visit us at · 2018-04-26 · is bubbling up in foreign-exchange markets and why the need for...

July 2010

visit us at www.e-forex.net

Regulatory uncertainty and turbulence in global fi nancial markets will not stop the continuous development of electronic trading technology, which takes centre stage in

this edition. We have created a new section within the magazine devoted to forex technology which will be highlighting a wide variety of topics that don’t easily fi t into other parts of the publication. Articles in this section will be examining core subjects as diverse as Complex Event Processing, Virtual Networking, Cloud computing and new FX Market Data distribution and storage solutions.

Our derivatives feature in this edition is examining how technology is opening up new trading opportunities and stimulating product innovation with electronic FX Options. This article also looks at what work is being done towards the development of an ECN for FX Options. There are signifi cant technology hurdles to be overcome in designing an electronic ECN which will operate effectively with FX Options but this isn’t stopping a number of companies who are currently working to solve many of the major issues involved. Some commentators believe it’s only a matter of time before we see FX Options trading on ECNs so we will be watching this space closely.

Our Focus section sets out to explore how new technologies such as RIA and development environments such as Flex and Silverlight are facilitating the development of a new breed of FX trade delivery platforms. The pace of change here is quite remarkable and as one of our contributors says, “you can easily fi nd yourself with a Betamax and not a VHS so it’s important that you don’t hardwire the technology into the heart of the mainframe.”

Finally, we have put together an article on MT4 Bridging technologies for our Retail e-FX Provider section. Advanced quote aggregation can give brokers an edge and makes a big difference to their profi tability in an increasingly competitive marketplace. This also applies to risk control and near perfect real time reconciliation/synchronicity between the MT4 platform and back offi ce systems. These are all areas in which standard MT4 Bridges have been designed to provide solutions for. We plan on taking this story further in the next edition by reporting on what products Bridge and other developers will be offering for the new MT5 platform.

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

Charles JagoEditor

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e-FOREX

SUMMER 2010

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Regulatory Roundup

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FOREWORD

14. Currency Derivatives: waiting for the next wave of regulationThat lawmakers and fi nancial fi rms are at loggerheads over the forthcoming fi nancial regulations is well known. What may be surprising, observes Manfred Wiebogen, is that upcoming regulations on OTC derivatives will also cover currency derivatives.

LEADER

18. The search for clarity: exploring new frontiers in FX TCAJohn Galanek highlights how nascent demand for Transaction Cost Analysis is bubbling up in foreign-exchange markets and why the need for transparency into FX costs is starting to spread to thousands of FX trading fi rms.

FEATURES

24. Risk, Research and Red Tape: FX e-commerce caters for a changing demand-sideIncreasing regulation and a renewed focus on risk management, alongside a growing and more demanding buy-side has meant that FX e-commerce providers are enhancing and revamping their platforms. Frances Maguire explores how some of the leading players are looking to grow their market share.

36. FX Liquidity Management: should you be taking a more pro-active approach?

Roger Aitken talks to some leading technology vendors to fi nd out more about the latest developments within the complex world of FX Liquidity Management.

48. Technology and product innovation: opening up new opportunities with FX Options Where once the more complex options’ structures seemed to be resigned to remain either RFQ or voice-based, Frances Maguire discovers how this mindset is slowly being eroded as technology advances and the ease of use of options’ systems increases.

FOREX TECHNOLOGY

60. Beyond the Jargon: The four key elements of technologyChip Lowry offers some advice for fi rms looking to appoint a technology vendor to optimize their current operations or to launch a solution for the fi rst time which involves ordering their most important needs into prioritized lists.

62. Second Generation CEP: laying the foundation stones for enhanced FX Trading architecturesNow that there has been a remarkably fast uptake within the FX space for CEP technology among both buy and sell-side fi rms, Roger Aitken quizzes leading CEP vendors and experts on the ‘second generation’ landscape and where the future lies.

AACI page 14Advanced Currency Markets page 99

Advanced Markets page 141Aegisoft page 108Aite Group page 64Aphelion page 121Apple Computers page 118Ares International page 10Atrium Networks page 89

BBahrain Financial Exchange page 96BaxterFX page 108Bloomberg FX page 69Bloomberg Tradebook page 105BNP Paribas page 25Bridgetrade page 57BT page 85

CCalypso Technology page 55Capital Markets Access Partners page 126

Caplin Systems page 117CBI China page 163

Citi page 29CME Group page 95Currenex page 11

DDeltaStock page Digitec page 16

Dukascopy Outside Back Cover

Dynamic FX Consulting page 164

EeSignal page 79Eurobase page 119 FFinancial Software Systems page 115First Derivatives page 67Finatek page 134Fixnetix page 12

FlexTrade Inside Back Cover

Forex Financial Services page 154Fortex Inc page 101FXall page 13FX Bridge page 53FXCM page 87

FXDD page 149FX Training Zone page 158FX Transparency page 18

GGAIN Capital page 4GFI Group page 51Gold-i page 128Google page 118Grey Spark Partners page 73

IIntegral Development page 10Interbank FX page 143IPC page 81ISE page 98

JJP Morgan page 7

KKnight Capital group page 27

LLeverate page 76

M

Marex Financial paghe 17MB Trading page 139MIG Bank page 23Morgan Stanley page 9

NNexaweb Technologies page 97Nordea page 5

OOne Zero Financial Systems page 131Option Computers page 43

PPFGBEST page 8PFSoft page 35Philip Futures page 109Portware page 6PrimeXM page 125Progress Apama page 107

RRBC Capital Markets page 31Rous Technology page 133

S SmartTrade page 39

Standard Bank page 4

Standard Chartered Bank Inside Front Cover

State Street Global Markets page 60Streambase page 64SunGard page 90Swissrisk page 77Sybase page 65

T360T page 54Thomson Reuters page 53TMS Brokers page 111Tradency page 21TradeSense page 108TraderTools page 41Transaction Network Services page 83

UUBS Investment bank page 32

Manfred WiebogenCurrency Derivatives:

Waiting for the next wave of regulation

John Galanek The search for clarity: Exploring Transaction

Cost Analysis

Frances MaguireTechnology & Product innovation: FX Options

Roger AitkenFX Liquidity Management:

A more pro-active approach

Chip LowryBeyond the Jargon:

Four key elements of technology

Nicholas PrattOptimising FX Feeds:

Low latency rate engines

Heather McLeanBridging the gap: Retail meets Institutional FX

Erik Lehtis Gearing up: High Frequency

FX Trading

july 2010 e-FOREX | 3

72. Optimising FX Feeds: introducing low latency rate engine servicesNicholas Pratt delves into the burgeoning vendor market for software products and applications designed to help banks, brokers and traders make use of rate feeds that can blended, aggregated and optimised to produce a more accurate, spike-free supply of prices.

80. Financial Extranets: Providing seamless and dedicated connectivity for FX Roger Aitken explores why FX trading fi rms are increasingly seeking dedicated connectivity - without contention- to their FX trading venues and counterparties and what are the benefi ts of using global Financial Extranets to achieve this.

VIEWPOINT

90. Why regional banks are positioned for growthRegional banks have taken a signifi cant step forward in their desire to offer more sophisticated services to their customers. The potential is real, and Igor Gitsevich outlines why it is up to the banks to fully realize the opportunity.

FX ON EXCHANGES

92. FX on Exchanges: A better way to manage risk?Frances Maguire examines what factors are continuing to drive interest in currency trading on the leading Exchanges and why the demand for new and innovative FX products from these venues is likely to increase.

ALGORITHMIC TRADING

102. Customising FX algorithms: fi ne tuning your order execution strategiesNow that mainstream adoption of algorithmic FX trading has begun, Nicholas Pratt discovers in what ways demands from traders are becoming more specifi c when it comes to their algorithms and the services needed to support them.

FOCUS

112. Special FX - building a new breed of trade execution platform Nicholas Pratt explores how a new breed of trade execution platforms are being built for FX and what expectations banks and brokers have of their platform providers.

RETAIL E-FX PROVIDER

124. Better Bridge - better broker? e-Forex talks to some of the leading MT4 Bridge providers to discover more about how different bridging technologies are characterised and what are the key trends in this relatively new, and specialized fi eld.

RETAIL E-FX CLIENT

136. Bridging the gap - Retail meets Institutional FX Heather McLean takes a look at how Retail FX providers are bridging the gap between Institutional and Retail FX by providing their clients with increasingly sophisticated and powerful trading tools.

146. Automated FX Systems: winning space on crowded desktopsHeather McLean talks to some of the leading providers of automated FX trading solutions to see what’s on offer and how traders can avoid some of the pitfalls associated with this type of trading.

158. Forex education and training: should you be joining an FX Masterclass?Sion Smith outlines how the forex educational market has recently been developing and some of the reasons for the increase in popularity of FX training courses, which can now be undertaken via a variety of methods and at fl exible times.

LOG-OFF

164. Gearing up to meet the challenges of High Frequency FX tradingErik Lehtis casts some light on the demanding world of high frequency FX trading.

Fine tuning order execution strategies

Automated FX systems

Optimising FX Feeds

July 2010

visit us at www.e-forex.net


NEWS

Last year, BNP Paribas launched OTCeTrader, a single-bank electronic trading platform which allows clients to click and trade a wide range

of vanilla derivatives in interest rates and foreign exchange, to clients in Europe. The bank is now preparing to deploy the platform to clients in Asia and the Americas later in 2010. The platform, which was developed in-house, provides live tradable quotes and highly-effi cient trade execution on interest rate swaps, options and standard exotics as well as FX options and hybrids. OTCeTrader can be used either by banks for liability management or by institutional investors for yield enhancement. For more information visit: globalmarkets.bnpparibas.com

Nordea has launched a true end-to-end electronic service for centralised FX dealing by corporate treasuries. The tool supports

the operating unit in converting an FX exposure report into a series of internal dealing requests to the centralised treasury unit, based on the corporate hedging policy.

“Our integrated offering based on our e-Markets trading platform and Trezone’s Business To Treasury solution truly minimises manual work and practically eliminates the possibility of human error in routine work,” says Per Brugge, head of Marketing and Global Business Development at Nordea Markets.

Traiana has announced that Morgan Stanley is the fi rst customer to go live with Traiana’s real-time FX margin solution. Nick Solinger, Chief

Marketing Offi cer of Traiana, says “Over the years our sell-side customers have told us there has been little innovation in FX margining. Given the signifi cant changes in prime brokerage and retail FX, customers now require a state-of-the-art, scalable, real-time margin solution across FX products and futures”.

Built on the proven architecture and functionality of Harmony, the solution provides real-time margining, and signifi cant processing and through-put capability. The system handles margin, credit, prime brokerage, introducing brokers and retail trading relationships, and can also be used to cross-margin FX and futures. Morgan Stanley’s Todd Miller, Managing Director, says “Over the past few years, we’ve experienced tremendous growth across all client segments. In order to manage that growth, we are committed to investing in best-of-breed technology. After reviewing all options, we realized that Traiana’s margining solution not only met our needs today but could also scale to support our business needs in the future”.

OTCeTrader prepared for Asia & Americas

Centralised FX dealing STP from Nordea

Morgan Stanley goes live with Traiana

Standard Bank Group and GAIN Capital have partnered to launch a collateralized foreign exchange trading service, Standard FX Trader.

Based on GAIN’s retail trading technology, Standard FX Trader marks the fi rst time a broad based retail forex offering will be made available by a South African bank. Richard de Roos, Director & Head of Foreign Exchange, Global Markets, Standard Bank said: “We are delighted to be able to work with GAIN Capital to extend our existing suite of electronic forex offerings by providing a new offering to our retail customers - greater access to trade forex.”

Standard Bank partners with GAIN Capital

Richard de Roos

Nick Solinger

FX excellence in many forms and shapesNordea delivers flexible trading capabilities through a variety of leading front-end suppliers. By joining Bloomberg FX <GO> dealing platform, Nordea provides another dealing channel in order to meet professional traders’ high requirements for excellent pricing, speed and availability.

With the newly released trading connection between Nordea and the Trezone system for automating corporate treasury processes, multinational companies have practically eliminated the manual work in converting decentralised FX exposure reports into centralised FX cover deals.

Visit us at www.nordea.com/e-MarketsNordea’s vision is to be a Great European bank, acknowledged for its people, creating superior value for customers and shareholders. We are making it possible for our customers to reach their goals by providing a wide range of products, services and solutions within banking, asset management and insurance. Nordea has around 10 million customers, approx. 1,400 branch offices and a leading netbanking position with 6 million e-customers. The Nordea share is listed on NASDAQ OMX Nordic Exchange in Stockholm, Helsinki and Copenhagen.

Phil Weisberg


NEWS

FXall, has announced FX PRIME Corporation as a new client on its diverse platforms.

As a signifi cant participant in the Japanese FX market, FX PRIME Corporation adds to FXall’s existing top tier client portfolio in Asia. FXall’s volumes in Asia Pacifi c grew over 22% in the fi rst quarter of 2010, and the new client increases FXall’s existing footprint in the region.FX PRIME Corporation is one of the leading Japanese Broker Dealers and is part of ITOCHU group, a conglomerate comprising 734 companies and 61,000 employees. FX PRIME Corporation now has access to the deep pools of liquidity provided across FXall’s diverse platforms. The liquidity available to FXall clients continues to grow following the recent acquisition of LavaFX from Citi, completed in January 2010.

Brokers from as far afi eld as Australia and Cyprus have recently been switching to

the ProTrader multi-asset solution from PFSoft. Rebranded as FastIQ, Australian brokers, Marketech, are now offering a completely new platform for their regional stock market. “We believe it’s a big step forward for the Australian market, as our traders have never used such a powerful tool for trading,” says James Martin, Marketech CEO. “PFSoft have proved themselves as a reliable and effective partner.”Traders Trust (Cyprus) have also gone live internationally with

ProTrader, branded as Smart Forex. “Competition on the Forex market today is very strong, and it’s especially diffi cult if you have the same platform as everybody else,” says Nicola Berardi, Traders Trust Director. “Providing this solution from PFSoft was a strategic decision which allows us to be one step ahead of the competition.” During the past 2 years, ProTrader has been deployed by 15 leading brokers and has proved itself as a reliable solution for a wide range of markets from Forex to CFDs, stocks, futures, forwards and options.

Phil Weisberg, CEO at FXall, commented: “In Japan, both volume and accounts trading on our system were up 5% in Q1 2010 versus Q4 2009. We look forward to offering a signifi cant player in the Japanese market access to the range of execution methods that meet its sophisticated trading requirements.”

FXall adds FX PRIME corporation

Growing interest in ProTrader platform

Portware FX integrates with Traiana

Portware has integrated Portware FX with Traiana’s Harmony Network.This

partnership will allow Portware FX clients to streamline post-trade processing and settlements with counterparties, resulting in lower operational risk and reduced trading costs. Portware FX is built on an open and highly fl exible trade architecture which allows for seamless integration with third-party and proprietary workfl ow applications. This fl exibility allows clients to develop comprehensive straight through processing (STP) solutions that increase workfl ow effi ciencies. Ary Khatchikian, President and CTO, Portware, noted: “In today’s FX market, fi rms

need to drive effi ciencies at every point in the trade. More and more companies are selecting Portware FX to address their advanced trading needs, and our partnership with Traiana gives users a turnkey post-trade solution for automated settlement and reconciliation.”

