets e-tradingplatform SGFXTrade is now operational around the clock. The bankhas also announced that options (traded via the phone) are nowincluded in the blotter of SGFXTrade.

SGFXTrade is a high performance, secure and reliable tool with user-friendly interface, servicing the full range of SG clients, from SMEs tocorporate and institutional counterparties. Working further toimprove its state-of-art e-trading architecture, Société Générale plansto continuously expand the functionality and usability of SGFXTrade.

Three major internationalbanks live with D-3The D-3 System is digitec's state of the art rate engine for FXforwards. The latest release has recently been selected by threemajor banks. They all went live during 2006 and use it to feed theirglobal e-commerce systems with reliable 24 hour real time rates.

Andreas Kiesselbach, Sales Director of digitec said: "A growingnumber of leading banks are replacing their spreadsheet basedsolutions and relying on D-3. The advanced technology ensures anew quality of prices while a central client server architectureguarantees a constant speed of updates."

D U B L I N • L O N D O N • M O U N T A I N V I E W • N E W Y O R K • S I N G A P O R E • T O K Y O • T O R O N T O

w o r l d w i d e

s t a t e - o f - t h e - a r t

u . s . p a t e n t e d t e c h n o l o g y

i n t e r n e t

s o f t w a r e & s e r v i c e s

i n n o v a t i o n i n c a p i t a l m a r k e t s

e - b u s i n e s s s o l u t i o n s

e n t e r p r i s e j a v a

Welcome to next generation eFX.

To upgrade your eFX solution, contact [email protected] or visit http://www.integral.com/eFX.

i n t e g r a l d e v e l o p m e n t c o r p .

newsTraderTools enhances eFX Trading PlatformTraderTools LLC has successfully introduced online chat and auditing capabilities over itsstraight-through processing eFX trading platform. The TraderTools chat and auditing solutionintegrates Jive Software’s Live Assistant with FaceTime’s IMauditor.

Mark Mayerfeld, Executive VP,International Sales at TraderTools,remarked, "As a technology companywholly focused on eFX trading and

global order management, ourgoal is to address the needs ofeFX traders as they arise. Thechat and auditing features

have already been successfully deployed at two important customers, each with internationaltrading desks located across multiple time zones. We look forward to offering these and otherexciting features to our clients as they become available."

Hotspot FXi surges in market share inEuromoney FX poll Hotspot FXi total multibank market share grew from fifth position in 2005 to second positionin the 2006 Euromoney FX Poll. The poll data further indicated Hotspot FXi is a leader inmultibank spot FX market share, when adjusted for forwards, swaps and other instrumentstraded on other platforms. In addition to market share gains, Hotspot FXi was placed firstamong multibank platforms in the key categories of speed of Execution and STP for thesecond year in a row.

Hotspot FXi’s execution speed is facilitated by the platform’s optimized client and bankinterfaces, live, executable rates, and instant finality of trades upon execution. STP isprovided through a distributed system that enables clients to route trades seamlessly via theirprime broker clearing banks into their existing middle and back-office systems.

news Nordea launches FXauxiliariesNordea has launched FX auxiliaries in the form of extensions andearly take-ups on its proprietary portal, e-Markets. Completed tradesin all 253 crosses tradable on e-Markets can now be extended ormatured early at either market or historical rates. The e-Markets TradeBlotter has also been extended to include tree structure views of thetrades including all amendments, facilitating easy tracking of originalsdeals and showing current outstanding balance on the trades.

Kenneth Steengaard, Head ofe-Markets at Nordea, says:“Extensions and early take-upsare very important products inthe Nordic area used by a verywide range of customers. Thefact that we have now enabledelectronic execution of thesetrade types will even furtherincrease the automation of FXtrading for our customers andsignificantly improve theoverview of how trades andamendments of these arerelated”.

ODL Securities enters JapanODL Securities Limited has recently opened a branch office in Tokyo,Japan to trade spot and forward foreign exchange, gold & silver.Regulation in the Japanese FX market was introduced in January2006 and ODL is one of the first foreign companies to be fullyregulated by the Financial Services Agency, the Japanese equivalentof the Financial Services Authority to undertake foreign exchangebusiness in Japan.

Alex Mackinnon, Global Headof Forex said Japan is one ofthe most exciting and fastestgrowing margin forex marketsin the world. And with therecent introduction ofregulation, all un-regulatedcompanies have had to ceasetrading. This means that themarket will become moreprofessional and increasinglydemanding for companiesoperating there. ODL are oneof the few companies to attain regulation and look forward to thechallenge of growing their Japanese market share in the future.


First production releaseof QuickFIX/JSmart Trade Technologies and the QuickFIX/J team, have announcedthe first joint production release of QuickFIX/J, a pure Javaimplementation of the QuickFIX engine and the only full-featuredopen source Java FIX engine currently available today. This initiative,which integrates the QuickFIX/J-engine design with Java enterprisetechnologies, is especially suitable for developing platform-independent, FIX-related applications, tools and user interfaces.

Founded in 1999 by former IT and trading professionals, SmartTrade, now used by HSBC, Dexia and Latam Trade, also usesQuickFIX/J to provide an out-of-the-box, enterprise-class, FIX-connectivity extension for its smartTrade Trading Platform (STTP).This initiative is part of Smart Trade's strategy to embrace the opensource community and push for the next-generation of tradingtechnologies.

FX Trading launches oneclick tradingFX Trading has launched one-click dealing, allowing traders toenter and exit the market at precisely the price they desire. From asingle dealing window, traders may buy or sell a currency pairwithout the hassle of multiple confirmation screens. Prices maychange drastically while traders navigate up to three confirmationscreens on other dealing platforms. With FX Trading’s one-clicktrading, trades are instantly executed at the current price.

This feature, coupled with FX Trading’s 2 wide bid/ask spreads,400:1 leverage, and interest free account features, allows FXTrading to cater to all types of traders.

Kenneth SteengaardAlex Mackinnon

newsDukascopy launchesInterbank FX trading platformDukascopy – a Swiss regulated Brokerage House has launched a newInterbank Forex Trading Platform, offering the biggest liquidity in oneclick and the lowest spreads on all major currencies and crosses.

The technology is based on the network of multiple API connections tomajor liquidity providers. The platform is available in two versions:Java and Web Clients. Today huge liquidity is provided in one click – 200million lot is traded with ~ 3 pip spread. Being a technology leader inForex trading, Dukascopy offers price execution control, anonymoustrading environment, tick charts, technical analysis and other advancedtools essential for professional Forex traders, banks and hedge funds.

IFX launches FX Multi-ManagerProgram IFX Capital Management, part of IFX Markets Ltd, has launched anew Alternative Investment product aimed at institutional and retailinvestors both on- and offshore UK.The multi-manager ForeignExchange program provides both diversification and riskmanagement, and potential for significant returns in anenvironment where yields on bonds and equities are declining. TheIFX Capital Management team, led by Philip Jones, employs adisciplined evaluation process for selection and allocation. Investorfunds will be allocated to established top-performing managerswith over 18 years of trading experience, as well as emergingmanagers.

Kevin Gillespie, the company’sHead of Business Development,commented: “This offering is, we believe, timely. Investors are realising that alternativeinvestments, with FX anoutstanding example, can provideadded value and diversification toportfolios. We are confident thatthe combination of the longexperience and good track recordsof our managers together with the program’s low drawdownstrategy, will prove attractive”. Kevin Gillespie

Hedge Funds and FX: Will the marriage last?

Hedge Funds and FX:Will the marriage last?


Foreword

Foreign Exchange trading that started as the

first and prime tool that created our banking

industry has now grown up to an estimated 2

trillion US$ daily franchise. No other product

equals this size. Many of the senior traders in

the markets have all started with this simplest

of product: you buy low and you sell high, or

the reverse. Are things that simple or do we

need to look at other factors? Are the flows

between different currencies that should be

the basis for transfers from one currency to

another still dominating? Or is the proportion

more like 10% for real business flows and

90% speculation, or worse?

For those long enough in our business, prior to

electronic trading, the currency crisis of the

ERM when the UK was humiliated is a good

reminder of strong forces in the currency

markets that have jeopardised many central

bankers and careers of Ministers of Finance.

And what do we see today, huge movements

in commodity prices, the recent fall out in the

Carbon credit area, the drop in the Icelandic

Krona value … who is behind all this? Are we

once again loosing touch with reality?

Hedge funds you may say? After two dismal

years the hedge fund industry is booming, with

growth between 4 to 8% and even retail issues

of 2 Billion US$ being marketed in order to

increase the availability of capital. The hedge

fund industry is even involved in mergers and

acquisitions, big companies have come under

attack, board members have been forced to

resign. And all this because the masses of

money under management have to be profitable

so the promised returns to the investors can be

delivered and big management fees can be paid

to those in control.

So who is behind that incredible volume, and

who is controlling it? Are we heading for yet

another disaster that the tax payer will need to

bail out?

The prime brokerage model certainly has

allowed more non-banks to participate. Never

has the market seen more participants, both as

price takers and increasingly also as providers.

The coming of age of electronic trading

systems has made this market transparent. The

changes are even being felt by individuals/

small investors who can now play the game

through preferred internet connections. And

the banking industry is willing to provide

those facilities.

If all these people are making money, who is

footing the bill? One can hear that interbank

platforms are losing money, one reason why

there is less proprietary trading in the dealing

rooms of this world. The interbank market is

dominated by a few very large players who are

in close contact with the hedge fund industry.

The relationship between this client base and

the very active banks in foreign exchange is

highly important. At the same time when

electronic trading is advocating transparency,

understanding the needs of your major clients

and being able to read the flows has become

top game.

So can one order move the market? Certainly

not in the major markets like Euro, US$ and

Yen. But smaller currencies can be under

threat when people similar to Soros see that

the fundamentals will support the trade. And if

a number of large currency funds think the

same way, a little spark can ignite a firework.

The large imbalances of trade will be

corrected. And while the hedge fund industry

is providing ample liquidity into the foreign

exchange market these flows will steer the

government, the guardians on the local

currency into submission and redirection of

economic policy.

One might say that hedge funds are becoming

the gamekeepers. So where are the poachers?

Where does this leave the regulators and

central banks? Price stability and reflection of

the true value of a currency are important.

Even more important is understanding what

drives the currency markets. By creating the

possibility of an open dialogue with the banks

through the foreign exchange committees in

the major currency centres, officials at Central

Banks try to understand the markets. An open

dialogue will quickly explain what is the cause

of sudden movements. Long gone are the days

of open intervention in the foreign exchange

markets. In this trillion dollar market no

intervention on the foreign exchange markets

alone can be successful. But in carefully

nurturing relations between the policy

markers, the politicians and the industry, this

successful business by the industry including

the hedge funds could continue.

Godfried De Vidts

President, ACI


Year-on-year volume growthof 25% for the past threeyears with no sign of let up -hardly the dying world of FXthat so many had predictedover the last decade and ahalf? The key driver ofgrowth has been electronictrading and in particularalgorithmic trading.

The drive towards electronic trading

has of course come from

technological advances, the ability to

generate electronic prices for clients and

equally important, the development of

tools and platforms through which to

distribute those prices. The multitude of

ECNs, aggregators and multi-bank

portals, as well as banks’ own single

provider portals pays testament to the

rapid advancement of electronic trading.

As API technology has evolved, so

algorithmic trading in FX has been born

and the breadth of players and their

backgrounds is staggering – from

astrophysicists to spot traders.

There are many diverse and complex

challenges that face banks in this

changing landscape:

• Technology and the investment cycle

• Pricing and risk management

• Relationship and the erosion of the

buy-side/sell-side demarcation

• The value of research and the impact

on the franchise business

• Market Structure

• Prime Brokerage

Technology and the investment cycle

Traditionally, banks have viewed

technology as critical to the smooth

running of their business but not

necessarily a key driver of P&L.

Algorithmic trading must change that

mindset.

The correlation between technology and

P&L is not only positive, it is logarithmic.

Maximisation of revenue from

algorithmic trading depends to a large

extent on cutting connectivity to

exchange levels and reducing, as far as

possible, the latency associated with the

price generation and propagation.

This is a fairly simple statement that

belies the difficulty. The skills required to

deliver this efficiency are not always

easily found in traditional FXIT

departments. The competition in the

algorithmic trading space is light on its

feet and employing technologists from

the best schools on high salaries. For FX

banks to compete, they must look beyond

their traditional resource pools

At the same time, once we accept that

technology is a key driver of P&L, it

becomes obvious that we must break the

traditional investment cycle with regard

to technology investment.

Impact on MarketMaking banks ofAlgorithmic Tradingin Foreign Exchange

Jeremy Smart

is Executive Director of FX at Morgan Stanley

L E A D E R

>>>

july 2006 e-FOREX 27

“The competition in thealgorithmic trading space

is light on its feet andemploying technologists

from the best schools on high salaries.”

In the past, FX businesses would typically

invest in Year 1, expect delivery in Year 2

and then reap the rewards on a

diminishing basis in Years 3,4 and 5 before

starting the process all over again. In this

technology driven market, that must

change and investment in technology has

to become a regular and consistent spend

to maintain competitiveness.

Of course, simply spending the money is

no guarantee of success and investment

must be made wisely and, crucially, in the

right people.

As managers, we have to recognise that

approval of the budget is the start of our

involvement in the technology process

and not the end.

Pricing and risk management

FX remains an OTC market. This means

that banks still have the ability to

determine when a trade is a trade – i.e. the

point at which the deal becomes a

contract. Some banks have used this as a

defence to cover up weaknesses in their

technology by rejecting transactions that

they do not like. That is not good for the

algorithmic traders. Inevitably, this must

change and the quality of execution will

become as important as the headline

price. As that quality of execution grows

in importance, banks will have to be

prepared to stand behind the prices they

show. Hence, making the right price and,

importantly, being able to change it as

quickly and as frequently as you would

like, is vital.

So the first challenge is to get trades at a

price that is right. The second challenge

is what to do with it once you get it.

Volume is of course an important

measure in our industry but the real key

obviously is monetizing it.

The market will inevitably reward those

institutions that are best at pricing and

best at risk management.

In the algorithmic market, manual risk

management is close to a non-starter. For

some institutions who are able to access

large amounts of diversified flow through

sheer scale and desktop presence, it may

be viable but, it is not optimal. Electronic

risk management is already here and it is

here to stay. At the same time, those banks

that are building or have already built

electronic risk management systems are at

the very beginning of the evolutionary

track and the possibilities of what can be

achieved in this area are almost endless.

“…algorithmic traders inFX are in the business forprofit only and trade anyasset that ticks up and

down and where there isprice transparency and

ease of dealing.”

Relationship

Fundamental to understanding how to

relate to our counterparties is an

understanding of who they are and what

they are looking to achieve. Clearly,

algorithmic traders in FX are in the

business for profit only and trade any

asset that ticks up and down, where there

is price transparency, and ease of dealing.

Once we accept this, it becomes clear

how to handle our relationship with these

counterparties.

They are mutual liquidity providers and as

such are market counterparties with

whom we should trade where there is

mutual benefit. We should be clear that

they are not clients in the traditional buy-

side sense.

What tends to complicate this fairly

simple assertion is that the algorithmic

traders may often be contained within

more traditional client vehicles with an

already complex trading & sales

relationship with the bank.

As ever, the heart of the relationship is an

understanding of what both parties want

and how they benefit.

The value of research and the impact on

the franchise business

Traditional FX dictum has it that clients pay

through spread for the value-add that banks

provide, mostly research and information

but also post-trade services. In the

algorithmic space, research is less valuable.

Most traders in the algorithmic space

have very short time horizons and are

focussed on short term technical market

moves or indeed market-making. The

level of EURUSD in 3 months time is

simply not relevant for these players.

Research of course remains a critical tool

in the franchise business and banks must

continue to have a very strong focus to

their core business. Algorithmic trading,

and more widely electronic trading, have

grown enormously over the last few years

but so has the whole market and the value

of the franchise remains undiminished. In

fact, a strong presence in both markets is

critical to showing clients that not only

does a bank have great research and

service but also that it has access to the

deepest liquidity pools that exist in FX

and hence can provide the best possible

execution for their clients. In this

way, the algorithmic activity is clearly

complementary to traditional client

business.

Market Structure

There are now a plethora of market

venues, being continuously added to and

with mushrooming numbers of market

models. All have promised, at some

stage, to deliver a truly efficient market,

open to all and compelling to market

participants. None can truly claim to have

delivered on the promise. Ultimately, it

could simply be that the mythical sweet

spot where the single marketplace is

compelling to sell-side and buy-side alike

simply does not (yet) exist.

This fragmentation of liquidity provides a

challenge for banks in the algorithmic

market. The anonymity of these markets

and the separate alleged manipulation of

price feeds by a small number of

participants has caused the algorithmic

industry to get a bad name. For banks, the

rule of mutual benefit must apply and each

relationship should be handled on its

merits. These judgements are bank specific

as all have a different yardstick depending

on the quality of their pricing and risk

management.

Prime Brokerage

It would be remiss of any paper discussing

the algorithmic trading market to ignore

the subject of Prime Brokerage which has

fuelled the growth of the algorithmic

engine. A few years ago, when FX Prime

Brokerage prices were between $15 and

$25 per million, the algorithmic market

would not have blossomed.

It is the automation of Prime Brokerage

that has allowed costs to come to a level

where even in the marginal revenue

environment of algorithmic trading, the

business can be truly profitable. The

market has almost reached an “at-cost”

position and it is hard to see further

reductions in cost unless they are

associated with wider asset-class

coverage.

The Future

Algorithmic trading provides a number of

key challenges for banks. Interestingly,

the challenges are as much about the

structure of FX businesses as they are

about the actual product. It is about

changing our mindset and conquering

problems that have had little or no

relevance in our traditional market. But it

is critical that in a competitive market like

FX, we embrace those changes and create

organisations that can meet those

challenges. For the banks that fail to rise

to the occasion, they will be destined to a

life outside this fast paced dynamic market

and ultimately perhaps, away from the top

table of Foreign Exchange.


L E A D E R

Research carried out by Barclays

Capital at the beginning of this year

shows a new trend emerging in the eFX

market. The survey it carried out indicates

that electronic trading users are reverting

back to single bank systems for the pre

and post-trade services that the banks

offer. Barclays Capital surveyed a total of

800 financial professionals who use

electronic platforms to trade products

such as foreign exchange, fixed income

and commodities and found that users

preferred single-dealer trading platforms

over multi-dealer systems.

Nearly 50% of respondents indicated that

they use only single-dealer platforms for

electronic execution. Only 16% use multi-

dealer platforms exclusively, while 34%

execute on both types.

This bucks the belief that, for FX electronic

execution, the single bank, or proprietary,

systems were losing out to the growth of

multi-dealer portals, such as FXall,

Currenex, Hotspot and Lava due to the

growing regulatory need to prove best

execution. According to the annual

research carried out by US consultancy

Greenwich Associates in April, use of the

single bank platforms fell from 51% in

2004 to 39% in 2005, while use of multi-

bank portals remained static, at 63% and

62% in the same period.

Reversal of trend

But Holden Sibley, chief operating officer

within Barclays Capital’s e-commerce

team, which carried the survey, says

the results show a definite reversal of

the trend.

He says: “In FX there has been a

proliferation of both multi-dealer and

single dealer platforms in the past few

years. A couple of years ago it was a close

race between those two camps, but in the

past 18 months there has been more of

a shift towards single dealer platforms

and Barclays Capital has contributed to

that shift.”

The survey also found that while banks

and other electronic execution providers,

including Barclays Capital, have delivered

certain complementary products on one

platform, 56% of e-trading users would

like to see more asset classes available on

a single trading platform.


The battle over e-FX market share: bucking the trend?Although the FX portals have become well established now, the battle over market share

still continues between the banks and the portals with both claiming they are winning.

As Frances Maguire reports, it still remains a case of ‘horses for courses’

M A R K E T P L A C E

Holden Sibley

"Clients want trade ideas andresearch provided to them, as well,

but on balance, our survey suggestedthat to most clients post-trade was

more important in selecting aplatform than pre-trade, afterexecution speed, stability and

competitive pricing."

>>>

Multi-asset class trading

Mr Sibley says that the survey was carried

out to ascertain its customers’ cross-asset

trading needs. He says: “Our strategy has

been very much orientated towards multi-

asset class trading. We’ve had a central e-

commerce organisation for a few years,

which is geared towards bringing

together our offerings across asset

classes not only from a sales and

marketing standpoint, but from the view

of product development. We are gradually

bringing together the technology

platforms across asset classes. One of the

key things that we were striving to get a

firmer grasp on with this survey was what

particular aspects of multi-asset class

trading our clients are most interested in.”

“We’re not expecting, and nor are our

clients telling us, that they want to do all

five asset classes together. In FX in

particular a significant number of our

users use our platform not as a primary

asset class – FX may not be the primary

asset class but they are a fixed income or

equity customer needing to do some FX

conversions for trading in those other

products.”

According to the survey, liquidity and

stability were listed as the main

motivators for choosing an electronic

platform, while other factors, such as cost

of execution, strength of dealer

relationship and connectivity options all

ranked secondary to core execution

capability.

Post-trade functionality

Post-trade services are more important to

users than pre-trade functionality. While

post-trade functionality is still evolving,

capabilities such as straight-through

processing and online trade affirmations

are among the key priorities for Barclays

Capital’s clients. A total of 78% of

respondents said that overall post trade

functionality was very important for

influencing their choice of platform.

Mr Sibley says: “There are a series of post-

trade considerations that we asked

clients about – including straight through

processing and account allocations. From

the STP perspective, clients are looking for

a firm that can provide trade feedback into

their own risk management systems.

We've connected to a multitude of clients'

in-house systems and have found this to be

a big win for clients because trades done

on BARX no longer have to be double-

keyed by the client into their own systems.

There are other important aspects such as

integration with prime brokerage, and

being able to provide consolidated voice

and electronic blotters.”

Research and trade ideas remain

important to clients. An overall pre-trade

offering incorporating research, news and

trade ideas is still a valued complement to

execution capabilities for a majority of

clients.

However, Sibley says that no pre-trade

service stood out on its own as a key

differentiator in the way that various post-

trade services did. He adds: “Clients want

trade ideas and research provided to

them, as well, but on balance, our survey

suggested that to most clients post-trade

was more important in selecting a

platform than pre-trade, after execution

speed, stability and competitive pricing.

But at this point in the game, several

years into it, many providers are getting

there on the execution front so what is

needed now is make those offerings

sticky and this is done through adding

value by offering pre-trade and post-trade

services.”Figure 1


32 July 2006 e-FOREX

Battle far from over

Mr Sibley believes that both multi-bank

and single bank portals will continue to

exist side by side but that the battle is far

from over as the banks are fighting back

with more reasons for customers to stay

in terms of post-trade services and now

that the focus is turning increasingly

towards cross-asset trading, which the

banks can offer. He says: “There are lots

of different types of clients in the FX

market and certain types of clients might

be more disposed to multi-dealer

platforms, so I don’t think they will ever

disappear entirely. However, our belief is

that if we can provide a combination of

liquidity and functionality on our platform

that is superior to what the multi-dealers

are providing, then clients will always be

attracted to that.”

Role of multi-bank portals

However, Mark Warms, global head of

sales and marketing at FXall, says that the

multi-bank portal offers more post-trade

services than ever before. He says: “We

have a multitude of pre and post-trade

services. We have connected to hundreds

of different treasury and portfolio

management systems, delivering

seamless flow of trade details between

FXall and clients' in-house systems. We

did that by investing in proprietary

connectivity tools and building an

integration team globally. No other

institution has matched the level of

integration with the various systems that

we have.”

FXall’s post-trade workflow tools include

cross-currency netting, the ability to do

multiple allocations, support for internal

dealing, the ability to do a trade then roll

that trade forward later. On the post-trade

side, it offers services such as automated

confirmations, settlement instructions,

payment netting and messaging to third

parties such as custodians and prime

brokers.

Says Mr Warms: “Crucially, we offer the

customers the ability to access prices

from multiple banks. Most large

institutions have multiple relationships

and, where they do have multiple

relationships, they prefer to use a multi-

bank system.” Warms also believes that

multi-bank portals will continue to have a

crucial role to play for the larger players.

He says: “If you are a small player and

you do most of your business with a

single bank there is an advantage to using

a single bank platform but for large

institutions that is simply not the case.”

But so long as FX trading remains

primarily a bi-product of trading another

asset class, banks, such as Barclays

Capital believe that they can increase their

‘stickiness’ and claw back market share by

adding value in other areas to keep trading

with a single dealer platform attractive.

Mark Warms

“Most large institutions havemultiple relationships and,

where they do have multiplerelationships, they prefer to use

a multi-bank system”

Figure 2

M A R K E T P L A C E

Transaction cost analysis, is exactly like

its moniker, it analyzes the cost of

execution. This intuitively seems simple.

If the broker charges a $1,000 for

execution, isn’t the execution cost $1,000?

Well, not really. To accurately measure the

cost of execution you need to measure

more than broker commission and fees.

Execution cost is typically segmented

into two major categories: explicit and

implicit costs. Explicit costs are fairly easy

to measure in a transparent market. They

are brokerage commissions and spreads. If

the broker charges you $1,000 and you

bought at the offer, your explicit cost

would be $1,000 plus the spread.

Calculating implicit cost however is much

more difficult. Implicit cost is typically split

into market impact, delay, and missed

trades. Market impact is the affect the

order had in the market, or how much a

buy order has pushed the market higher /

sell order has pushed the market lower.

Delay, is the amount the market has moved

between the acquisition decision and the

execution price and missed trades are the

prints (other executions) that you

unfortunately were unable to participate in.

If you guessed that in the equity market,

commissions were the lion’s share of the

cost, well you would be wrong. Actually,

the way Plexus (now a subsidiary of ITG)

measures it, the largest aspect of

transaction cost in the US Equities market

is delay, not commissions, impact, or

missed trades. The lost time between the

decision to buy and the actual purchase

happens to be deadly.

Importance of Data

However, if by just reading this you

guessed that transaction cost analysis

requires a significant amount of data, you

would be absolutely right. Equity TCA

requires that you have the universe of your

decision-point time-stamped orders, when

they were received by the trading desk,

how the trader segmented the order, how


by Larry Tabb

FX Transaction Cost Analysis:Reality or Pipedream?

>>>

“….if you are trying tomathematically analyze

your FX trading costdown to the gnat’s

eyelash - the data is justnot there to do a

sophisticated analysis.”

orders were executed or delegated, all of

the executions associated with the

segmented order, and all of the market

data associated with every single order in

the market, or at least the volume weighted

average price of all of the asset that traded

that day. This is a significant amount of

data. The question is, is this data available

in the FX market, can it be developed, and

by who? And is this data really important

to developing new and maybe more

interesting TCA in the FX marketplace.

For the most part, the majority of

underlying data is not available for

traditional TCA in most over-the-counter

marketplaces. There are no unified markets

or trading venues in over-the-counter

markets, so there is no unified execution

tape. The market is not only bifurcated it is

tri or even quad-forcated (if that is even a

word). There is an inter-dealer market

where dealers trade, a credit-intermediated

dealer market where hedge funds trade,

dealer-to-client electronic RFQ systems to

the buy-side, and the phone or single

dealer market where the bulk of the dealer

to customer business is done. These

systems are not linked together and there

is no central trade reporting.

Because there isn’t a unified market it is

difficult to benchmark your trades. Who can

definitely say that the price from your dealer

was or was not the best? While it may have

appeared to be best according to the market

data platform, there may have been an RFQ

transaction, a dealer to customer trade, or

even a phone-based order that may have

been better priced. This fragmentation also

makes it difficult to measure both impact and

missed trades, as there is no way to calibrate

your executions against the market.

So the idea of FX TCA looks bad – huh?

Well if you are trying to mathematically

analyze your FX trading cost down to the

gnat’s eyelash - the data is just not there to

do a sophisticated analysis.

To more fully obtain accurate TCA

information the industry must develop an

execution tape, a list of all executions

across all execution venues (inter-dealer

broker, intermediated inter-dealer broker,

multi-dealer RFQ platforms, and dealer to

customer transactions) that provides the

time and date of the transaction, the

product, quantity, and the price with a

credit normalization field that allows for

consistent data analysis across the

counterparty creditworthiness. Credit

normalization of FX TCA will be important

as unlike equities, FX prices are predicated

upon counterparty creditworthiness.

The chance of this occurring in the

immediate future is limited. The market is

segmented, the dealers and trading

platforms have a vested interest in keeping

the data private, there is no consistent

protocol in which all parties communicate,

and there isn’t even a regulatory body to

force everyone to play nicely in the sandbox.

Improved access to data

However, that said, life is changing. The buy-

side, though automated execution platforms

and market data providers has greater

access to data than ever before. Platforms,

such as EBS Prime provides intermediated

hedge fund access to the inter-dealer market

and platforms such as HotSpotFX and

LavaFX enable the buy-side the ability to

trade with each other through a two sided

marketplace. Technology can grab, capture

and store streaming quotes to provide

measurable time series. And we are also

seeing increasing demand for benchmarks

such as EBS’s SmoothRate, which is about

as close to a VWAP rate for FX as one could

hope for in a fragmented marketplace.

That said, firms are also beginning to move

away from average price executions and

move toward an implementation shortfall

approach to measure transaction cost.

Implementation shortfall ignores VWAP

and benchmarks the order against a

decision price, which was the price at the

time it was determined to trade the asset.

So if the portfolio manager, treasurer, or

fund manager decided to buy a currency

when it was at a specific level, that specific

level would be the benchmarked price,

hence acquiring it lower would be positive

and acquiring it at a higher price would be

counted as a negative. The challenge with

measuring trading cost in this manner is

that while it does measure how well you

did against your order, it does not help you

understand the liquidity characteristics in

the market and how to better trade that

product the next time.

Conclusion

While more sophisticated implementation

shortfall methodologies use volume and

time and sales data to measure market

impact and missed trading opportunities,

one needs to start somewhere. And that

starting point seems to have occurred. With

greater client demand, there will be greater

pressure on dealers and execution

platforms to open their data, provide unified

access, and generate the metrics needed to

better understand execution, and only then

will firms truly be able to measure trading

cost in a sophisticated manner.


FX Transaction Cost Analysis: Reality or Pipedream?


Reuters and CME launch

FXMarketSpace

I N D U S T R Y R E P O R T

By Heather McLean

>>>


FXMarketSpace will be worth the cash says

Michael McCorkle, who is currently

treasury business manager at Reuters, and

will move to the new venture in a sales

capacity. He comments: “We see excellent

growth potential for what we feel is a small

investment due to the growth of the FX

market. FX has experienced some very

robust growth after being written off a few

years ago, and we expect it to grow

further.”

Rick Sears, who is set to move from CME

to the new business where he will become

its chief sales officer, adds: “This is not just

another matching engine for FX. This is an

initiative to build a robust market space.

This is an alternative. There isn’t an

exact model for this. We’ve found

two partners who can make this unique,

which makes FXMarketSpace’s offering

compelling. Reuters has been a household

name in FX for decades, and CME has been

the same in financial futures. Our joint

commitment of almost $100 million to

make this initiative work is also unique.”

Three directors from each company will

create the board at FXMarketSpace,

including Reuters’ chief executive officer,

Tom Glocer and its executive director and

president of the Business Division, Devin

Wenig, plus CME’s chief executive officer

Craig Donohue, chairman Terry Duffy and

chairman emeritus, Leo Melamed.

The leaders of the joint venture on the

ground are to be Reuters’ Mark Robson as

chief executive officer, and CME’s Richard

Sears as chief sales officer and Bryan

Hunter as chief operating officer.

Development of the platform has already

begun and the venture should launch in

early 2007, with profitability being reached

in 2008. The big six currency pairs are on

the line up for FXMarketSpace, with the

Euro, Yen, Swis Franc, Canadian Dollar,

Pound Sterling and Australian Dollar, plus

four crosses. The company will launch with

FX Spot, and around nine months after that

will hit the market place with Forwards.

Depending on how those products go,

Sears says FXMarketSpace will then go

ahead with FX Options. He adds: “For now

though, we’re focused on getting things up

and running on Spot.”

Principles behind FXMarketSpace

The idea for FXMarketSpace came about

for a number of reasons. Both Reuters and

CME have realised that foreign exchange

has emerged as a strong asset class that

can be exploited further. With more non-

bank financial institutions operating in the

FX market and the simultaneous growth of

online and algorithmic trading, both

parties have identified a gap in the market

that can potentially broaden the number of

traders in this growing space by bringing

electronic FX trading to a wider audience.

“FX has experiencedsome very robust growthafter being written off afew years ago, and we

expect it to grow further”

Reuters and CME are set to launch a worldwide electronic

foreign exchange marketplace with central clearing. The

equal joint venture will see the pair creating

FXMarketSpace, an independent entity that will be a

culmination of both companies’ expertise and technology.

FXMarketSpace will operate as a separate third party

capitalised by both firms. The pair will invest up to $45

million each into the joint venture to get it to profitability.

Michael McCorkle

“The interbank market isused to the OTC marketand so combining them

with the strengths of CME,in the whole clearing and

central counterpartymethod, results in

removing the need forcredited remediation

in the market.”

Sears explains: “The fundamental

principle behind FXMarketSpace is the

market is always demanding increased

efficiencies, from another drive through

burger joint to more computing power. We

thought that by bringing our two

companies together, our core

competencies could go some way to

solving the demand for more efficiencies in

electronic FX trading, with execution, low

latency matching engines, greater

anonymity, straight through processing,

settlement and centralised clearing. In the

end, it’s back to creating greater

efficiencies for the customer.”

FXMarketSpace will grow the FX market

overall, Sears comments: “Most of the

feedback we’ve got on the effect of this on

CME FX Futures is that FXMarketSpace will

only serve to grow trade. Our buy side

customers have told us that access to an

open FX platform, meaning where

everyone can play, and an efficient

platform, through a central counterparty

with cash trade, will serve to allow them

more opportunities to participate in FX and

for some market participants, it will serve

to give them more trading opportunities in

the future.”

Sears adds: “The company will have a

heavy emphasis on the markets and

customer on-boarding. CTAs, prime

brokerage units of banks, hedge funds and

prop shops are demanding more access to

centralised pools of liquidity, so there’s a

lot more buy side demand for access to this

kind of company.”

Removing credit constraints

McCorkle comments: “It’s very exciting to

go and be a part of what we all see as the

next step in the FX market. I think

FXMarketSpace is seeing the evolution of

the market through to the next step. We’re

going into this with the idea that this is the

way the market wants to go. FX in general

is growing as an asset class, and this will

remove some of the credit restraints to

allow it to grow even more. The removal of

credit restraints means the growth in trade

volume. We are fostering growth in the FX

market.”

FXMarketSpace is set to become a global

force to be reckoned with, Sears and

McCorkle state. The joint venture will be

based in the UK under the Financial Services

Authority. It will provide an electronic

trading platform that will offer the over the

counter FX market with anonymous cleared

trades. That FX market is the most actively

traded asset class globally, worth around $2

trillion (BIS Survey 2004 said $1.9 trillion

trades per day) in daily call around and

electronic trades combined.

Seeking approval

FXMarketSpace is still subject to regulatory

and shareholder approval, McCorkle says:

“European anti-trust clearance is the main

thing we’re waiting for, as the first level of

clearance we need. At the moment we are

dealing with customers in an information

sharing manner on this. Once we have

clearance, we’ll be able to go forward and

get into pricing models and solicit

customers for their feedback in a much

more detailed manner.”

Both parties are confident that what they

propose will be an asset to the marketplace

and will drive more foreign exchange

trades globally, as well as more

business to their respective companies.

FXMarketSpace will be accessible through

the CME Globex® electronic trading

platform, Reuters Dealing 3000 for

interbank trading and Reuters Trading for

Foreign Exchange for dealer to buyside

connectivity. The new project does not

therefore detract from either company’s

existing concerns, none of which will

become part of the new entity.

Customers of FXMarketPlace will benefit

from the use of CME’s clearing and

matching capabilities and Reuters’ desktop

technology and network, with trading


I N D U S T R Y R E P O R T

“Most of the feedbackwe’ve got on the effect ofthis on CME FX Futures isthat FXMarketSpace will

only serve to grow trade.”

Rick Sears

“FXMarketSpace willprovide operationalefficiencies around

settlement, with lowerCLS fees and low latency,

resulting in an overallreduced cost in trading.”

Reuters and CME launch FXMarketSpace

access, trade notification and market data.

Additionally, customers will be able to

trade anonymously, receive transparent

prices via the CME Globex platform and

central counterparty clearing services

through CME Clearing, plus the additional

electronic FX trading plusses of decreased

costs and straight through processing.

McCorkle comments: “The interbank

market is used to OTC market conventions

so our intention is to offer a product with

these characteristics along with the

strengths of the CME around clearing and a

central counter party. This will remove the

need for bi-lateral credit intermediation in

the market meaning that all prices will be

available for trade by all participants.

Reuters is bringing its very strong global

desktop footprint to the venture with a user

base of more than 100,000 on its flagship

information desktop -- Reuters 3000 Xtra --

and a community of 18,000 Dealing 3000

terminals. Of that 18,000 around 7,000 are

using the Matching product to trade FX

spot, forwards and options. FXMarketSpace

will be made available over both Dealing

3000 and 3000 Xtra with Reuters providing

the installation and support.”

Cost efficiencies

Sears adds: “From a credit perspective in a

central counterparty model, everyone will

have access to the best prices in the market.

And because it’s a central counterparty, we

can do post trade settlement with one

payment per currency per day.”

McCorkle continues: “The big benefit,

particularly for the buy side, is that the

removal of bilateral credit restraints in this

cleared model will allow buy and sell side

institutions to trade with counterparties

they were unable to trade with before.”

And cost efficiencies will be increased

through FXMarketSpace, McCorkle adds:

“Post trade settlement netting will result in

cost efficiencies that will be passed on to

end users. For prime brokerage and the

clearing side of banks, there will be

increased fee income opportunities, which

can also be extended to their client base.”

Sears agrees: “FXMarketSpace will

provide operational efficiencies around

settlement, with lower CLS fees and low

latency, resulting in an overall reduced cost

in trading.”

And so now what remains to be seen is

how these two gilt-edged parents manage

to work together in their new venture and

grow the company. Watch this space.



Lately, while going through my mail, I'm noticing more and moreconferences targeted toward the hedge fund community. Everythingseems to be about hedge funds -- regulating them, operating them,selling legal services to them, and more specific to Portware, thetools they use to trade. To that subject, most discussion centers onthe execution management systems (EMS) and order managementsystems (OMS) the hedge funds use. While these technologies grewprimarily out of the equities world, the rapid rate of FIX adoption andthe move toward more electronic trading in the FX markets has ledto a significant uptick in the amount of foreign exchangefunctionality being integrated into them. Because of thisdevelopment, it’s important at this time to clarify the distinctionsbetween the two with specific regard to the FX markets.

EMS vs. OMS:Key differentiating factors

By Andrew Yao, FX ProductManager, Portware

>>>

There seems to still be a lot of confusion about OMS and EMS

technologies, both in the equities and FX worlds. One of the

easiest ways to differentiate features when thinking about order

management systems and execution management systems is to

remember that historically, order management systems did front

office work, but really weren't designed for direct trading. Most

order management systems were FIX enabled so they could ship

orders to brokers to be worked. Users would generate the

orders by rebalancing their portfolios, but those orders would be

sent to an intermediary, not directly to the market.

Execution management systems on the other hand were created

as a mechanism to facilitate direct market access (DMA) trading

by the user. As brokers began to let clients use their FIX 'pipes'

to get to the market, these systems were provided as the

gateway to their plumbing. Since OMSs were FIX enabled as

Introduction to Grid Computing: The reason behind the insanity

1Research has shown that a given desktop or server is utilized less than 10 percent of the time on average.

well, they too were soon plugging into the plumbing. That

development has led to an increased need to significantly

enhance the trading functionality of an OMS.

Convergence

Today, it can be said that both systems are converging and

sometimes overlapping in functionality. Therefore, clients are

using one or both systems in different ways depending on their

workflow and degree of overlap. One of the more common

things we see is the EMS serving as the centralized aggregation

point for all trading. There can be many different OMSs feeding

into this EMS as it serves as the gateway to the Street. With an

increasing number of multi-strategy

shops opening up, we see more of a

centralized dealing desk with the

EMS acting as the central system

for total trade control.

While OMSs excel at portfolio

accounting, analytics, and

compliance, EMSs are designed to

allow further granularity in order

control. It’s important that they

scale with increased volume,

handle high message throughput,

and are extensible enough to

integrate with other real time feeds

such as customized trading

analytics. The EMS must be a

flexible platform that can be

customized to match the different

workflows for each trading desk

and asset class.

EMS technologies and FX markets

Application of EMS technologies to

the FX markets offers a prime example of the level of

extensibility they offer. In the electronic, over the counter, world

of FX trading, EMSs are being used as a point to source FX

liquidity. The EMS is able to connect to multiple counterparties

and aggregate all the liquidity in one place for the dealing desk.

That, coupled with the granular ability to handle orders, opens

up the dealing desk to a whole host of untapped ways to

optimize trading. Specifically in FX, a dealing desk could receive

all their orders, start netting them in real time, execute the net

amounts, and allocate them back to the sub accounts. The EMS,

in this case, essentially creates its own market feed based on all

the liquidity providers that are setup and allows traders to

execute without having to think about each individual accounts

or the specific liquidity provider that is being quoted.

In a more induced FX trading scenario, the EMS could be trading

non-dollar denominated assets and could be calculating the

currency exposure in real time.

It could then be setup to send an auto hedge order to the

liquidity pools that are currently aggregated on the platform.

Rather than just sending the orders out to the liquidity pool, it

could be designed to work with instructions such as, “flatten out

my currency exposure, but don't push it too much until it

reaches over $25m. When it gets there, be more aggressive.”

Execution management systems were designed from the

beginning to handle this type of trading. A key differentiation

point between EMSs and OMSs will be the degree of control you

have over your trading across asset classes, including FX.

Another example of how an OMS and an EMS might work

together is that the OMS may have some FX orders across a

number of accounts. The EMS would

get all the orders, net them together,

and trade across the liquidity pools

on the platform. While it’s trading,

a user can set up an algorithm to

function as a trailing stop which

moves the stop prices several pips

below or above the value of your

current position. Again, the point

is, while the OMS provides some

portfolio accounting and order

management tools, the execution

management system does the

heavy lifting with respect to trading

and order handling.

An important factor to enabling

more FX trading in execution

management systems is further

standardization on communications

protocols and how each liquidity

provider behaves. This will help

weave together all the fragmented

liquidity that is around. Moving

forward, clients will be looking for whatever liquidity they can

get with the tightest spreads possible in all market conditions, so

it will become necessary to see more integration with exchange

based liquidity sources.

Lastly, clients will also increasingly be using algorithms to auto-

trade their FX orders, with the EMS serving as a platform for

sourcing the liquidity and building their automated strategies.

Because of this, it is crucial that the system is flexible enough to

match the workflow and the algorithmic requirements for FX as

trading styles evolve over time.

The development of these new technologies has significantly

quickened the pace of change in the FX markets. There is a lot to

keep track of and new innovations seem to crop up on an almost

daily basis. While it can be daunting at times, it’s important to

remember that in the end, these developments will help

everyone trade better, which can’t be a bad thing.


EMS vs. OMS: Key differentiating factors

vie

wpoin

t


Introduction – Consolidation and

Fragmentation of Markets

2006 continues to providedramatic evidence of the rapidtransformation that is sweepingthe vast and growing FX asset class that now exceeds $2 trillion in daily volume.Significant investments arebeing made on the part of banks,brokerages, exchanges andvendors -- individually and injoint ventures -- to automate,systematize and consolidatewhat has historically been a manual, fragmented anddecentralized collection oftrading venues. Combine thiswith the shifting ownership ofthe major FX trading exchanges,and one needs a scorecard tokeep track of the players, theirstrategies and target markets.

While at first glance, outsideobservers of the FX marketplacemay be surprised at the pace ofthis change, we believe that what

we have been seeing over thepast several months is the naturalprogression and evolution of theFX markets. In particular, thisinevitable nature of markets toconsolidate and fragment is aconstant and has a real impact ontrading and the success or failureof trading relationships.

Fragmentation in markets results from competition based on business and technologyinnovations. As markets centralizeor consolidate to gain scale,certain segments becomeunderserved and are open toalternative trading venues thatmore specifically meet theirtrading needs.

Additionally, new participantsthat enter existing marketschange the trading dynamic withtheir different approaches andmotives to trade, co-opting thevenue to their style as they growin size and volume. There aremany recent examples of thisphenomenon, such as the adventof EBS Prime, which manyindustry experts point to as oneof the reasons for the foundingmember banks to sell the entireplatform because it was nolonger meeting their originalinter-dealer needs.

As these alternative venues growand gain critical mass throughconsolidation, there will be newcycles of innovation andcompetition to carve out certainsegments that have specific

needs better served elsewhere.

This dynamic of consolidation

and fragmentation is a constant

that can be seen in virtually all

industries, markets and trading

venues. In addition to the

repeating cycles of markets to

consolidate and fragment, the

nature of trading amongst

institutions and their traders

varies dramatically as well. These

differences are fundamentally

due to the “heterogeneity” of the

participants and the trading

systems that they use.

There are many dimensions

contributing to the participant’s

heterogeneity, with the most

important being their "motives

to trade" (market makers,

hedgers, speculators, asset

exchangers, etc.) which can

be substantially different, and

therefore necessitate different

trading venues, styles and

approaches. Other dimensions

include information asymmetries

among participants (informed

or uninformed traders),

active or passive, patient or

impatient, risk-return expectations,

investment time horizons and

corresponding reaction speeds

to market conditions, investment

styles, as well as many others.

As a result, FX market participants

should recognize that their

heterogeneity will continue to

bring more cycles of change, and

therefore realize that “one size fits

all” will no longer apply.

Harpal S. Sandhu, CEO, Integral

Development Corporation

Heterogeneity in theFX Markets: “One size fits all” doesn’t fit anymore

vie

wpoin

tViewpoint is a column in e-Forex where we invite

organisations, companies and individuals to comment on eFX and FX trading issues. Please feel free to write to us with your own views

on these contributions as well as suggestions for other topics.


Heterogeneity Implications

Ultimately, such a large degree

of heterogeneity among the

participants and the various

trading venues they use for

providing and consuming liquidity

implies certain outcomes that can

be predicted and planned for.

Such as:

• The concept and the process for

“liquidity discovery” (searching,

sourcing and matching liquidity

from multiple venues) will be

emphasized as much, if not more

than the process of “price

discovery.“ This will be even

more relevant for FX vs. other

asset classes due to the

decentralized and opaque nature

of the FX markets.

• Trading venues will continue

to evolve as participants

differentiate themselves and re-

determine on an ongoing basis,

what exactly attracts them to, or

repels them from a trading

venue or type of counterparty.

• Information transparency regimes

will change as venues innovate to

attract new and incremental

business, including price and

counterparty transparency both

pre- and post-trade.

• Trading costs, whether they

are embodied in spreads,

commissions, fees, etc will

change as liquidity takers realize

the value of liquidity depth,

resiliency and immediacy; while

liquidity providers will realize

their true opportunity costs and

seek to avoid customers who are

incompatible for their services.

• Trading protocols and workflows

will digitize and become more

electronic as participants enter

the market at low costs with

new electronic business services

for trading with others, such

as Quote, Order and Credit

Providers as well as Facilitators.

Price and execution latency will

therefore become an even more

critical issue, due to its impacts on

operational and execution risks.

These predictable outcomes raise

an important opportunity for FX

market participants. In order to

succeed, participants need to

acquire technology and "on

demand" services at low or no

entry costs to adapt as fast as

these changes occur.

Flexibility in an On-demand World

Flexibility in systems is an

absolute in order to respond to the

market and the constantly

changing nature of trading

relationships and new liquidity

venues. Innovative use of

technology will allow for the

unbundling and re-packaging of

core services, therefore the

optimal solution leverages

technology to its fullest through

the right set of network and

trading services that are on-

demand and easily provision-able

based on trading dimensions.

Just as the ubiquity of the telecom

grid enables you to easily dial

someone and engage in a

conversation without having to

invest and deploy infrastructure,

the existence of a similar grid for

FX trading allows FX market

participants to quickly and easily

initiate and evolve specific trading

relationships.

Integral’s FX Grid was built to

facilitate such an “on-demand”

world. FX Grid is connected to 13

of the world’s largest market

makers and over 200 institutions,

providing direct market access and

the fastest connection among

trading parties. Market participants

connect to FX Grid through a

single Integral API™ from which

they can negotiate, execute and

settle trades with counterparties.

System integration becomes

an “on–demand” service by

eliminating the need to integrate

and manage multiple systems and

services as well as insulating

participants from changes in

technology made by other

participants in the network, such

as modifications to their systems'

APIs.

This end-to-end automated system

allows for precise provisioning

of liquidity, giving sponsoring

institutions unprecedented flexibility

to provide, target and deliver

customized liquidity solutions to

their individual customers.

Through this complete solution,

FX market participants are freed up

to innovate on their FX business

models, giving them a highly

scalable platform. FX market

participants owe it to themselves,

their customers and stake-holders

to examine their current systems

and determine how they can best

leverage this new technology to

access new markets, grow their

businesses and achieve real

business efficiencies.

About the author

Harpal S. Sandhu is CEO of

Integral Development Corp, the

leading provider of innovative,

end-to-end solutions to automate

FX trading. Integral’s FX Grid and

FX Inside platforms provide a

complete, end-to-end liquidity

sourcing and distribution system

that is delivered under a

sponsoring institution’s branding.

Founded in 1993, Integral employs

more than 170 professionals and

maintains development, support

and sales offices in Silicon Valley,

Chicago, New York, London,

Tokyo, Singapore and Bangalore.

Employing trading algorithms has

been the buzz lately on FX trading

platforms, but to believe that algorithms

could take the place of traders is

to believe in Hollywood fairytales. The

movie “π”, a grainy, black and white

art film - not particularly good, but

interesting nevertheless - tells the story

of Max Cohen. Max, a brilliant but

troubled mathematician, is obsessed

with Pythagoras, Archimedes and

Leonardo da Vinci, and uses his

home-built supercomputer, Euclid, to

analyze exchange markets and predict

performance utilizing a pattern in π.

The movie presents a series of hysterical

perspectives insinuating that everything in

this world is represented by a numeric

pattern that, once discovered, is the

singular and foolproof recipe for success in

exchange markets. It’s the proverbial “buy

low, sell high” trading model that every

undergraduate dreams about.

Given the obvious volatility within the

marketplace as well as an increasingly

competitive bank-side, over dependence

on automation is now and always will be a

pitfall. What algorithmic trading models

can do for the FX trader, however, is

improve execution performance through

better order management and strategies

that reduce market impact.

Algorithmic models and their purpose

Algorithmic trading models can be thought

of as “packets of strategies,” individually

conceived and customized to help the

trader execute trading tactics with the

flexibility to revise strategies swiftly or

implement new ones on the fly. They allow

both the sell-side and buy-side to take on a

greater volume of trades with more

efficiency and less chance

of error.

It is important to differentiate

between “Alpha Models”

(which generate risk and

P&L) and “Execution

Models” (which are

designed to reduce market

impact and execution costs).

Electronic “Alpha Models”

generally are not purchased

from vendors but are the

product of highly specialized

and secretive hedge funds

and prop desks. On the other

hand, there are commonly

accepted execution models

available from vendors

(Figure 1).

Stand-alone platforms run on a trader’s

workstation and include these standard

trading models as well as a secure

environment for Tick by Tick processing of

a client’s custom algorithms. The best

trading platforms allow traders to employ

their own proprietary algorithmic models

or utilize pre-defined models that can

be easily customized to fit distinct

parameters.

Market Impact and Execution Costs

The traditional approach to trading large

size in the FX market has been the Request

for Quote (RFQ) model where both the

amount and the counterparties (but not the

direction of the trade) are disclosed

pre-trade.


DemystifyingAlgorithmic Trading

Sean Gilman

Chief Technology Officer at Currenex, Inc.

Figure 1

A typical algorithmic trading platform includes a model selector that lets traders select specific

algorithmic trading models.

>>>


In contrast, most algo execution models

slice large orders to reduce market impact,

using time weighted averaging to adjust

the amounts on a predetermined hourly

curve (Figure 2).

Pegged Orders automatically peg a Good-

Till-Canceled iceberg (or reserve) order to

either the bid or offer and adjust it in real-

time as the top of book market changes.

This model is designed to execute large

size with minimal market impact and

without “paying the spread”.

Other popular algorithmic models are

variations on trailing stops and synthetic

crosses, which specify timing stratagem,

the size of the orders to be executed, and

lowest destination cost routing. Again, the

better trading platforms come with these

pre-defined algorithmic models that FX

traders can utilize with little or no prior

experience employing algorithms.

A lack of Benchmarks

In the world of equities where information

is published by regulated monopolies, the

success of a particular execution model

can be determined by comparing the

average price obtained through a

particular model with the VWAP for that

particular stock. Because there is no

consolidated ticket feed for FX there is no

way to perform this comparison in FX.

Therefore, measuring the performance of

an FX execution algorithm is a fairly

arbitrary process. The best algorithmic

trading platforms will graph execution

prices against market rates over time.

Some ECNs (like Currenex) and banks

provide the ability to trade based on

directly calculated benchmarks. These

benchmarks are calculated hourly, from

various published algorithms. While this

technique has not proven particularly

popular with hedge funds, it is the

preferred method for many real-money

funds and some large corporations.

Anonymous liquidity pools are crucial

Most of the algorithmic execution models

were developed for the buy-side equities

market. They leverage the anonymity the

central counterparty brings to the table to

hide patterns which would create market

impact in a non-anonymous OTC market (as

the models are easily reverse engineered).

“Other popularalgorithmic models are

variations on trailing stopsand synthetic crosses,which specify timing

stratagem, the size of theorders to be executed,and lowest destination

cost routing.”

When these models are used to trade

FX on direct bank relationships, they

rapidly lose their desired effect and

can have a negative impact on execution

performance.

Figure 2

The Order Slicer lets the trader define the amount to be traded as well as thenumber of slices over a defined period of time.