Ary Khatchikian


NEWS

Financial market participants can now strengthen their Foreign Exchange market

data and trading capabilities thanks to a new partnership between connectivity provider Transaction Network Services (TNS) and EZX, a leading trading software fi rm. The new partnership will see TNS and EZX create a premium, low latency FX market data and trading aggregation service. This FX trading solution will offer fi nancial institutions the opportunity to connect to multiple trading venues, via TNS’ Secure Trading Extranet, seeking vital market liquidity to serve the growing demand in the FX market place.

Alan Schwartz, President of TNS’ Financial Services Division said, “The partnership with EZX opens up many new avenues for TNS. FX trading is one of he largest growing market segments in

Foreign exchange clients of PFGBEST are fl ocking to access Typhoon, a “liquidity

aggregator” that PFGBEST created a few months ago to allow the world’s largest banks to compete with the best bids and offers for both retail and institutional traders. Typhoon gives individual investors, CTAs, hedge funds, money managers and institutions equal and anonymous access to the true interbank foreign exchange (FX) marketplace, optimizing trading opportunities for all traders.

“Typhoon ensures straight-through processing, so that all orders are automatically matched to the best available bid or offer without dealer desk intervention. This model ensures effi cient, transparent price discovery and order execution in the world’s fastest-growing market, which is global foreign exchange,” said PFGBEST President and Chief Operating Offi cer Russ Wasendorf, Jr.

Tradency has introduced a new Mirror

trading platform which is a gateway to a wide range of qualifi ed and tested Forex trading strategies. It enables automatic real-time execution, based on the trader’s individually selected strategies.

The Tradency platform uses cutting edge technology to provide traders with a user friendly interface, rich graphic indicators and robust

the industry today and offering this new, premium, off the shelf trading solution will enable us to help meet the requirements of the fi nancial industry, providing a seamless solution for the end client. EZX has a vast amount of industry knowledge, and through both our software capabilities, we can offer a technologically competent solution, playing a crucial role for FX traders.”

execution. The platform offers innovative trading tools such as smart fi lters, potential risk indicator, and comprehensive, real-time strategy status cards, designed

to assist traders in making educated trading decisions. In addition, Tradency has developed the T-Score which analyzes the strategy’s performance data, while paying extra attention to risk and reward. A high T-Score indicates that the strategy is performing well under current market conditions.

TNS and EZX provide FX Trading solution

Tradency introduces new Mirror Trading platform

PFGBEST sees increased demand for Typhoon

Alan Schwartz

Russ Wasendorf

For further information,

please contact:

[email protected]

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The Foreign Exchange market is evolving at a breakneck pace.

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Today’s highly complex environment requires trading solutions

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Morgan Stanley, another counterparty or anonymously through

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navigate the FX market with confidence — today and beyond.


NEWS

Gaitame.com Co. Ltd, Japan’s largest retail FX broker, has rolled out a new global FX liquidity aggregation platform. The platform

provided by Integral Development Corporation allows Gaitame to strengthen its risk management operations, optimize its cost structure, and increase its fl exibility in the market. Gaitame will be able to deliver improved service levels and execution performance. Using Integral’s technology, Gaitame.com has control of its very sophisticated distributed FX liquidity aggregation system and is able to very quickly add new providers and adjust the current composition. Built upon FX Grid®, the FX aggregation system combines the liquidity from more than 10 banks and direct STP integration with prime brokers and trust banks. “We are very excited about partnering with Gaitame.com and helping them execute on their aggressive expansion plans,” said Harpal Sandhu, CEO, Integral Development Corp. “After a very short ramp up period, Gaitame.com has achieved greater operational effi ciency and greater independence from their liquidity providers and prime brokers.”

The latest release of TraderTools’ FX Trading Platform features enhanced FX White-Labelling functionality, including:

• A web portal for global customers, allowing access to a bank’s FX services from any browser, with no client-side installations

• Fully-customizable interface, similar to other feature-rich applications, providing high-quality widgets for a rich user experience in a bank-branded environment

• Streaming of customer-tailored prices, with spread prices pushed to the customer’s browser from the TraderTools FX Pricing Engine

• One-click dealing, and resting-order entry and management, using a grid of clickable dealing cells

• Full integration with other FX Trading Platform modules (FX Liquidity Aggregation, FX Pricing Engine, FX Order Management), with online order credit checking available via the back offi ce with full STP

Ares International Corp. has recently signed a contract with Cosmos Bank to assist the bank to adopt the deposit and foreign exchange

modules of AFEIS(Advanced Foreign Exchange Information System) developed by Ares. The adoption is expected to complete by the third quarter of this year. Cosmos Bank is facing the issue of the information system digit-change at the start of the fi rst-century of the Republic Era (equaling the year

2011 of the western era). Ares AFEIS is a new foreign exchange computer integration system with complete functions that cover foreign exchange businesses such as retail banking, wholesale banking and dealing room.

Gaitame.com chooses Integral

TraderTools releases new FX Trading Platform

Cosmos Bank to adopt Ares FX system modules

Customer Foreign Currency Account StatementHarpal Sandhu


NEWS

Hamburg-based technology vendor DIGITEC, known for the ‘D-3’

FX rate engine already used by a large number of global banks, has started development of a brand new system for settlement of FX and MM trades. Architecture and process logics are based on cash fl ows rather than on instruments and transactions. This allows easy procedures for adding new products and

connecting to new front offi ce systems as well as fi tness for high volumes. Innovative concepts for fl exible queue handling, control panels and intervention features with re-queuing and de-queuing capabilities will be integrated. One of the highlights is very fl exible handling of the SSIs (Standard Settlement Instructions) together with Association Rules that ensures mostly automatic handling and high STP rates.

DIGITEC announces back offi ce initiative

Fixnetix connects to Hotspot FX

London-based Fixnetix has announced that FX trading connections to Hotspot FX,

are now available with co-location services complete in Secaucus, New Jersey. The Hotspot FX connection via Fixnetix offers an added boost as co-location supplies cross connect options to traders wishing to access multiple asset classes universally on the 24 plus Fixnetix data centre connections. “Fixnetix strives to provide the most optimal trading solutions for our customer base of banks, funds and prop shops worldwide,” mentions Hugh Hughes, Chief Executive of Fixnetix. “We are proud to provide low latency connectivity to Hotspot and multiple asset classes as our FX

service offering is stronger than ever with our recent alliance to NY-based Market Factory, an FX feed handler allowing for buy side and sell side instant access, thereby increasing counterparty diversity and liquidity.”

Hugh Hughes

Velocity Trade (VT), the Canadian Forex broker, located in Toronto

and London has announced aggressive plans to widen execution capabilities and overall client coverage. “Our Clients have global needs that will now be serviced under a single VT umbrella” said Simon Grayson, Principal Partner. The expansion includes the acquisition of a broker, based in Auckland, NZ and Sydney, Australia. “This acquisition will give VT a signifi cant presence in the Asia Pacifi c region.

Greg Morgan, VT Principal Partner will relocate to the region to run the growth strategy. Additionally, Velocity has entered in to a strategic marketing relationship with Computershare, offering foreign exchange execution services to Computershare’s Canadian client base and are exploring opportunities to cooperate further in other jurisdictions. Computershare is the world’s largest and leading provider of investor services, operating in more than 20 countries. VT has also announced plans to expand offi ces to include; Vancouver, New York and Charlotte, NC.

Velocity Trade to widen execution capabilities

Simon Grayson

Think Solutions. Think FXall. Contact us at +1.646.268.9900 or [email protected] www.fxall.com

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partner with the FX

In my earlier contribution to this column I highlighted the resilience of the FX market shown during the crisis, went through the regulatory initiatives mulled at

the time and summarized the main risks / challenges being faced in Forex. As far as FX is concerned, my conclusions were that regulators should encourage more use of CLS Bank to reduce Settlement Risk rather than forced clearing and warned that fresh regulations may hinder the resilience of the marketplace and its own development.

Financial market participants, including ACI International have lobbied the European Commission to leave out the USD 49.2 trillion FX derivatives market from new regulation on the basis that they were not a contributing factor to the crisis. The exact details on how the new rules

will affect this market remain unknown until the new rules are announced.

OTC Market Regulators concerns on derivatives are fully justifi ed. We all remember that in September 2008, American International Group Inc, a major participant in the credit derivatives market nearly collapsed and threatened to take the entire fi nancial down with it. Moreover, the growth in derivatives dealt Over the Counter (OTC) over the past decade has been tremendous and almost reached USD 615 trillion as at the end of 20091.


Currency derivatives: waiting for the next wave of regulation

That lawmakers and fi nancial fi rms are at loggerheads over the forthcoming fi nancial regulations is well known. What may be surprising is that upcoming regulations on OTC derivatives will also cover currency derivatives.

FOREWORD

Manfred Wiebogen, President ACI The Financial Markets Association

From this vast amount of outstanding notional amounts, derivatives in foreign exchange make up around 8%. This is namely made up of forwards and FX swaps with a maturity of less than twelve months. On the other hand, the bulk amount of the OTC market is dominated by interest rate derivatives with over 73%. Figure 1 above illustrates the remaining risk categories of derivatives.

The fi rst indications derived from the studies published and comments given by regulators were that FX Forwards and FX Swaps would eventually be exempted from new regulations on derivatives. The news broke in May, when the EU Commission announced that currency derivatives will be covered by draft European Union rules due in July.

Regulators are wary that remaining loopholes would be exploited by the industry, so they opted for a blanket solution. For instance, market participants can purposely structure interest rate derivatives as currency derivatives to achieve the same aims but avoid regulation. Therefore, the European Commission made it clear that currency derivatives will not fall outside the scope of new regulations concerning derivatives. FX derivatives are normally too customized or may not be liquid enough for central clearing. However, European regulators are expected to discriminate between standardized derivatives that are cleared centrally and those using bilateral clearing. This will be done by widening the difference of the capital charges between centrally cleared and bilaterally cleared contracts contained in the Capital Requirements Directive.

Clearing houses

Clearing houses remain at the heart of regulators plan to reduce risk in the derivatives markets. This is meant to have a twofold pexiburpose: fi rstly to increase fi nancial stability by reducing default risk and secondly, to increase post trade transparency (PT).

Default risk The main benefi t of a clearing house is that it minimizes counterparty credit risk by asking Members to deposit substantial initial capital and maintain variation margins. However, clearing houses do not eliminate all risks. For instance, market risk remains because market movements will still effect the risk position of a system relevant clearing member.

In fact, clearing houses themselves will become exposed to risks arising from variations in collateral value. As the recent fi nancial crisis has shown, most OTC transactions were collateralized but when all of a sudden, the collateral became illiquid and fell in value, counterparties which assumed to be covered had to scramble to fi nd the cash to meet their obligations.

Post trade transparency Transparency is a hot issue as it can divulge sensitive pricing information, details on transactions and even type of exposures. According to regulators, lack of transparency has created diffi culties in accessing reliable prices, assessing risks and checking best execution.

Clearing houses could end up reducing transparency regarding fair values and counterparty exposures


>>>

1 ‘Semiannual OTC derivatives statistics at end-December 2009’ BIS. http://www.bis.org/statistics/derstats.htm

Figure 1: OTC Derivatives By Risk Category

Commodities 2.9, 1%

Interest Rate449.8, 73%

Unallocated 73.5, 12%

Forex 49.2, 8%

Credit Default Swaps

32.7, 5%

Equities 6.6, 1%

(Source and Figures in USD Trillion )

FOREWORD

because each participant’s variation margin for individual instruments exposures is not publicly disclosed. Thus while clearing houses do effectively decrease counterparty credit risk, they can simultaneously decrease external insight into a fi rm’s overall exposure to both credit and market risks. Another idea being fl oated that would bring transparency to the OTC market would be the creation of a Trade Repository (TR) for all OTC derivatives. This will be in the form of a centralized registry that maintains an electronic database of every OTC derivative. As highlighted in a consultative report published recently by BIS2, ‘’the primary benefi t of a TR stems from the improved market transparency facilitated by its record keeping function, the integrity of information it maintains and effective access to this information by relevant authorities and the public in line with their respective information needs’’.

ConclusionRadical changes in the way that derivatives are dealt,

executed and settled are certain. At this stage, the market eagerly awaits the new wave of rules to be announced in July. The rest of 2010 will be dedicated to consultancy. Meanwhile, market participants and fi nancial fi rms will attempt to lobby the commission on a number of measures being proposed.

Surely, there will be a push towards compulsory clearing via regulated central clearing counterparties. Clearing through a clearing house will become the norm and not the exception. When this is not possible, a higher capital charge will be imposed to make bilateral clearing unappealing. Moreover there can be incentives to standardize derivatives so they can be traded on exchanges. With so many changes in regulations, it is hard to envisage how the foreign exchange market will look like in a fi ve years time or so. What is for sure is that as long as there is trade and a need for cross boarder cash transfers, there will be an FX Market and in all probability, this will be stronger and even bigger than today.

2 Considerations for trade repositories in OTC derivatives markets. BIS, MAY 2010. http://www.bis.org/publ/cpss90.pdf?noframes=1


The search for clarity:exploring new frontiers in FX TCA

Transaction Cost Analysis (TCA) is nothing new in the equities space. For more than two decades, most buy-side institutions spent considerable time and resources to measure just how cost-effectively they executed on their stock trades. The reasons why are clear: TCA provides unparalleled insight into the best execution framework and can identify opportunities for cost savings and performance improvement.

LEADER

Today, nascent demand for that same type of TCA is bubbling up in foreign-exchange markets. In fact, that need for transparency

into FX costs is starting to spread to thousands of FX trading fi rms, especially those that claim to offer world-class trade execution.

Of course, recent currency-trading litigation brought against custodial banks has sparked investor demand for more data on FX dealing costs. However, even

By John Galanek, COO, FX Transparency


>>>

with high-profi le lawsuits and the corresponding link between the benefi ts of equities and FX TCA, there are several barriers to widespread adoption of TCA in the highly fragmented FX market.

Barriers to FX TCA adoptionFor starters, FX execution quality isn’t on top of many investors’ list of considerations when weighing what will make their investment a success. Typically, their concerns focus on whether they bought the right stock, and did they buy it near its low price. (The

conventional wisdom is that if an investor leaves 50 basis points on the table for poor FX execution, it is not material because they are trying to make 50 percent on the stock trade).

That fl ying-blind strategy on the investors’ part, however, has created one big benefi ciary: the banks. Since the Offi ce of the Comptroller of the Currency (a

division of the US Treasury) began tracking the data

13 years ago, FX trading has been

the most lucrative part

of bank trading revenue in the

United States. In their role, the banks

act as principal to OTC currency trades,

not as an agent as they often do in equities; therefore, their economic incentive is to give investors the worst possible rate that they will accept, because the bank has the other side of the trade (when the investor becomes long a currency, the bank becomes short the same currency).

In other words, many banks are in no hurry to change the FX status quo.

In addition, most buy-side fi rms do not have timestamps that represent execution time on their currency trades. Timestamps make it much easier to utilize the existing equity TCA methodologies and evaluate the execution quality of a single trade. But even in the absence of timestamps, if investors are trading 5 basis points away from the mid-market rate on most of their trades, there is no way to hide that fact with a good sample of trades.

Next, the disjointed nature of the FX market itself is, perhaps, its own worst enemy: There is no volume data that represents the entire OTC market. FX liquidity is fragmented across tens of OTC trading platforms and direct trades between counterparties (see Figures 1 and 2 below). This makes a typical equity VWAP analysis a diffi cult starting point for FX TCA.

Additionally, every participant’s tradable volume in an OTC market is a function of credit - who has extended you credit, and to whom you have extended credit. Each market participant (both buy-side and sell-side) has different liquidity available to them. Therefore, even if each electronic platform were to publish volume data for trades ex-post (which most currently do not), those volumes would not be representative of both Firm A’s and Firm B’s liquidity. This is different from the exchange-traded equity world where credit inconsistencies do not exist. In equities, all participants face the exchange from a credit perspective, and all have equal access to liquidity.

Lastly, accounting for the costs of the FX forward adjustment is arguably more important than debates about VWAP proxies for the spot price, since it is much less transparent. Most buy-side FX trades are not executed exactly for the spot date, but for some other value date. Painstaking efforts must be taken to store accurate day counts and FX swap points for any currencies that will be part of TCA (and using simple interest rate differentials does not account for the basis risk between the pairs and is hence a fundamentally fl awed approach).

What’s driving FX TCA adoption?

There are market forces and structural forces that are leading increasing numbers of FX trading fi rms (on both the buy-side and sell-side) to analyze FX trading costs.

On the buy-side, history tells us that large mark-ups on custodial bank FX trades have been a vexing problem for investors for decades. What has put FX TCA on the radar screen of both the asset managers and plan sponsors has been recent litigation between the State of California pension funds and State Street Bank.

Buy-side fi rms are also struggling to provide support to their best execution practices in currency space, where most have historically not performed TCA on a regular basis largely because FX has been given a free pass from hurdles defi ned by MiFID and Reg NMS.

LEADER


The regulatory environment for all OTC trading is increasing globally, leaving less wiggle room for currency execution quality.

On the sell-side, the strategy is simple: Banks are looking to FX TCA as a way to win market share by demonstrating that their market-making capabilities and electronic-trading platforms offer superior execution for the buy-side.

Risky business

Mark Twain once famously said: “What gets into trouble is not what we don’t know; it’s what we know for sure that just ain’t so.” Mr. Twain’s comment captures the challenges facing investors that transact in the OTC FX market, many of whom have believed the currency market is always liquid and best execution is a given, but have never bothered to actually measure it.

Those fi rms that choose to ignore FX TCA probably won’t suffer too much in the short term. But in the long term, investment managers run the risk of being asleep at the wheel, if and when a client or stakeholder of theirs investigates currency trading costs before their manager does.

For sure, FX TCA is a larger concern for the buy-side investors than it is for sell-side fi rms.

Buy-side fi rms today must ensure that they are analyzing and addressing the needs of their various customer constituencies, such as clients and key stakeholders. This base ranges from clients of hedge funds and asset managers, to pensioners and state attorney general offi ces for public plan sponsors, to the

board of directors and employees at a private pension.

The overriding concern is that one of these core stakeholder groups will address FX costs before their investment manager does, which will make the manager look like it hasn’t been doing basic best-execution due diligence. That, in turn, can lead to losing a valued client, especially if the results are poor.

What are the benefi ts?

Again, we can look to history to predict how transparency in the FX markets will benefi t clients and institutions, while at the same time providing a signifi cant and new competitive differentiator for both buy-side and sell-side fi rms.

A large, sweeping benefi t for all buy-side participants will be a reduction in overall FX trading costs as TCA becomes ubiquitous. This is, of course, exactly what happened in the equity market 25 years ago when TCA went mainstream. There is no good reason to think that the same outcome won’t repeat itself in the FX market. For asset investors, measuring costs can

Figure 2

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Figure 1

LEADER


lead to a process to reduce them, which in turn leads to better performance numbers. After all, how can you actually reduce trading costs if you don’t bother to measure them in the fi rst place? Extra levels of due diligence can also give asset managers an advantage when competing for new business.

Good enough for FX TCASince the OTC currency market is so fragmented, the methodologies and tools for getting that critical look at transaction costs are still being perfected. But as many others have put it before: Let us not allow the quest for “perfection” be the enemy of “good enough.”

In this instance, it can be reasoned, some FX TCA is much better than no FX TCA at all. The lack of market-wide volume data can be overcome by assuming a constant order fl ow rate, for example. This is not a perfect situation, but this assumption can provide very meaningful analysis. It is also important to recognize that FX TCA is not an “apples to apples” comparison unless derivatives are compared to derivatives, swaps are compared to swaps, and spot trades are compared to spot trades. You get the picture.

Some FX TCA providers now have enough data to offer a meaningful peer benchmark. For instance, it would be useful to know that your fi rm’s cost is 0.3 basis points to trade spot and forward EURUSD; but it’s even more empowering to know that the median for other buy-side fi rms is 1.2 bps and, by comparison, your fi rm is better than 87 percent of the others in the TCA provider’s peer universe.

Cautious optimism

Just because there are nascent solutions entering the marketplace doesn’t mean that all participants are willing to accept them with open arms.

First movers in the space include leading-edge market-makers who are embracing FX TCA to prove to their clients just how good they are at what they do. Many FX platforms now provide FX TCA as part of their execution service. And leading banks that push the volume model as opposed to the hard-markup model are anxious for third-party FX TCA providers to show just how good their pricing really is.

However, the biggest hurdle to making FX TCA as robust as equity TCA is a lack of transparency surrounding execution time on the part of custodial

banks. Hedge funds and sophisticated asset managers don’t have this problem; but anyone who invests in emerging market securities does.

The custodial banks have the FX data, of course, but they don’t want the world to know how much they are making by acting as principal on forex trades. Therefore, investors won’t be able to ascertain timestamps from the banks until one of the banks decides to truly partner with their clients. Then, the other banks will have to follow along—or risk losing the faith and trust of their clients.

The road ahead

There is no doubt that demand for FX TCA has started to increase. The lawsuit fi led by the State of California pension funds will likely end up being a catalyst for those investors who are seeking greater transparency in currency trading costs.

Still some managers are reluctant to engage in FX TCA because they are concerned the outcome may not be fl attering. But as Abraham Lincoln once said, “You cannot escape the responsibility of tomorrow by evading it today.”

The fact that equity TCA has become so prevalent serves only to bolster that assertion. There are, however, a few more things that will help FX TCA to become as widespread and robust. First, buy-side fi rms need to modernize their order management systems to make them capable of tracking timestamps: Order creation time, arrival at the trading desk time, and order completion time are common in equities and can make FX TCA more comprehensive.

As better data with timestamps becomes the standard input to FX TCA, this will support the development of pre-trade cost analysis models (both empirical models and theoretical models). An estimate of trading costs ex-ante will be extremely valuable for traders who need to decide between executing at 4 pm EST and taking on price risk by waiting for the Singapore open.

Investors today do not have to stand for their custodians’ refusal to provide execution timestamps. The investors are the clients, and they wield more power than they think. This outdated practice has to–and will–change. It just makes too much sense not to.


FEATURE

Earlier this year, BNP Paribas launched a sophisticated new eFX platform, called BNP Paribas FX eTrader, which, according

to Andrew Cohen, head of e-commerce strategic initiatives at BNP Paribas, has been met with a very positive reaction from clients. Volumes have already increased sharply in the fi rst few months since launch.

The FX-only platform handles streaming spot, forward, FX swaps, sophisticated, simple and algorithmic orders. BNP Paribas FX eTrader replaces an older system, which was mainly used inside the bank. Before rolling out externally, BNP Paribas FX eTrader was initially deployed internally to more than 1,000 users, in 58 different locations, as a test-run to prove that it worked globally on an industrial scale, 24 hours a day.

Cohen says: “We thought that it was a very good test-bed – to get every single one of our internal marketers to use it, as well as our traders, options traders, internal clients, and subsidiaries, before we actually went to our external clients. When we were completely happy with it we started to roll it out externally to clients.”

The decision to rebuild the platform came from a realisation that a large amount of client business is today concentrated around single dealer platforms and the bank needed a sophisticated one to compete effectively. Cohen says that BNP Paribas has big ambitions within the FX world and needed a very strong single-dealer offering to realise these ambitions.

Streaming pricesThe majority of streaming prices for the single dealer platform are delivered over the intranet to the GUI, although a direct connection is also available. BNP Paribas also uses other distribution channels, such as a streaming API and multi bank platforms.

“BNP Paribas can connect to a client’s own aggregator and stream prices via our API, or alternatively, we can stream prices to a multi bank platform. BNP Paribas


>>>

Risk, Research and Red Tape:

Increasing regulation and a renewed focus on risk management, alongside a growing and more demanding buy-side has meant that FX e-commerce providers are enhancing and revamping their platforms. Frances Maguire explores how some of the leading players are looking to grow their market share.

By Frances Maguire

FX e-commerce caters for a changing demand-side

FEATURE >>>


has been streaming prices to multi bank platforms for many years and have had a consistently high ranking on them” Cohen says.

BNP Paribas FX eTrader, the bank’s single-dealer platform, offers an execution order management system, within the front end, that gives clients the ability to leave orders and to manage their orders within that system, as well the ability to amend or cancel them. For those users, with standalone order management systems, with different depths of order management, BNP Paribas could connect to them via its API. Cohen adds that some of the newer, less common features, such as trailing stops, are proving popular in its single dealer platform.

BNP Paribas FX eTrader has given BNP Paribas an opportunity to build and offer much greater post-trade support. It offers three types of STP, via the major STP providers. Cohen says: “What we are hearing from clients is that they don’t want to do bespoke work with each bank. The general trend is that clients use one or two of the third party providers so we offer STP solutions via these platforms and handle the integration work for the customer.” Furthermore, FX e-Trader is being hooked up with BNP Paribas’s very well established cash management platform Connexis.

For Cohen, the biggest requirement users are demanding from providers is consistent pricing and service from a robust and reliable platform, alongside the functionality to do everything they want to do, from streaming spot, to FX Swaps in all the currency pairs they need to trade, and fi nally, visibility on all the trades, reporting and STP.

Stamos Fokianos, managing director and global head of FX eTrading at RBC Capital Markets, says that the bank is aggressively forging forward with some signifi cant enhancements to its FX e-commerce offering and feels the time is right to invest further in its infrastructure, talent and overall client offering. “We are looking at every part of our business to fi nd places where we can improve our service, enhance our offering and build on the success we have had to-date,” he says.

Some of the areas Fokianos plans to explore include enhanced pricing models, reducing some latency and improving risk management.

Currently, RBC’s e-Commerce application, FX Direct, includes an order book enabling customers to leave orders for execution by RBC and connect to portals, such as FXall, Currenex and Bloomberg Spot.

Competition between top 10Fokianos says the competition between the top 10 banks is fi erce and it is driving a lot of innovation in the industry. “Remaining static, in terms of capabilities and improvement to client service, is a recipe for losing market share in this market. RBC wants to ensure we remain competitive in this market by building on our success and enhancing our offering on a global basis.”

“This really isn’t any major shift in our philosophy or change in direction at RBC. We are simply going where our clients and their increasingly sophisticated needs are taking us. We are expanding our capabilities, adding top talent and focusing on ways to enhance our service,” said Ed Monaghan, Global Head of FX at RBC.

Fokianos says RBC’s new platform will feature an expansion of the products available and improved effi ciency in processing. Fokianos believes there are a sizeable number of clients who desire to connect to the bank directly, placing orders through their order management or treasury management system. RBC is also working on upgrades to their FIX API to make processing more seamless throughout the lifecycle of the trade to reduce errors and missing confi rmations, especially for those corporates not using Swift.

According to Fokianos, a number the enhancements will benefi t real money managers with complex

Andy Cohen “What we are hearing from clients is that they don’t want to do bespoke work with each bank. The general trend is that clients use one or two of the third party providers so we offer STP solutions via these platforms and handle the

integration work for the customer.”

Enter the world of

Hotspot FX

You’re invited. Come join the growing and diverse client base that has connected to Knight’s award-winning institutional FX ECN, Hotspot FX. Hotspot FX offers speed, robust technology and complete anonymity.

Open the door to experience deep liquidity in over 50 currency pairs and exceptional service and support – now you’ve entered the world of Hotspot FX.

Find out what Knight can do for you

To learn about Knight Capital Group, Inc. (Nasdaq: NITE) go to knight.com.© April 2010 Knight Capital Group, Inc. All rights reserved.

To find out:phone +1.212.209.1420email [email protected]

FEATURE


needs and corporate customers that want to instruct payments. “We feel the key to adding value is providing robust, client driven, analytical information.”

He says: “In this competitive FX market, desktop space is at a premium. If you wish to be relevant to your clients your offering has to add a lot of value. Providing effi cient transaction processing, access to a breadth of products and robust information capabilities are of value, and interest to today’s sophisticated client.”

RBC will launch its new capabilities in a phased approach, providing it to key clients looking for specifi c functionality. “As we add functionality, we will roll the system out to a wider group of clients as it applies to their specifi c needs.”

While there is much uncertainty about the future regulatory treatment of OTC derivatives, and within that between FX swaps, forwards and options, Fokianos says that if every trade, that has a forward maturity, has to be reported to the regulators, a very big investment will be needed, in terms of management information systems.

“We are hoping that there will be some rational debate around this. While options can be seen as a speculative instrument but in my book, options are not there for leverage they are there for hedging,” he says.

Price differentiationFergal Walsh, Co-Head of FX eTrading at Citi says that when the bank was building the backbone for its Velocity platform and FIX distribution infra-structure, it reviewed the generation and distribution of streaming prices and, with an eye on the future, honed in on scale, liquidity and price differentiation in an effort to meet the diversifi ed needs of clients on Velocity and to differentiate its pricing to its clients on multi-bank distribution channels.

He says: “We’ve invested in a truly scalable and fl exibleinfrastructure – from price generation and distributionengines to matching, acceptance and risk managementsystems. We could be accused of over-engineering – abit like building a fallout shelter in the latter half of the last century – you’re pretty sure or hoping you’llnever need it, but nice to know it’s there it if all goespear shaped. In the nuclear markets of May 6th - thisfl exibility and scale allowed us to stay in the game,meeting clients needs throughout the turmoil andmarket making right through the volatility spike.”Developing the complete array of order types thatclients may choose to trade with on an e-commerceplatform is complex and time consuming work, yetvital to remaining competitive. From traditionalFX orders that are routed to a trading engine or adesk, through to algorithmic orders running from

>>>

Stamos Fokianos “Providing effi cient transaction processing, access to a

breadth of products and robust information capabilities are of value, and interest to today’s sophisticated client.”

Fergal Walsh“We’ve invested in a truly scalable and

fl exible infrastructure – from price generation and distribution engines to matching, acceptance

and risk management systems.”

FEATURE


some of the most advanced models available, Citi isextending the distribution of these capabilities to asmany destinations as a client may choose to executefrom. Walsh says: “While streaming risk pricing is thecore product of any market-making bank, the rangeof available order functionality is going to be a key point of differentiation in future. The FIX Standardcontinues to simplify the task of distributing thesecapabilities to a broad array of destinations.” CitiFX has invested a signifi cant amount of effort into this aspect of its electronic product suite over recent years. For some organisations, having access to real-time risk metrics, alerts, effective exposure and cash fl ow reporting is as important as the provision of competitive liquidity. The CitiFX Click platform is our real-time reporting suite that covers these requirements and more. It is very customisable and gives clients the ability to review P&L, trades & positions at group and portfolio level within a couple of swift ‘clicks’ on the interface.