Demystifying Algorithmic Trading

Most algorithmic execution models (order

slicing for example) require complete

anonymity on a central counterparty

model to protect the identity of the trader

at all times. Additionally, ECNs must not

provide market makers with customer

identifiers (as most FX ECNs do), which

give market makers the ability to reverse

engineer individual models.

Smart-routing Technology – The world is

getting smaller

As both sell-side and buy-side traders

continue to advance their sophistication in

the FX marketplace, new technologies are

crucial in assuring faster, better fills at the

time an algorithmic model executes an

order. A mechanism that shrinks the

disparate market to a single execution

venue ensures optimal execution for

traders. Automated trading is about timing

and execution, so every millisecond

counts; therefore, if an order match exists,

then a match must occur across liquidity

pools without slippage (Figure 3).

Smart routing technologies allow a single

order to exist simultaneously in multiple

markets and are critical for algorithmic

execution models. Scalable connectivity

for placing trades quickly and efficiently—

with full integration of information among

all participants—is another key ally as

these new technologies promise to better

route orders in multiple liquidity pools and

execute in asymmetric relationships.

An algorithm’s effectiveness, after all, is

only as good as the order routing

technology existing on the platform where

it has been employed.

The winners

It is important to look at the evolution of

the equities markets as an indicator of the

potential direction of the FX market,

keeping in mind that credit and anonymity

will continue to have a strong effect on FX.

While algorithmic execution models play

an important role in equities, there are also

many other execution models that have

flourished. In particular, call-auction block

trading systems, which allow funds to

trade large sizes with little or no market

impact and total anonymity, play an

important role in equities but do not exist

in FX.

Hedge Funds are positioned as the obvious

innovators in leveraging proprietary

execution models to trade large volumes

across multiple liquidity pools. Taking a

more conservative approach are the real-

money funds and corporates.

However, with standard execution models

focused on certainty of execution (RFQ)

and benchmark trading procedures, these

firms will find algorithmic trading

platforms a cost-effective, efficient

alternative to traditional trade execution.

“Most algorithmicexecution models (order

slicing for example) requirecomplete anonymity on a

central counterparty modelto protect the identity ofthe trader at all times.”

Finally, the sell-side is beginning to use

algorithmic models on their trading desks,

enhancing their own strategies to deliver

trades and employing their own

automated strategies to keep pace with the

booming FX industry. Banks have the most

to gain from this new technology—and the

most to lose if they fail to adapt.

π’s director, Darren Aronofsky, tapped into

the pipe dream of a flawless trading

model—an algorithm smart enough to

beat the exchange markets at their own

game. Students from MIT took the film

seriously enough to form a secret society

devoted to the movie’s implications,

impressed with the concept that such a

solution could be deciphered and

employed on their own terms. While this

secret π society is not active in the FX

market (that we know of), there have been

many examples of algorithmic Alpha and

Execution models that return very positive

results—but only for a limited time.

As with anything, the market eventually

becomes more efficient and the model

becomes less and less viable. Algorithmic

trading in FX is and will continue to be a

process of evolution, and smart humans

will continue to play key roles in expanding

the viability of its use. Success with

algorithmic trading does not depend on

finding the perfect model (it doesn’t exist);

what’s most important is the seamless

human/machine interface that’s efficient

enough so that traders can evolve faster

than the competition.


Figure 3

Graphing displays current and historic market rates and the trader’s executions.

At first glance, it might seem that

algorithmic FX trading for major

currency pairs is an irrelevance. Finding the

liquidity that sometimes proves elusive in

equity markets isn’t much of an issue. A

trader trying to fill a reasonably sized order

in EURUSD on a venue such as EBS

shouldn’t have to struggle too hard.

Buyside hurdles

Most industry experts accept this point, and

definitely see it as a factor in the relatively

slow uptake of algorithmic trading in FX. “If

trading a really liquid pair, such as EURUSD,

you don’t really need to be doing anything

particularly sophisticated in terms of

execution algorithms,” says Andrew Yao, FX

product manager at Portware.

“When the size is substantial, quite a few

buyside clients have told me that they

would prefer to pick up the phone and get

a quote for the full amount rather than

splitting the order into smaller amounts

and trading electronically”

Superficially this might seem illogical, but

the relative lack of buyside anonymity is an

important differentiating factor between

the FX and equities markets. “If a buyside

customer is dealing direct with a bank (i.e.

not on an ECN) then they are clearly visible

to the bank,” says Yao. “I think that is why

the buyside would prefer to hit one bank

with the full amount rather than

giving them advance notice that they will

be feeding an order in gradually.”

Other commentators feel that there could

be more fundamental obstacles to wider

adoption of algorithmic trading in FX.

“We already know from other markets,

such as futures, that as algorithmic and

automated trading increase the transaction

count goes up,” says Dmitry Bourtov, CEO

of Unimarket, which acts as investment

manager for the Solaris Market Neutral

Hedge Fund.

“The FX market is still evolving

technologically and as yet we do not know

whether all the various execution venues

will be able to handle the increase in

transaction volume. The scale of this

potential increase can be gauged from the

futures markets, where the messaging count

on the top four exchanges rose by 40% in

just the first five months of this year.”

Fragmentation

Another potential obstacle is the variation in

dealing rules and practices across execution

venues. For example, venues tend to have

differing rules governing the size and

frequency of orders that can be submitted in

a particular time period. Individual banks will

have their own individual risk control

mechanisms which may accept or reject an

incoming trade. Ultimately, with banks

providing the bulk of the liquidity in FX, they

have the right to decide whether or not

they will provide that liquidity at a

certain point in time. Contrast that

with electronic equities trading

where there is the general

expectation that when an

order is sent, it will be filled.


Unlocking the natureof FX algorithms

Andrew Yao

Andy Webb

Greater adoption of algorithmic trading for FX has been a popularprediction for some time. But what types of algorithm are likely to provepopular in the FX environment and what hurdles may need to beovercome if FX algorithms are to take off? Andy Webb investigates.


The fragmentation of dealing practices in

FX represents a very significant

housekeeping hurdle for algorithmic

trading. “We have to write rule sets for

each and every FX execution venue so that

any algorithmic trades can be routed in

accordance with these different practices

automatically,” says Yao. “This is a greater

issue than it is in electronic equities, which

are comparatively mature, so there is an

expectation that execution providers

function in the same way. You send them

an order and they do their best to forward

or fill that order right away – if they don’t,

they won’t survive.”

If this housekeeping represents a labour

intensive chore for a specialist vendor such

as Portware, it will be a considerably

bigger challenge for those buyside

participants who wish to write their own

FX algorithms in house.

The problem is that this basic housekeeping

also has to be maintained on an ongoing

basis (as execution venues make changes to

their dealing rules and APIs) before any

value-added work can be done on actual

algorithm development.

Possible algorithms

Assuming these

hurdles can be

o v e r c o m e ,

what will

“typical”

FX algorithms look like? While liquidity per

se may not be an issue in major pairs, there

still remains the opportunity for price

improvement.

“I think the lack of volume data in FX

means that rather than being so concerned

with volume profiles (as in equities) the

focus will be more on how one cherry picks

the moment of execution in order to gain

an extra pip or two,” says Mark

Montgomery, global business development

director at Latent Zero.

“If you have a good feel for the volatility of a

pair, you can concentrate more on how

price fluctuates within your target

area so as to time your trade effectively. Thus

you might expect the algorithms used in FX

to focus more on the risk reward of trade

timing – i.e. balancing the price improvement

opportunity of delay with the certainty of

trading immediately. Logically the

predominant benchmark in FX will therefore

be TWAP rather than VWAP.”

Unimarket’s Bourtov sees particular

algorithmic opportunities in cross rates that

are not directly quoted. “It is established

practice to derive these cross rates

synthetically – for example, to buy or sell

CHFJPY one would actually make two trades

in (say) USDJPY and USDCHF,” he says. “An

algorithmic model could automate this

process to avoid the risks of legging into the

spread manually and at the same time scan

for the best implied rates across multiple

pairs. For example, the best CHFJPY bid

might be available by trading USDJPY and

USDCHF, while the best offer might be

achieved by trading EURJPY and EURCHF.”

FX versus equity algorithms

Will FX algorithms be more complex than

equity algorithms? Not according to

Portware’s Yao. “I think current equity

algorithms are sufficient for use in FX,” he

says. “In fact, the equities world is slightly

more complicated because the liquidity is

widely fragmented and people wish to

retain their anonymity. FX also tends to be

a more direct market in that usually tend to

buy or sell immediately where liquidity is

available, as opposed to posting limit

orders and waiting inside the book.”

However, Bourtov sees the potential for

more sophisticated algorithmic opportunities

across the entire FX complex beyond just

spot. “FX has exceptional liquidity in its

associated derivative markets,” he says.

“Therefore, if algorithmic trading across all

these markets becomes possible, far more

complex algorithms incorporating perhaps

multiple derivative instruments become

feasible. Users may ultimately be able to

express very precise views of a particular

currency or basket of currencies using these

strategies.”

But…

While algorithmic trading may be expanding

into FX, some see a potential problem for

the sell side. One of the benefits for broker

dealers in equities is that producing

algorithmic models has been the “value

add” that justifies them receiving order flow.

“The more variables you have, the easier it

is to make the development of algorithmic

models appear a high powered quantitative

process,” says LatentZero’s Montgomery.

“However, in FX you don’t have volume data

and that removes one very significant layer

of complexity, in that volume benchmarking

etc is not necessary/possible. Therefore,

from the sellside perspective, the

promotional prospects for FX algorithms

may be rather smaller.”

Dmitry Bourtov

Mark Montgomery

TWAP

Cas

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tudy Traiana Harmony expands market

footprint with FX Options STP.

Traiana’s Harmony service was launched less than

two years ago to provide a secure, scalable

service to efficiently manage the give-up process

between prime brokers, executing banks and ECNs.

It was initially offered to cover cash FX products, but

was expanded to cover FX options based on demand

from several major prime brokers already on

Harmony.

These prime brokers have been active

in driving strategy for the product, including

defining a common set of option valuations.

Harmony’s support for FX options is a relatively

recent development, but already a number of major

executing banks are live with the service. There are

currently deals flowing through eight executing bank

to prime broker relationships, and a significant

pipeline of additional participants that are expected

to go live in the coming months.

The service connects all trading partners using

Harmony Message Center, a central hub that

provides a single point of connection, replacing the

manual processing of give-ups and the use of

multiple interfaces.

Harmony quickly gained strong acceptance by

transforming the transmission of trade data,

streamlining tri-party processes and replacing costly,

time-consuming and error-prone data entry.

“Harmony exceeded $52 billion in volume in a single day on May 17, 2006 and

recently recorded its one-millionth give-up.”

The level of popularity and market leadership

achieved by Harmony in such a relatively short time

is illustrated by the achievement of two, recent

milestones; it exceeded $52 billion in volume in a

single day on May 17, 2006 and also recently

recorded its one-millionth give-up. These highlights

were achieved during a period of ongoing,

accelerating growth for Harmony in all key

categories, including overall message and ECN

volume, as well as the number of trading partner

relationships logged into the system.


Traiana Harmony Message Center: FX single barrier option trade ticket.


Expanding Beyond Cash Products – Enabling FX Options STP

Harmony’s rapid adoption and growing popularity is due in no

small part to a wide range of attractive features supporting

straight through processing of FX transactions, which now

include vanilla and exotic options. Building upon the core FX

service, Harmony provides for the electronic routing of options

trades, incorporating direct integration with banks’ front- office

deal capture and options processing systems. Harmony

enables bank STP throughout the option lifecycle –

including new option trades, option exercise and option

expiry, that:

• Captures and routes options market events direct from

the bank’s options processing system

• Provides an STP feed to prime broker systems

• Offers intelligent linking between underlying options and

the associated exercise/expire messages

• Generates exercise or expiry notifications for bank

participants

Other, key Harmony features that have fueled its growth include:

• Deal status and visibility to the trade lifecycle, consisting of:

• - Prime broker trade status, highlighting matched and

unmatched deals, as well as processing errors

• - Option processing status – identifying live, exercised and

expired options

• Options positions tracking

• - Visibility to positions across a bank’s tri-party relationships

• - Sophisticated monitoring, including notional and delta-

based positions

• - Continually updated valuations, reflecting trade and

market event activity and current market rates

• Tri-party limit monitoring

• - Monitoring of participants’ tri-party credit limits across

cash and options products

• - Proactive alerts of credit limit breaches and warnings

• - Reporting and visibility to credit lines, utilization and

exceptions

• - Sophisticated calculations, reflecting prime broker lines

for net open position, daily settlement limit, tenor and

permitted products and currencies

• MIS reporting, highlighting FX and options volume,

including total deals and notional value

Options types supported by Harmony

Harmony supports vanilla options as well as the most

commonly traded exotic options. Options types that can be

routed through Harmony today include European and

American vanilla options, NDOs (non-deliverable options),

single barrier options (up & in, up & out, down & in and down

& out), double barrier options (knock-in & knock-out) as well as

digital options.

Benefits to the FX Community

With the inclusion of FX options, Harmony extends the rich set

of benefits it provides to the FX community. As with FX,

options processing on Harmony provides benefits such as

reduced costs, increased trade transparency and visibility into

available limits and trading power. Participants will enjoy faster

execution due to end-to-end straight through processing that

eliminates the need for manual keying of trades and a

corresponding reduction of operational risk and related errors.

Traiana TPL: Executing Bank pre-deal limit check to confirm resulting utilization of client’s credit limits.


Society isn’t as secure as we think it is

Safe and prosperous societies only

stay that way as long the economic

infrastructure remains stable. It is

perhaps tempting that in affluent

societies, we presume it will always stay

that way. Perhaps we should not be quite

so confident.

The threats are out there. Obvious natural

disasters such as Hurricane Katrina or

terrorist events such as 9/11 caused a lot of

human suffering and triggered adverse

economic affects which in turn contributed

further to human suffering. Yet the

economic affects of these will be relatively

short lived, at least on a macro scale.

There are less obvious, longer-term

threats to the economic model which are

worthy of consideration and could have

far wider implications for society.

Algorithmic trading would not appear on

many people’s danger list, certainly not

alongside Al-Qaeda but it certainly has

the potential to change markets and

society as we currently know it.

Markets need volatility to be profitable

Volatility is the lifeblood of the markets.

Without it a large source of cashflows and

profit is lost. Financial and service based

economies not rich in natural resources

are particularly vulnerable in this regard.

Today many price makers use

sophisticated systems to offer prices to the

markets. These systems already contain

algorithms that automatically adjust the

prices based on market conditions,

customer ratings, and the positions held

by the makers. On the other side of the

fence the price takers are employing

algorithmic trading techniques to trade.

Both these technologies are being

developed at a frightening rate, so what

happens when the ultimate price engine

meets the ultimate algorithmic trader?

Historically spreads and margins have

diminished as market volatility has

eroded. Indeed, electronic systems

trading has even brought markets to a

halt in the past. This normally happens

when a market becomes fast and starts to

gap up or down and panic measures kick

in preventing trading, drying up liquidity

in the process. This was apparent during

Black Monday (19th October 1987) and its

aftermath, when world bourses or stock

exchanges had to be repeatedly

temporarily closed due to electronic

trading in a thin market.

This caused gapping in market prices

(causing the market to spiral out of

control) and therefore leading to panic.

With stops being triggered and positions

closed out, the market lacked confidence

for any speculative players to get involved

and most people sat on their hands.

This caused North American bourses to

temporarily close as they had reached

their limit gap down for the session on

very thin trading, re-opening again

sometime later that day. This continued

for several days after the initial knee-jerk

reaction in which the US market lost

almost one-quarter of its value in less

than one trading session.

Then there are the bear markets, where

shares die the death of 1,000 cuts, suffering

agonising losses stretched imperceptibly

over months or even years. Measured

against the mightiest of these, the 1987

share slump may not look that impressive.

Algorithmic trading traceable to Black

Monday

Black Monday 19th October 1987,

prompted by the announcement of worse-

than-expected US trade figures and the

response by US Secretary of the Treasury,

James Baker, who indicated that the

sliding Dollar needed to decline further.

This caused a world panic as fears of the

likely impact of a US recession were voiced

by the major industrialised countries.

Between 19 and 23 October, the New York

Stock Exchange fell by 33%, the London

Stock Exchange Financial Times 100 Index

by 25%, the European index by 17%, and

Tokyo by 12%. A lot of these losses where

caused by algorithmic trading.

Algorithmic trading:

Carl Martin, Group Technical Director

at Eurobase International

>>>


Crashes caused by intense sell trading, and

crunches

Broadly speaking, market crashes come in two

main flavours. The first - and less harmful - breed

is the sudden onset of panic, an often violent

reaction to an event or trend that feels nasty at the

time but tends to be short-lived, coupled with

system generated trading and stops. With the

benefit of hindsight, these crashes are soothingly

called ‘corrections’. The much more dangerous

type is the prolonged depression, commonly

known as a Bear Market. Here, shares may rarely

fall spectacularly, and may give occasional signs

of rallying, but little by little their value is bled

away over the years.

Black Monday's collapse - by far the biggest one-

day stock market fall in history - was ironically also

arguably the least justified market crash ever. On

the next trading day, the Dow rose by more than

100 points - its biggest ever one-day gain up to

that time - and had recovered all its lost ground by

just over a year later.

History repeats itself on Black Wednesday

The panic of Black Monday was also evident in

1992. On Black Wednesday (16th September 1992)

system generated selling resulted in gapping

foreign exchange and money markets. When

Sterling fell out of bed, the Government raised

interest rates by 50% in one day from 10%, initially

to 12% then up to 15%, forcing the Pound out of

the ERM (Exchange Rate Mechanism) and cutting

to 12% the very next day. The Exchange Rate

Mechanism was a system for tying its value to that

of other European currencies. Black Wednesday,

as 16th September 1992 came to be known,

provided one of the most memorable failures of

post-war British economic policy. It was the

defining failure of John Major's Government; it

was a huge boost to Euro-scepticism; it made

currency traders like George Soros (one of the

pathfinders for both program buying or selling,

with his influencing methods) rich.

Interesting times ahead

The biggest long-term question in the FX market at the

moment undoubtedly surrounds China and its currency the

Renminbi. The reluctance of the Chinese Government to let

the Renminbi float on the foreign exchange markets, is a

major distortion within the global economy and amongst

many other things keeps Chinese goods massively cheaper

than they would be if the currency were allowed to float.

This has lead to economic embargos by the US, and to a

lesser extent Europe, to get the currency into line and

prevent China and its exporters becoming cash rich, with

hard currency. However at some stage in the future the

economic cycle in China will slow down, as they drop their

guard allowing the markets to play with their currency, with

system trading coupled with their work force demanding

more money for the respective job in hand, therefore

pricing Chinese manufactured goods more expensive,

along with the upward cost of raw materials, and the

unknown of FX forces.

Getting the right ‘Algo’ strategy

There are a number of banking institutions offering broking

services with different algorithmic trading strategies. If so

many brokers can do it, the argument runs, it cannot be that

difficult. So how can one broker's algorithms be

differentiated from another's? When the quality of

algorithms varies dramatically from broker to broker, all it

will do is make the brokers get fat wallets, as it’s not the

brokers taking the positions on but merely taking their

brokerage or commissions from both the program buyers

and sellers.

The markets would be wonderfully placed if all of these so

called ‘brokers’ used the same algorithmic macros. Pricing

all the buys in the same place and all the sells in the same

place. Having all the auto pricing or speculative traders

running a huge position with ‘loads of money’ to take on the

Algo boys and triggering the Algo’s stops and causing them

so much pain and panic, in a kind of ‘he with the most

money wins’, in a financial casino style of gamble scenario.

This could lead to financial disaster.

Could Autotrading really cause economic meltdown?

It sounds like the plot for the next sci-fi novel, but leaving

price engines to slug it out with algorithmic traders has the

potential to do serious harm to any advanced economy,

which in turn could lead to social unrest and political

instability. With institutional profit margins driving personal

greed such events in Europe and the US could have serious

consequences, on economies and people’s wealth. It could

trigger wide scale job losses, world recession, and

ultimately the resulting civil unrest and lawlessness could

lead to scenes like those in New Orleans but on a bigger

global scale.

Algorithmic trading:Social unrest in the making?


Cross-Product Multibank Portal

with

Integrated In-House Trading

For more information please contact:

Christoph Perger

360 Treasury Systems AG

Grüneburgweg 16-18 /

Westend Carrée

D-60322 Frankfurt am Main

Germany

Email: [email protected]

Tel: +49 69 900 289 0

www.360T.com


Implementingreal-timecontrols overAlgorithmic FXtrading modelsAlgorithmic trading is the new black; for any bankat the cutting edge of fashion, this year’s must haveare the supermodels trading the largest volumes.But when the flash photography is over, and thedesigners have gone back to work on next year’scollection, who will be left wearing the Emperor’snew clothes? We go behind the scenes at VolumeBank to see how one imaginary bank is copingwith its first model deployment.

[email protected]

[email protected]

[email protected]

[email protected]

Algorithmic Trading

[email protected]

Further to our call last week on the final deployment issuesof the Mars XL5 trading model, we have now completedinstallation of the Reuters Prime and EBS AI key stations inLondon. The XL model team has also requested weexamine HotSpotFXi, Currenex and Lava as possible futureliquidity providers.

With regard to the initial credit limits to be set, we now needto establish these within RM, could you respond to thegroup with your structure.

GHFX – has the PB documentation been signed andreturned yet by XL?

RgdsProject Manager

Algorithmic Trading

[email protected]

[email protected]

[email protected]

[email protected]

Re: Algorithmic Trading

[email protected]

Just to give you a flavour all these vendors have slightlydifferent depths and types of liquidity, in the future we willneed to have some sort of blending engine that willamalgamate all this liquidity into a deeper pool, because XLwill demand the deepest possible feed.

They are all working to offer the lowest possible latency onpricing, and with the changes in ownership recentlytechnology spend is going to hopefully increase over thenext 2 years as they compete. In terms of STP, the softwarevendor copes with them all in a unified fashion currently, sono problem on future proofing on the integration side.

PM – sales team report all the PB docs are in place, soready to go from the legal side.


[email protected]

[email protected]

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[email protected]

The key issues raised in the December meeting have beenaddressed as follows ;-

Low latency – high volume trading is the key to this model’ssuccess, and hence no aspect of our control structure canadd any latency for STP or risk management – we havemeasured output to downstream systems and test rates inexcess of 1500 tickets per second have been achieved, sowe don’t anticipate any problems in this area.Multiple risk limits – the software we have chosen allows usto set limits for open position size and currency within thetotal client limit structure. US$ 100 million open position hasbeen allocated across the 4 major currency pairs to betraded.Warning Alerts and Actions – we have set total openposition alerts at 60%, 80% and 90% utilization, and the APItermination point at 100%

Re:Algorithmic Trading

>>>

[email protected]

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[email protected]

Guys,

What audit trail will we have of this model’s activity please?Do you have real-time overview of what it is doing, or are thelimit breaches all you see? I cannot sign this off unless wecan demonstrate that RM has addressed all these issues.

rgdsCompliance


[email protected]

[email protected]

[email protected]

[email protected]

Re;Re;Re:Algorithmic Trading

[email protected]

Limit breaches will generate an on screen alert and audibleat 60% and 80%, and an e mail and SMS alert can begenerated at any % level you wish to any of the group, or byanyone on Tivoli. On screen we see a constantly updatedopen position and credit utilization, and the display is colourcoded for green at 60%, orange at 80% and red at 90%.

Re;Re;Re:Algorithmic Trading

[email protected]

[email protected]

[email protected]

[email protected]

Re;Re;Re;Re:Algorithmic Trading

[email protected]

Gentlemen,

Before we deploy this model, I would remind you of my 4priority issues as discussed in December, PM pleaseconfirm on the following:- Management control –


In addition to RM I want GHFX and CM to see the 60,80,90alerts, also what happens to the API at 100% limitutilization?

Disaster recovery – what failover plan is in place where thekey stations within the office are not accessible by themodel? – I don’t want any complaints about lost data fromsome XL whiz kid at 3 am in the morning.

Integration – I am happier now STP been achieved.Scalability – having used our remaining IT budget for FX forthis year on this, please tell me that your solution can copewith more of these models if project targets are achieved.

[email protected]

[email protected]

[email protected]

[email protected]

Algorithmic Trading

[email protected]

The software essentially takes control of the key station ineach case, and will shut off trading completely at 100%utilization if additional trades are attempted that wouldincrease the open position. However, data will still becollectable by the model even after shutoff.

DR is covered because we have backup servers running thesame STP hub software which contains the credit checkermodule, so it would be a matter of re-connecting the modelto the backup key stations which can be achievedreasonably quickly. We will back up the data collection too,and XL have their own DR strategy.

We are designating this XL model 1 with a view to future XLdeployments, when we can again slice the limits by model.The software allows us to see an overview of all modelsrunning, and then to drill down to individual details.

Algorithmic Trading

[email protected]


[email protected]

I take it you will be able to see some reporting on how thismodel trades in general without breaching our non-disclosure with XL? Also, if we wanted to, could we limit thevolume turnover allowed by the model?



[email protected]

Re;Re;Re;Re;Re:Algorithmic Trading

[email protected]

We will be able to see brokerage figures, volume turnoverand response time data from the key stations, but restassured there is no aspect of this that XL would beconcerned with in respect of us somehow discerning thetrading methodology on decisions made by the model. Theywere happy with this following the live demo by the softwarecompany anyway, so it’s not an issue in my view.

Volume turnover I am not concerned on since in this caseit’s all PB, so again no issue. In the future we may need todiscuss some form of dynamic credit allocation across thevarious liquidity feeds with the software vendor, but they tellus they already have discussions on this underway withother users and the liquidity providers as a future upgrade.


[email protected]

[email protected]

[email protected]

[email protected]

Re:ReRe; Algorithmic Trading

[email protected]

RM demonstrated the alert system to my satisfaction this am,and I have setup the audit logs with the software vendortherefore approval to begin trading is given.


[email protected]

[email protected]

[email protected]

[email protected]

Re;Re;Re;Re: Algorithmic Trading

[email protected]

Approved then. Please call XL to give them the good news.When does UAT testing begin ?

Re;Re;Re;Re: Algorithmic Trading

[email protected]

[email protected]

[email protected]

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[email protected]

Today. Just called them and we will start at midday.

At the start of this I did wonder about the deadline, butoverall it has been easier to get this started than perhapswe all anticipated. If all goes well with the testing, I proposewe start live trading next week.

Re;Re;Re;Re;Re:Algorithmic Trading

[email protected]

[email protected]

[email protected]

[email protected]

Re;Re;Re;Re;Re: Algorithmic Tradin

[email protected]

Excellent, please talk to PR about a press release.

Re;Re;Re;Re;Re: Algorithmic Tradin

Implementing real-time controls over Algorithmic FX trading models

To be continued…….

Cas

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tudy e-Forex talks with

Michael DuCharme,Business OperationsManager with theRussell CurrencyManagement Group,an asset manager.

Michael DuCharme

Michael can you tell us a little about the currency

services that Russell Investment Group offers and

your approach to FX trading?