Research and analyticsJames Dalton who runs the CitiFX Intelligent Orders team says that Citi’s approach to the distribution of research material and advisory product is evolving rapidly; the relatively static portals of yesteryear no longer cut it in an environment where media consumption patterns are evolving at breakneck speed, alongside the technology available to browse it, and Citi is currently working on several initiatives, designed to break down the traditional model. Says Dalton: “Allowing our customers to analyse hedges held with other counterparties across multiple entities, enables them to make informed decisions based on their total FX and risk portfolio. When it comes to daily trading and cash management, clients are able to perform automated consolidation of exposures across a global network, with hourly executions providing full STP automation. Citi’s global network also allows clients to deal directly in onshore currencies from a head offi ce level, with the same seamless execution and settlement as the rest of the CitiFX product suite.”

According to Dalton, breath of product is a key strength of the CitiFX e-commerce platform. Many asset managers that execute FX for passive businesses also manage active portfolios. Their post-trade processes need to be robust and consistent across all fl ows.

Benchmark execution has its place alongside aggressive risk pricing, depending on the nature of the underlying business. The provision of algorithmic

order types is also crucial for those orders where stealthand transparency are paramount, which is somethingCiti provides via the Intelligent Orders Suite. As theinterpretation of best execution tends to vary betweenclients, Dalton says Citi needs to be able to match upproduct to their expectations accordingly. He addsthat Citi is closely tracking the alternative businessprocesses required to handle this kind of sweepingregulatory and compliance change in the market. Hesays: “Thankfully we’ve already made changes to ourinfra-structure and product suite that does not requiremuch more than fi ne tuning for us to cope with anyincremental reporting or margining requirements.”

Since the Morgan Direct platform was launched 18 months ago by JP Morgan, it has supported real-time streaming executable prices 24 hours a day, 5 days a week, for up to US$100m notional value for G7 currency pairs. JP Morgan also provides streaming pricing for NDF currency pairs. Eddie Wen, global head of e-commerce for FX and Rates at JP Morgan, says: “Most of our transactions that occur on electronic platforms today are done on streaming prices. Users run an application, see the live two-way prices and click on the price and the deal is done. Users can enter a notional amount, and the price refl ects the liquidity available.”

According to Wen, streaming prices have now replaced RFQ as the business norm in execution. For the more

>>>

James Dalton “Allowing our customers to analyse hedges held with other

counterparties across multiple entities, enables them to make informed decisions based on their total FX and risk portfolio”

FEATURE


complex instruments, in options, a combination of streaming prices and RFQ is still used. “For the fi xed tenors and rates, there are streaming rates that are constantly ticking and updating, and when they choose a deal it will automatically request for a dealable price for that very specifi c strike, auto-priced and execute, so it is a hybrid between streaming and RFQ.”

Order ManagementOne of the areas of greatest focus at JP Morgan is order management. The bank is putting a lot of emphasis on giving clients the ability to work orders on an electronic platform. He says: “This includes the basic functionality, like being able to electronically accept and manage standard take-profi t and stop-loss orders over MorganDirect, as well as providing an API so that orders can fl ow directly from our clients’ trading systems into ours.” JP Morgan is also enhancing the number of order types supported on the platform. Besides standard take-profi t and stop-loss orders, a product called AlgoX supports a suite of algorithmic order types, such as TWAP+ and Sliceberg. These specialized order types are designed to satisfy clients’ specifi c execution needs. “For example, a very large order can be worked over a long period of time, either hours or days, and have the risk dissipated gradually in smaller pieces,” he adds. Wen says that liquidity is an issue in the current volatile markets and it is putting pressure on execution spreads for large orders. As a result JP Morgan is encouraging customers to use orders as a means of execution as this reduces the amount of price impact on the trade, improves spreads, as well as allowing users to disguise the order fl ow a lot better.

Post trade initiativesOn the post-trade side, JP Morgan has Morcom, a post-trade online portal that consolidates voice and electronic trades across multiple assets into a single portal. He adds: “Clients want a full back offi ce solution. We also have developed many post-trade features so clients can roll their trades, allocate splits, aggregate trades, and provide settlement instructions. Now that this is done directly with electronic tools it eliminates much of the manual labour and errors in post-trade services.”

While much of the initial focus has been on online execution, Wen says the operational workfl ow of a transaction is very important to some clients, and likely to become even more critical, especially in the light of current regulatory discussions about post-trade repositories and reporting.

Wen also believes that the greatest drivers towards electronic trading are price transparency, clear audit trail with time stamping, and timely provision of information. It is these benefi ts, and the ability to show best execution, he says, that will continue drive more electronic execution. “With what is coming out of many regulatory discussions, it is clear that the regulators are looking for greater transparency in the marketplace and the electronic solutions are best suited to provide some of that transparency,” he says.

UBS’s FXTrader Plus platform has one-click executable streams in all major currencies, precious metals and NDFs. Where market liquidity does not normally support streaming (e.g. most NDFs or very large ticket sizes) the application automatically offers an RFQ. Simon Wilson-Taylor, managing director, global head of FICC eCommerce, at UBS says: “Our executable streams provide access to UBS’s core FX liquidity, as well as blended market liquidity and allows clients to place bids and offers into the system.”

While UBS does not offer an order management solution, its e-commerce integration specialists work closely with customers to advise and integrate to the right commercial and bespoke solutions for their needs.

Eddie Wen “We also have developed many post-trade

features so clients can roll their trades, allocate splits, aggregate trades, and provide

settlement instructions”


>>>

Fully integrated STPWilson-Taylor says that UBS has long set a very high standard for pre and post-trade services, and is really one of the only banks to offer fully integrated STP as part of its range of e-commerce services. The FXTrader Plus platform includes access to its industry leading FXWeb product for research and trading ideas, and to FXBuzz for current events and market colour, while its Keylink platform provides comprehensive cash management services, including trading and STP.

There are many ways in which UBS support clients requirements with customised e-FX solutions to cater for their auditing and best execution requirements, ranging from MiFID-compliant, multi-asset class, trading services in Europe, to time-stamped and benchmarked execution services, to comprehensive post-trade reporting and analysis.

John Miesner, managing director and global head of sales, Hotspot FX says that as the fi rst institutional FX ECN, Hotspot FX has always delivered real-time executable streaming prices. “We deliver our data in one of two ways. Either through our FIX market data protocol, which provides 50 millisecond updates of our market or, through our ITCH market data protocol, which provides streaming updates for every event that occurs in our market,” he says.

Hotspot offers a traditional GUI, as well as access via Knight Direct, Knight’s multi-asset order management system to trade equities, options, futures and foreign exchange, via a single application. Knight Direct also provides users with access to a suite of algorithms and strategies in equities, options and FX. Additionally, users can access the platform through leading third party platform providers, or directly via Fix or Java APIs.

Three Tier Credit model

Miesner says: “We continuously work with our prime broker banks, post trade providers, and software vendors to optimise STP, trade reporting and settlement solutions. In addition, we are always searching to improve our technology and product offering for post trade solutions. For example, we just introduced our ‘Three Tier Credit’ module, where secondary prime brokers can more effi ciently manage their client relationships within their prime brokerage structure. We are also upgrading our trade feeds with our prime broker banks, which will allow faster processing times as well as improving fl exibility in trade data transmission.” He also adds that as an electronic execution platform, every transaction has a log fi le that can illustrate best execution, time of execution, time of entry into the market, number of

Simon Wilson-Taylor “Our executable streams provide access to UBS’s core FX liquidity, as well as blended market liquidity and allows

clients to place bids and offers into the system.”

John Miesner “We deliver our data in one of two ways. Either through

our FIX market data protocol, which provides 50 millisecond updates of our market or, through our ITCH

market data protocol, which provides streaming updates for every event that occurs in our market,”

Risk, Research and Red Tape: FX e-commerce caters for a changing demand-side

FEATURE


matching counterparties. In short, any data that might be required by a regulatory body, is also available to the client on request.

FXall offers clients a choice of multiple execution methods depending on their trading requirements. These include collaborative dealing, request for stream, continuous streaming liquidity and an anonymous order book. Clients use one front-end to access over 500 currency pairs from more than 70 liquidity providers, and even the largest transactions can be executed in seconds with the tightest prices on offer from FXall’s providers.

Phil Weisberg, CEO of FXall, says: “Our active trading capabilities represent the best combinatioin of ultra-low latency from FXall’s Accelor platform and sophisticated order types from our recent purchase of LavaFX. Clients benefi t from a single platform that provides access to continuous, multiple rate streams with instant execution, deep liquidity and complete fl exibility around execution strategies. Many clients use our GUI front-end to leverage the power of their relationships, but some also use our API and market data.” FXall’s advanced trading systems also leverage comprehensive STP capabilities for control and compliance to streamline foreign exchange workfl ows for asset managers and corporations alike. Thoughtful STP, netting and collaborative dealing with banks can reduce the effort required to execute an entire portfolio of trades across multiple allocations, currencies and forward dates.

Post-Trade SolutionsSettlement Center is FXall’s automated post-trade service, which provides clients with a robust, secure and effi cient solution for confi rming and netting trades, in addition to managing complex settlement instructions that can be implemented on a stand-alone basis or fully integrated into a complete end-to-end execution and settlement workfl ow solution. Clients achieve a high degree of control over their operational processes for all trades executed, whether on FXall’s platform or elsewhere.

According to Weisberg: “Our ongoing investment in post-trade messaging assures clients that our platform is capable of executing even the most highly structured settlement instructions and ensures that they will be prepared to handle any new regulatory requirements that may arise in the future. By creating an accessible, low-cost messaging network, we’re able to reduce operational risk and reduce the confi rmation cycle dramatically, from as long as ten days down to seconds.”

Settlement Center is a comprehensive offering with support for CLS trade management, custodial notifi cations, settlement instructions, split payments, netting and automation of prime brokerage give-ups.

Reporting and Client InsightWeisberg says that reporting capabilities that reinforce advanced control and compliance processes are embedded in FXall’s platform, helping clients meet internal and external rules and fi duciary standards. Trade details are automatically captured and reported at every stage of the deal lifecycle, providing an unbroken audit trail and providing a basis for comprehensive analysis and evaluation of trades. FXall offers comprehensive reporting that can be tailored to client needs. Clients can gain insight around trading methods through proprietary Execution Quality Analysis reports that deliver insight about the best trading methods based on execution strategy. A partnership with ITG also offers sophisticated Transaction Cost Analysis reports to support fi duciary compliance, improved performance and best execution.

“We continue to invest in our platform to provide clients with the most effective and fl exible trading alternatives available, in addition to effi cient post-trade processes and support for CLS. We believe the focus on this transparency and market insight will become increasingly critical in the future,” says Weisberg.

Phil Weisberg “By creating an accessible, low-cost messaging

network, we’re able to reduce operational risk and reduce the confi rmation cycle dramatically, from as long as

ten days down to seconds.”

Defi nitionsThe defi nition and applications relating to Liquidity Management have prompted a considerable amount of debate. Various market participants have used it as a catchall term, with the meaning interpreted slightly differently depending on who one canvasses. However, whichever way you choose to defi ne it, having a sound FX Liquidity Management structure in place helps to ensure that trading opportunities can be more effectively grasped and risks more effi ciently managed. It also makes even more sense in terms of institutions when they are operating globally and managing FX rates and Liquidity internally and for their external clients.

With regard to key applications including Liquidity Aggregation, CEP and Smart Order Routing, one defi nition of Liquidity Management might be to regard it as the “science of automatically managing market and resting order fl ow with minimum human intervention”, according to Yaacov Heidingsfeld, CEO and co-founder of TraderTools Inc., a New York-based provider of software and services to fi nancial institutions specifi cally trading FX.


FX Liquidity Management: Should you be taking amore pro-active approach?

FEATURE

The topic of Liquidity Management across the capital markets and in the FX space in particular has received a growing level of attention over recent years as innovation has allowed technology to meet the complex Liquidity requirements of banks and fi nancial institutions, thus helping to deliver effi ciencies and mitigate risk. Roger Aitken talks to some leading technology vendors to fi nd out more about the latest developments within this space.

By Roger Aitken

He adds: “Liquidity Management from TraderTools’ perspective means: Am I looking at all my currency exposure from all the sources of my supply and demand simultaneously - in real time and electronically? With the volume of trades in the FX market and ballooning tickets it’s worth bearing in mind that this is a key requirement can no longer be performed manually.”

Harry Gozlan, CEO and founder of fi nancial trading systems specialist, smartTrade Technologies says: “Liquidity Management in my opinion relates to all that concerns the interface between the originating orders from a client or traders, right through until those orders are executed.”

smartTrade is one of the industry leaders in cross-asset Liquidity Management solutions for banks, broker-dealers, asset managers, and large hedge funds. The fi rm recently introduced a new product called LiquidityDistributor for low latency customised distribution of OTC Liquidity (including FX). This solution is the fi fth modular component in its product suite - alongside the vendor’s LiquidityAggregator, LiquidityCrosser, LiquidityOrchestrator and LiquidityConnect solutions.

Adding value and reducing costsThere are a number of reasons why banks and other fi nancial institutions that trade FX should be considering adopting more effective and automated FX Liquidity Management strategies. Ultimately it can add signifi cant value for fi rms who deploy such technology and can help tailor differing FX rates for certain client types or ‘buckets’ (e.g. institutional, corporate, retail).

Today, in order to compete, institutions also need to drive down their marginal costs and extract as much profi t as they can. And, for many sell-side institutions - who want to retain customers - this means considering putting in some kind of intelligent strategy.

Several years ago, after a raft of research reports from fi rms including Aite Group


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and TABB Group were published - examining some of the early adopters of Liquidity Management solutions - the benefi ts of LMS systems became pretty clear. For example, they have helped with increased price transparency, which would lead to narrower bid/offer spreads, and in turn drove higher volumes. Also, in terms of electronic Straight-Through-Processing (STP), having an automated Liquidity Management solution could reduce the cost of processing trades that were considered unprofi table in earlier times. Add to this global trading across time zones, which allows banks to capture greater spread.

Examining LM architecturesPeter Kriskinans, Managing Director at Option Computers (DealHub), says as banks increase their activity in e-Commerce: “Reaction speed in terms of price delivery and auto-hedging dictates an in-depth examination of the entire Liquidity Management

architecture and the characteristics of the current and planned client fl ow.”

In the case of DealHub’s Business Activity Monitoring system, this can display real-time and historical reports of client fl ows and sales credit P/L, and is held up as “an ideal way” of making client fl ows visible to the naked eye by collating data in a single display - often making this “easily available for the fi rst time in some institutions.”

This type of overview can be used to see instantly the activity of an individual client, and the effect on revenues of changing the price spread, or moving the client from an ECN to the bank’s in-house e-Commerce platform.

“Once a critical point in terms of volume fl ow is reached, or even designated in planning, the key advantages of internalising these fl ows become apparent,” explains Kriskinans.

“To reach this point the bank must examine and defi ne the requirements for a robust intelligent price distribution system, Smart Order Routing, Liquidity Aggregation and algorithmic hedging.”