Russell offers an agency FX solution to investment

managers (IMs) and pension funds interested in

enhancing FX performance, controlling costs, and

reducing operational risk.

IMs and pension funds are the first to recognize that

improving FX prices and controlling transaction costs

are important contributors to their performance

results. However, security selection and trading

infrastructure, compliance, and a host of other issues

also have a significant impact upon performance.

These requirements compete for the legal staff,

management oversight, operations support, and

information technology expertise needed to build or

upgrade and maintain an FX infrastructure.

We’ve spent considerable resources to build an e-FX

process to manage currency transactions for Russell

funds; we’re offering that infrastructure to those

clients who find it too costly, time consuming or risky

to build or upgrade their own infrastructure.

Russell believes that clients should consider agency

trading of FX. What benefits does that have over

handling FX on a principal basis?

Russell seeks to improve performance through

competitive pricing gained through our extensive

non-affiliated bank counterparty panel and access to

electronic trading venues. In addition, by operating

as an agent, Russell has an incentive to maximize the

number of trades that are matched. That incentive

does not exist when currencies are traded on a

principal basis. The reduction in trading costs that

results from trade matching at a mid-market price is

a unique driver of execution improvement in the

agency model.

We also promote cost transparency as a benefit of

our services, as we time stamp and report the results

of all our FX transactions. Our clients can see the

true cost of every deal, and they have the opportunity

to regularly review our results and provide

appropriate feedback.

However, as interested in price improvement as all

clients are, the discussion always turns to operations

and risk control. We’ve observed that some clients

are grappling with a labor intensive operations

process that often includes faxing orders and

execution results and voice confirming deals. With

time and staff resources stretched very thin, clients

have little time to evaluate, design, and implement

better processes.

That’s where Russell can provide substantial value.

We’ve built the communications systems, trading

applications, and relationships from which clients

can reap immediate benefits. We’ll manage the legal

documentation to establish additional relationships,



provide a seamless communication system with clients, obtain

competitive prices, and electronically communicate deal

results to custodians.

By letting Russell manage their currency needs, clients can

focus on the aspects of their business that provide the most

value to their customers.

How are you leveraging e-FX tools and technology to improve

your FX trading services?

In the last 16 months we’ve implemented a sophisticated OMS,

set up a FIX communication network, and signed four

electronic trading agreements and began trading. We also

developed a system to increase the number and type of SWIFT

messages that we can send on behalf of our clients. The

results have been substantial improvements in productivity,

lower error rates, and less costly exception handling.

Russell considers e-FX to be more than just trading

applications or ECNs. We look at e-FX as a broad currency

management process than encompasses communications,

trading, and settlement. Thus, we’re always looking for ways

to improve that process. For example, we’re expecting to

participate in Continuous Linked Settlement (CLS) in late June.

CLS will allow us to offer clients the opportunity to significantly

reduce settlement risk.

In what ways are your clients benefiting from e-FX?

Benefits for our clients have been twofold. First, e-FX, among

other aspects of an agency model, has helped clients receive

better execution results. Second, clients have benefited

indirectly: they're able to instantly take advantage of the

services we offer.

The CLS feature is an excellent example. Some clients are still

faxing trade tickets to their custodians. By using Russell’s e-FX

infrastructure, they’re able to gain access to SWIFT messaging

and, in turn, to CLS. The major benefit is clients don’t have to

spend enormous amounts of time and money evaluating

SWIFT providers, negotiating agreements, developing the

internal processes needed to connect to the SWIFT network,

testing, and maintaining those systems and then developing

additional processes to participate in CLS.

For Russell, e-FX has been the linchpin of an increasingly

complex FX infrastructure that we can offer to clients to take

advantage of systems and processes that save time and

money.

>>>

You trade electronically with a variety of currency

ECNs. What's attractive about the ECN model?

We’re attracted by many of the characteristics of the

ECNs, not least of which is very competitive pricing.

A true market place environment, enhanced trade

management, streamlined straight through

processing (STP), scalability, improved efficiency, a

central limit order book, and anonymous trading are

other appealing features.

Of particular importance, our clients are demanding

better evidence of compliance with best execution

guidelines, and the ECNs help us achieve that. ECNs

time stamp our trades and, in some instances, also

supply the bid and offer rates currently available at

the time of trade, giving us the necessary information

to show our clients the true cost of each trade.

What trading features and functionality are you

particularly looking for from an ECN?

Our two largest issues are trade aggregation and

connectivity. Like most real money managers, we

trade on behalf of many clients, each with one or

more accounts. The most serious hurdle to frequent

use of the ECNs is the inability to aggregate trades

from multiple accounts into a block, trade the block,

and allocate the resulting rates among the underlying

accounts.

Connectivity is another obstacle. ECNs provide a

graphical user interface to allow users to hand enter

trades, but manual trading can be risky, defeats our

STP initiatives, and isn’t practical for large numbers

of trades. We use Charles River Investment

Management System, but it requires a significant IT

upgrade to communicate with the ECNs via Financial

Information eXchange (FIX). ECNs also provide their

customers with application programming interfaces,

but again, this requires IT resources that are limited

because of other competing demands.

We’re not sure what the connectivity answer is. In a

perfect world, ECNs would be easy to connect to and

integrate with existing systems. Connectivity has

been an issue at Russell, and we would suspect with

other IMs interested in participating in this segment

of e-FX.

Do you have a "wish-list" of additional features or

functionality you'd like to see offered by ECNs?

Of course! ECNs trade spot, but because asset

mangers trade FX to settle security deals or hedge

currency risk, forward points are typically required.

The need for points means calling the prime broker

on the phone or setting up some sort of process to

obtain points. An easier, automated system for

obtaining points would be a significant improvement.

Trade size thresholds and available currency pairs

also impede active ECN trading. Minimum ECN trade

sizes of $500,000 to $1,000,000 often prevent us from

trading frequently. We net our client’s trades

whenever possible and find that the resulting trade is

often too small to meet the ECNs trading minimums.

Currency pair availability stymies more frequent

trading. A few crosses are available on two of the

major ECNs, but most pairs involve the dollar. We

trade on behalf of Canadian and Australian accounts,

and we find we must use more traditional trading

venues for these deals.

Looking ahead, where do you think the continued

development of e-FX products and solutions will

have most impact on your trading activities?

Russell expects ECN trading to significantly increase

over the next 12 to 24 months. As ECN technology

improves and as competition among the various

trading platforms increases, we anticipate that ECNs

will offer more and better features. The result: trading

foreign exchange will be easier, less expensive, and

operationally less risky. This can only mean better

prices and trading outcomes for our clients.

We’re looking to the e-FX applications as the means

to cost effectively manage larger (we hope!) volumes.

We’ve begun collecting information and evaluating

execution management systems as the next step in

our technology evolution. Managing more clients

and orders, devising better strategies for trading and

easily integrating with different trading venues is the

next logical step for Russell to take.

66 july 2006 e-FOREX Case S

tudy

e-Forex C

ase S

tudy

e-Forex C

ase S

tudy

tested FX trading solutionIFX Direct – a tried and

IFX Direct is a reliable, fast and accurate trading platform for all a client’s foreign exchangedecisions. It is unique in putting EFP trading side-by-side with spot forex on one single screen.

In normal market conditions there is no dealer intervention; the system provides transparent liquidity combined with asophisticated order-management system which can cope withcomplex orders such as contingents, OCOs, stop-loss andGTCs, which can be filled, settled and reported back instantly.

This tried and tested forex trading platform from IFX Marketscan be delivered to clients in three different ways, to provide whatever trading environment the client requires.

The basic method allows clients to trade through the platformdirect with IFX’s dealers, with straight through processing (STP)which can be delivered in a variety of formats from emails,through to file transfer protocol (FTP).

The second method is as a White Label, which is aimed at IBs,FCMs and other client-facing institutions. It is branded with thelogo of the institution. The institution itself is able to dictate itsown spread and commissions with the end-user.

Thirdly, the Application Programming Interface (API) enables athird-party software system to be “plugged-in” at the front-endof the trading platform. Positions can be auto-offset, or theinstitution can use the IFX price engine, just as a feed.

The API can be used in a variety of ways. At its most basic it isa price feed; but it can also be linked to third-party tradingplatforms, multi-bank portals, or automated trading systems(black-box) to name just a few.

IFX can tailor these solutions to each institution, and cansimultaneously offer more than one of them to a single entity.

For further information please contact:IFX Markets Ltd

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july 2006 e-FOREX 67Sponsored Statement

The FX options market is a very broad

market, from central banks to retail

banks, and such a diverse customer base

can all benefit greatly from the

transparency of online pricing and online

trading. Already, the appetite is increasing

for more than just vanilla deals to be

executed online and the banks are racing

to add tradeable exotic options to their

options trading platforms.

Steven Reiter, head of FX options at

Citibank, says: “The greatest demand and

growth has been from the second and third

tier banks that are not liquidity providers

but have their own regional clients and

depend on the major market making banks

for liquidity. Online platforms for options

are tremendously valuable because we can

offer ‘click and deal’ trading for an infinite

number of options.”

According to Reiter the only real market

conditions affecting the growth of online

options trading is the increased

competition. “I would not say that market

conditions specifically demand online

trading but that the narrowing of spreads

over the last few years has made online

trading a more useful tool in everyone’s

arsenal. Customers are turning to FX

options in increasing numbers because

they have confidence in the liquidity they

are getting from the banks. Options offer

them flexibility and enable them to

express views that cannot be expressed

with spot or forwards. As markets get

more volatile, options are a favourite tool

for trading.”

While some customers are more

comfortable with the language of the

options market and are only looking for

the transparency, speed and ease of

execution online, others are looking for

more guidance and use the online

platform for price discovery and to try out

strategies online before picking up the

phone. Regardless, of the customer type,

Reiter says, the larger the trade, the more

likely they are to pick up the phone and

the bank views the online tool as an

excellent supplement to its regular

distribution channel.

Citibank launched CitiFX Options Online

(Fig 1) eighteen months ago and already

the bank believes that its customers have

passed the incubation period needed to

move across to trading options online.

In the last quarter, between fourth quarter

last year and first quarter of this year,

Citibank saw its online options volume

quadruple. Although it offers online

options trading to a wide range of

institutional customers the bank is now

rolling the platform out to its emerging

markets FX customers as well.

Additionally, the bank will release a new

version of the options trading platform

next month, which will enable trading in

exotic options. Reiter says: “We don't

currently offer exotics options trading

online, only pricing, but this will change

with the next version of our platform. We

will offer the full range of first generation

exotics - over 40 different exotic options,

as well as multileg dealing, greatly


The option to go exoticTrading FX options online is evolving fast. Just two years since the first electronic optionsfacilities began appearing, the banks believe the time is right for more exotic options to beexecuted online, writes Frances Maguire.

Steven Reiter

Figure 1


enhancing our current autodealing capacity

in vanillas." He adds: “In particular, the

online platforms are very suited to the

smaller deals – which tend to include

exotics. The online system really lets

users to hone in on the right strategy that

fits their needs and then they can choose

to trade online or call to execute the

same trade.”

UBS has been offering exotic options

trading online for almost five years, on

UBS FX Options Trader (Fig 2). While both

vanilla and exotic options volumes traded

online have grown year-on-year, the

proportion of exotic options tickets done

online has remained around 20 per cent

of the total. John Bartter, head of

structured FX at UBS in London, says:

“This is something we identified a while

ago and built into our platform. We have

15 different exotic products, or panels,

available. For example, within the

Barrier Panel, there are about 80 different

by-products available.” Mr Bartter adds

that its customers have become very

comfortable with trading first generation

exotics online but that those corporates

dealing in second-generation exotics are

not necessarily keen to trade them online.

Some deals are so complex that they can

take days to put together.

For Deutsche Bank, the foreign exchange

options product has become an extremely

commoditised one in a very short space

of time. Volumes have increased

exponentially and margins have

compressed with greater transparency

or price.

Ian O'Flaherty, global head of spot FX at

Deutsche Bank, says: “This increased

commoditisation has lead to customers

putting a premium on speed, ease of

execution and transparency, all of which

are ideal for online platforms. Whilst the

platforms are relevant and beneficial for

all client segments, high volume flow

clients are finding them particularly

beneficial.”

Deutsche Bank says that it has

endeavoured to make autobahnFX (Fig 3a)

as flexible and customisable as possible.

Says Mr O’Flaherty: “For example,

customers can price structures and view

quotes via a number of different ways,

depending on how an individual client is

used to thinking about FX options.”

While customers certainly value liquidity,

he adds that there are other features that

they look at when choosing an options

platform.

>>>

Figure 2

Ian O'Flaherty

Figure 3a


“They look at breadth of products

available via the platform, trade rejection

rates, how competitive spreads are, the

ease of transacting, including post trade

processing and how stable the platform is

overall,” he says.

For the past two years autobahnFX has

provided users with streaming executable

volatility (vol) prices. The bank has recently

doubled the number of currency pairs priced

on autobahnFX, and it now allows users to

price and save their own strategies as well

as view prices in terms of vol, percentage of

notional, pips and premium (Fig 3b).

Neehal Shah, managing director, globalhead of currency options and preciousmetals trading, at Deutsche Bank, says:“We are aiming to improve our offeringby soon providing automatic pricing for alarge variety of exotic and structuredproducts across the full range ofcurrencies that we publish – an area thatso far has been slightly neglected byoption trading platforms. We will alsofurther increase the streaming notionalamounts that we broadcast; and lookingto provide access to Deutsche Bank’svolatility analysis via the same platform.”

All banks cite the importance of straightthrough processing to online optionstrading, and as volumes rise it willbecome critical. GFI offers a number oftools and services in its Fenics FX productsuite, ranging from its award winningmarket standard packaged platform forpricing, analysing and managing FXoption positions to its electronic

execution platforms, some of which are

available for license either as a complete

end-to-end e-trading system or as

components for integration within a

client's existing infrastructure.

Kurt vom Scheidt, GFI's FX product

manager, says: “GFI is experiencing an

increasing level of demand for its products

from banks of all sizes. Tier 1 banks want

to talk about how they can best leverage

GFI's experience and technology alongside

their own investment and intellectual

property regarding pricing. Smaller

institutions, which have not yet built their

own pricing engines and internal tools

used to distribute FX option prices from

their trading desks, want to talk about how

GFI can bundle together its components

into a plug and play system since they

don't have the same requirements as the

larger liquidity providers in terms of

integration into existing systems.”

At the end of the day, in a market like FX

that has increased volume along with

fierce price competition, no one can have

an increase in levels of profitability

without adequate technology investment

to garner operational efficiencies and to

reduce operational risk. Towards that

end, intersystem connectivity, or straight

through processing, is critical.

Mr vom Scheidt says: “Option pricing canbe made available electronically on astreaming basis both in terms of volatilitytrading as well as for live trading without adelta exchange, provided the institution isable to achieve the requisite level ofintegration with a cash FX e-tradingplatform. Most importantly, the benefits ofelectronic trading are not limited to pricingand execution, particularly when speakingin terms of FX options, which are inherentlymuch more complex in terms of processthan the underlying cash FX products.Streaming electronic pricing for strips thatcan include exotic FX options as well ascommon standard multi-leg combinationsis still a little way away, but there istremendous benefit to be derived throughautomation of the price distribution, pricediscovery and trade capture steps of theprocess for these instruments.”

To this end, GFI has just launched its newStructuring Module (Fig 4) which willmost certainly offer massive up-ticks inefficiencies. The execution of FXelectronic options is just about to getinteresting, and more exotic.

Neehal Shah

Kurt vom Scheidt

Figure 4

Figure 3b

� In what ways would the use of options provide a moreeffective way for us to hedge our currency exposure?

The use of options provides the most efficient way for

corporations to protect themselves from potential negative

affects of foreign exchange (FX) movements. Options are not

necessarily expensive and because they can be customized to

suit specific exposure scenarios often they are actually the

cheapest and most effective way to hedge currency exposure.

Buying (or selling) futures or forwards do no more than lock a

company into a rate and so they are highly inflexible in what is

a dynamic and ever-changing market environment. The beauty

of options is their flexibility — they can be specifically tailored

to provide payoffs that match end users’ exposures more

closely, and also suit their tolerance to risk, corporate policy

and satisfy their accounting and compliance requirements.

Additionally, they can reflect users’ general outlook on the

market. All of this can be done cost effectively, and frequently

at a lower final cost than using forwards.

We can illustrate this by using a “Forward Extra” as an example.

This strategy is very popular with corporate treasurers. Let’s

consider a US corporation which has euro-denominated liability

due for payment a year from now. The corporate expects the

euro (EUR) to generally weaken against the US dollar (USD)

over that period, but it still wants to ensure it is hedged in case

the EUR strengthens. The prevailing 1-year outright forward rate

is 1.2880 (for reference, current spot exchange rate is 1.2600). As

an alternative to locking himself in through a simple outright

forward, the corporate treasurer enters into a zero-cost Forward

Extra strategy. He chooses a strike of 1.3000, which is 1.2 US

cents per EUR above the current forward rate, and sets a trigger

level of 1.1800.


The e-Forex SurgeryUsing options for more effective hedging of corporate currency exposure

With Udi Sela Senior Product Specialist, [email protected]


The strategy provides protection if the EUR strengthens above1.3000 and also some significant upside potential if it weakens— as long as it remains above 1.1800. As illustrated in thechart, the best scenario for the corporation is for the EUR toweaken, which it expects, but not below 1.1800. If EUR/USDremains above the 1.1800 trigger throughout the year, thecorporation is free to buy EUR at the prevailing market rate onthe expiry date — which it will obviously choose to do if thespot is below the 1.3000 strike price. This provides a potentialprofit (saving) as high as 10.8 US cent to the EUR (8.3%) at nocost and with minimal downside risk (<1%). The worst casescenario would see the corporation having to buy EUR/USD at1.3000 rather than 1.2880.

� We are a fairly small corporate. What factors might help usdetermine if the use of options would be helpful to us?

If a corporation has market exposures as a result of itsoperations or financing activity, it would always be wise tostrongly consider using options to hedge those risks. Theavailability of both bespoke (over-the-counter or OTC) andexchange-traded options provides a wide choice of strategiesand any CFO or Treasurer should always evaluate varioushedging alternatives. The universal availability of platformssuch as SD-FX™ makes it easy to carefully analyze hedgingalternatives and get full information on their true market cost.The advent of SD-FX has brought more transparency andliquidity to the market, which has definitely helped increaseoption trading volumes over the past few years. More market-making banks are now catering to smaller corporationsoffering them highly competitive prices, even for those optionsand structures that would have been considered out of reachuntil recently. There are numerous reasons why corporations,independent of their size, should always consider usingoptions as part of their risk management strategy. Now thatthey can easily price them accurately, monitor their fair marketprice, measure their risk properly and perform flexible “what-if” scenario analysis, including on the most complex exoticOTC structures, there are few arguments not to do so.

� How would a corporation go about managing itsderivatives activity?

It is important that treasurers have an integrated platform thatcan manage market risk, portfolio life-cycle and hedging-compliance, as well as all the audit tracking associated withmanaging all derivatives activity. The upcoming SD-Corp™Risk Management platform for corporations has a deal entryand tracking function that lets treasurers save options in aportfolio with all the administrative attributes and annotationsneeded for accounting, tracking and management purposes.Once compiled, treasurers need to carry out on-goingmanagement of derivatives trades, including mark-to-marketand sensitivity analysis for the deals, as well as automated life-cycle event management, such as when triggers have been hitand expiry dates reached.

But before starting to build up a derivatives portfolio,corporations should know where they stand vis-à-vis marketmakers regarding options pricing. In this regard, the fullyintegrated SD-FX pricing and analytics system givescorporations a real edge, since it lets them accurately price thekind of strategies they want to pursue with the same precisionas the market makers themselves. If the true market price of an

option or option strategy is known, corporates are naturally ina far better position to receive better rates from their chosencounterparties.

Furthermore, SuperDerivatives is embedding "Request-for-Quote" functionality into SD-FX. This will allow corporations torequest simultaneous on-line quotes from multiplecounterparties. This will save them time and effort and alsoincrease the likelihood of them getting the best price availablefor any specific quote. The deal can even be closed andcompleted on-line with market-making banks. This feature letscorporations be more assertive in getting better options pricesfrom their banks, saves execution time and minimizesoperational risk.

� What sort of feedback have larger corporate treasurydepartments like ourselves given you, with regard to thesort of features they would like to see included on acurrency option platform such as your own SD-FX ™ andthe Upcoming SD-Corp™?

SD-FX has always fully incorporated the feedback it receivesfrom its users — in fact so much so, that it is accurate to saythat the system’s design now is one that is driven by themarket. The platform is hosted on SuperDerivatives’ serversaround the world and it is updated on a weekly basis withoutany additional cost for its customers. Numerous updates aredone on the basis of customers’ requests.

Basket Options, Deposit Notes and Range Accruals are just afew options and strategies that users have specificallyrequested. Additionally, many powerful features and tools,such as the “Looking for Strategy” wizard, have been added asa result of customer demand. Many corporate treasurers arenow fully aware that the most effective way to hedge theircurrency exposure is through the use of options. However, touse them, they have to be completely comfortable in theirunderstanding of the risk they are assuming. Also, they oftenhave to show that their strategies meet with and comply withaccounting standards, such as IAS 39 and FAS 133. Ourcustomers are looking for the ability to build and price up moresophisticated strategies, such as multi-leg products, Quantosand Digital baskets. Importantly, they are looking forcomprehensive analysis and management tools for hedgingagainst risk exposure, including P&L reporting, pre- and post-trade reports, settlement tracking and detailed audit trails, aswell as specialized tools for managing the risk.

� What sort of advanced capabilities should be included in asystem for optimizing hedging and derivatives activity bycorporations?

SD-FX offers specific hedging tools. The "Looking for Strategy"function lets users create groups of options to limit risk andfind optimal hedging strategies. All users have to do is enterthe parameters of the underlying exposure (e.g. committedpayment in foreign currency) and the strategy constraints. Forexample, how big a premium you are willing to pay and howmuch you are prepared to lose. You can even specify yourmarket outlook, e.g. the expected exchange rate range. SD-FXthen suggests a list of strategies, each of which will hedge theunderlying exposure based on the specified limits.

>>>

Other hedging tools in SD-FX let users see the various riskelements associated with any given strategy as a series ofgraphs. Each graph shows how a different risk responds tochanges in the underlying asset price and other marketconditions. The risks displayed include theoretical value,Vega, Delta, dVega/dVol, Gamma, and dDelta/dVol.

Another effective strategy building tool is the SD-FX Solverwhich allows users to find the appropriate strike or barrierneeded to achieve a desired market price. Treasurers can usethe Solver to find a target price for the whole structure ofmore than one option. This feature allows treasuries to easilyprice up more complex structures at zero cost.

� What sort of functionality should we expect optionplatforms to provide us with that would help us to monitorboth our hedging and IAS 39 and FAS 133 compliancerequirements for hedge accounting?

Corporations have to be able to measure hedge effectivenessand have access to real-time accurate pricing. We wouldexpect capabilities that allow treasurers to intuitively matchup an initiated hedge with the underlying exposure(exposures include anticipated payments and receipts in aforeign currency). This would help provide easy monitoring ofboth the hedge and the underlying, facilitating compliancewith hedge accounting. SD-Corp can be easily integrated withexisting corporate Enterprise Resource Management oraccounting systems, which contain all necessary informationpertaining to the underlying business activity. Examples ofsuch business records include cash flows with an indication ofthe actual transaction; the level of probability of incoming andoutgoing payment; resource flows, such as fuel and rawmaterials and their inter-related cash flows and debtrepayments. As a result, SD-Corp can analyze marketexposures and recommend hedging strategies, enforcecorporate hedging policies and enable after-the-fact hedging-compliance reporting.

The SD-Corp system and deal capture process automaticallyenforces the corporation’s hedging policy. When a derivativeis entered into the system, it must be matched to an existingunderlying exposure, and validated against both corporatehedging limits, such as the largest allowed position in aspecific currency pair, and external accounting standards,such as IAS 39 and FAS 133. Reports required for accountingcompliance are automatically generated by the system at aclick of a button. The report templates and preparation logichave been designed in conjunction with expert accountants.

Therefore, they contain all the required information and arepresented in the correct audit-ready format.

Finally, in order to be eligible for hedging accounting compliance,any system has to offer tight control towards complying withvarious internal and external operational standards, such asSarbanes-Oxley (SOX) Section 404. Privileges and permissionsmust be easily definable and enforceable reflecting corporatestructure, operational and financial-risk limits. And of course, afull audit-trail must be readily available to assist in internal andexternal audits and reviews.

� We would like to be able to carry out some more advancedrisk scenario analysis and stress testing. How easy is it toconfigure option platforms to do this?

SD-FX and SD-Corp offer Scenario, What If and HorizonAnalysis. Users have the ability to build any number ofscenarios, which they can run on existing portfolios or onthose created especially for testing a theoretical outcome.This enables them to simulate how any scenario will affectany position, to plan strategies in advance, and to developnew plans in a more risk-free environment Portfolios can bedissected according to users’ needs. Stored customerpositions can be analyzed for credit and market riskassessment. The platform makes it easy to follow up onspecific deals, counterparties and also to perform activitiesinvolved with expirations, barriers and fixings.

Other functionality should include the ability to performadvance risk scenario analysis, stress testing and alert users ifthere are any unexpected moves in the market. In addition,treasurers need to have easy access to different types ofcustomizable reports, which can be delivered in a range offormats. Customers should also expect the ability to performflexible Horizon Analysis, such as what was the value ofposition for the end of Q1 and what is the projected value ofthe position for next week.

� Looking ahead, how is the current functionality of currencyoption platforms likely to evolve to cater for the growingneeds of the corporate treasury market?

SD-FX is now largely designed by its end users. It has evolvedas a result of the ongoing dialog between our customers andour support and development teams. This is really one of thehallmarks of SuperDerivatives. And because SD-FX and SD-Corp are hosted web-based services, SuperDerivativessignificantly cuts time-to-market when translating customers’feedback into new features. Our customers have becomeaccustomed to having new features and new option classesadded almost on a weekly basis. We believe this is a key issuebecause the options market is highly dynamic and evolvesincredibly quickly. Only platforms that are able to keep one stepahead in offering the features and strategies their customersseek will be able to survive. Looking ahead, we expect to seemore hybrid trading, as well as correlation products.Correlation trading is already popular, such as with Baskets andQuanto options. Treasurers are starting to monitor their risksnot only across currency, but also across asset. For example,when a British airline whose reference currency is Sterling isbuying fuel in US Dollars, it is exposed to a combined currencyand energy price risk. Cutting-edge corporate risk managementplatforms will have to provide corporate treasurers with thetools to manage such risk effectively.


One of the primary goals of Grid

Computing has been to virtualize

the underlying infrastructure and to

allow organizations to take advantage of

resources across the enterprise. In

environments such as FX Trading, where

the market is volatile and large amounts

of money are traded, a grid infrastructure

can quickly turn around analytics and

other reports to help provide access to

knowledge – which ultimately leads to

better critical decision making about the

trades made within the course of a day.