In relation to other key services and solutions (e.g. Liquidity Aggregation, Liquidity Distribution, Intelligent Pricing, and Smart Order Routing) which are being offered as part of a ‘comprehensive’ and integrated LMS architecture, Kriskinans asserts that there is “considerable crossover” between vendor solutions.

“Often banks will combine several offerings to create the hybrid solution that covers their exact requirements and utilises the ‘best-of-breed’ solution from each particular vendor,” he adds.

With DealHub, the vendor claims it has “solved the problem encountered by banks seeking a single, unifi ed layer of proven technology across their entire e-Commerce distribution platform.”

The DealHub Connectivity Manager Price Distribution solution distributes high performance FX rates to clients via the bank’s own Single-Dealer Platform (SDP), white label offerings, directly integrated API clients as well as multi-bank ECNs. This is claimed as having “the fl exibility of being able to integrate with any CEP vendor as well as the bank’s internal systems to give a wide choice of price source and hedging capabilities.”

Peter Kriskinans “Reaction speed in terms of price delivery and auto-

hedging dictates an in-depth examination of the entire Liquidity Management architecture and the characteristics

of the current and planned client fl ow.”

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smartTrade. . . Liquidity Management with backbone.

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FEATURE


Option Computers also provides Liquidity Aggregation with a comprehensive range of connectivity to ECNs and single bank APIs. And, this March the vendor successfully implemented its DealHub/Connectivity Manager price distribution solution at a leading global bank. It provides their customers with a strategic tool for low latency streaming of prices to multiple client-facing platforms.

TraderTools’ Liquidity Management Platform™ is offered up as one of the only systems on the market today that integrates the “four disciplines” of electronic FX trading, namely: an FX Pricing Engine, FX Liquidity Aggregation, FX order Management and FX White-Labelling.

“These are the four key elements of any system thatany bank trading in FX requires,” states Heidingsfeldin New York. “But the fundamental question is really:As a bank are you buying all of those elements froma single vendor, or are you looking to use certainelements that you already have. Moreover, even if the system components are disparate, the overall Liquidity Management Strategy (LMS) should be unifi ed.”

More fl exible Aggregation solutions

Looking at initiatives leading vendors have been taking of late to make FX Liquidity Aggregation solutions more fl exible in order to help in the optimisation of fl ows and to deliver more compelling competitive advantages, much has been happening.

At Option Computers they already have an extensive range of trading interfaces to multiple Liquidity venues. The fi rm’s Liquidity Aggregation GUI has a wide range of functionality including Order Management, which allows the user to construct their own order strategies that can be saved as preset order templates and used again.

Heidingsfeld at TraderTools, says: “As a technology vendor wholly-focused on FX, we deliver an open system, whereby if a potential customer has anexisting LMS technology they wish to integrate, we can do that for them. As such, it does not have tobe an ‘all or nothing approach’ where customers areheld hostage to a particular offering.”

He adds: “Given that our licensing model is transaction-based, end-clients have all the technology [LMS solutions] available to them. They’re able to

decide which components and solutions theywish to select and compare the results in real time.”And, in terms of ROI, Heidingsfeld says thatTraderTools has a “proven model that objectively demonstrates increased revenue streams” for banks deploying its Liquidity Management solutions.

According to Heidingsfeld, one unnamed bank clienthas been able to save around $75 per $1m worth ofFX volume traded through just two aspects - FX Liquidity Aggregation and FX Order Management. “And when our FX Pricing Engine and FX White-Labelling modules are activated, that number could be much higher,” he adds.

Distribution strategiesTurning to steps that fi nancial institutions can take to develop more effective distribution strategies for FX

>>>

Yaacov Heidingsfeld “To me, more effective distribution strategies in FX trading

all really revolve around more effective pricing.”

Leave the

aggregation to us

Liquidity ManagementPlatform

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Liquidity, banks will usually either have a white label e-Commerce platform or their own single dealer platform. But commonly both, “as they seek to reach a distributed audience of clients trading on their favoured platform,” notes Kriskinans.

He adds: “The most effective fi rst step any bank can take is to future-proof its architecture to allow it to move fl exibly in any direction to reach end clients.”

Heidingsfeld adds: “To me, more effectivedistribution strategies in FX trading all really revolve around more effective pricing. Essentially, there really are no more than threeways to distribute prices to a bank’s customers:(1) an FX White-Labelling solution, which mostinstitutions have adopted and are looking toupgrade; (2) a Multi-Bank Portal; and, (3) a FIX API to the customer.

The method a bank chooses depends on it size and customer base.” However, he goes on, “Regardless of the channel, they have to ask whether they are making the best possible prices and offering razor-sharp prices for different customer profi les.”

At Option Computers they achieve more effective distribution strategies for FX Liquidity for institutions with two key products. DealHub’s Connectivity Manager is a price distribution solution, which provides a strategic tool for low latency response to price requests

for FX spot, Forward, Swaps and NDFs to multiple client facing eCommerce platforms. DealHub’s Single Dealer Platform Gateway forms a common interface to the Bank’s Single-Dealer Platform and direct client trading API over the Bank’s messaging middleware of choice. It acts as the bank’s own ECN calling the DealHub Connectivity Manager for pricing, maintaining stream assignments, handling session Management and user entitlements and calls other systems to process blotter requests, pass orders and book deals as required.

Another stepAnother “essential step” towards future-proofi ng Liquidity distribution strategies is to plan for the volume and type of price requests and resulting trades, which will grow exponentially as the business increases. DealHub’s Connectivity Manager, for example, is designed to handle extremely high trade throughput and handle two-way communication of events between sophisticated algorithmic trading software.

Their Connectivity Manager incorporates highly fl exible rules-based processing and provides support for Request for Quotes (RFQ), Request for Streaming (RFS) and executable streaming prices as well as Dealer Intervention. It manages the negotiation and validation of the deal request lifetimes according to the protocol of the individual ECN, performs credit checking against internal systems, and validates outgoing rates against a Market Data source and creates STP to the Bank’s downstream systems.

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DealHub’s STP system is said to be capable of processing in excess of 2,000 trades per second, and offers “compliant archiving” and overview for a comprehensive solution to integrate to the Bank’s downstream systems and workfl ow processes.In relation to how more advanced Liquidity Distribution frameworks can help banks and brokers better manage Liquidity pools and the margin/spread adjustments they need to apply to various types of client (Corporate, Institutional and Retail), Kriskinans says: “Banks that combine CEP vendors with DealHub’s Price Distribution system have tremendous fl exibility on where and how they construct prices and allocate credit during a price request.”

Market data considerations

Electronic FX trading desks are becoming very burdened with the distribution and fan-out of market data to clients. The problem is compounded within

FX where brokers are dealing with a wide range of clients including retail, corporations, and institutions who are all profi led differently for commissions and credit limits.

As a fundamental component in the implementation of a widescale single-dealer eTrading platform for OTC products, smartTrade’s newly introduced LiquidityDistributor hopes to solve many of these issues by enabling organisations to customize and create complex matrices for their distribution of market data and prices to various types of clients including custom spreads and limits over any messaging infrastructure. LiquidityDistributor can manage the complex matrix of clients who can be grouped into different Liquidity pools with different sales spreads, set multiple price tierings for the clients, dynamically move clients between pools and spreads, and apply credit checks before establishing a market data stream and the tradable stream.

Harry Gozlan explains: “LiquidityDistributor enables our customers to customize their order fl ow for Aggregation, Matching, and Smart Order Routing and now also to customize the distribution of that Liquidity. Clients will be able to create very complex patterns for their quotes, Liquidity stacks, spreads and limits to fan out to their clients over any messaging infrastructure for a higher level of client servicing at a very low level of latency.”

Furthermore, smartTrade customers will have the “ability to choose the combination of how they want their market data distributed including full market data, incremental, and confl ated snapshots.” As such the LiquidityDistributor is offered up as a “proven solution” for individual asset classes including FX, as well as fi xed income and equities. “It’s a natural solution for a cross-asset trading infrastructure,” Gozlan asserts.

Connectivity and Latency issuesAs regards connectivity, latency and legacy integration issues associated with revamping or upgrading an existing LMS, Kriskinans says: “Banks may choose to take a phased approach where their initial stance is to use some elements such as an existing price engine and add the DealHub price distribution layer as a

simple ‘framework’, which passes on pricing to existing client facing platforms.”

>>>

Harry Gozlan “LiquidityDistributor enables our customers to

customize their order fl ow for Aggregation, Matching, and Smart Order Routing and now also to cus-

tomize the distribution of that Liquidity.”

FEATURE


The fl exibility is then created to migrate some currency pairings off into an automated Liquidity Management and hedging solution, whilst leaving existing pricing arrangements in place for less active pairings. And he says, when the bank is ready to expand coverage, the “migration path is in place”.

Latency is clearly a key issue to be solved. Banks often ensure this is minimised by having three separate instances of their price distribution system - each one serving the clients in the global region. With new

vendors entering the connectivity space to compete with the traditional providers, improvements in connectivity speed are continuous.

Heidingsfeld says that latency and scalability are two areas that highlight both the challenge and promise of LMS systems. “The more the integration points and disparate technology, the greater the latency. Liquidity, as well as system optimization, should be measured across the entire FX platform. Because when the technology is closely integrated, the LMS solutions can really shine.” He adds: “the whole conceptof Liquidity Management is still relatively new and has essentially grown up over the past 12-18 months. There aren’t many true LMS systems available on the market today.”

TraderTools is one vendor that starts conversations with banks about the individual modules that make up an overall LMS architecture – based on their immediate pain points.

“While some of these institutions already have RiskManagement systems processing FX trades end-to-end, the issues really centre on whether they can process the information and fl ow required,fast enough to extract the value they need.”

IntegrationAs to integration issues, Gozlan states: “Today there are not really so many issues if there is an existing LMS in place within an institution. However, what’s important is to have a common transport - a common technology - to transport data from the trade. Typically it is in place.”

With connectivity being in situ, he contends that it is not that diffi cult to basically cut out the existing component and replace it with one that is even more sophisticated. What can be sometimes be “problematic” is around a bank’s desire to redesign the front end - facing out to clients. Gozlan notes that the other element that may require some work is when a decision is made to extend out to other asset classes – within FX and beyond.

For example, if bank chooses to expand its FX spot LMS system into FX plus options, the existing LMS system has to combine two different workfl ows. “For spot FX they may have streaming [prices] whilst FX options could be RFQ-based. While we can undertake this as a vendor, it is not so much a legacy problem but more an organisational issue for the bank or

fi nancial institution in question.” According Kriskinans, vendors are proving themselves “tremendously experienced” within their particular realms of technical competence. As the market is driven towards automation, vendors are offering their knowledge and expertise in handling new scenarios that arise.

“Typically each bank will want to control and own the intellectual property it creates when it defi nes its hedging strategies, spreading matrix and smart order routing algorithms,” notes Kriskinans. “But [also] vendors are there to provide a workbench of core functionality and support that facilitates this process.”

Build versus buy

A number of factors will infl uence whether FX trading fi rms should consider developing their own proprietary LMS infrastructures or outsource this function. “Time to market is also a key factor in deciding to outsource to vendors,” says Kriskinans. On top of this, he adds that banks must consider the time and costs involved in developing in-house and the skilled resources required to ensure integration to multiple systems - price engine, hedge, credit, etc. This may not necessarily be available at all banks.

Kriskinans adds: “In the same way that it is unnecessary in 2010 for a bank to write its own STP feed handlers, when companies like DealHub can supply these type of solutions off-the-shelf, there are best uses of resources where the bank can create its own IP, and logical outsourcing decisions where vendor solutions are tried and tested.” The modern Liquidity Management solution is therefore most likely to be a collaboration between the bank’s in-house expertise and the vendor’s ability to deliver the latest innovations in technology and process.

BayernLB deploys aLiquidity Managementplatform

BayernLB is the leading Bavarian commercial bank for large and middle-market corporate customers in Germany and Europe. One unit within the bank that

has consistently outperformed over the past few years is the FX trading department, headed by Marc Burgheim. Although profi table, the unit is still largely based on manual trading.

Automation is the ChallengeMarc knew that FX trading was providing stable earnings for the bank. But he also knew that those earnings “could be increased with the right investment.” The right technology was the answer. If much of the FX trading could be automated, Bayern would be able to offer better prices, more Liquidity and quicker response times than any other bank in its peer group.

Step 1 was Aggregation, in order to reduce spreads andincrease profi tability. Step 2 was full STP, in order to be ableto increase trading in Options and Emerging Markets.

Marc checked out various Aggregation tools as well as ECNs with Aggregation functionality. The problem was that each one of these solutions would have to be integrated with additional tools in the future (i.e. to handle algorithmic trading or auto-hedging).

Integration is the AnswerAfter a relatively short, evaluation period the TraderTools’ Liquidity Management Platform™ (LMP) was chosen and went live in the Bayern FX trading room.

With manual trading, it is humanly possible to handle only 2 or 3 Liquidity sources at a time. Now Bayern FX traders are “more than happy” being able to stream 5 or more separate Liquidity sources at a time.

“What sold us on TraderTools was the fact that its LMP offered a lot more functionality than just Aggregation,” explained Marc. “We’re looking forward to activating algorithmic trading and auto-hedging functionality in the near future.”


FX Liquidity Management: Should you be taking a more pro-active approach?

CASE STUDY

Retail FX option perspectivesJoe Cunningham, chairman of FX Bridge Technologies, provider of combined FX spot, CFDs, and options trading software says “One of the big

complaints of Retail FX customers is their only risk management tool is stop orders and even when they are right about the directional move of the market they frequently lose money because they keep getting stopped out. Retail FX customers are now demanding the same risk management tools and trading strategies they have for equities and futures: standardized put and call options. He goes on, “Retail traders already understand “exchange-style” vanilla options and they will know how to work with them immediately in FX.”

FX Bridge has just released the latest edition of its FX dealing platform ProTrader Plus™ (PTP 5.0), which features a completely new graphical user interface (GUI) and other signifi cant user enhancements. Among other new features, dealers get a customer alerting, communication, and monitoring subsystem which allows them to track, communicate en mass, and handle one-on-one contacts with their entire trader base in any language. PTP 5.0 also includes multi-dimensional cross-asset margining, commission and rebate tracking, and managed group trading. PTP 5.0 is FX Bridge’s fl agship product, which is licensed to banks and forex dealers, for trading spot, CFDs, and options.

Over the last 18 months, Cunningham says demand for electronic trading in options has grown dramatically due to the increased volatility in the market, particularly


Technology and product innovation:

opening up new opportunities with FX options

FEATURE

While increasing use of electronically traded options is gradually redefi ning what is regarded vanilla and exotic, the move towards the development of an ECN for FX options, and the current regulatory debate around central clearing all point to one conclusion: watch this space. Where once, the more complex options’ structures seemed to be resigned to remain either RFQ or voice-based, this mindset is slowly being eroded as technology advances and the ease of use of options’ systems increases.

By Frances Maguire

due to demand coming from retail investors. “There is no ECN for options for retail traders. FX Bridge is probably one of the only options technology providers that works with the big banks, the largest options liquidity providers, and we have plans for an ECN for options, offering

best bid, and smart routing, in the future.”

“We see that the fi duciary requirement for best execution will lead towards an ECN for options.