The Foreign Exchange Market and FX

Trading: Challenges and uphill battles

Very simply put, FX Trading is the act of

one currency being traded by another

and, until recently, it was tagged as

“exotic.” FX is different than other forms

of trade because it is the largest trading

market with the largest number of players,

including individuals, banks, institutions

and governments. The challenge within

FX Trading begins with the trader who

needs to reduce portfolio risk with a large

number of variables at play – Market that

is open 24 hours a day and a geographical

dispersion of traders and effectors, which

make hedging more risky than one

would like.

A near-perfect1 scenario occurs when a

trader is capable of calculating risk to a

desired level of precision before the next

change occurs. As shown in Figure 1,

there are a number of variables that might

affect the outcome of the risk calculation.


>>>

In recent years, the word “grid” has evolved to take on a whole new meaning. Grid Computing, a phraseonce known as Metacomputing, was being used to describe the association of connected PCs that act as ifthey were one powerful computer. With the growth and wide acceptance of Web services, this up-and-coming technology has shown more promise and growth than originally anticipated. Utility, Autonomic andOn-Demand computing are some of the technologies that have spun off from the notion of Grid Computing.With this evolution comes much confusion about which technologies are right for what organization andwhat true benefits can be gained for today’s enterprise. The goal of this article is to shed some light on theapplications of Grid Computing in the Foreign Exchange Trading Market (FX Trading).

Introduction to Grid Computing:The reason behind the insanity

By Art Sedighi, Senior ConsultingEngineer, DataSynapse

>>>

1A perfect scenario would be if one knew that there was no risk involved.

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There are two ways to achieve this scenario. First, reduce the

number of variables that are a part of the risk calculation. If one

could change the number of input variables, then a quicker risk

calculation can be provided. Second, reduce the rate of change

for each variable so that it is slower than the capability to adapt

to change.

Neither of these two solutions will hold for too long, but let’s

revisit the second solution and focus on: “… the capability to

adapt.” Adaptation is one of the most widely used phrases in

the business world. How can a Grid Infrastructure help one to

adapt to the volatilities of the FX market?

Grid Computing: The silver bullet for FX Trading

While Grid Computing may not be the solution to all trading

problems, it can solve the problem at hand – the ability to

calculate portfolio risk in a desired time frame. As discussed

previously, some of the challenges of FX Trading are

the risks associated with the market and the ability to minimize

risks as much as possible. For any given portfolio,

one must hedge appropriately, and at the right time. This is where

Grid Computing comes into play. Grid creates an environment

that identifies and assigns underutilized resource work, thus

enabling one to harness the unseen computing power of the

enterprise to finish a given job within the desired timeframe.

If traders wish to calculate the risk for an FX holdings portfolio,

there is little or no collaboration among traders to determine

status and variables could “fall through the cracks,” making the

calculation less reliable and the trade based on speculation

rather than calculated risk.

Using a Grid Infrastructure reduces the risk of the above

scenario. Grid harnesses the unused cycles of desktops

(servers, blades, etc.) and allows tasks to run in a more timely

and efficient manner. If the goal is to lower risk calculation

times from days to minutes or seconds, this is easily achieved

with a Grid of 500-1000 nodes dispersed across the enterprise.

And now we present the silver bullet – the Manager that sits

between requests and the worker Engines. The Manager

efficiently schedules and allocates tasks to the available

resources in such a way that idle resources are now utilized

to the maximum potential1. This in turn allows for more

scenarios to be simulated, as shown in Figure 2. With the ability

to create and assess multiple sets of variables, traders can more

accurately adapt to the changes in the market.

More recently, Grid has the ability to provide Fabric – what is

also known as Compute Fabric – which allows applications to be

shared across the enterprise by many applications and users.

The goal is to allow multiple applications across the enterprise to

share resources in a manner by which Service Level Agreements

(SLA) are met or exceeded. As depicted in Figure 3, many

applications access the Grid Infrastructure through a common

interface. The Grid virtualizes the underlying resources and

creates a fabric that will be used by all users. The challenge then

becomes the infrastructure’s ability to provide metrics by which

users are charged back for the amounts used. These charge-back

models reflect business needs and are affected by the SLAs set

forth between Grid users and the Enterprise Grid provider.

Conclusion

FX Trading will benefit very much from Grid Computing. There

are multiple scenarios that can be created – but the main theme,

particularly within an FX environment, is the ability to deliver

accurate and speedy results. Grid Computing environments

allow for project and application diversity, while delivering

information that empowers business decisions to be made in a

proactive and strategic manner.


Figure 3: The Utility Computing Model for the Enterprise

Figure 1: A Typical Risk Calculation

Figure 2: Typical Grid Infrastructure Used for Risk Calculation

Introduction to Grid Computing: The reason behind the insanity

1Research has shown that a given desktop or server is utilized less than 10 percent of the time on average.

Put the pieces together.

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For a free FIRST demo, E-mail us [email protected]

For more information: North America +1 610 617 7988 Europe +44 1 732 852 697 www.fxpress.com

Recent advances in networking services

promise to accelerate the adoption of

electronic trading within the foreign

exchange (FX) market. With more than

US$2 trillion traded per day, foreign

currencies are the most actively traded

asset class in the world.

In a market this large, one would expect

aggressive adoption of electronic trading

platforms to improve market efficiency.

And yet, just 44% of FX traders use

electronic trading systems, according to

Greenwich Associates. Complex application

interface (API) portal integration, system

scalability challenges and the need for

faster networks are frequently blamed for

the slower-than-expected adoption of

electronic FX trading (eFX).

However, improvements in the speed,

control and scalability of Ethernet-based

wide area networks will change all of that.

As we’ve seen in the equities and

derivatives markets, the migration to

electronic trading to support more trades,

greater efficiency and narrower spreads is

irresistible to the market.

The need for speed

In 2004, the average response time for

online FX trading systems was 400

milliseconds. Today, according to

Eurobase, response times can be as low as

six milliseconds. Algorithmic traders and

hedge funds are driving this “need for

speed”. Familiar with fast platforms used

to trade other asset classes and

derivatives, these power users utilize FX

electronic communications networks

(ECNs) as an alternate source of liquidity.

Launched in 2001, Hotspot FX was one of

the early adopters of an ECN trading

platform in the dealer-client spot forex

market. Per day, the company makes 5,000

to 10,000 trades. On high-volume days, as

much as 45% of Hotspot’s volume is buy-

side to buy-side. Lava FX, FXall, EBS

operate similar FX ECNs.


Innovation in Network Services –Giving customers control of theironline FX trading environment

S. Keao Caindec is Chief Marketing Officer

at Yipes Enterprise Services, Inc.

>>>


Bigger players accustomed to fast trades

and much higher volumes are getting into

the FX market. This -- more than any other

trend -- will force commercial banks, new

FX ECNs, prime brokers and buy-side firms

to upgrade their networks and systems to

support more growth.

The Chicago Mercantile Exchange (CME),

New York Board of Trade (NYBOT) and

Eurex have all added FX products. In

December 2005, CME recorded its highest

ever FX trading volume of 872,271

contracts with a notional value of US$96

billion. NYBOT has more than 29 FX

products. And this is just the beginning.

The large derivatives exchanges see great

opportunity to use their significant

membership to create new liquidity pools

for the FX market. These exchanges are

also used to dealing with volumes not seen

in the FX market. Consider that the most

successful FX ECNs may trade 10,000 per

day. The CME platform can handle more

than 173,000 messages per second.

With 56% of all FX trade volume going

through large commercial banks using

older interbank systems, the opportunity

for ECNs and exchanges to offer a

faster and more efficient liquidity pool is

staggering.

What about the Network?

So if the trading systems scale, will the

networks keep up? Absolutely. Thanks to

recent advances in Ethernet technology,

banks, exchanges, ECNs, sell-side and buy-

side firms will have more control and

greater speed.

Ethernet, in use by more than 98% of all

networks, is well-known, easy to administer

and cost-effective to operate given its

decades of performance in Local Area

Networks (LAN). Ethernet’s use as a wide

area network service (Carrier Ethernet

service) is growing rapidly. The global

Ethernet service market — the fastest

growing in telecommunications — is

expected to increase to $20 billion by 2008.

In addition to its simplicity, Ethernet is a

more cost-effective solution. According to a

recent study by Network Computing, Carrier

Ethernet service is approximately 30% less

expensive than a conventional VPN.

While cost is important, gaining scalable

high-speed access to forex market data will

always take priority. As data latency

decreases, trading volume goes up. For

any exchange, ECN, clearing house or

broker-dealer, the ability to provide a

robust network solution that matches the

growth of the industry will increase trading

volume, foster growth of the liquidity pool

and create a unique offering in the

marketplace.

While most online FX trading occurs over

the Internet, as FX products are added to

market data feeds, the industry will see

more trading occurring over Ethernet-

based DMA. Consider that online trading

portals are subject to the “best effort”

nature of the Internet.

With Ethernet-based networks, users

benefit from service level agreements that

include guarantees on latency as low as 5

milliseconds within a metro, and 250

microseconds of jitter, or variation in

latency. As a layer-2 network protocol,

Ethernet is simply faster and more efficient

at broadcasting market data than layer-3.

Also, with recent advances such as

Ethernet Automated Protection Switching

(EAPS), end users realize the reliability

and recovery characteristics of SONET.

“as FX products are addedto market data feeds, the

industry will see moretrading occurring overEthernet-based DMA.”

Innovation in Network Services – Giving customers control of theironline FX trading environment

In addition, Virtual Private LAN Services (VPLS) provides MPLS

features across global Ethernet wide area networks (WANs).

Typically scalable to 1 Gbps, these networks offer the scalability

and speed required by the emerging eFX market.

Finally, some providers provide “bandwidth on demand”

functionality to support instantaneous increases in bandwidth to

support very short-term needs. For example, one large clearing

firm using Yipes FinancialConnect! (a next generation extranet)

logs into their customer administration portal and adjusts

bandwidth prior to major known market events (e.g. interest

rate announcements, contract pricing, major economic news) to

handle short-term increases in trading volume. After the event,

they can turn it back down in 24 hours. Such control is

invaluable to trading platform operators that must support both

spikes in trading volume while also controlling costs. These

network technology improvements, along with improvements

in APIs and trading systems, will allow the continued growth of

electronic FX trading.

Conclusion

As the derivatives exchanges, FX ECNs, hedge funds and

algorithmic traders continue to take the eFX market into

uncharted waters, we can expect significant changes in the flow

of trades and the underlying networks that support them.

Luckily, innovation in network services including significant

advances in Ethernet’s use in the wide area will keep pace with

this change. The question remains, however, how much faster

will the trading community migrate to eFX? With US$2 trillion

per day at stake, the answer is: not fast enough.

The FX market is the largest, most liquid

financial market in the world, and it is truly

a global market, trading around the world

and around the clock. With BT Radianz’s

global reach, 7x24 customer service, and

network connectivity to major trading and

market data FX venues and services, our

shared market infrastructure is the ideal

connectivity platform for global foreign

exchange trading.

Through a single, redundant connection,

BT Radianz is the only connectivity

platform that gives customers direct

access to the widest range of FX services

worldwide. More than 40 firms use BT

Radianz to give clients access to their

services including market data, pre-trade

analytics, single-bank trading, multi-bank

portals, prime brokerage, risk, and

customer management tools.

The BT Radianz network connects over

10,000 financial sites around the world

through a single, redundant, fully-

managed connection and provides access

to more than 400 pre-trade, trade, and

post-trade applications from 200 of the

world's leading content and service

providers across the straight-through

processing (STP) chain.

Supporting Market Dynamics

BT Radianz understands that the foreign

exchange market is the largest, most

dynamic market in the world and that it

supports all other markets. With the

creation of new derivative products and the

increased use of automated trading

strategies, the FX market continues to grow

significantly. By 2007, electronic foreign

exchange trading is expected to comprise

more than 60% of total FX trading volume,

according to a study by ClientKnowledge,

up from just 30% in 2004.

Not only are the dynamics of the FX market

itself changing, unprecedented growth in

other markets is having a subsidiary effect

on foreign exchange. The increased use of

cross-border and algorithmic trading

strategies by hedge funds and traditional

money managers is resulting in enormous

growth rates in market data and trading

volumes that consequently have direct

impact on the FX market. Financial firms

trading foreign exchange are facing

enormous challenges to maintaining ultra-

low latency delivery of FX market data and

access to electronic trading venues.

In such an environment BT Radianz knows

that speed is key and that milliseconds can

make the difference between profit and loss.

As a leading provider of secure, reliable,

scalable connectivity and hosting to the

global financial services community, BT

Radianz’s shared market infrastructure offers

a platform optimized for the time-critical

demands unique to financial services.

BT Radianz also provides the widest range

of connectivity to FX liquidity sources –

multi-bank and single-bank – and we

understand the issues and requirements

our customers face when connecting to

electronic FX venues and trade

counterparties. By consolidating access to

all e-FX venues onto the BT Radianz shared

market infrastructure, our customers have

the fastest, most flexible, most efficient

connectivity solution that is backed by a

100% service level agreement guarantee.


BT Radianz:Connectivity to Global FX Markets

“The FX market has growndramatically in the past severalyears with much of its growthattributable to alpha currencytrading by hedge funds and

leveraged desks at traditionalfirms that are managing for

pure currency returns. At thesame time, long-term analysis

demonstrates a clear linkbetween fundamental

economic activity and growthin foreign exchange volumes,

driven by the growth andglobalization of the world

economy. Based on these twophenomena, daily marketvolumes are expected to

exceed $3 trillion by 2010,more than 75% of which willbe transacted electronically.”

Justyn Trenner, ClientKnowledge

Global FX service providers on RadianzNet>>>

july 2006 e-FOREX 85Sponsored Statement

Benefits of accessing Global FX Markets

through BT Radianz

Access to top e-FX venues: Regardless of

whether a firm uses an application

programming interface (API), multi-

liquidity provider center, or single

liquidity provider for their electronic FX

trading, BT Radianz can provide the

connectivity. All of the largest multibank

portals and more than 20 single-bank

venues use the BT Radianz network as the

secure access and distribution platform

for their clients.

Fast, consolidated connectivity: The

average FX firm manages relationships

with five-to-ten liquidity providers. BT

Radianz consolidates connectivity for all of

a customer’s e-FX trading venues and

counterparties onto a single connection –

saving money, time, circuits, equipment,

maintenance, and management. Our

unique shared market infrastructure allows

existing customers to connect to new

services and trade counterparties in as

little as one day, facilitating business

interaction by reducing many typical

impediments to connecting to customers

such as security and compliance checks.

The BT Radianz shared market

infrastructure model ensures fast, secure,

reliable access to foreign exchange

services around the world.

Ultra-low latency: The BT Radianz

infrastructure supports the high capacity

and minimum latency that the financial

markets require. The entire network – from

core to client access – has been designed

specifically for the high-speed, high-

performance delivery of market data and

trading applications. The unique design of

the BT Radianz shared market

infrastructure – using the highest capacity

lines available and network engineering

methodologies that minimize serialization

delay – allows us to offer our customers

latency performance that is equal to or

better than equivalent leased-line solutions.

Scalability: With market data rates

increasing as much as 50% per year,

rapidly scalable connectivity for both

market data and trading is critical. Each

customer connection is constantly

monitored by our customer service and

engineering teams to prevent data loss.

This allows BT Radianz to alert customers

before market traffic reaches critical levels.

The unique design of our infrastructure

also allows our customers to monitor their

connection and generate usage reports for

their internal planning and audits.

Expertise: As the world’s leading

connectivity provider to the global

financial industry, BT Radianz provides IP

networking services to more than 10,000

sites around the world, all of which trust

BT Radianz with their most critical data and

trading connectivity. Our company was

created with the sole purpose of providing

connectivity to the finance industry, and

our shared market infrastructure is

designed and managed by financial

technology veterans to meet the stringent

requirements demanded by our industry.

Multi-bank and single-bank portal access:

Firms utilizing multiple trading strategies

require multiple execution venues. BT

Radianz provides access to the widest

range of electronic FX trading venues

including all major multi-bank portals and

more than 20 banks throughout Asia-

Pacific, Europe, and North America.

Fully-managed, 100% availability: The BT

Radianz shared market infrastructure is

fully-managed and fully-redundant, and

carries a 100% Service Level Agreement

(SLA) that ensures your connectivity is

always available. A BT Radianz connection

is diversely routed to the customer site.

The BT Radianz team designs and

manages all connectivity to ensure that

customers have the capacity and resiliency

needed to reliably receive market data and

to trade.

Flexibility: BT Radianz offer a number of

commercial packages that facilitate fast

changes to connectivity when trading

strategies change, including the ability to

increase capacity, or add and remove

services as quickly as one day. Customers

who access multiple electronic FX trading

services within a region can switch venues

at no cost, offering greater flexibility for

constantly shifting trading strategies.

ASIA/PACIFIC

Japan + 81 3 5562 6008China + 852 2532 3690

Singapore + 65 6290 7100Australia + 61 2 9231 7579

EUROPE

United Kingdom + 44 20 7650 9000Belgium + 32 2 700 2573France + 33 1 56 52 84 50

Germany + 49 69 25 49 69 25Italy + 39 02 5821 5606Spain + 34 91 585 85 37

Switzerland + 41 1 217 8000

NORTH AMERICA

New York + 1 212 415 4600Boston + 1 617 235 9000Chicago + 1 312 629 4750

© 2006 BT Radianz. BT Radianz, its agents and employees shall not be held liable to or through any user for any lossor damage whatsoever resulting from reliance on the information contained herein. BT Radianz and the BT Radianzlogo are registered or otherwise protected trademarks of the BT Radianz group of companies around the world.


BT Radianz: Connectivity to Global FX Markets

Deutsche Bank is an acknowledged market leader* inproviding liquidity in the FX markets, and we recentlylaunched Laddered Pricing to add to our comprehensivesuite of products and functionality. Laddered Pricing is anexciting new feature available within Deutsche Bank’sproprietary GUI application autobahnFX and it is alsoavailable via our new Rates API product, which in itself isavailable in JAVA, FIX or Excel format.

Laddered Pricing is a bespoke feature that allows our clients to configure and display

real time, truly streaming prices for different amounts in over 180 currency pairs.

They access the ladders from within their Liquidity Window feature which supports Spot

or Outright trading for up to 100 mio notional in some of the Major currency pairs. Each

amount configured is displayed via “rungs” on the ladder and each is priced

dynamically to show the correct spread for the amount in the currency pair that has

been configured by the client. Users can trade directly via the rungs by double clicking

the appropriate price. Trade execution is confirmed via a trade affirmation window and

all trades appear on the “Today’s Trades” blotter. The confirmed trade can be booked

STP via TOF or FPML or it can be printed for manual input by the client.

The introduction of dynamically priced, user defined ladders has given Deutsche Bank a

powerful client facing tool that continues to grow our FX volumes in an increasingly

competitive market place. This new feature has been welcomed across a broad

spectrum of our clients and since its introduction Deutsche Bank has seen its

e-FX volumes rise substantially. In the past 3 months since Laddering has been

marketed to our client base, FX Spot and Outright volumes have increased by an

impressive 85% versus the 3 months previous to Laddering being introduced.

Dynamically priced ladders bring the following benefits to our clients;

• Clients receive a customized spread based on the currency pair and amounts they

need

• Clients can configure their streaming amounts and displays to suit their personal

trading styles and liquidity needs

• Clients receive the appropriate spreads for the amounts that they need to trade,

allowing Deutsche Bank to increase the amounts streamed to up to 100 mio in some

of the Major currency pairs

• Transparency of price and liquidity

• Clients models can trade more efficiently

• Clients are more aware when Deutsche Bank has a particular “axe” to trade


TH

E e

-FO

RE

X P

RO

DU

CT

T

HE

e-F

OR

EX

PR

OD

UC

T

IntroducingLaddered Pricing:a powerful client facing tool

• No 1 Proprietary Platforms, Euromoney FX Poll May 2006.


As previously mentioned, Laddered Pricing has

appealed to many different types of clients for

many different reasons. Clients who themselves

are clearing client flow are quite often unsure of

the amounts they need to trade beforehand.

Customizing how their Liquidity Window is

displayed before them saves them precious time

when clearing risk. When clients are at the point

of executing their business they may not have

decided exactly how they will clear their flow.

Some clients may choose to clear their risk in one

hit or they may decide to break their flow into

smaller sizes.

They have found that having pre-defined ladders

helps their speed of execution once their decision

has been made. Other clients that trade odd sizes,

perhaps exchange style amounts, can also save

time when trading by having their amounts

displayed pre-trade. Streaming ladders also provide

price transparency to our clients in that they can see

Deutsche Bank’s entire stack of liquidity.

Clients using black-box or algorithmic trading

models can also take advantage of the price

transparency to improve the efficiency of their

models and Deutsche Bank can also improve the

way we show an “axe” or interest in a particular

currency pair . Before Laddered Pricing was

introduced clients would have been unaware if

Deutsche Bank had an interest to trade at a

different rate for an amount under the maximum

amount they were being streamed. Laddered

pricing provides a more efficient way for

Deutsche Bank to show its clients that it has a

particular interest.

Dynamically priced ladders allow our clients to

execute their business in a more efficient manner,

which has led to even deeper relationships

between Deutsche Bank and its client base. This

new feature continues Deutsche Bank’s strong

commitment to innovation and to offer its clients

the best live streaming executable liquidity.

The opinions or recommendations expressed in this article are those of the author and are not representative of Deutsche Bank

AG as a whole. The services described in this article are provided by Deutsche Bank AG or by its subsidiaries and/or affiliates

in accordance with appropriate local legislation and regulation.


Peter Luypaert is head of corporate sales

for the treasury and financial market at

Dexia Bank in Belgium. He comments:

“There is still quite a huge battle between

mono and multi bank platforms in the

Benelux. From the buyside’s point of view,

multibank would be preferable. But from

the sellside, it’s clear that that type of

solution isn’t going to make any money.

Multibank platforms offer the most

advantages to customers, but if there’s no

money in it the banks won’t trade with

customers. Some banks might pull out of

some segments of e-FX market activity or

from counterparties. It works both ways.”

Marc Baseliers, head of the e-commerce

desk in the global financial markets

division at Rabobank International, says

banks are biting back hard: “The corporate

clients market and smaller financial

institutions are being approached more

aggressively by banks and probably have

a relationship with more than one bank,

dealing with the headquarters rather than

local offices. On top of that layer is the

large international corporates, who have a

multitude of relationships, dealing with

international banks. These have more

structured and complex requirements and

The Benelux region is currently immersed in a battle between banksand portals for system market share. e-FX trading is growing rapidly inthe region, while many small financial institutions are being absorbedinto larger, growing businesses as acquisition fever takes hold of thearea. Yet whose platform traditional and new businesses will moveonto, is a key issue, particularly for the banks. Multibank platforms arethe favoured option in the Benelux for large corporate treasuries andalso for a growing multitude of mid sized corporates, which is puttingpressure on mono bank platforms. Those platforms feeling thepressure are often smaller or middle tier pan-European banks ratherthan their global counterparts, which are having to work harder toprovide customers with what they want or risk loosing business.

The Benelux region

R E G I O N A L e - F X P E R S P E C T I V E

Heather McLean

By Heather McLean

use multibank platforms as they are

extremely price sensitive.”

e-FX as a sales tool

Rick Landa, Senior sales advisor for

treasury and corporates also in the global

financial markets division at Rabobank

International, explains how banks are

utilising their position against multibank

portals: “In the Netherlands, clients are

probably more dedicated to banks than

people think and have more familiar

relationships with their banks than in the

UK or US. Banks approach their clients

using FX online as a marketing tool, as a

high performance on the platforms tells

them you're a professional bank and a

dedicated sales person, and clients will

reward that with other business. After the

client has used an online FX service for a

certain time it is easier to explore other

business opportunities.”

Dexia Bank in Belgium also uses its e-FX

platform as a foot in the door to

customers, as Luypaert explains: “We’re

too small to play in the global market like

UBS with its e-trading platform. So in our

case, our e-FX platform is still a sales tool

more than anything else, taking us on to

more work with customers.”

This is trickling down to the middle

corporate segment, Baseliers states.

These clients are also demanding the use

of multibank platforms to get the best

prices, which is increasing competition

within the banks in the Netherlands.

“Banks can see margins dropping and

competition increasing, so levels of

competition throughout the pyramid are

rising. Banks, especially in the mid

market, are being forced to be even more

aware of potential improvements in terms

of efficiency through automation.

Obviously multibank portals are already

maturing, but if you look at the way

clients are using these it’s not just about

bottom dollar any more. Clients know that

at certain stages they can rely on banks’

willingness to provide them with a

valuable relationship.”

Luypaert adds: “These days, not offering

an FX e-trading solution is basically

putting your business at risk. But it goes

further than that; the larger corporates and

hedge funds demand multi bank platforms

which are not of interest to us as a bank.

But we have to offer a third partyalternative to our own platform, or wemight lose them partially or completely.We offer customers that demand amultibank platform 360T, but we try tokeep them on the mono-Dexia platform.”

Getting e-FX solutions to customers

Yet many of the banks are behind the

portals in the Benelux in terms of getting

an e-FX solution out to customers. And

some banks have been slower off the

mark than others, as ING Bank admits.

Wim Van Genechten, head of e-business

financial markets ING, explains: “ING is farbehind our competitors where theproprietary solution is concerned inBelgium but we are catching up. We willsoon launch the proprietary solution in theNetherlands to midsize corporates as wejust received the approval from theregulators. In Luxemburg we will be onlinesoon. Our hit ratio on multibank portalshas improved significantly last year. Withina couple of months we will be amongst ourpeers. In a couple of months we willsucceed in becoming a challenger in themarket”

Options and derivatives

Dexia Bank does not offer derivatives on

its platform because of the complexity of

doing so, Luypaert states. “Mostplatforms, including ours, can’t handleinterest rate or currency options, whichhave to be done over the phone.”However, he adds: “In future, morecompanies will offer derivatives online asin the longer term, all business will gothrough platforms.”

As far as FX Options are concerned, ING

Bank is not yet offering its clients the ability

to trade these electronically. Van Genechten

explains: “These are the evolutions in themarket. More and more we hear thereshould be e-tools to offer FX Options toclients, so we now have a transactionalengine for FX and MM. A informative portalaround this engine will be built andlaunched very soon. It will give us thepossibility to plug FX Options and IRS-engine in quite easily.”

Sebastian di Paola, a partner at PWC in

Belgium, heads up the consultancy’s

corporate treasury solutions group. He

says there is a distinct lack of companies

trading FX derivatives other than vanilla

forwards electronically.


Rick Landa

“In the Netherlands, clients areprobably more dedicated to banks

than people think”

>>>

Marc Baseliers

“The corporate clients market andsmaller financial institutions are

being approached more aggressively by banks”


He says: “I don’t see that many

companies trading e-FX derivatives. More

complex options will be done over the

phone. Most companies tend to hedge

the bulk of their exposure with forwards,

and these will very often use e-platforms

to do so, and with some very fine tuning

of the top layer some slightly more

structured products. But I don’t think very

many companies are doing anything

other than very vanilla products

electronically anyway.”

Customers have so far not been

clamouring for access to trade FX

Derivatives on electronic trading systems

in the Benelux. As such, companies such

as Currenex have traditionally not been

providing them either although this is

about to change. Marion Freijsen,

Executive Board Member of OHM,

working for Currenex extensively in

Europe, states: “As with any platform, as

a technology provider you seek to provide

people with those instruments they trade

most frequently. This represents perhaps

80% of their daily trading.

The 20% “other” types of transactions are

harder to build into a platform, and

therefore it is a cost justification whether

or not to provide them. This is reviewed

regularly to make sure it continues to

match market expectations. Currenex

currently caters in-depth for those

instruments being traded, building out

from for instance plain vanilla orders to

also provide “Icebergs” and other

technical variations” She adds: “in 2006

we will bring FXOptions and Interest Rate

Swaps, which are the instruments most

commonly used in addition to “regular”

FX and Loans & Depos”.

360T claims it is the only multibank

trading system in use in the Benelux that

can be used to buy and sell derivatives, as

well as the usual vanilla Spots, Forwards

and Money Market Loans and Deposits.

The portal can allow users to trade FX

Options, and the business has just

launched Money Market Funds on its

system, which de Boer says is a US-based

functionality preference that is becoming

more relevant in Europe today.

Sell side white labelling?

White labelling a mono bank solution is

an option for European banks, especially

those without the internal resources to

maintain pace with multibank portals.

Dexia Bank opted for an internally

developed solution, Luypaert states. He

comments: “It’s much more expensive to

do it this way but if you use a white label

solution you lose all the flows, as they go

straight to the outsourcing company

offering you the solution.”

Yet ING Bank is one of those that has

moved to an ASP electronic foreign

exchange platform. It began by developing

its own proprietary solution five years ago,

but found that option to be expensive and

slow to market with new innovations, only

doing 10 to 20 trades a day.

So a year ago the business decided to

launch the ASP solution worldwide in

order to be cost-efficient.In the meantime,

its operations based in Belgium were

using an ASP solution which was quick to

market and financially sound, and doing

around 160 trades a day. So a year ago the

business began moving its international

operations to the ASP solution.

Van Genechten comments: “All the

transactional trading engines are

becoming commodities, so their time to

market is very fast. To do that oneself

takes a lot of time and money. The roll

out is still going on now, and from 2007

we will be going for 24 hour trading.”

De Boer says “We see that corporates and

banks are looking for a solution to trade

electronically with their (inhouse) clients.

Our solution will bring them a fully

integrated trading platform where 24

hour trading and support is guaranteed”

Buyside online appetite

The smaller end of the corporate market

within the Benelux is starting to move into

e-FX trading, Baseliers says: “The appetite

of small and medium sized corporate

customers for e-FX trading is increasing.

They’re not necessarily banking with us at

head office level, but a couple of years

ago we rolled out our corporate trading

Sebastian di Paola

“Most companies tend to hedge thebulk of their exposure with forwards,

and these will very often use e-platforms to do so”

Marion Freijsen

“Customers have so far not beenclamouring for access to trade FXDerivatives on electronic trading

systems in the Benelux”

system to this segment and it’s been

growing along the ambitious lines we

originally thought of.”

But retail traders are not hitting the e-FX

radar in Holland, Baseliers says: “There

are so many large players in the Dutch

market that for small retail players, there’s

too much unknown and too much risk. So

we don’t see a high popularity of e-FX for

private individuals at the moment.”

However, ABN Amro is pushing into the

SME end of the market with a couple of

initiatives, Andy Kidd, Head of eFX

Strategy for ABN Amro, states. “We're

looking to deepen our penetration

thorough to the SME and retail segment

thus increasing our share in the region. We

already engage with many of the regions

multinationals, but expect future growth to

be more with the mid market.”

To date the appetite of the buyside at ABN

Amro has been split in the Benelux. Kidd

explains: “Our Dutch MNC's have been

quite pro-active in the online debate and

other International Treasury operations in

the region have likewise been keen to

adopt, as has the private banking

financial community in Luxembourg.

Elsewhere in Benelux clients have been

slower to react, but the appetite is

increasing which we are planning to

build on.”

Within the Benelux Van Genechten says of

the larger mid sized corporates to the

giants, 90% to 100% are using some form

of e-tool for FX and money market trading.

ING Bank’s electronic platform provider

says that there is monthly e-FX trading

growth of around 8% in the Benelux. “We

also see that in our own statistics, which

are going up very quickly,” Van Genechten

states. ING Bank currently offers FX Spot,

Forwards, Swaps and Money Market

Deposits, over its system. They also offer

Straight Loans, however for the moment,

they only represent 1% of the total. 51% of

transactions are Spots, 26% are Forwards,

3% are Swaps and 20% are Money Market

Deposits.

Mark Warms, general manager for Europe

at FXall, quotes Greenwich Associates'

annual report on eFX, which shows that

just over half of buy-side clients in

Benelux are trading online. "Foreign

exchange volumes are growing, and e-FX

volumes are growing even faster. As the

Greenwich research shows, around half

the buy-side are trading online - which

means that there is still a lot of room for

growth."

Single or multibank portals preferences

On FX trading, di Paola states: “The

Benelux has a pretty good culture of

corporate treasury. The people are

relatively technology literate, which would

tend to mean they have understood the

benefits of using an e-platform for dealing

FX. The larger companies see the benefits

of using a multibank platform to enhance

the efficiency of their competitive bidding

process which will ultimately save on

spreads, while we see smaller corporates

using mono bank platforms and not

focusing quite so much on price, but more

on efficiency.”

Marco Verstegen, a currency trader at

Masterfoods based in South Holland, says

his business uses all types of electronic

trading platform for its vanilla FX product

trades. He says that they trade FX spots

and forwards electronically because it's

efficient and reduces errors and helps to

lessen risk. Anything else is dealt with in

traditional ways.

Verstegen comments: “We use a large

scale of products, as all we’re looking for is

best execution. There isn’t one product

that can give us a single way of reaching

that, so we use different types, including

multibank platforms, single bank platforms

with the major banks which have great e-

tools, algorithmic trading products and

other online systems, to see which one can

benefit us in a particular area.”

Consolidation

Eric de Boer, the Benelux regional sales

manager at 360t, says that he estimates that

of the active buyside in the the Benelux

region, around 40% to 50% are using e-FX

trading platforms, leaving room for growth.

“We also see that corporates are

centralising their Treasury activities, this

gives us the possibilitiy to offer our in-

house trading module where Treasury

acts as an in-house bank.” he says.


Mark Warms

“Around half the buy-side aretrading online - which means that there is still a lot of room

for growth.”

>>>REGIONAL e-FX PERSPECTIVE The Benelux region

Wim Van Genechten

“All the transactional trading enginesare becoming commodities, so their

time to market is very fast”

Andy Kidd

“We already engage with many ofthe regions multinationals, but

expect future growth to be morewith the mid market.”


However, he adds: “There has been a

consolidation of insurance companies and

small banks in the Benelux. Larger

financial institutions have begun acquiring

the former myriad of smaller business that

the region was formerly famous for.

There’s been a lot of convergence in the

marketplace in the Benelux, with

operations being changed into one large

factory. That consolidation is raising a lot

of IT questions, so they are rethinking their

IT infrastructures now. Putting in

multibank portals will help them to get

transparancy in the market and to

streamline their administration process by

implementing a full STP environment.”

Freijsen comments on the acquisition

situation in the Benelux: “There have

been a lot of acquisitions over the past

two years in the Benelux, as in the rest of

Europe. A lot of private banks are now

being taken up into larger structures. In

the Netherlands for example, a lot of

merchant houses that had previously

turned into private banks are now part of

conglomerates.”

e-FX future for the area?

The future for the Benelux in terms of e-

FX usage is a positive one, according to

Tom Buschman, chairman and CEO at

standards organisation, TWIST. Through

his work at TWIST, Buschman has been

able to look closely at the technological

acceptance within different European

countries. He comments on the Benelux:

“You could say that the Benelux, as wellas the UK and Nordic countries, havemore of an appetite for using technologyand online trading. This appetite to dothings differently and to use multibanksolutions means there is a morecommercial relationship between thecorporates and banks in the Benelux.”

Freijsen adds: “We’ve seen slow growth inthe Benelux, but lately we’ve seen quite alot of movement and there’s a lot more inthe pipeline. I call it the third wave, ofadoption by the laggards in the market.The e-FX landscape has now becomemuch clearer, platforms are here to stayand people in the Benelux have acceptedthat trading online is the way to trade FX”

Tom Buschman

“You could say that Benelux, as wellas the UK and Nordic countries,

have more of an appetite for usingtechnology and online trading.”

Marco Verstegen

“We trade FX spots and forwardselectronically because it's efficientand reduces errors and helps to

lessen risk”

Eric de Boer

“there’s been a lot of convergencein the marketplace in Benelux,

with operations being changed intoone large factory.”

REGIONAL e-FX PERSPECTIVE The Benelux region

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tudy The Interbank FX platform:

the next move from Lava Lava first entered the foreign exchangemarket in October 2004 with the launch ofLavaFX™, its comprehensive FX productsuite designed for and used by the buy-side. It offers a Central Limit Order Book oflive dealable prices, full price transparencyand depth of book, and the ability to placebids and offers, together with Lava'ssophisticated order types. The systemaggregates multiple sources of FX liquidityinto a single access point, which can betapped via the fast, intuitive LavaFX userinterface, or through a FIX API.

New features

Recently, Lava announced the addition of a

pioneering new feature, Staging Area, to the LavaFX

product suite. Developed through dialogue with

leading trading firms, Staging Area simplifies

execution during the order management process. It

permits asset managers, hedge funds, CTAs, and

signal driven traders to seamlessly load and manage

orders individually or in batches and ensure

executions are within size, side and price restrictions.

The next phase

The Interbank FX platform represents the next phase

in foreign exchange offerings from the company. The

new offering will provide the interbank community



with an impressive array of sophisticated order

types, full depth of book and superior functionality

for electronic foreign exchange trading. e-Forex

asks David Ogg, CEO of LavaFX, to tell us a little

more about plans for this new initiative.

David, what prompted Lava Trading to look at

moving into the interbank market?

We feel the interbank community has been

underserved for a number of years, with few

alternatives. We are confident the banking

community will welcome our superior modern

trading platform. Our advanced functionality and

technology gives us a real edge from a trading

perspective and also from a cost perspective.

Lava entered the FX market in late 2004 with the

launch of LavaFX™, an extremely comprehensive

FX product suite. Will you be leveraging your

existing proprietary technology for your new

interbank platform?

Absolutely. Our technology has already been

proven in the marketplace and we will be using

that technology for the new interbank platform.

Not only will we bring tested new technology to

the interbank market, we will also introduce an

innovative way of allowing banks to seamlessly

move large positions among interested

counterparties.

A key feature you plan to offer is what you are

calling a “blind” system. Can you tell us a little

more about how that works and what it entails?

While we cannot disclose the actual details of our

“blind system”, we can say it will solve a very

specific need. Currently, banks frequently sit on

large positions, looking for innovative solutions to

offload that risk to other institutions with

offsetting risks. We have developed a very clever

mechanism for that risk transference to take place.

Can you illustrate some of the other important

functionality and advanced order types that the

platform will offer?

The LavaFX interbank platform will offer pricing

transparency with full depth of book, discretionary

and reserve order types, pegged orders and time

sliced orders all incorporated in a streamlined,

modern dealing interface or also available via an

API . This functionality gives the trader a full array

of tools that allows them to more efficiently

execute trades in a manner consistent with their

goals than is possible today.

How are you planning to make the platform

available?

The platform will be available as a downloadable

application which can run over the Internet or

through leased lines established directly from a

bank into the LavaFX datacenters or via an API.

Why are you so confident this new platform will

provide a more cost-effective and efficient trade

execution solution?

We will be bringing a superior way of trading to

the marketplace. The order types we are

introducing are designed to enhance both the

speed and quality of executions. We are also

delivering a system with vastly reduced

installation costs. No dedicated hardware will be

required onsite. We have also met with many of

the world’s top banks and are working very closely

with them to ensure our products meet or exceed

their expectations.

When do you expect to launch the new interbank

platform?

We will be launching in the second half of 2006.

>>>Case S

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David Ogg


FX Order Management:Let the games begin!

There are two primary factors driving developmentand investment in FX Order Management (FXOM):business process and added value. With regard tobusiness process, banks are vying to provide morefunctionality as a means of attracting morecustomer business. Automating the process alsoreduces the sales and administrative costs ofmanaging that business. In terms of added value,most banks believe that the information contained inthe order book can be used to better understandindividual client behavior as well as general industrytrends. Evidence of this growing interest can be seenin the proliferation of research in the area ofMicrostructure pricing.

Yaacov Heidingsfeld is COO

of TraderTools LLC

Leveraging e-commerce for FX Order Management

>>>


Participants in the FX markets, especially the larger banks and

brokerage houses, are now looking to extract value out of

order flow. Many of these organizations have grown through

mergers and acquisitions, and have therefore inherited disparate

business practices and systems – resulting in fragmentation of

liquidity. Time differences between their international dealing

centers only add to this fragmentation and loss of centralized

control. Therefore such institutions are now looking for ways to

view their order flow across their organization. Lastly, buy-side

institutions are becoming more demanding, and there is pressure

to reduce the overall cost of trading, clearing and settlement.

In order to support and grow the overall number of clients served,

an institution requires an “always-available” workflow processing

engine that automates all aspects of the electronic dealing

process. FX transaction costs are at least partially determined by

the difference in the bid/ask spread, corresponding to the loss

incurred by simultaneous Buy and Sell transactions.

The most cost-effective way of executing trades for a market-

making institution, is to cross them internally while still achieving

best execution. [See figure 1 below.] Apart from saving on

transaction fees, internal crossing minimizes the impact and

opportunity costs of trades, while maintaining available credit.

Liquidity can also be enhanced by directing organization-wide

order flow into the internal marketplace, provisioning features like

market-making, auto-quoting from inventory and providing a

single order book that follows the markets across the globe.

Figure 1: Internal crossing

In order to keep up with market growth, an institution would want

to adopt a flexible, hierarchical, enterprise-wide platform for

managing foreign exchange orders, where the top layer of

management is responsible for the entire inventory of orders; to

wit, a Global Order Book for the enterprise.

Global Order Book requirements

The first requirement for a Global Order Book is for it to be

structured according to hierarchy. Hierarchical order

management is a policy-based system that uses an organization’s

natural structure in the shape of a pyramid, with each row of

dealing entities linked to entities directly beneath them. Each unit

of the hierarchy must be able to perform its tasks without any

interference from other units (on parallel, higher or lower levels).

Secondly the Global Order Book requires flexibility. The system

must allow for the widest set of business practices so that each

unit within the hierarchy can tailor the system to how it does

business. It must also allow for changes to processes,

requirements and asset-class support as business needs change.

The third requirement for a Global Order Book is performance.

Everyone in the hierarchy (dealers as well as customers) should

be able to receive updates from the system in real time. The

system should have a flexible security policy that is defined and

enforced top-down and includes the ability to restrict access from

one entity to another.

Finally a Global Order Book must have clearly defined points of

integration to front-, middle-and back-office systems at each

level of the hierarchy and have the ability to interface “out-of-the-

box” with any system.

Related research

The overall goal of a Global Order Book is to grow order flow.

Order flow, in this context, is taken to be a variant of net demand

of buyer-initiated and seller-initiated orders. As noted by Lyons in

his 2001 book, The Microstructure Approach to Exchange Rates,

order flow “is a variant of, rather than a synonym for, net demand

because, in equilibrium, order flow does not necessarily equal

zero. More efficient crossing – the ability to buy and sell against

two orders while capturing all or part of the spread – means that

there is less need for what is commonly known in the FX market

as ‘hot potato trading’ as a means of sharing risk.”

Further, in their paper entitled, “Evolutionary Reinforcement

Learning in FX Order Book and Order Flow Analysis,” Bates,

Dempster and Romahi examine whether pattern recognition

techniques can be applied to successfully infer trading strategies

when order flow data is coupled with order book derived

indicators. Their promising approach has shown that the use of

order flow and order book data is usually superior to trading on

technical signals alone.

What does this mean to the market participants?

Putting theory into practice

As the sell side competes for volume growth, and the buy side

becomes more selective in its processes and more demanding

technologically, we see the FX liquidity providers continuing to

invest in their own order management offerings.

Whereas in the past, the order book was little more than an

electronic notepad – with alarms to notify traders that certain

market conditions were now in place causing an order to be

executed – it is now becoming the keystone to managing a bank’s

FX business.

FX Order Management: Let the games begin!

Firstly, more and more “pipes” are being opened into the order

book to enable the seamless entry of orders from sales desks all

the way down the pyramid to the ultimate buy-side customer.

These pipes take the form of APIs (Application Programming

Interfaces) which allow a bank to integrate all order flow from all

its various sources – multi-provider portals or the bank’s own

branded Internet offering. Depending on the business model of

the provider bank, some offer APIs to their buy-side customers to

be integrated directly into the “black-box”, high-frequency trading

models so often spoken about in today’s trading environment.

Other banks offer their customers the ability to send order

spreadsheets in a customer-driven format for automatic upload by

the bank in real time into the order book.

Secondly, once these orders are active, institutions are now

differentiating themselves by offering automated execution.

Orders are now being processed with minimal human interference

in a truly automatic, yet customizable, way. This automation

basically eliminates the need for traditional manual filling, with

the associated costs in terms of time and human resources.

Customized automation using streamed rates can now be

provided according to client and/or institutional preferences based

on specific execution rules. [See figure 2 below.]

Figure 2: AutoFill

Thirdly, once the order is executed, the customer is notified

automatically in real time. Here too, various institutions are trying

to differentiate themselves by offering some or all of the various

methods for electronic notification. Some offer a web-based

applet, email or SMS; others offer an API. In the first three

offerings, the customer is basically a passive entity waiting for

notification. In the case of an API, this notification can be

integrated by the buy-side trading engine to generate additional

orders which are then fed via the API back into the order book.

Finally, the effect of the additional information contained in the

order book has some provider banks using this data in order to

shape and create electronic pricing. This information is also being

used to identify the pockets of supply and demand (in the form of

Buy and Sell orders) and in the automated execution environment.

Conclusions

Tier-one banks are currently investing in technology in the area of

FXOM in order to retain their premier positions. The key drivers are:

(1) Business process, to attract and service customers more

cost efficiently

(2) Added value, from the extraction of order flow information

for more effective pricing

Innovations must include the ability for customers to have direct

access to their order books, and at the same time, reduce

associated transaction costs. To accomplish these goals, larger

banks and brokerages would like to implement a Global Order

Book – which optimizes internal order flow in order to capture the

spread on maximum deal flow – for increased profit margins and

reduced transaction costs. Furthermore, by integrating FXOM

functionality, instead of having to resort to “hot potato” trading,

smaller organizations can now compete directly with their larger

counterparts.

The stagnation years for investing in new technology in the

Finance industry seem to have come to an end. Consolidation

within the FX industry has convinced many participants to invest

in tools that focus on FXOM. Institutions can readily license

available technology, customize it with their own brand of added

value, integrate it into their existing infrastructure – thereby

growing transaction volumes and increasing profitability – all

without a commensurate increase in risk. All institutions aspiring

to these goals should examine the benefits of implementing a

commercially-available FX Global Order Book today.




FX Limit Order Management – A significant service differentiator for the FX business-line

Over the past several years, IT&e Limited has been working closely withleading banks to develop the increasingly complex FX order managementfunctionality requested by their trading and sales desks. Experience hasshown us that by being attentive to this pre-transaction level functionality,we are enabling traders to manage larger order books, providing sales staffwith a deeper knowledge of their clients needs, and delivering significanttransparency and STP benefits to both the banks and their clients. Thisarticle discusses the complexities that need to be addressed by a modernorder monitoring application, looks at some of the advantages that banksare uncovering by enhancing the capabilities of their FX order managementplatform, and considers the benefits of offering a functionally rich ordermanagement environment to end-user clients.John C. Groetch is COO (Americas) at IT&e


Why focus on orders ?

Today’s FX market is characterized by negligible bid-ask spreads,

a plethora of accessible high performance/low-cost execution

platforms, and an increasingly level playing field with respect to

liquidity access. A seemingly constant wave of new ECN’s

offering better functionality and faster response times has

catered well to the rapid demand growth for online spot FX

trading, but for banks that are interested in adding value to their

clients’ businesses, service offerings beyond liquidity provision

and settlement have become critical competitive factors. Our

experience has been that enhanced FX order management

services can help banks win and secure increased client order-

flow - and through their ability to support and manage a wider

array of order types - to better manage risk and grow their

bottom-line.

We are also witnessing client behavior that indicates steady

growth in the size of their order book as they gain familiarity with

white-labeled order-monitoring consoles. The rationale for this

behavior is that these services deliver win-win outcomes for

both the order-watching and order-placing parties. They enable

a mutually beneficial level of information exchange, where

traders gain a better sense for incumbent flows, and client’s

benefit via access to real-time order status information. By

specifically addressing the chief order management concerns of

their demanding clients, banks are seeing that more order

business is being entrusted to them.

The challenge of Global Order Monitoring

Most trading organizations operate globally via a network of

dealing rooms spread across various geographic locations, often

performing different roles within the FX business line. Some

operate 24-hour desks in the major centers because their best

clients desire a single geographic point of contact. For very large

clients, confidentiality is often as important as quality of execution

in selecting the partners they place their orders with, and if their

identity were to be compromised or the confidentiality of their

trading activity jeopardized, they will sever a trading relationship.

These largest clients represent the most challenging segment in

the FX business, and their demands usually include specific

requests such as monitoring orders without divulging their identity

to the trading desk (anonymous orders), watching orders only

during specific time periods during the day (zone orders), creating

new orders based on the occurrence of defined market

occurrences (event orders), or utilizing trading-range based rules to

automatically generate orders as the market reaches or breeches

certain levels (range orders).

Also, because many emerging market currencies are only tradable

during a local market time zone, it is important that orders can be

monitored through a proxy currency pair during the hours where

no local market is available (proxy orders).

>>>



“The single most important element toget the order monitoring business

functioning productively is to providea powerful “dashboard” for both the

trading and sales roles”.

In short, any system that attempts to fulfill the requirements of

this global customer segment must be capable of

accommodating some rather complex business logic. We have

observed that most generic order applications are incapable of

monitoring such orders, and so they reside “off network” and

are passed manually from one trader to the next – an obvious

compliance risk that is increasingly subject to scrutiny.

Adaptable GUI to accommodate different trading roles

The requirements of a modern FX order management platform

are vast, and beyond the obvious need to monitor all of the

various order types in a robust and reliable way, a new level of

flexibility is needed for traders and salespeople to understand

what is happening within their order book.

The single most important element to get the order monitoring

business functioning productively is to provide a powerful

“dashboard” for both the trading and sales roles. For the

traders, orders are generally organized and displayed in a way

that helps them to anticipate forthcoming flows, and the

dashboard should have easily accessible tools so that they can

perform analyses on the impact of potential market movements,

redistribute or “pass” their orders to other traders, and

configure specific visual and audio alerts that warn them about

particular market movements or events.

For the sales staff, the typical dashboard configuration displays

the orders of their clients in a way that keeps them on top of the

pertinent activity for their key relationships, and allows them the

possibility of having a broad overview of the customer orders for

analytical purposes. These different uses of the dashboard are

critical to the successful management of a large order book, but

are very different in terms of what information needs to be made

available. We provide a sophisticated dashboard builder to

accommodate for these different needs, and allow each user to

define their own workspace. By using our powerful dashboard

building toolkit, our users create custom “views” that

incorporate only the orders and related information that are

relevant to their role, while remaining on top of any events that

require their attention through our system-wide warnings and

alerts mechanism.

White-Labeling the Order Monitoring application

While most ECN’s offer some generic order entry and monitoring

functionality, the obvious focus of these platforms is to present

timely market quotes, trade blotters, and post trade settlement

information - not the monitoring or managing of complex orders.

Building a client-facing order application around a robust order

management platform (rather than into a dealing platform) is an

inherently more effective strategy, as the underlying application

specifically addresses the higher-level order management issues.

In our experience, a white-labeled browser-based order

application that allows customers to manage their order book

from wherever they are – a self-service capability most of them

desire, but do not currently have access to – will result in their

utilizing this functionality to incorporate complex execution

strategies into their FX business with the provider. One white-

labeled application that we recently released allows

permissioned users to monitor their “un-submitted” orders on

the provider’s order-monitoring platform via a browser. In short,

they can see their orders via the host’s website, even though the

host (as provider of the service) is not watching the orders. Our

experience is that clients will utilize this capability when they are

monitoring the market actively, and most often, will later

“submit” these orders to the host when they are away from the

market.

The attraction of this model is that the clients are provided with a

means to monitor their orders against the market - at no cost -

and without obligation. However, because the orders are already

entered onto the host’s platform, with a single click of the mouse

they can submit them to the host’s traders when leaving for the

day. It is assumed that an appropriate business relationship can

be defined to make this arrangement suitable to both user and

host, and the system administrator can easily authorize selected

customers to gain access to the browser-based functionality.

As shown in the diagram (above), the design we employed

segregates client-side data from dealer-side data, protecting the

dealer platform against performance degradation risk, and

inherently insulating the dealer-side database from the client-side

database. Finally, we offer easy integration with other FX business

systems such as deal capture and counterparty limit monitoring,

and can consume rates from any composite market rate source.


e-FX - a catalyst for improvingGlobal Order Management

Over the past three years within all the tiers of the sell side community,there have been varying levels of investment in FX electronic trading,predominantly surrounding fundamental execution and pricingcapabilities. These have continued to evolve and have been throughcyclical investment programmes to leap-frog or keep pace with theircompetitors - only to be on par or ahead of the game for a brief period.These are driven by continuing client demands to provide additionalservices centred around the capabilities such as streaming executable rates(SER), direct connectivity through API integration, on-line FX Options,Algorithmic Trading, Outsourcing as well as eFX Order Management. Jon Martin is Managing Partner at Stentra


Priorities have been driven by client requirements and the

competition, as well as the cost to develop and deploy functionality.

The ability to maintain or increase flow has focused banks on SER and

APIs. FX Options, Order management and Outsourcing are being

heavily scrutinised for their return on investment and are often only

marketed and utilised on a sporadic basis.

This business case for eFX Order management can be difficult to

quantify. It is often seen as an ancillary service and not necessarily

as an area where increased liquidity can be achieved. Admittedly,

there are quantifiable savings that can be achieved by reducing

losses caused by manual errors when re-keying orders taken

by phone.

“Historically Order Managementsolutions have focused on the trading desk’s need to manage

orders on a global basis.”

However these errors tend to be intermittent and may not

necessarily be completely solved by an electronic offering. The

case for additional electronic functionality is further complicated

by the Sales view that the client needs advice and values the

relationship, and with the Trading desk’s reluctance to add more

flow to their auto execution flow that may already be complex to

manage.

These are, however, not insurmountable issues. eFX Order

management should be viewed as a natural extension of any

existing electronic proprietary offering as well as a mechanism

to provide a more efficient and effective trading process through

auto-fills as well as greater efficiencies of full STP. Despite this,

the take-up has been slow across the market.

Historically Order Management solutions have focused on the

trading desk’s need to manage orders on a global basis. This

entails accepting and capturing the order, monitoring its status

and proximity to the market, filling orders and at regional close

of business transferring orders over to the next region. This

simple process suggests Order Management should have been

one of the simpler capabilities to develop and implement;

however, in reality it raise many business challenges and

complex technology issues impacting the Client, Sales and

Trading functions.