Although options are already completely transparent, a single dealer system that can offer transparency and the best possible price is particularly important with options where volatility makes up a sizable portion of the premium.”

Cunningham does not believe that FX options, as they are provided today, will be part of the exchange model. He says they are more likely to remain bilaterally traded. However, apart from the very complex


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Joe Cunningham “Retail traders already understand “exchange-style”

vanilla options and they will know how to work with them immediately in FX.”

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products, Cunningham believes the days of trading FX options by voice are coming to an end but that the more complex derivatives products will remain RFQ for the foreseeable future. No matter how complex the option is it is still based on a volatility curve and can be expressed electronically.

FX Bridge recently introduced Strategy Optimizer on its retail trading station. It enables traders to input an anticipated price move, a timeframe for that price move to be achieved, and an amount they are willing to risk on the trade. From there, Strategy Optimizer analyses every permutation of long and short calls and puts over every strike price and expiration to fi nd the optimised combination of options that yields the highest return for the predetermined risk amount. The trader can optimise for a specifi c strategy, say a long call spread or a short put calendar spread, or for any possible strategy.

Cunningham adds that FX Bridge is the only technology provider to offer cross-asset risk-based margining for spot and options. “FX Bridge’s proprietary Volatility-based Margining™ system protects FX dealers from the ‘hundred-year fl ood’ worse case market scenario, yet traders never tie-up a penny more in margin than they are at risk for,” he says. FX Bridge provides an STP facility to provide pricing and analytical tools, not only for high volume/low latency executions but also a variety of STP fi lters for executions going through forex dealers, as well as

extensive options pricing and analytical tools for both the dealers and the traders.

FX Bridge’s trading GUI has a feature that enables analytical tools, for margin calculation for any combination of long/short, put/call spot positions, for risk management, to evaluate overall positions and any combination of long/short puts and calls and also to stimulate trades individually and as a combined position across the portfolio.

Algorithmic options tradingJust two years ago, Cunningham says that there

was little real interest in algorithmic options trading for FX but today it is a very different picture. FX Bridge is working with several algorithmic trading developers, who are modifying equity algorithmic programmes for FX that will include spot and options trading in one strategy. It is highly expected that FX algorithmic trading will follow the same growth curve as equities, in fact, as Cunningham points out, creating algorithms for FX is perhaps less complicated than equities because there is not the added complication of corporate events to take into account.

But most importantly of all, Cunningham predicts that a huge growth surge in trading options is very likely, in about six months, pending expected changes in regulatory requirements. The Commodities Futures Trading Commission (CFTC) and the National Futures Association (NFA) are considering changing leverage rules for forex dealers in the United States. They have suggested reducing the leverage forex dealers make available to their trading customer from 100:1 or 200:1 down to as little as 10:1. Most industry observers anticipate that the rule will probably settle somewhere around 20:1, putting spot trading on leverage parity with currency futures contracts in the US. He says: “If this happens, options will be the only instrument available for US based traders who want to utilise high-leverage strategies in their FX trading.”

Richard Brunt, head of GFI FENICS says that the diversifi cation of risk away from traditional investor

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FEATURE


markets is driving both institutional and retail investors to the FX options market. He says that increased volatility and number of players in the underlying spot FX market also leads to a natural progression of interest in FX options.

FENICS Professional™ a GFI FENICS platform for pricing, trading and risk management of FX options includes FENICS Trader™. FENICS Trader gives customers access to a multiple bank liquidity pool. FENICS Professional clients can use the FENICS Trader component to price options from the liquidity bank’s proprietary volatility surface.

Brunt says: “These prices can be fi rmed up via GFI FENICS RFQ technology and the user can trade directly from the FENICS Professional Application. The system is fully audited and captures all trade details via the GFI FX Blotter. This transparency clearly helps meet the need to show best execution.”

Brunt believes that RFQ, either through voice or electronically, is currently the only viable method for offering prices on what is effectively an infi nite number of available OTC FX options. “There is of course the more structured strike and fi xed date approach that exchanges offer and this may be more appropriate for streaming live prices. The differences between the two approaches satisfy two very different customer bases. In one instance the option is created to hedge against a

specifi c market risk, event or currency fl ow while in the other the options are traded primarily by buy-side market makers or speculators,” he says.FENICS Professional is an FX options middleware solution that delivers huge effi ciencies to its clients, allowing traders to deliver their proprietary prices to their sales teams around the globe, and even direct to their customer on internet using the FENICS Enterprise™ component. Full STP as standard to the banks back-end system ensures that trades fl ow seamlessly between systems without the need for duplicate entry.

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FENICS Professional™

Richard Brunt “FENICS Professional has fl ourished in the

market segment through offering a platform that not only prices and risk manages the banks FX options, but also gives them the tools to generate fl ow through

integrated sales applications, and retail products such as DCIs (Dual Currency Investments).”

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In Q3 2010, GFI FENICS will launch FENICS Professional version 12.1, which will include new functionality including: RFQ capabilities and auto dealing between sales and trading, chat, volatility spreading by counterparty and additional sales tools such as termsheets, supporting local languages.

According to Brunt there is some demand for algorithmic trading strategies in FX options, but without the aggregation of prices in the OTC market take up will always remain small compared to spot.

Brunt says that smaller banks are looking for integrated platforms that deliver more than the ability to price an option. These banks are inundated with ‘free’ pricing systems from proprietary e-commerce platforms and the traditional vendor boxes.

He says: “FENICS Professional has fl ourished in the market segment through offering a platform that not only prices and risk manages the banks FX options, but also gives them the tools to generate fl ow through integrated sales applications, and retail products such as DCIs (Dual Currency Investments).”

Clearing of FX optionsBrunt believes that the likelihood is that at some point clearing of FX options will be mandatory, although it could be some time before the different regions can put this into practice, given the truly global nature of the FX options market. That said, clearinghouses are already saying that they will clear FX options and some clearinghouses are taking it on themselves to start the build process. Alfred Schorno, managing director of 360T Group, says that options have always been a well-liked instrument for users with real underlying hedging exposure. “Based on the fact that market makers and portals offer streaming electronic pricing for standard options the interest from institutional traders has also increased,” he says.

Schorno says that FX options can already be traded on several single bank trading channels and also multi bank portals, like 360T, which offer features to execute different types and structures of options. He adds that while MiFID best price execution is still not a hot topic for FX and FX option business, nevertheless some of the market participants are already putting a big emphasis on this requirement, which will certainly come soon.

According to Schorno the defi nition of ‘vanilla’ is evolving quite a bit as fi rst and second generation

options are increasingly perceived as vanilla structures nowadays. “Investments of the provider banks into their electronic pricing abilities are ongoing, but I guess that for the foreseeable future anything beyond second generation options will remain RFQ based,” he says.

Alfred Schorno “I guess that for the foreseeable future anything beyond

second generation options will remain RFQ based,”


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360T Group has a strong belief in a best of breed approach and therefore concentrate on communication and execution. 360T offers request and execution features and of course, STP solutions to optimise the trading workfl ow while there exist very well established and specialised tools for analytics and pricing.

While Schorno believes it is still too early to judge the likely impact of the current regulatory debate over the future handling of OTC derivatives, as the specifi c regulatory requirements are still unclear. He says, however: “Interpreting the tendency that higher margin requirements and a limitation of leverage could be the outcome the effect will limit fi nancial institutions with high leverage.

Growing market However, Eric Jawitz, senior market specialist, at Calypso Technology, says that regulatory initiatives are expected to increase the size of the market for FX

options, increase transparency and reduce the risk, due to the increasing likelihood that they will soon be cleared through a Central Counterparty Clearing House (CCP). “Even without a regulatory mandate to clear FX options though a central clearing house, initiatives by fi rms such as the CME are underway to start clearing FX options, possibly as soon as year end,” he says.

For Jawitz, with the increase in international commerce, there is a growth in the volume of currency derivatives trading. Increases in volume will strain manual systems, so it is even more necessary to have a clean STP solution.

He says: “Currently, when you trade FX options, you have to accept the counterparty risk of trading with a bank. In the past, there wasn’t much of a deterrent. Recently people have lost the appetite for taking this risk. With CCP clearing, people wanting to trade FX options will no longer have to take the counterparty risk of any bank. Instead, with the CCP as their counterparty, their risk would be greatly reduced. This would allow banks with lower credit ratings to become market makers, increasing the size of the market and lowering the spread on the trades.”

ECNs

There are some attempts being made to build new trading models (such as portals, ECNs etc) for FX

Technology and product innovation: opening up new opportunities with FX options

Eric Jawitz “With CCP clearing, people wanting to trade FX options will no longer have to take the counterparty risk of any bank.”

FEATURE

options and Jawitz believes that with CCP clearing, there will be much more interest in these sorts of venues. However, he adds, until there is suffi cient volume on these platforms, trading on the new ECNs will not be suffi cient to prove best execution.

Likewise, he believes that, if the platform is right, increasing use of real-time pricing for more complex options’ structures will become possible. He says: “FX options market makers use real-time pricing models to determine the prices they are willing to trade at. If the proper venue is created, we may see real-time bid/offer prices posted for more complicated, but common, FX option structures.”

Calypso has invested heavily in FX options’ functionality and released many new features this year. Says Jawitz: “With our FX options pricing sheet, you can easily create new multi-leg structures, defi ne formulas linking the fi elds together, and add the completely confi gured structure to the system for use by anyone in the fi rm. This makes it much easier to enter a trade and greatly reduces potential trade-entry errors.”

A powerful new solver can solve for strike, vol, notional and other fi elds including solving for zero cost structures (see picture for calculation of Strike for a Zero Cost Collar).

Multi-leg structures can be set up to generate one confi rmation. Modifi cations, expirations or triggering of barriers also generate messages on the structure level as well.

This makes life much easier for the back offi ce. Additionally, sophisticated option expiry and barrier triggering greatly reduce the complexity of one of the most error-prone FX option activities.

“As always, the integrated front-to-back multi-asset design of Calypso, along with a real-time feed of market rates, increases effi ciency and reduces costs for all asset classes,” he says. Traders from banks, hedge funds, asset management and corporations are looking for a change in the way FX options


are traded. Currently they need to make three to four phone calls to get prices, and if spot rates are moving they may have to make the phone calls again. Jawitz believes they would be happier using an ECN for automated execution. In addition, this may help them further with more liquidity and better execution. “Another great benefi t of an ECN is a direct feed to the back offi ce. This reduces the demand on the back offi ce,” he adds.

Glenn Rosenberg, managing partner, of Bridgetrade strongly believes a better options’ trading platform is needed and is developing an FX options’ ECN, that includes a innovative clearing solution that ultimately goes to central clearing but would have to be in stages, starting with bi-lateral trading.

He says: “One of the things we had to do was come up with a solution to trade complex over the counter products and engineer an intuitive front end GUI, which we have created and which I think will be very attractive for this market place. Also, it will facilitate the ability for people to trade directly with one another, because currently the central part of this

market has been the relationship between the bank and the customer. This is deeply embedded in the psyche of everyone in FX. It might have been true, at some point, in all asset classes, but a lot of other products have shifted away from this and I think FX will be a product that will follow this route.”

He believes this will happen as the FX market evolves and gets more different types of traders into the market, such as algorithmic traders, proprietary traders, hedge funds looking to make markets, this relationship will start to dissipate. This is why Rosenberg has been trying to fi nd a way to put this dealing capability on to a platform. This is available for spot FX, but most of the options trading models tend to be RFQ still.

Says Rosenberg: “At some point I think it would be interesting to be able to match up any two traders in options.”

Conclusion

In terms of the complexity of some options, Rosenberg says it is only time before more and more can be traded electronically. “A fair amount of options can be commoditised, and that includes exotic options as well. Once you can commoditise something, and put in a standardised input for matching, it can be done, but you always need the human touch to help solve more complex problems,” he says. It has been a slow process, but he thinks, traders are ready to make the leap to electronic trading for options.

There is a growing demand from smaller institutions and retail institutions for the same benefi ts of electronic ECN and Calypso’s Jawitz believes it is only a matter of time until we see FX options trading on ECNs and clearing through CCPs. He says: “The market will grow and spreads will decrease. The only losers from this change may be the top-tier banks, which will no longer control the major trading. However, even these banks may profi t from the increase in volume.”

Regardless of whether clearing becomes mandatory for FX options – LCH-Clearnet has already begun building an FX options clearing system, which is expected to go live early next year – the debate about whether more complex structures can be traded electronically and whether an FX options ECN would gain traction will continue.

Technology and product innovation: opening up new opportunities with FX options

Glen Rosenberg“At some point I think it would be interesting to be

able to match up any two traders in options.”


We use an endless list of jargon to orient ourselves to the electronic FX business. Appraisal of our most common FX

terms shows how arbitrary they can be when used without context. For instance, “straight-through processing” is so important to the effi ciencies of electronic trading that it has its own acronym, “STP,” yet it encompasses any number of

different procedures from treasury management system workfl ow to trade positioning and hedging by retail brokers. Other examples include “best execution” and “algorithmic trading,” both of which are black holes with infi nite applications that forbid any uniform application of the terms. And let’s not forget “internalization,” the jargon du jour used at our latest panel discussions and seminars. This term is often applied to suggest some novel patented technology; meanwhile, it really isn’t more than a newfangled label for fl ow optimization. The prevalence of blanket terms can lead to some bad habits. Whether through expediency or assumption, one might exclude important context when accounting for requisites. In preparing to look for a vendor to optimize current operations or to launch a solution for the fi rst time, it’s worth ordering your most important needs into prioritized lists, with expanded descriptions under each requirement. Before registering specialized needs, the list should fi rst index the four key elements of technology: performance, scalability, risk management and extensibility. Whether starting or enhancing services for a hedge fund, corporate treasury center or brokering service, these are the fi rst items that too often get checkmarks without a thorough audit of the underlying service. Again, these are more than checkboxes to be ticked on a work order, for they can defi ne the success or failure of the alliance itself. Here are the key points to consider:

Performance

Ask the bidding vendor when their computer servers were upgraded. While techies may say the Intel Xeon 5680 is the best equipment, server connectivity, redundancy and attention to maintenance are more important than brand hardware. Also, you need to fi nd out if their servers use optical networks to provide access to their trading system as they are among the fastest in the industry.

Beyond the JargonThe four key elements of technology

FOREX TECHNOLOGY

It seems as if every few months there is an article or panel discussion that appropriates a new catchphrase to sum up our industry’s current fi xation with the latest technology. These colloquialisms form the vernacular to communicate complex issues. Vendors adopt the “insider talk” to market and promote services to clients based on their technological acumen. For many of these clients, however, the essential details underlying their technical jargon may not be obvious — or even available.

COM

MEN

T

By Chip Lowry


It is also important to know if the data feed is tick-by-tick or provided in incremental snapshots. The key to a fast-matching engine is what industry insiders call “distributed matching engines,” in other words a framework that allows multiple-matching engines to function as a single unit to handle instrument load and provide fault tolerance. A fully distributed system allows for microsecond order matching. Vendors who focus on performance technology should be able to demonstrate low-latency trading through fully auditable trade tickets where average order matching time is measured in milliseconds or faster.

Scalability

Don’t confuse performance for scalability. Where performance focuses on time measurements in response, scalability is about concurrent access. At fi rst glance, it would seem the best vendors are those focused on the institutional class, where blackbox traders execute stealth strategy in a high-frequency environment. Yes, a professional trading venue geared toward the most lucrative class of traders is paramount. On the other hand, the preeminent electronic communication networks (ECN) don’t connect to more than a few thousand participants at most, while a deployment geared toward the retail FX market, for instance, might service tens of thousands of participants. And that’s for one hub. Ask if the vendor services the entire spectrum between retail and institutional traders. Experience with all segments means they’re more likely to have expertise extending a graduated infrastructure custom to individual market segments.

You may also want to fi nd out what data stream packet analyzers they use for continual performance measurement. Also called “sniffers,” these tools provide powerful network auditing and network traffi c information for the purpose of calibrating load balancers and preventing outages. As users grow and trade volume increases, session services and multiple-matching engines should be added in succession.

Risk Management

Risk management starts with reliable administrative software servicing the entire workfl ow. Ask the vendor to disclose information about their client and liquidity management tools. For brokers looking to create a retail trading solution, it’s these management tools that allow them to automate safeguards and protect profi ts when aggregating liquidity from market makers and segmenting clients into categories based on trading patterns.

It is important to ask for a written security policy, and when reviewing it, remember that cryptographic features, such as digital certifi cates and SSL session keys, are a necessity wherever information is passed or stored. Also ask if they have third-party audit reports. Since government regulations may require audit trails, perhaps it is most important that the vendor show fl exibility for customizing real-time reporting, including orders executed, orders resting, client login, margin and fi nancial statistics, and other important lifecycle data, so fi nd out what their redundancy standards are. Finally, ask for server uptime documentation and what problems they’ve had. If they respond that their system uptime has been 100 percent, then you know it’s too good to be true.

Extensibility“Reach” is of paramount importance. A proven track record utilizing market resources effectively and effi ciently suggests a vendor is experienced with growing their clients’ businesses. FX execution is only as good as the available liquidity. Ask if they have direct market access through established relationships with banks, and if so, which ones. If they have standing alliances with large fi nancial institutions and other vendors, they’re likely to be plugged into the evolving nature of a fast-changing industry, where technology and liquidity progress from new and established places. The vendor must have the willingness to build technology and liquidity relationships on their own. Vendors demonstrating the fruits of these nurtured partnerships and acquired technology should not have a problem identifying these established relationships.

Of course, these are merely starting points. Don’t forget to check the vendor’s references as part of the evaluation process; for example, the number of years in business, number of clients, and the size and availability of their support teams. If you have a long list of requirements, you should submit it to prospective vendors with enough lead-time so they can respond in time. The request for proposal (RFP) gives vendors equal opportunity to respond with written proposals coupled with product demonstrations. Terminology should never replace thinking, so ask questions whenever new phrases arise. While lingo is convenient for starting the conversation, knowing the implications for each market term will help predict the ultimate success of a business alliance.

Chip Lowry is the chief operating offi cer at Currenex, Inc., part of the State Street Global Markets division of State Street Corporation.


Complex Event Processing (CEP) technology is increasingly becoming the foundation for high-speed trading and a wide variety of

low latency, transactionable infrastructures within the foreign exchange (FX) space and other asset classes. While the frenzy around CEP - essentially a sophisticated software tool - that took hold in early 2008 may well have mellowed somewhat during the fi nancial crisis and certain prominent bank collapses, this very fact has propelled risk management and real-time monitoring to the top of fi nancial fi rms’ agendas. The upshot is that prospects for CEP deployment across the capital markets - including the FX market - would appear pretty robust.

Spending growthResearch from analysis fi rm IDC recently forecast that spending on CEP Middleware would rise by over 50% annually over the fi ve years from 2008-2009. And, Boston-based Aite Group, another fi rm which analyses CEP in the context of the FX market, has put spending globally on CEP software across the capital markets at US$303m in 2008 and growing.

According to the recent Aite Group report, ‘The Data Utility Knife: CEP Cuts Into Enterprise Architecture’, while trading and trade-related projects like smart order routing (SOR) accounted for 48% of existing use cases, risk management and market data areas were making “double-digit headway”. That said, precisely

gauging CEP deployment specifi cally within FX is hard, since it can form part of multi-asset deployments.

Early adoption of CEP was in fi nancial services. High volumes of data, sub-second latency requirements, high levels of control and fl exibility helped CEP spread across Wall Street and City of London fi rms. The rapid increase in fi rms seeking to gain a competitive edge in analysing

skyrocketing volumes of customer data in FX - both at the Institutional and Retail level - is fuelling the spreading adoption of CEP technology.

“CEP is a natural fi t for the high-speed trading space because it provides agility via rapid development and deployment of new applications, and it can deliver the low-latency performance required for this market,” states Jeff Wootton, Sybase CEP Product Manager and Senior Director, based in Chicago.

Second Generation CEP: laying the foundation stones for enhanced FX Trading architectures

FOREX TECHNOLOGY

With Complex Event Processing (CEP) having spread out across the asset classes - initially within equities – there has now been a remarkably fast uptake within the FX space for CEP technology among both buy and sell-side fi rms. Roger Aitken quizzes leading CEP vendors and experts on the ‘second generation’ landscape and where the future lies.


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“It’s really the agility that is key,” he adds. “With the pace at which the FX market is evolving, fi rms that trade in this market require tools that can evolve just as fast.”

First generation CEP offered high performance correlation engines allowing users to build applications, while second generation CEP is more about realising the need for a complete - holistic - application development environment, that developers have come to expect from mature systems.

Sean O’Donnell, Director of Technology in London for the RealStream suite of products at First Derivatives (former Cognotec business), says: “The fact that FX is by its nature an OTC market - and not like a centralised exchange - means there are many more participants and far more multi-party relationships. That increases the complexity in terms of the number of transactions and events, which has a direct impact in relation to CEP, which is clearly geared to handling that level of messaging.”

Retail FX demand for CEPWithin the FX market there are different kinds of trading profi les. There are high net worth individuals (HNWIs), all the way down to day traders and novice traders. Compared to the traditional Institutional FX space where there are perhaps low hundreds

or thousands of participants from the existing banks and brokers, the Retail space has tens of thousands of participants.

“All of that information has an impact on what a CEP engine can actually do in terms of profi ling these kinds of clients, which would be vastly different to the Institutional user base,” says O’Donnell.

In terms of the fast growing demand for CEP within the Retail FX industry, this has essentially been fuelled by the growth in electronic trading of FX as brokers

seek to gain a competitive advantage and manage their risk in real time, coupled with the rise in global investing.

Evidence of the trend can be seen with electronic trading having accounted for approximately 65% of all FX trading at the end of 2009, but the expectation is for this fi gure to reach more than 70% by end of 2012 according to Aite Group research (‘High Frequency Trading in FX’, April 2010).

And, despite the decline in overall FX trading volumes between 2008 and 2009, the Retail FX market seems to have grown slightly in 2009 (see bar chart). While the Retail FX market still only accounts for a small fraction of the global FX market (averaging c. US$125 billion a day or around 3.5% of the global FX total of c.$3.7 trillion), most large FX banks are increasingly looking for ways to interact with the uninformed Retail fl ow.

Sang Lee, author of this Aite report, stated: “For now, Deutsche Bank and Citi have taken the lead among the large FX banks with their Retail offerings, Deutsche Bank with dbFX and Citi with CitiFX Pro.”

StreamBase Systems, based in Boston, regards itself as one of the largest “pure play” vendors in the space. It

has been winning business from a number of Retail FX broking and spread betting fi rms, as well as in the more Institutional (buy- and sell-side fi rms) traditional fl ow. “The opportunity in Retail FX is really around fi ne grain control of the customer relationship,” says Richard Tibbetts, chief technology offi cer at the fi rm. By way of example, he cites GAIN Capital, a client of the company which has used the vendor’s CEP technology to refi ne how they price and direct quotes to their end customers. This helps them assign how they hedge and how they manage the fi rm’s position, which Tibbetts claims is proving a “very profi table” application.

Other Retail FX offerings

First Derivatives’ RealStream suite of products offers services to both Retail and Institutional clients. “As part of the Delta product suite, we have a CEP engine at its core. But additionally we have two platforms out there both for the Retail space in our RealStream margin products, and also out to our Institutional FX client space,” says O’Donnell. The product suite covers a range of key areas from mission critical trading and risk management systems and utilities for users, traders and developers.

The fi rm’s Delta CEP offering delivers unifi ed scalable real-time performance plus touts ease of


>>>FOREX TECHNOLOGY

Average Daily Trade Volume in FX (In US$ Billions)Source: Aite Group

Jeff Wootton “CEP is a natural fi t for the high-speed trading space because it provides agility via rapid development and deployment of new applications, and it can deliver the

low-latency performance required for this market.”


integration with existing systems and a wide range of technologies. The technology itself was honed in the high performance algorithmic trading units in investment banking, but is now in demand in a range of other technology centric sectors.

Delta CEP monitors all application activity during the day and publishes activity to a real-time database for historical archive/analysis. It can publish data to a wide variety of external messaging platforms for event-based actions.

According to O’Donnell: “Delta utilises a series of CEP modules each designed to handle a specifi c business logic for one aspect of the event processing. The unique message capabilities of the underlying technology allows a modular build-up of events that focus on an individual aspect of the event processing.”

Wider integration issues

Leading CEP providers have also been making strides in tackling issues associated with integrating CEP platforms with Retail and Institutional FX execution systems/platforms.

“We’ve seen that customers already have their own interfaces to the execution systems they use, so our CEP technology [Sybase] ends up being integrated with the customers’ internal systems,” notes Wootton. “They are using CEP as an additional real-time computation technology within their existing operations framework.”

Tibbetts says with regard to integrating CEP platforms with Retail and Institutional execution systems that it is a “big chunk” of the StreamBase framework for FX data aggregation.

One increasing trend that has been witnessed is trading fi rms that used only to deal (connect) with one or two FX execution venues like EBS and Reuters are now connecting to multiple venues, possibly several dozen or more. Indeed, StreamBase reveals it has two ongoing projects for sell-side institutions, where one fi rm’s FX system is connected to over 20 different venues.

This vendor provides adaptors to the specifi c protocols (the networking details, with some FIX-based) and its framework for FX aggregation takes each of those schemes turning them into a certain format. Then it pushes data up to the trading algorithms, the trades or pricing engine, and allows market participants to get a single view of the market.

First Derivatives’ O’Donnell notes that there have been “different approaches” in how CEP providers have tackled issues around integrating these platforms with Retail and Institutional FX execution systems.

He says: “You have tended to get traditional CEP vendors where their ‘sweet spot’ has just really been focussed around the CEP engine and - from a vendor perspective - offering that out as an engine with possibly some add ons. Then other third party providers are approached in terms of the actual downstream systems.” Effectively this would be a distribution engine into the Institutional or Retail FX segment, and then these are subsequently plugged together. And, typically this tends to be price

FOREX TECHNOLOGY >>>


FOREX TECHNOLOGY

aggregation says O’Donnell, after which prices are being pushed into those sort of platforms.

“From our perspective at First Derivatives, we are in a unique position since we have a proven core CEP engine that is pretty much deployed in all the major investment banks as well as having a Retail and an Institutional e-FX platform.” According to O’Donnell, the added advantage of this is that rather than having “disparate or loosely linked platforms where latency could arise”, they can deeply integrate them.

“That enables us to have much more accessibility to the data, which obviously makes the CEP technology itself much more powerful. And, we have the opportunity to inject the power of that CEP engine right into the core of both the Institutional and Retail execution venues, rather than being a third party where it is an add on.”

Partnerships

Partnerships between market data providers and CEP vendors will ultimately streamline the process of data processing and delivery, and can thereby facilitate new solutions for real-time FX data analytics being offered to end users.

“Pricing and reference data must be integrated, normalised and distributed in real-time and be of quality to be fed into trading and risk models. This would also result in reducing the time devoted to cleansing and delivering this reference data,” says Sybase’s Wootton.

He adds: “Technology tools such as CEP when aligned with market data vendors can help provide a more holistic approach to trading as well as risk management.”

Tibbetts points out here that: “One doesn’t want to be locked into a specifi c data vendor. As such we work with data vendors including Reuters, Interactive Data, Bloomberg, as well as small fi rms like ACTIV and others in the U.S. and Canada.”

With the StreamBase out-of-the-box CEP system, specifi c data (bid/offer prices, historical information, news events, etc) can be fed into the system and interrogated by quant analysts or software developers, either using off-the-shelf framework components or customised logic that has been developed.

Along with other leading vendors StreamBase is using an Eclipse-based development environment. Developed by IBM and used as an alternative to Java, it is an extensive platform for all sorts of software development, administration and management tasks.

“We have a deep integration with that platform (Eclipse), which provides us with a very rich developer experience,” notes Tibbetts.

More generally on partnerships, StreamBase has also developed the ‘StreamBase Component Exchange’ (SBX). The StreamBase Component Exchange allows customers, partners and other users of the StreamBase platform to download and distribute reusable components in an effort to build new event processing applications more quickly and improve upon existing applications.

Richard Tibbetts “The opportunity in Retail FX is really around fi ne

grain control of the customer relationship.”

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First Derivatives have many relationships with market data providers and O’Donnell says they “expect more” in the future. He says that the fi rm is “looking to expand” their Retail and Institutional platform - into other asset classes - beyond purely FX. That should bring scope for additional sources of market data coming to the fi rm’s offerings.

Testing & debugging

The latest generation of CEP solutions are increasingly facilitating more rapid building, testing, debugging and deploying of FX trading applications.

“This is really the raison d’être of CEP,” says Wootton. “The value is in the agility gained by building new applications on a platform that reduces the time to build and deploy by 80% - on average.” This is, he

points out, according to Sybase’s customer feedback as compared to building the same applications from scratch.

CEP is fundamentally a “developer productivity tool”, and it also eliminates the need for specialist programming skills (e.g. network programming, multi-threaded programming, low-latency data handling). “As such it allows users to focus on the business logic and to go from prototyping directly into production without an extended development cycle.” adds Wootton.

Tibbetts explains that over the last few releases of StreamBase’s platform debugging has been improved to a point where it has both “break point and trace trade” debugging.

“This allows [users] not only to stop an application as it is operating, but also to look back over the history of an application and understand why it made a lot of those decisions,” he says.

Using StreamBase CEP technology a developer can record the execution of an application (i.e. putting trades in the market) and explore why certain trades went wrong - even though the application largely works. By creating a trace of the application one can work backwards from the erroneous output to discover what caused the application to make the wrong decision. It can be used for algorithmic trading, order routing or market data analysis.

Backtesting, which is a slightly different process and separate from correctness testing, allows evaluation of large amounts of historical data from one day, a month, one year or even multiple years. In this area StreamBase partners with Reuters, Vertica, KX and others. StreamBase allows users to play back the data and put certain scenarios on it.

Established presence in FX

CEP technology is already assisting FX fi rms with market-making, risk-management and surveillance operations.

In the FX market many leading vendors like Sybase have seen adoption of CEP for real-time pricing, both in the spot and derivatives markets. Sybase claim they are seeing “a signifi cant amount of interest” in CEP for


FOREX TECHNOLOGY

Sean O’Donnell “You have tended to get traditional CEP vendors where

their ‘sweet spot’ has just really been focussed around the CEP engine and - from a vendor perspective - offering that

out as an engine with possibly some add ons.”

real-time risk monitoring across asset classes, including FX - but not limited to FX.