Key to determining where synergies and process improvements

can be made is a detailed understanding of existing workflows.

In the diagram below we have tried to show an outline of a

typical manual order management process.

Admitting the client directly into business workflows raises

questions over areas such as how the client and sales workflow

must be amended; what auto-fill capabilities and overall controls

are required and how efficient straight through processing needs

to be. Fully integrating eFX Order Management with your voice

business creates a catalyst for improving Global Order

Management and reviewing existing workflows to create an

optimal comprehensive solution.

The client’s optimal solution

Many clients look for self-entry order management capability.

They seek the ability to easily enter, import and manage single,

linked and bulk orders. They need the ability to view the status

of all their orders (both web-originated and phone-originated)

with varying levels of management authority depending on

the individual’s responsibilities. The application requires

functionality to:

• see where orders are in relation to market levels, what is hot,

what has expired and what has been filled

• cancel, edit, deactivate and re-activate transactions at any

time prior to fill.

• generate client and trader alerts by email or SMS when an

order changes status or is filled.

• Link orders dependent on order status – If done then, If not

done, Good ‘til close etc.

• Provide the client with an easily useable and secure

environment.

Sales optimal solution

Sales share similar needs to the client and must be able to act as

the client’s proxy if any order changes are required or have been

instructed by the client. Sales also look to take a view across

multiple clients, viewing new orders, hot orders, filed orders,

expired orders as well as potential credit issues. In some cases,

Sales need the ability to control the order acceptance process as

well as dealing with exceptions such as credit issues and market

proximity problems. Keeping the salesperson close to the

client’s requirements ensures they are up-to-date in real-time.

Automatic booking and allocation, post transaction, needs to be

a seamless integrated workflow for both the client and the trader.

Trading’s optimal solution

For Trading, the incentives for eFX order management and the

subsequent automation of the flow may not be seen as truly

beneficial. Enhanced trade STP can often been viewed as nice to

have rather than an economic driver but although auto-fill

execution is a challenge it does bring benefits.

If the process is to be automated, it must be on the trading desks

terms. Their ability to effectively manage orders in bulk or

individually as well as the ability to pass control on to the next

time-zone trading centre must not be diminished. Auto-validation

on market proximity is very desirable; functional management for

manual or auto acceptance of orders is mandatory.


>>>



The order book needs to continually monitor client specific

executable rates to ensure transaction at the correct level.

Functionality should be included permitting auto-fill triggers to be

set at specific levels including existing SER or RFQ levels; however

it should be possible to easily modify or reduce these levels to

take advantage of changing market conditions. Trader controls on

auto-fill are paramount; controls around the type of trade such as

Stop Loss vs Take Profits, volume and CCY pair should all be easily

manageable. Traders will also want the ability to intervene on an

autofilled order and change it to manual execution.

Client spreads also need to be in-line with any set on the existing

electronic offering. This works well when reaching the level for a

Take Profits; however, it will need flexibility in not applying

spreads to Stop Losses for the same clients. It is difficult for a

trader to make money on a stop loss without either filling at a

rate well beyond the stop loss level or by filling before the

market rate has truly passed the stop loss level.

Once an order is filled, full STP is needed, updating the trader

book as well as passing it to the down stream Settlement

systems. For the more complex organisations where there are

multiple front and back office systems, more sophisticated order

routing as well as in branch back-to-backs may be required.

Ideally, an executed order should follow the same STP process

as an RFQ.

Clear, concise and workable rules governing passing of

ownership of orders to the next centre are mandatory. This

automation may also force more formal hand-offs and

synchronisation with any global single price ownership and

position ownership; these may have previously been facilitated

with manual and less formal processes.

In the diagram below we have tried to show an outline of an

effective integrated order management process.

Current issues

eFX Order Management raises potentially significant challenges

for both the business and technology. A detailed understanding

of the functional environment must be the foundation for

change, covering areas such as client interfaces and workflow to

order books, workflow management capabilities to support the

order through acceptance, integration to credit risk systems for

automated credit checks, integration to streaming executable

price engines and execution platforms, as well as integration to

down-stream trade capture and risk systems.

Technically providing a solution that delivers functionality and

workflow to clients, trading and sales may not be the most

complex issue. A more significant challenge is the integration to

existing platforms for Order Management, Pricing and Auto-

execution, with STP requirements becoming complex. As

automation is increased precise and clearly defined rules need to

be placed around order ownership across all regions; this is

combined with existing bank price ownership and position

management. Workflow relationships between the price and

execution system, credit checks, order management solution

and downstream position keeping solutions must become

tightly aligned. Effective cross-platform and cross-region static

data can be a critical success factor with the need to align trader,

client and transaction details through multiple platforms.

Through an ever-changing market, vendor solutions have

predominantly offered either strong order management tools for

traders or client facing capabilities but not both. Either option

creates its own issues - you can build around your existing

capabilities to fill the gaps, which creates major challenges with

integration, or look for an all encompassing solution which may

require investment and commitment. Hard decisions need to be

made on the technology strategy going forward in order to

create one long term scalable and maintainable solution.

Conclusions

There is little doubt that an integrated eFX Order Management

capability combined with traditional order business creates

significant pressure on optimising efficiencies within the sales and

trading lines. A fully integrated workflow between the client, sales

and trading groups, incorporating controlled auto-execution on

fills, offers significant benefits to clients. Providing this capability

leaves little flexibility in compromise in the overall solution. The

core and surrounding technology needs to be open and accessible

to easily enable this capability without hacking together a complex,

unscalable and unusable solution. Client demands for increasingly

tighter spreads and a reduction of cost per trade adds credence to

the business case for eFX Order Management for clients as well as

providing streamlining for the overall transaction process.

Stentra are a Financial Markets Technology and Software

Consultancy

Gentlemen what characterizes a

good FX order management system?

Spurr: An Order Management service

aims to provide a structured way of

trading based on profit targets and

managed loss tolerances. In an OTC

environment, like FX, such orders are of

even greater importance. Users should

have immediate and unrestricted access,

dynamic control and management of their

orders, a number of variables to choose

from and customize their orders and the

ability to build more complex structures,

together with intelligent monitoring tools

and real-market rates.

On the execution side, users need to be

filled in the best possible way; fast,

efficient and transparent auto execution

should be available when the size of the

order, the time zone and market conditions

provide enough liquidity.The true test of

an effective Orderbook is the quality and

consistency of the liquidity behind it.

Warms: The most important characteristics

of a good order management system are

ease of use and connectivity. To deliver

maximum efficiencies to clients, an order

management system needs the ability to

integrate to a variety of order generation

systems and a variety of execution venues

to cover all asset classes. In turn, the

execution venues should be integrated to

clients’ back office systems for automated

post-trade processing. This makes it

possible for clients to achieve end-to-end

straight-through processing for the entire

securities modeling and trading process,

from identifying the FX requirements

through to trading, confirmation and

settlement.

Clients can choose from a wide range of

order management tools and services

offered by trading portals, banks or third-

party vendors. FXall’s clients, for example,

might use FXall’s QuickOMS, the order

management component of their portfolio

or treasury measurement system or a

combination of the two. Because FXall

interfaces seamlessly to these systems,

users can enjoy the benefits of STP

regardless of which method they choose.

Why has the order management

space become such an important

area of attention for FX providers?

Spurr: The demand has always been there

for electronic order book functionality but

the banks have been slow to respond. FX

is rapidly growing as an asset class in it's

own right and is being traded as such, with

an increasing bias towards order based

trading styles as clients apply their trading

models and disciplines honed in the

Futures and Equities markets. As such,

clients expect the banks to provide the

same tools that are available to them in

other markets such as in Equities and

Fixed Income, including the ability to place

and monitor orders.

The increasing use of algorithms in

trading and the sophistication of clients

require intelligent order systems which

can place and execute orders at target

levels. These models rely on FX order


FX Order Management:meeting the growing needs of clients

T H E e - F O R E X F O R U M

Yaacov Heidingsfeld gets the viewpoints of both a leading

foreign exchange bank and FX portal. He poses some questions

to Martin Spurr, Head of Integrated Treasury Solutions –

ecommerce at The Royal Bank of Scotland and Mark Warms,

global head of Sales and Marketing at FXall.

Yaacov Heidingsfeld


management tools to help with their

multi asset trading strategies, to get

simultaneous and efficient execution

across the board when their signals/

targets are reached.

Finally, RBS’ e-trading activities are

entirely driven by a client relationship

strategy and we have therefore invested

in our electronic order book tool as a

means by which we are able to reward the

reciprocity of value and trust that exists

within the environment of an order book

service. We achieve this through

delivering a much higher order of

execution efficiency than may otherwise

be possible in an environment in which

banks are, on occasions, blindly

supporting streaming liquidity.

Warms: The order management process

offers significant opportunities for eFX

providers to add value to clients. Order

management can be a time-consuming,

complex process and one that is open to

errors, particularly for large asset

management firms managing hundreds

of individual accounts. By delivering tools

that make it possible to net requirements

across accounts and currencies – while at

the same time taking into consideration

compliance factors such as which bank(s)

each account can execute with – FX

providers can deliver further cost and

efficiency gains to clients.

So why are people focusing on order

management now? Historically, the equity

markets were the first to automate, then

fixed income and now foreign exchange. In

any asset class, the road towards electronic

trading follows a natural progression. The

first task is to streamline and automate the

trading process itself. Once that has been

solved, the focus broadens to encompass

other aspects, including order

management and back office processes like

confirmation and settlement.

Where are most of the current efforts to

improve FX order management functionality

being made?

Spurr: It is important to consider the client

groups according to their underlying

needs and requirements of their service

providers. As mentioned above, the

banks and portals have been slow to

develop electronic order book capabilities

though more recently we have seen an

increasing level of activity which can be

broadly categorized as follows;

- Workflow tools developed to service

both corporate and institutional clients

for their various FX needs and typically

including very rich pre and post trade

functionality and STP (splits, allocations

and integration to treasury management

and portfolio management tools.

- Investment and sophistication levels

have been growing over recent years as

both the banks and portals jockey to

position themselves as lead service

providers to the clients.

- Supporting client trading tools and

models with complex, order based

trading tools to continually improve the

clients’ ability to manage efficient

execution. These tools tend to have a

high concentration of functionality on

the trading functionality and a lower

demand on the pre and post trade tools

discussed above. The investment is

directed towards delivering closer

proximity to market and higher capacity

both of which can ultimately only be

delivered by electronic execution tools.

- It is this area where we have seen the

greatest activity in the market, driven

largely by the explosive growth of cross-

asset and model based trading.

Warms: The importance of connectivity

means that many providers, particularly

those that serve the fund management

community, are looking at FIX

connectivity. Over the last year, we have

completed a number of FIX integrations to

leading OMS vendors, as well as clients’

in-house systems. As the adoption of FIX

for FX increases, we expect to see further

demand for custom FIX integrations.

FIX connectivity means that the status of

positions maintained on portfolio

management/order generation systems

can be updated in real-time as the FX

orders are executed, completely removing

any reliance on manual processes such as

the manual import/export of spreadsheets

for instance.

Other areas of focus include the

development of workflow tools that help

clients streamline execution and save on

the bid-offer spread, including netting and

cross-currency netting capabilities. Many

clients are also looking for the ability to

execute multiple orders simultaneously

and more complex orders, potentially in

competition, and this is something that

FXall has included as part of QuickOMS.

Who and what is responsible for

driving the demand for this improved

functionality?

Spurr: All parties, banks, client and

portals/IT services providers are driving

this development:

- Banks like RBS, continually strive to

deliver clients with a broad range of

innovative and competitive dealing

tools to encourage them to build deeper

relationships with RBS and ultimately

trade more with us.

>>>

Mark Warms

“To deliver maximum efficiencies toclients, an order management

system needs the ability to integrateto a variety of order generation

systems and a variety of executionvenues to cover all asset classes.”


T H E e - F O R E X F O R U M

- As mentioned above, the nature of

order book trading is based upon a

higher level of mutual trust that enable

banks to offer better, more consistent

execution and pricing to their valued

clients. True market liquidity lies within

the banks own dealing functions and is

rarely truly reflected in the external

systems and portal. Dealing directly

with a banks order book gives clients

improved access to this much deeper

pool of liquidity.

- Clients, benefit from fewer missed

deals and deeper bank relationships

when dealing within the auspices of a

bank delivered electronic order book

such as the one offered by RBS. This is

sharply contrasted by the trade off of

anonymous dealing via third party

order book tools with the inevitable

increase in rejection rates and

occurrence and problems associated

with of partial fills that are an inevitable

consequence of anonymous dealing.

- Portals/IT services have recognized the

opportunity to extend the functionality

that they have developed for the

Equities and futures market into FX and

have been investing in their platforms

to deliver the required functionality.

Warms: Without a doubt, the demand for

more sophisticated order management

tools is coming from buy side customers.

Corporates and fund managers alike are

looking for ways to further increase

efficiency and reduce costs, processing

times and operational risk. This in turn is

driven both by business considerations –

cutting trading costs can ultimately

improve fund or treasury performance –

and regulatory or best practice

requirements. The implementation of

MiFID, which will require asset managers

to document and monitor execution

policy, will put further pressure on the

selection of order management systems.

For corporate clients, the trend towards

centralized treasuries has led to increased

demand for order management systems

that support internal dealing. In response,

we have added internal dealing

functionality to QuickOMS, making it

possible for corporates to share trade

requirements between locations and

consolidate external dealing in the central

treasury.

What sort of information are providers

particularly keen to collect and collate

from their order books and does this

confer any competitive advantages?

Spurr: In RBS we have very strict controls

in place for client’s orders to ensure the

integrity of the client information that we

manage. In aggregate the order book

information provides valuable insight into

market depth and interest as well as

assisting the trading operation with the

positioning and risk management of

deal flows.

In addition, banks can analyse the flow

and orders strategy and help clients

achieve better execution, advice on VWAP

and TWAP algorithmic or benchmark

execution and be creative about the

possibilities around their client’s needs.

Warms: As an independent trading portal,

FXall is not a provider of liquidity and

does not take positions in the FX markets.

Trade details are kept strictly confidential

between each client and its counterparty,

and are never published to the market.

What impact is the arrival of Algorithmic

trading going to have on the FX order

management environment?

Spurr: Algo trading in FX has recently

been embraced as a trading methodology

by both clients and banks. Many hedge

funds and other proprietary platforms

have introduced autonomous or human-

driven algorithms to trade the currency

market increasing both volumes and

trades. This means that the onus is for the

banks to offer an electronic orderbook

which can cope with multiple orders and

strategy levels whilst ensuring that orders

get filled at market levels (also discussed

above re changing to order-driven market

and requirement for close market

proximity). The role of the trader is

changing to being a strategist; the future

trader will select execution strategies,

rather than execution him/herself.

Successful orderbooks will not just

provide order templates, but will also

make available building blocks for

customized execution strategies, a black

box within a product.

Warms: One effect of algorithmic trading

will be to make connectivity more

important than ever. If a model generates

an order to buy or sell as soon as the

market hits a certain point, it is essential to

be able to execute this order in the stages

and timings determined by the algorithm

without adding any additional delays -

every millisecond of slippage could mean

losing money. Organizations using

algorithmic trading tools will need to

connect these to execution venues using

high-speed connections such as FIX or

Application Programming Interfaces

(APIs), which enable traders to execute

these trades with minimal latency.

Equally important as speed is liquidity – to

fill orders quickly, clients will need

consistently deep liquidity in a broad range

of currency pairs and instrument types.

How are the top FX providers likely to go

about differentiating their FX order

management solutions?

Spurr: The ultimate determinant of a

valuable order book offering will be a

combination of a number of key factors:

- The integrity depth and consistency of

liquidity and reciprocal market

information that the service delivers to

the client.

- Richness and range of functionality,

speed, capacity and performance of the

technology and the ability to tailor

bespoke solutions to meet the clients

needs both now and in the future all

within the within the broader context of

their relationship with their service

provider.

Warms: The top FX providers stand out

because of their willingness to develop

custom solutions for individual clients.

Every customer has a different FX

workflow, and for this reason there is no

such thing as a ‘one size fits all’ order

management solution – systems need

to be adaptable to different client

requirements. For an asset manager, this

support of client specific workflows might

mean the ability net across multiple fund

accounts. Asset managers will often

submit blocked orders on behalf of

several fund accounts, each of which may

have a separate group of liquidity

provides that it can trade with. FXall has

designed QuickOMS so that it can identify

which accounts’ requirements may be

blocked with others’ and, where

permitted, the common banks shared by

those accounts, and then directs the trade

request towards those banks. For

corporates, as discussed, support for

internal dealing is a key differentiator.

What enhancements have you recently

made to your own order management

products and services?

Spurr: The RBS FX Electronic Orderbook

has been developing based on client

feedback and constant market innovation.

We are now offering auto execution and

SL one touch, Forward rollovers multi tree

order strategies combining OCO and IDO

relationships, blackout periods and an

Application Protocol Interface (API) so

that clients can connect their own trading

and proprietary systems directly. In

addition we will be very soon launching

auto executed SL Managed (With

protection) orders, Perpetuals, call orders

and the ability to clone orders from the FX

Electronic Orderbook real-time blotter.

Warms: The latest version of the FXall

trading system allows the user to manage

everything from a single display, while

being able to continue to view real time

market prices. The user can block and

unblock orders to optimize trading

efficiency, while still adhering to any dealing

compliance restrictions. The user can then

select from a range of trading workflows.

Throughout this process the order

management blotter maintains the status

of all orders (and updates that status on

the clients’ other in house systems),

allowing the user to sort and filter at will.

This allows the user to focus on the

activities requiring his, or her, attention.

What functionality will shape the

next round of FX Order Management

innovation?

Spurr: I think that the next development

will concentrate around the ability by

banks to offer multi asset orderbook

products offering therefore their clients

the ability to link or create complex

algorithms which will combine different

events, markets and levels to execute

complex order strategies. It might be that

RSB sees only the FX element of such a

transaction, but it needs to offer the

“hooks” or connectivity to other multi

asset products to allow for the strategy to

work. We should expect this to drive

further movements towards order driven

trading style and the market infrastructure

required to deliver this.

Warms: One trend that has emerged in

the equities space is transaction cost

analysis, or TCA. TCA involves examining

past trading performance to identify the

impact of the type of security, trade size,

time of day, executing broker and other

factors on execution quality, and using

this analysis to inform execution policy.

This analysis relies on being able to

analyse the client’s own history and

pattern of executions.

For example, a client’s trade data might

reveal that for certain transaction types

they typically get better execution at one

time of day than another, or that certain

liquidity providers consistently deliver

more competitive pricing on particular

currency pairs. An order management

system can use this information when

assisting the user’s decision on when to

trade and who to trade with. Best

execution has become a priority in foreign

exchange. This trend will only intensify

with the introduction of MiFID. As a result,

we expect to see transaction cost analysis

become a priority for FX users and

providers alike.


FX Order Management: meeting the growing needs of clients

Martin Spurr

“FX is rapidly growing as an assetclass in it's own right and is beingtraded as such, with an increasingbias towards order based trading

styles as clients apply their tradingmodels and disciplines honed in the

Futures and Equities markets.”

Flexible delivery of FX market data& technical analysis

With the technology at their disposal, banks

should not lose sight of their ultimate goal;

enhancing shareholder value. The FX revenue

stream may be split into two broad categories;

proprietary (risk-taking) trading, which involves

significant p&l swings, or servicing a Client

Franchise, which is relatively risk free and provides

stable – if not always greater - revenues. Most banks

combine these two areas, with the Var element

changeable and usually dependent on the quality of

earnings from franchise.

There are three ways in which banks try to

differentiate themselves to attract and retain

customer business:

1. Price

Given the power of modern dealing technology,

vanilla FX pricing has become commoditised and

banks struggle to differentiate themselves on price

alone.

2. Relationships

The continual movement of FX sales staff

between competitor banks is testament to

the value that these institutions place on

client relationships. Strong dealer/client

relationships can be transferred quite

quickly between banks, which effectively

facilitates direct client acquisition by

competitors.


Banks, funds, corporations and private investors receive FX Market Data and Technical Analysis services via avariety of technologies. Paddy Osborn analyses the pros and cons of service distribution and examinesdevelopments that will shape the future delivery of marketdata and technical analysis.

Paddy Osborn


3. Added Value Services

Provision of added value services remains the key to securing

and retaining new FX business. Since the trading styles - and

hence requirements - of Hedge Funds, Real Money Managers,

CTA's, Corporates and Central Banks are so diverse, the

challenge for banks is to remain relevant to clients in each

sector without losing control of their own expenses.

Fixed comms lines versus Internet

Historically, professional traders have relied on desktop

applications for market data information and analytics, with

real-time data feeds delivered via dedicated comms lines. Most

banks re-distribute these real time feeds internally via LAN or

WAN from their major centres to other branches, avoiding

duplication of hardware and saving costs on external data

delivery.

Major data providers – e.g. Bloomberg - have built dedicated

global networks to deliver their products and data direct to

customers. Radianz and Savvis Virtual Private Networks

(VPN’s) resulted from the demand for high speed, efficient and

secure data connections between banks, brokers, exchanges

and buy-side institutions.

The emergence of the Internet as a viable alternative to fixed

comms lines has initiated a revolution in the market data

space. Niche vendors began delivering data via Internet as

“...browser based products are now getting closer to offering

comparable levels of functionality to desktop products.”

early as the mid 1990’s, reducing their data transmission costs

while increasing their potential audience by removing

geographical boundaries. The major market data providers

were slower to adopt Internet delivery due to their reliance on

and investment in existing infrastructure.

Desktop Applications versus Browser-Based Solutions

Today, most dealing rooms are equipped with desktop

applications, installed on each user’s PC. While desktop

solutions offer robust, sophisticated and established

functionality, there are some negative issues around

portability, software packaging (for both new installations and

software upgrades) and the high level of in-house support

required.

However, browser based products are now getting closer to

offering comparable levels of functionality to desktop products.

Internet delivered, browser based GUI’s require no software

packaging, no local installation, and negligible local support.

Upgrades can be loaded quickly and most applications allow

user access from any PC with an Internet connection.

The assumption that the cost of web based delivery is less than

the cost of equivalent desktop services is also being re-

evaluated, since users recognise the significant data,

infrastructure and support costs which still apply.

Following the development of web based FX liquidity provision

by companies such as IFX, FXCM and larger corporate players

such as FXall and Currenex, banks have introduced their own

on-line FX trading platforms to complete the current day

landscape. Banks are still increasing their e-ratios, with a

significant majority of FX trades being executed electronically

at many institutions.

Banks Becoming Vendors

Amid the battle to provide added value services, banks

continue to focus on their own technology and data. Some

banks are themselves becoming providers of market data and

analytics services to the buy side, moving into areas

traditionally dominated by vendors such as Reuters and

Bloomberg. However, banks are not only entering this space to

enhance information provision to their customers, but

increasingly to service their internal dealers as well.

>>>

Top tier banks already have on-line FX trading platforms

and most provide liquidity to one or more multi-bank FX

portals; the race is now on to attract more customers by offering

more sophisticated functionality and information.

This includes news, advanced charting, technical and

fundamental research, options pricing and more, all

packaged within a flexible, easy-to-use platform. They

want to keep their customers from going elsewhere by

providing every service that their clients require.

Now, banks may build in-house systems themselves or

buy technology from external technology providers. While

banks control the development of their core platforms,

they tend to buy in specialist applications such as charting,

options pricing, etc. There are a number of reasons for this:

• cost of in-house development,

• availability of internal IT resources and specialised

development expertise,

• cost of on-going support and maintenance, and

• the need for speedy time to market.

Most banks therefore choose to integrate specialist third party

applications within their core in-house trading platforms.

From a market data vendor’s perspective, it is clear that

this aggressive move from the banks may challenge their

dominant share of the desktop market. However,

market data providers are evolving to offer customers

more flexible solutions and are working more closely

with banks to help them deliver the information that their

customers require.

Retail Market

Another sign of how technology is driving markets is the news

that major global banks are launching margin FX trading

services to cater for the retail market. This sector has always

been beneath the radar of global players, but tighter margins

and fierce competition for traditional custom from Funds,

CTA's, Corporates and Central Banks is driving the banks down

the value chain in search for more profitable business.

The reason that they can to do this now is technology.

Sophisticated, scaleable solutions are now available and

affordable, so customers that previously didn’t justify the cost

of servicing are now profitable areas for the banks.

The Future

Looking ahead, I expect to see further dramatic progress in this

space. On your PC, most applications will be browser based.

Algorithmic trading will be widespread, squeezing arbitrage

opportunities and further tightening FX spreads. Volumes in

emerging markets will increase as banks and investors seek out

better returns. Two-way streaming, tradable FX options pricing

will be available on-line for all tenors, with auto quoting on

trades of $100 million and more. FX Sales Dealers will have the

technology to structure on-line streaming options deals for their

clients.

On your BlackBerry, PDA or other mobile device you

can already:

• view streaming FX rates and real-time news,

• examine real-time charts with trend lines and studies

drawn by bank analysts, and

• receive SMS alerts, trade FX on-line, leave buy & sell

orders, etc.

These services have been developed separately by different

vendors, banks and brokers, but soon your mobile device will

have a bigger, higher resolution screen, with everything

integrated seamlessly together within a single, real-time mobile

platform. Streaming on-line FX spot and options trading, click-

&-trade functionality direct from FX charts, etc. will also

become the norm.

Alongside this technology, personal relationships will continue

to play a significant role in bank-client interaction. Clients want

a personalised service and banks need to offer information

that is relevant, quick to absorb and easy for clients to

handle. Banks are competing for e-mail inbox real estate

and customers are inundated with information. Ultimately,

banks that provide services and technology which improve

the efficiency and profitability of the client will be best

placed to maintain and expand their Client Franchise.


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- Margin monitors- Portfolio analysis and

simulation tools- Calculators: Swaps, Vanillas,

Exotics and Strategies withVolatility Surface

- Trade reporting - Cash flow management: - Stress testing- IB access

- Margin relationshipconfiguration

- Commission infrastructurefor IB’s

- Multiple back office reports- Auto roll-overs, - Cash management- Interest rate generation

- Feed aggregation and pass-through

- Pre Trade credit checking- Spread management

- Broker breakdowns- Real-time position keeping- White Labels- Deal Capture

If you can use a mobile phone, you can useSaxo Bank’s new MobileTrader. It’s that simple!Saxo Bank has launched a powerful newwireless FX platform that is secure, easy to use,and compatible with almost any phone. Thesepowerful features were the target for theproject from the very beginning.

Design rationale

It was crucial for Saxo Bank to design the new mobile FX trading

platform to support the widest range of mobile devices out of the box,

keeping development and support costs at a manageable level. For that

reason, they made the decision to go with XHTML technology.

This proved an attractive option for a number of reasons. Chief among

them, it gave them a single code base, and an application that is

supported by almost any mobile phone in the world. The technology also

provides them with an intuitive, well-known, menu-based user interface

and resolves security concerns by utilizing Secure Sockets Layer (SSL)

connections, the industry standard for internet security,

Basically, this provided a nice box that fulfilled their baseline

requirements. The only disadvantage being that the GUI is built from

pages that are more static in nature. On the other hand, choosing a

different mobile technology to provide a more dynamic GUI often leaves

you with either a phone compatibility issue or more work in

development, maintenance and support.

Before making a choice of mobile phone technology, it is important to

consider whether it will be a stand-alone application or will only provide

mobile access to an existing web application. XHTML is the obvious

choice for the latter category, owing to its simplicity. Saxo Bank’s

MobileTrader goes hand in hand with the bank’s new WebTrader which

is the primary portal for product offering.


MobileTradere-Forex highlights the new wirelessFX platform from Saxo Bank.

P R O D U C T L A U N C H


Building a mobile platform using XHTML need not be as complex

as it sounds. Saxo’s solution was basically a combination of well-

known and proven technologies configured in a new way in a new

environment. The building blocks of the platform are HTTPS for

protocol and security, XML and HTML for content, ASP.NET and IIS

web server for hosting and development and GPRS for data

connection. Another great benefit of the setup is that the bank can

share common software modules between MobileTrader and

WebTrader.

Features and functions

MobileTrader offers all the trading features needed by a

professional FX trader. These features are available via a

menu-based user interface.

Selectable menu items have

a digital shortcut, providing

swift navigation of the

application and help pages.

Users are able to trade 50+

major FX crosses on live

tradable prices with the same

world-class liquidity as their

main product, SaxoTrader.

Trades can be placed in all

standard order types, such as

stop and limit orders, market

orders and trades. See figure

(Market Trading)

All currency crosses can be

viewed with the new

advanced charting tool,

which is specially designed

for mobile phones to

provide the best possible fit

with any given display. In

addition to size, users can

also choose landscape or

portrait orientation. See

figure (Charts).

More trading resources from

SaxoBank are accessible via

MobileTrader. The user can

see live streaming news

headlines and stories from

three major providers (see figure ‘News’), plus all FX analysis and

reports produced daily and weekly by Saxo Bank.

MobileTrader also provides wireless access to all a users accounts,

both current and past. At any time, the user can view his or her list

of open positions as well as working orders. Positions and orders

can be fully managed by

the user. Unrealized Profit

and Loss are calculated in

real-time for each position

and for the account as a

whole, together with

current margin figures, see

figure (Account Status).

Past and present account

statements, including

details, are also available,

making it efficient to

check and overview a

users account balance by

mobile phone.

To complement the platform Saxo Bank will soon be introducing 10

major CFD indices, as well as more FX crosses. These CFD’s will be

tradable using the same sharp and easy UI flow as for FX. Other

exciting new features will be rolled out in the months to come.

A messaging system is being developed, which will send out SMS

alerts of pricing and trading - such as when an order is being

executed or when a stop order trails. New report types offering full

access to past trading activity will also be implemented.

Saxo bank is also looking forward to the prospect of white labelling

MobileTrader for two major partners. This will deliver wireless FX

trading with MobileTrader to thousands of FX traders around

the world.

Charts

Market Trading

News

Account Status

The ability to recognize a trend isone of the most important skills anytrader can harness. The FX market,like other financial markets, willtrend upwards, downwards, orsideways over varied timeframes. If atrader can learn to discern whichdirection the market is trending, theyposition themselves to succeedgreatly. Today, as a result ofincreasingly sophisticated chartingpackages and trading platforms,even novice traders are easily able toutilize sophisticated indicators tohelp recognize trends.

A trend is simply the overall direction of

the market. At some points, trends may

be easily recognizable. At other times,

trends may be overshadowed by wild

market fluctuations or hidden within a

ranging currency pair. Failing to recognize

a trending market can mean death to even

the most skillful trader. For example, if a

trader shorts a currency pair at what they

perceive to be a strong resistance point,

but fails to recognize the market’s overall

upward trend, they may be on the wrong

side of the position. Although the

resistance seemed strong in this case, the

upward trend is often more powerful and

more likely to lead the market’s

movement.

As trading platforms become more

sophisticated, the average trader is able

to harness increasingly complicated

indicators to recognize trends. Tools that

were once reserved for only the most

sophisticated traders are now available to

anyone with a basic charting package and

an internet connection.

ADX

An ADX line illustrates the directional

change and/or movement on a scale of 0-

100. When the ADX value is rising, the

market is trending. When the ADX line

falls, a trend is not presently occurring.

Analyzing the ADX is only the first step; it

does not tell you what direction the

market is trending.

DMI

After a trader analyzes the ADX line on

their chart and determines that the

currency pair in question is trending, they

must determine in what direction it is

moving. DMI (Directional Movement

Index) is a highly sophisticated

mathematical function for recognizing the

direction a market is trending. Prior to

modern charting packages, DMI was too

complex for most traders to implement.

Newly developed charting software

simplifies DMI by creating two lines. The

first line measures +DI (positive

directional movement). The second line

measures -DI (negative directional

movement). These values are calculated

on a scale from 0-100. When the +DI

crosses above the –DI line, a buy signal is

created. A sell signal occurs when the +DI


Traders WorkshopHarnessing e-tools in Trend Analysis

by Patrick Kinsel, Head Analyst, FX Trading


crosses below the –DI line. As a result of

combining the ADX and DMI indicators,

the trader has discovered that the market

is in fact trending and has a sense of what

direction it is moving.

Moving Average

Moving averages are one of the mostrudimentary indicators in use today.Moving Averages are simply the averageprice at a specific point in time. Whenthese points are combined, they create asmooth line representing the market’soverall movement and illustrate trends. Bysetting moving averages over differenttimeframes, a trader can ascertain a widesense of the market’s movement.Although Moving Averages were alwaysrudimentary to calculate, modern chartingpackages save traders the time and effortneeded to average a market’s points.

Bollinger Bands

Once a trader analyzes Moving Averages,they still need to determine if the markethas reached the peak of its trend or if itwill continue on its present course.Although a moving average line will tellyou that the market is currently trendingupward or downward, it will not revealhow near it is to reversing direction.

When a trader initiates the BollingerBands on their platform, two lines aredrawn two standard deviations awayfrom a simple moving average line. Oneband lies above the moving average andone band lies below the moving average.The market’s volatility is represented bythe values of the standard deviations. Asthe market becomes more volatile, thestandard deviations increase and thebands widen further from the standardmoving average. As the market becomesless volatile, these same bands contracttoward the standard movingaverage.Traders interpret Bollinger Bandsin many ways. Contracting bands,symbolizing a decrease in volatility, areoften interpreted to precede a sharpincrease in volatility. However, most tradersemphasize the market’s movement withinthese bands. As prices near the upper band,it is an indication that the market isoverbought and nearing a reversal. Asprices approach the lower band, it is anindication that the market is oversold andnearing a reversal.

Although Bollinger Bands can provide anexcellent sense of the market’smovement, it is important to rememberthat they may only represent a small

fluctuation within a greater trend. Todetermine if the overall trend is reversingor if it is only a minor reversal before themarket continues on its present course, atrader should consider all these indicatorsover various timeframes.

Parabolic Indicators

The ultimate purpose of these indicatorsis to determine entry and exit points tothe market. By analyzing the ADX, DMI,and Moving Average, a trader is able todetermine if the market is presently risingor falling. However, that is simply notenough information for a trader tosucceed. No trader wants to buy theGBP/USD at its peak. Even though atrader may know the GBP/USD ispresently trending upward, they need todetermine if it will continue to rise or ifand when it will reverse.

The first indicator with this aim is theBollinger Bands mentioned above.However, sophisticated traders analyze asmany indicators as they’re familiar with,hoping to gain a broader understandingof the market’s movement. Parabolicindicators are a sophisticated means todetermine entry and exit points and cangreatly aid a trader. Before utilizingParabolic Indicators, a trader should firstview the ADX, DMI, Moving Average, andBollinger Bands. Parabolic Indicators areonly useful in a trending market, whichthese other indicators will reveal. ParabolicIndicators is a time/price system utilizing atrailing stop and reversal method called“SAR,” or stop-and-reversal. When atrader initiates Parabolic Indicators ontheir charting package, a sequence of dotsis created. If the market is trending, atrader is able to follow these dots eitherupward or downward until SAR is reachedand the market reverses. In an upwardlytrending market, the first dot is placedwhen the most recent high has beenbroken. The first dot is placed near themost recent low price.

As the market rises, the dots will followsuit, accelerating as the trend continues.When these dots change direction, thetrend has reversed and the trader shouldpull profits from the market. ParabolicIndicators work best for traders looking tohold positions over the medium to longterm. A trader should watch the movementof these dots until they begin to accelerate.If a trader intends to open a short termposition, the trend may reverse and forcethem to close at a loss. However, if thetrader intends to open a long termposition, the Parabolic Indicator is anaffective means to determine when youshould enter and exit the market, allowingyou to capture the greatest portion of amarket’s trend.

Online Technology

These technical indicators represent onlya fraction of the tools available to modernday Forex traders, yet surpass anythingreadily available just a few years ago. Asa result of increasingly sophisticatedcharting packages, even novice traderscan utilize these complex indicators.Although a trader may not understand thefunctions that create these indicators,they’re easily able to interpret them andimplement their findings.

On almost all modern day tradingplatforms, a trader must simply click theirmouse to initiate these indicators. Savingtraders the time to learn and thencalculate these technical lines each timethey want to enter the market allowstraders to focus on more forms ofanalysis. Although basic tradingplatforms now offer a wide range oftechnical indicators, some traders chooseto purchase more advanced chartingpackages. These new developments soonfind their way onto the more basicplatforms, improving everyone’s ability toharness technical indicators and succeedin the Forex market.

Unnoticed by many, a quiet revolution has been taking place in the forex market.

As recently as five or six years ago, the typical interbank spread on a currency

pair such as EUR/USD was five pips and the minimum ticket size was a million units.

Today interbank spreads for EUR/USD can be as low as 0.8 pips with tickets as small

as 100,000 units. That contraction in spreads is astonishing—especially when you

consider that for market makers who don’t charge a commission, the spread is their

primary source of income. Not even personal computer prices have come down so far

so fast.

But the revolution runs deeper: five, six years ago only a small, elite class with proper

credit credentials could trade forex, and most of that was done over the phone. Today

anyone can open a margin account, make a token deposit, and trade forex over the

Internet with very small transaction sizes. And this with spreads on EUR/USD between

1.5 and 3 pips. And this dramatic trend in tightening spreads will likely continue. By

next year, spreads of less than one pip on EUR/USD will become much more

common; within a year or two the spread on this same pair could drop to 0.5. Perhaps

the most astonishing part of all this is not the phenomenon of spread contraction, but

how few traders understand spreads’ impact on their return on equity and the number

of new trading strategies this enables.

The impact of spreads on ROE

A simple way to measure the impact of spreads is by their actual cost. With a spread

of three pips, the trader pays the market maker 300 (units of the quote currency) for

each million traded round-trip. With a spread of two pips, the trader pays only 200.

For the occasional trader this may not mean much, but for active traders such a

difference can add up quickly.

With five round-trip, one-million trades a day, on average, the difference comes to

120,000 a year. A more telling way to measure the cost of spreads is to consider their

effect on annual return on equity (ROE). As an example, assume a trading strategy

that results in 5 round trip trades a day using 2:1 leverage. If the annual ROE is 20%

when trading on a platform with a 3 pip spread, then switching to a platform with a 2

pip spread will result in a 45% annual ROE when trading the same strategy,

corresponding to a 125% improvement!


The real priceis the (which?)spreadBy Michael Stumm, OANDA Corporation

VOICES FROM THE RETAIL FX TRADING ENVIRONMENT


As the table above makes clear, even a half a pip of spread can

make a big difference. Traders will notice, and so will their

clients. In fact, as the last row shows, a losing trading strategy

can be turned into a winning strategy simply by moving from a

platform with 2 pip spreads to one with 1.5 pips. Lower spreads

greatly increases the number of viable trading strategies. And

the greater the leverage, the more dramatic the effect, as shown

in the following graph.

The pitfalls of comparison shopping

Switching to a platform with lower spreads has obvious benefits.

But making an apples-to-apples comparison in today’s

marketplace is enormously challenging:

“platforms based on matching enginesmay advertise tight spreads, but their

depth-of-book may be illusory orfleeting, so that quoted spreads maynot be available for larger tickets.”

Different currency pairs have different spreads; quotations on

EUR/USD may look competitive, but what about other Spreads

tend to increase (counterintuitively) with ticket size: the larger

the ticket, the wider the spread --- see Figure 2 for an example.

And platforms based on matching engines may

advertise tight spreads, but their depth-of-book may

be illusory or fleeting, so that quoted spreads may

not be available for larger tickets. Spreads on the

interbank market tend to fluctuate—going higher

when liquidity is tight or price volatility is high (for

example, when numbers are reported).

Some platforms offer better average prices for those

that primarily trade on the numbers, while other

platforms offer better average prices for those that

don’t. (Some online brokers “guarantee” the same

spread regardless of market conditions, but such

guarantees typically come at the cost of higher

overall spreads. And be sure to read the fine print!)

Most platforms show different prices to different clients.

Sometimes this is to support a cut for an IB. But in many cases,

the price may be skewed against a client if the market maker or

broker thinks it can predict the direction of the client’s trade. The

effect is the same: a higher spread. Spreads have to be

considered along with quality of execution. Re-quotes, slippage,

and stop-hunting are all patterns that artificially increase the

effective spread.

Frequent slippage will sabotage the tightest spread. And again,

beware “guarantees” that slippage and re-quotes cannot

happen: this sort of protection usually comes at the cost of a

spread premium. Absent hard comparative data, the primary

source of information about quality of execution and trading

styles is other traders’ first-hand experience with different

platforms.

But this can be a snake pit as well, since one trader’s dream may

be another’s nightmare, considering that different clients are

treated differently. Professional traders tend to be well-

connected, frequently share information, and trade

simultaneously on multiple platforms. It’s easier for them to

know when they’re getting good prices and put pressure on the

market maker otherwise. Non-professionals don’t have that

advantage. They usually depend on one of the popular bulletin

boards (such as www.elitetrader.com, www.moneytec.com, or

forums.oanda.com). As you have probably experienced, these

bulletin boards can be dominated by noisy postings from self-

anointed experts or “plants” with a commercial agenda. But if

you can cut through the noise, the bulletin boards can be useful

and informative.

A plea for transparency

Today, forex brokers and

market makers are able to

exploit two vulnerabilities

that affect many traders:

traders don’t understand the

importance of spreads, and,

they lack the information to

even guess if they’re getting a

competitive price. Hence, most

traders get a spread that is too

wide. In an unregulated, over-

the-counter market, of course,

there is an inevitable lack of

transparency. But how long

can this go on?

Given that forex trading is becoming increasingly mainstream,

market makers (and regulators) should be concerned. Over-

regulation would be an unfortunate reaction, because that

usually tends to stifle innovation and sap market efficiencies.

(Take the situation with equity transactions, for example: modern

technology could reduce the cost of these trades to a few cents,

but that has not happened. Sure, trading commissions have

come down, but they still remain relatively high and spreads

remain high as well.)

Self-regulation is the better way to go. We’d like to propose a

simple scheme that would help the forex market regulate itself,

encourage innovation, and work to restore market (pricing)

efficiency. Each forex market maker and broker should publish

(on their Web site) the price of every executed transaction; every

transaction would include a time stamp, the currency pair

traded, the size of the transaction, and the price at which the

transaction got executed. The published list could easily be

audited by an independent third party.

This scheme would allow every current or potential client (as

well as regulators and the press) to assess the pricing policies of

every market maker and get a clear view of real spreads. Given

today’s technology, such public reporting would be simple and

inexpensive to implement (i.e. the information is already stored

in the broker’s database, and real-time information on each

client’s transactions are already being made available to that

client online). This scheme would re-kindle genuine competition,

restore some of the efficiency that is lost through pricing

manipulation, and encourage traders who are currently

disenfranchised by irrational and punitive pricing practices that

are so common.


VOICES FROM THE RETAIL FX TRADING ENVIRONMENT

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The e-Forex Interview

The e-ForexInterviewWith Chip Lowry, head of Global

Link, Europe, at State Street.

>>>

Chip, State Street launched FX Connect®, its foreign exchangetrading system in 1996 and last year it surpassed $45 billion in dailytrading volume. Why do you think its value proposition has becomeso attractive for real-money managers over the last 10 years?

FX Connect solves a very real problem for fund managers: How doI handle the multitude of orders I need to deal with on a daily basis?Many systems in the market concentrate on price and price is animportant factor, but we take a different view that price is just onepiece of the larger conversation around trade lifecycle management.FXConnect has also far surpassed the $45 billion in daily tradingvolume figure as well.

In the past, you’ve talked about how FX Connect® "re-engineers" theFX trading process. Can you explain what you meant by that andhow this benefits Fund Managers?

The main problem fund managers have faced in the past is not priceper se, but the Price, Process and STP problem. Those are the factorsthat get you to best execution. We spend a lot of time with managersdiscussing their trade process philosophies. We work with them tocreate efficient business processes which can be incorporated intotheir internal systems and provide best execution. I remember oneclient we worked with several years ago. We had a person on-site fora week doing process discovery. The trader received a report in theform of a printout but didn’t know what system it came from.Someone else printed the report and gave it to the trader but didn’tknow if he could get the data in electronic format. The system thatcreated the report was an in-house legacy system. We had to followthat trail all the way back to trade origination. At the end of a week, wemapped out the process and showed it to the traders who were reallyamazed at how awkward their process was. We worked with them tocreate a more efficient business process enabled by FX Connect.

State Street’s multi-asset class network, Global Link®, now features46 liquidity providers representing over 140 dealing room locationsand delivers unique fact-based research, decision support tools andtrading technology for six asset classes to clients in 24 countriesworldwide. What has that success taught you about whatinstitutional investors are really looking for from an electronictrading network?

One thing that stands out is that one size does not fit all. Whetherit’s something like FX trading styles, FIX versions, or futures clearing,clients want choice and open access. We’ve been very proactivewith providing client choice over the last 10 years. Clients also wantto see innovation, and we’ve been equally proactive in innovatingacross asset classes. In FX, we quickly realised that the point ofexecution is a small part of best execution. As a result, we’veprovided innovative solutions across the workflow process, bothbefore and after the actual point of execution. In FIX we have anability to offer FIX translation at different end points in our network.In futures, we’ve collaborated with a third party to offer a uniquefutures clearing capability tied to State Street’s custody systemswhich completely streamlines processes and offers compellingoperational benefits.

Our focus in this edition is on the impact of e-commerce on FXOrder Management. How important is the arrival of so-calledExecution Management Systems (EMS) likely to be, in improvingthe handling of FX orders?

EMSs have been around in the equity space for some time now.Ideally, a trader would like one system on the desktop that couldtrade all asset classes from a single blotter. Unfortunately, with thepace of innovation in the financial markets, it’s very difficult for onesystem to keep up with financial innovation. So you are faced withthe decision to go with one system that does everything but notparticularly well, or go with specialised trading systems with deepfunctionality but which only deal in a specific asset class. With theincreased focused on best execution, managers want to be able todemonstrate that they can handle complex orders among differentasset classes efficiently while adding value with the trading process.The way to do this is with the use of EMSs. We are now seeing theconcept in the FX space as well as other asset classes. Some of ourworkflow solutions incorporate our own EMS solution whichrepresents our 10 year experience in the electronic FX area.

State Street has recently developed a comprehensive foreignexchange execution management workflow solution via GlobalLink® for Merrill Lynch Investment Managers (MLIM) in London. Doyou see the collaboration with MLIM as representing an importantstep in the evolution of e-FX?


The MLIM project allowed us to pull together several types of

processes that we had done for other clients in one important

workflow EMS solution. The challenges MLIM faces in FX order

handling are not unlike other large investment managers. We

partnered with them to create a truly efficient business process that

allows them to maintain full control over how they trade a myriad

of orders while adhering to specific compliance and ERISA

requirements. Working with MLIM, we have expanded the concept

of what an FX EMS can be. It is a multi-user, multi source system

that really defines leading edge thinking in this area.

We’ve seen figures that suggest that 50% is a fairly accurate

reflection of current institutional participation in online trading. If

that’s the case, what factors are likely to stimulate increased uptake?

Will issues surrounding FIX and CLS be at the top of the list or will

the need to demonstrate Best Execution, or compliance with the

new, more onerous regulatory environment, be the main drivers?

Some surveys I’ve seen suggest that phone trading is still a factor

for over 80% of fund managers’ processes. That doesn’t mean that

the phone is the only venue, but one of many venues including

multi-bank and single bank portals. That really doesn’t surprise me

however, as FX is still a relationship business and larger trades are

still done on the phone. It’s not uncommon for a large trade to be

done via a call and the associated splits to be subsequently sent via

FX Connect. It really is all about having a range of trading options

available and choosing the right one for the situation.

With respect to FIX and CLS, those are important drivers.

Standards will certainly increase market uptake. I don’t think

regulations and compliance will be the direct drivers to wider

adoption of electronic execution. They will however push the

market towards better business processes of which electronic

trading will be one.

How much progress has been made on enabling the FIX standard

to handle the business processes embedded in FX Connect® and do

you believe there will be a greater focus on how the standard can

be used to improve automation in the FX arena?

I think creating standard processes in FIX for FX is one of the most

active areas that the FIX group is working on currently. I co-chair

the FX Business Practice Subcommittee for FIX and it’s great to see

all the industry participation in this area. Because FX trading can be

so unstructured, we have some lively debates about how things

should be done. We’ve bedded down some of the simpler flows

and are looking at what we will do next in phase 2 of the project. As

you can imagine, given all the different ways of trading FX, the

number of processes is very large.

FX Connect is a very flexible product and there hasn’t been a

workflow yet that we haven’t been able to accommodate. FIX is also

very flexible and I think there is a good fit between the

communication that FIX provides and the detailed workflow

provided by FX Connect. The two complement each other very

well. We are well down the road of FIX enabling our FX Connect

workflow capabilities if a client should require this.

Earlier this year, State Street partnered with SSISearch to provide

an automated link between Global Link’s FX confirmations network,

GTSSSM, and third party SSI databases. What was the rationale

behind this initiative and what benefits does it bring?

There are two important points about the work we are doing withSSiSearch. Firstly, standard settlement instructions (SSIs) are thebane of every fund manager’s existence. No one really wants todeal with them. Every fund manager either handles it inhouse oroutsources it to a reluctant custodian. The problem is that the sameinstruction for receiving euro for a given bank exists in multitudesof databases spread out across the industry. If an instructionchanges, everyone has to know to update their databases. That isclearly very inefficient. With the work we’re doing with SSiSearch,banks enter their own instructions once into the database. If thatbank changes their instructions, anyone who uses that databaseautomatically gets the updates. It’s a really simple but powerfulidea. The other point has to do with CLS. SSiSearch also providesthe instruction database for CLS Bank. All parties that settlethrough CLS list their instructions in this other database.

Bringing these two points together allows us to provide some greatbenefits to our clients through GTSS, our FX settlement centerproduct. After a trade is confirmed in GTSS we check the SSidatabases to see if the trade is CLS eligible. If it’s not, we check tosee if the settlement instructions are listed. Either way, we willpopulate the SWIFT messages with the appropriate instructions.Fund managers no longer have to worry about SSIs and when theircustodians begin to settle fund activity through CLS, theinstructions will automatically update. This is exactly the simplicitythat fund managers have been seeking.

We have recently started to focus on the opportunities that the FXmarket presents for Algorithmic Trading, which has seen excitinggrowth in the equities space. Are the complex currency tradingrequirements of most institutional money managers likely topresent significant barriers to the adoption of Algo FX trading?

Algorithms in the FX space will certainly fill a niche. For fundmanagers I think they will be used for low value trades where atrader just needs to get something done. These might be dividendpayments or interest repatriation. For those types of trades somesort of VWAP, TWAP, or other benchmark could be appropriate.Larger value trades will be worked by the trader. The issue is thattrades in the institutional market are really proxies for a lot ofallocations that can number in the thousands. To use an algorithmlike slicing-over-time, you will inherently get back partial fills asdiscrete trades. Allocating these partial fills back to underlyingbreakouts can create compliance issues about how the prices areassigned. For hedge funds or where people are trading on behalf ofonly a single entity or account, algorithms can play a major role,especially proprietary algorithms. However this is not a typicalworkflow for investment managers.

In Global Investor Magazine’s 2006 Foreign Exchange (FX) Survey,State Street was ranked number 1 in the GI 100 Best Overall FXService category, which included respondents from the 100 largestthird party asset managers. Do you see this as mainly a reflectionon your comprehensive breadth of FX offerings or more on yourcommitment to superior customer service?

It is really a reflection of both. It underscores our expertise atproviding the most comprehensive breadth of offerings in theindustry spanning multiple FX requirements. In addition it is areflection of our 10 year history of working closely with institutionalinvestors and consistently providing them with superior clientservice. We are not standing still either. There is a lot more in thepipeline to come from us.

The e-Forex Interview – with Chip Lowry


Danske Bank is the largest bank in Denmark and a leading player

in the Scandinavian financial markets. The Danske Bank Group

offers a wide range of financial services, including insurance,

mortgage finance, asset management, brokerage, real estate

and leasing services. Over 800,000 users rely on Danske Bank’s

online banking and trading services – and of course, security and

stability are always in focus.

With excellent ratings at both Moody’s and Standard and Poor’s,

Danske Bank offers a one-stop gateway to the top of Europe, and

although our Scandinavian roots afford us a distinct advantage

in the region they certainly don’t hold us back from further

international growth.

Key figures from our 2005 annual report show:

• Total assets: DKr2,432bn

• Shareholders' equity: DKr74bn

• Solvency ratio: 10.3%

• Subordinated debt: DKr44bn

• Core earnings for 2005: DKr17,789m

Danske Bank – always open for FX

Within the realms of FX we offer a dedicated team focusing on

global flow 24 hours a day. High-tech access to our services is

available through all channels – Danske Trader, Reuters

Dealing, and of course, by phone.

Danske Trader

The online tool for FX spot, outright and swap transactions for a

wide range of currencies, Danske Trader provides consistent

streaming prices and a host of other valuable FX execution

services such as Quick Trade, split and block trades.

Individually configurable, Danske Trader is extremely flexible

and intuitive to use. Danske Orders is a part of Danske Trader,

and allows users to view, place, amend and cancel profit and

loss orders 24 hours a day. Individual settings mean you can

receive notification of order execution via email or SMS, and

track all your orders on the deal log.

Easy access at all times and a high level of control are crucial

factors built into Danske Trader, whilst Straight Through

Processing and a high level of transparency, coupled with the

ability to view price streaming online, mean that you need never

miss an opportunity.

Sponsored Statement Danske Bank is voted no. 17 FX Bank in the world and no. 1 in Scandinavia (FX Week/ RISK Magazine)

Danske Bank –always open for FX

For further information please contact:

Danske Markets

Global Flow and Solutions

Jesper Ronald Petersen, e-mail [email protected] or

Claus Holmark Asved, e-mail [email protected]

Reuters DANO/DANX +45 3334 1003

Meet us at

SIBOS stand FO2 in Sydney from Oct. 9 to Oct. 13 2006

e-forex · 2018-04-26 · f or several years we’ve strived to get the message across about what...

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