“In fact, part of the appeal is the ability to aggregate positions, value the positions and exposures, in real-time, across asset classes,” explains Wootton. “This allows users see their total exposure - at all times - along different dimensions.”

The ability to track both market risk and credit risk in a single system is also a “big draw” says Wootton. “For pricing, the ease with which pricing algorithms can be refi ned and updated is a large part of the appeal. And, unlike ‘off-the-shelf ’ trading applications, with CEP the user has total fl exibility and control when it comes to the algorithms used.”

Tibbetts says: “Pre-trade risk checks are a standard thing that gets developed in StreamBase and it is a pretty common application.” Perhaps more controversially he suggests that the “simplest of simple” pre-trade risk management checks would have caught the kind of fat fi nger trading that some have speculated caused the recent near 1,000 point intra-day fall on the Dow Jones Industrial Average.

Critically though, he says it is important to “structure your limits” on trading whereby a set list of risk limits is enforced. These can be in terms of risk exposure to the whole market or specifi c securities or currencies.

“We even have some customers who have factor-based risk exposure. And, when a particular trade would take a trader or trading desk outside their ‘risk envelope’ the technology can intervene to stop the trade.” Some StreamBase clients also like to change risk rules during the day to have intra-day visibility, “at least for the

high-frequency trading or prop desks and ideally for the whole fi rm.”

Finding new applications

Turning to whether CEP in FX will move beyond popular applications such as FX aggregation and pricing, smart order routing, market data management and algorithmic trading, Wootton says his fi rm

is witnessing a “constantly expanding” range of applications. In addition to the above list, he fl ags up another area as being related to limit management.

“Beyond that,” he asserts. “The most notable is the growing adoption of CEP beyond pre-trade applications and into post-trade applications for real-time position keeping and exposure monitoring, with continuous valuation

using live market prices and aggregation across multiple asset classes and risk dimensions.”

Tibbetts adds: “We are also witnessing CEP’s move to the middle offi ce. It’s just beginning, but new offi ce organisations are realising that being up to the minute or indeed the second is

benefi cial.” This is in terms of being able to process things much more swiftly and giving feedback to front-offi ce systems in order to keep clients updated on their positions and being able to understand (intra-day) when things start to go wrong.

O’Donnell points out his fi rm sees further and deeper “integration” in their global business with platforms in the FX space - both at Retail and Institutional level - and by leveraging their CEP technology. Furthermore, he highlights greater integration around data analytics and trading patterns, work around matching engines and “auxiliary services” that are going to be built around the CEP engine.


Second Generation CEP: laying the foundation stones for enhanced FX Trading architectures


These new feed services also need to be able to cater for new and increasingly complex FX instruments in addition to the highly

liquid FX spot market. They also need to ensure high availability in all market conditions and also provide improved risk and exposure management operations. But perhaps above all, in today’s market, FX rate feeds need to be very, very quick because the pursuit of low

Optimising FX feeds: introducing low latency rate engine services

FOREX TECHNOLOGY

Rate feeds are an essential part of the FX trading process and like every other process it is something that is continually subject to re-engineering and investment in technology development. This development has increased manifold since the advent in electronic and algorithmic trading and it in turn has created a burgeoning vendor market for various software products and applications designed to help banks, brokers and traders make use of rate feeds that can blended, aggregated and optimised to produce an accurate, spike-free supply of prices that refl ects true market prices.

By Nicholas Pratt


>>>

latency still seems to be the most pressing priority for market participants.

“All of the big FX dealers are using in-house systems,” says Frederic Ponzo, managing director of consulting fi rm Grey Spark Partners. “The pricing engines that were built three to four years ago required low latency and tight integration with risk management systems but there were no credible systems out there so banks had to build everything in-house.”

This is not to say that third party vendors do not have a space, says Ponzo, only that this space is more suited to the tier II and tier III banks and the various buy-side trading fi rms and corporate treasurers. But for the major banks dealing in

the highly liquid markets of spot FX and outright

forwards, third party vendors would not be considered. “The speed in streaming

and updating prices is what makes the difference and that is through technology. And you don’t get that kind of stuff out of house. The average tier one bank is between $100 and $150m a year and those kinds of funds are not available to the average vendor.”

Frederic Ponzo “The pricing engines that were built three to four years ago required low latency and tight integration with risk

management systems but there were no credible systems out there so banks had to build everything in-house.”

The fi nancial engineering required in these FX markets is very simple from a conceptual perspective, says Ponzo. Nevertheless, the themes for all technology developers of FX rate feeds, whether in or out of house, are the same, says Ponzo. “First of all it is about latency, this is the most critical element. Then it is about pre-trade risk, as long as it does not affect latency, which is technically challenging. Essentially it is a compromise, between latency and oversight. The banks will deny this but it is always a compromise.”

Underlying dataWhen it comes to FX rate feeds, says Gary Owen, sales and account manager at Swissrisk Financial Systems, the belief has always been that the underlying data is the most important element of providing rates to clients and having cleansed data is an absolute must. “What we need to do is to ensure that the underlying data is good, clean and accurate whether it is coming from a single source, a multi-bank portal or a direct feed from a single bank,” says Owen.

“The ultimate goal would be to merge all of the pricing data with no spikes to form a central core price for your own use. To do this you must have fl exibility so that you can either form a mathematical average price from several live feeds or take a weighted average price based on assumptions you have regarding the quality of each live feed and the prices they are providing. With this fl exibility dealers can come into their own by adding their own sentiment and valuing the feeds accordingly.”

The introduction of algo trading has brought into focus the importance of clean data. For example, Owen relates the story of one client that angrily accused his system of giving out bad prices and costing the company millions. “When we went through it, it turned out that their own prices were being sent to Reuters which was then sending them out again only to be reabsorbed by the trading fi rm. This created an arbitrage opportunity for other traders and it was seized upon.”

But with the right technology in place these kind of things can be fl agged as an error and traders can then realign the system, says Owen. “These are the kind of issues that algo trading can create if they are not carefully monitored. You have to be quick but you also have to be solid and you have to recognise certain trading patterns.


FOREX TECHNOLOGY

Gary Owen “The ultimate goal would be to merge all of

the pricing data with no spikes to form a central core price for your own use.”

If there is one trader making lots of small executions time and time again it is likely that they are trading against you because you pay a separate fee each time you execute, so you have to move to block that trader.”

Another operational risk issue that fi rms have to be aware of is when certain price providers may be less keen to quote prices, say when US economic fi gures or rate changes are announced, says Owen. “We have certain time slots where you can drop a certain bank out of an average price. So users can manually adjust the rate feeds and the adjustments to the average rate calculations will be made automatically.”

LatencyLatency is of course an important issue in the FX market, particularly in terms of supplying FX rate feeds but there is a growing feeling that the pursuit has perhaps gone quite far enough for now. “Latency has got itself to the point where it has become almost insignifi cant in terms of rate feeds, says Owen. “For example, I have had traders tell me that if the latency is over half a millisecond then they do not want to know but that is still because the information is becoming too fast to be usable. Anything over half a second is of course unacceptable and responses have to be instant but at some point every fi rm has to make the trade off between removing latency and what is usable.”

A further trade-off exists in the use of feasibility checks and the latency that these operational risk measures introduce, further emphasising the balance between speed and control that is required by traders when employing algorithms. “We can do all of these checks but with each time you put one in, it will also add latency so you have to discuss this with clients and be open with them so that they can make adjustments and use their own judgement.”

Many of the vendors that have developed FX rate services and feeds accept Ponzo’s point that the higher echelons of the market’s participants will always look to develop their own technology but such is the size of the FX marketplace and the number of participants within it, that a third party vendor community can still fi nd enough business out there to thrive. “There will always be a very small group of leading banks that has enough development capacities to upgrade their in house solutions and react quickly to changes in the market or integrate the latest know-how,” says Andreas Kiesselbach, sales manager at Germany-based Digitec, a provider of pricing and trading solutions to the FX industry. “All other market participants have

>>>



to decide if time to market and costs or independence is more critical for them. Vendors that have been adding enhancements to their solutions over many years usually have more expertise than a typical IT department of a bank.

Kiesselbach also recognises that low latency is a key concern for traders across the market but he also emphasises that there are several aspects to the pursuit of low latency. “One of them is: How long does it take before the rate engine exports a new price. This takes usually just a few milliseconds. But the more important problem for many banks is that the chain of downstream systems is too long. A rate request from a multibank platform goes to an e-trading system. A margin system adds a spread and then the rate engine generates a price that has to be routed back to the multibank platform. This response time is usually much longer than the pure latency of just the pricing system. Only a closer link of rate engine and e-trading platform can resolve this bottleneck.”

The whole focus on latency is also more pertinent to FX spot pricing, rather than FX forward pricing where the market moves much slower and pricing feeds require much more focus on yield curves, checks and comparisons. “There is a much greater range of prices in the forward market so neither the engines sending the data or receiving it, would be able to cope if all of this information was provided in a low latency basis,”

says Kiesselbach. “So while speed is important in any market, sometimes it is also important to analyse the price and see if other sources differ and whether to adjust the spread accordingly. Or to run cross-calculations of a currency pair and compare that with a direct feed. It is about putting more intelligence into the system.”

Monitoring & AnalysisAnother feature more relevant to the FX spot market is the integration of monitoring and analysis tools with live feeds in order to assist with processes such as error or fraud detection and research. “The key term here is ‘hit reaction’,” says Kiesselbach. “The rate engines must be able to react with automatic skewing to multiple trades that are executed only on one side to reduce the period during which any losses may be incurred. It can be diffi cult to tell when a trader has the wrong spot price but it is possible to limit the effects of having a wrong price.”

Although the general focus for the FX spot market is on low latency, there are algorithms being developed that are more sophisticated than merely taking a price and sending it out again, says Kiesselbach. “There are banks that are devising the spot price from an FX future price. And there are banks developing quite complex algorithms that perform lots of calculations before sending out the price again.”

The list of additional features created through the use of algorithms is growing all the time, says Kiesselbach, and includes blending, automatic adjustments, comparisons, automatic spreads that depend on volatility, different pricing models in different time zones and more. “This all implies that it’s not only latency that counts and even if several banks are using the same quote machine from an external vendor, they will still use it with individual pricing models and strategies. Of course all of these calculations add latency to the process but the benefi ts can often be greater than an approach purely focused on speed. Ultimately it comes down to that balance between latency and accuracy.”

Proprietary feed servicesLeverate is an enterprise software services provider to online fi nancial brokers, and supplies FX rates to retail brokers and fi nancial institutions and with a background in aggressive algorithmic trading. It is this background and the time spent taking advantage of data feed weaknesses as part of an arbitrage strategy that inspired the company to develop its own feed services.

FOREX TECHNOLOGY

Andreas Kiesselbach “There is a much greater range of prices in the forward

market so neither the engines sending the data or receiv-ing it, would be able to cope if all of this information was

provided in a low latency basis,”

>>>


FOREX TECHNOLOGY

Lior Shmuely “Not only do deviations, spikes or delays in rates expose

brokers to substantial losses, they also can damage repu-tations and create confl icts with honest traders.”

“Whilst trading we did not know where the market was at all times, in order to know where it was we had to create our own feed”, says Lior Shmuely, vice president of Leverate Technological Trading Ltd. After intensive market research it became clear to Leverate that such a solution did not exist in the market so the company developed its own data feed for internal use and which it now offers to brokers – particularly those based online and focused on the retail market.

The use of algorithms within this data feed service is an integral part, says Shmuely. “Forex trading is by nature a high-risk and volatile business. Market makers and retail brokers in particular, are vulnerable to arbitrage hunters, scalpers and other types of fraud, due to their commitment to minimizing order rejection. It has been reported that the average market maker loses between $30,000 - $50,000 on every $1billion in trading volume to arbitrage hunters trading on off-market prices.

“Not only do deviations, spikes or delays in rates expose brokers to substantial losses, they can also damage reputations and create confl icts with honest traders. For example, misquotes due to a spike may activate stop-loss or take-profi t limits, resulting in unpleasant situations that lead to distrust between brokers and traders. We make sure that the feed supplied to the broker is accurate under all market conditions by backtesting them against our data supply to prove their accuracy,” says Shmuely.

Need for verifi cationIn today’s markets, banks and brokers should be seeking assurances that speed and integrity of their rates are verifi ed and maintained, says Shmuely. “Banks and brokers should fi rst of all ensure that the quality of the feed is suffi cient to allow online instantaneous trading. The supplier should offer solutions and support to the services provided and the bank/broker need to request a list of monitoring procedures as well as technological support to support the claims made by the supplier. Today, many forex brokers receive ‘fi re and forget’ rate feeds from banks or other major brokers that do not monitor or analyze their rates against the ‘true’ market price. Other sources including recognized and established feed suppliers provide indicative rate feeds which are not suffi ciently fast or precise to meet commercial brokers’ business needs.”

This data quality issue has also become a key part of Leverate’s marketing drive and its efforts to recruit new customers, says Shmuely. “When a new potential

client addresses us with questions regarding the feed benefi ts, we actually present that potential client with the discrepancies on their own feed. This is done by integrating Leverate’s systems into the client’s trading platform and storing all client per-symbol ticks in our tick database. We then use a feed comparison distributed system to check for the accuracy and reliability of the client’s feed and to produce a report which is sent to the potential client in order to show how Leverate’s feed could resolve that client’s feed problems.”

Conclusion“Banks and brokers are looking to minimize risk and maximize the bottom line,” says Shmuely. “Today it is not enough to offer superior real time feeds – brokers and traders alike are demanding superior liquidity behind the feeds as well as demanding superior service and risk management capability.” When selecting a vendor to supply rate feed services, FX traders must consider the following criteria, says Shmuely. “First and foremost they must consider the quality of the feed offered – speed as well as accuracy and precision. Then they must look at the supplier’s history and how long it has been in operation as legitimate, fi nancial feed supplier and how good its reputation is.” Other factors such as service level and expertise, client base and recommendations must also be taken into account as well as the extent of features available through the products on offer – from anti-fraud services to business continuity.

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FX trading fi rms today are seeking connectivity to multiple FX trading venues and counterparties to ensure that

they have the widest range of data points and opportunities. To take advantage of arbitrage and other trading opportunities such fi rms are looking at connectivity paths on a monthly basis ensuring that their routes are the fastest, as well as ensuring operational reliability that comes with a 24/7 market. Increasingly they are seeking dedicated connectivity - without contention - through fi nancial Extranet providers to a variety of FX trading venues and counterparties due to

FinancialExtranets: providing seamless anddedicated connectivity for FX

FOREX TECHNOLOGY

Roger Aitken explores why FX trading fi rms are increasingly seeking dedicated connectivity to their FX trading venues and counterparties and what are the benefi ts of using global Financial Extranets to achieve this.

By Roger Aitken


>>>

ongoing market/trading venue fragmentation. Contention in a trading/communications context

refers to competition by users of a system for use of the same facility at the same time. The term contention ratio applies specifi cally to the number of people or fi rms who share a set amount of bandwidth.

Private InternetAlan Schwartz, President of Transaction Network Services’ (TNS) Financial Services, based in New York, explains: “The way we defi ne our fi nancial Extranet is in terms of providing clients with access to more or less a private Internet, with all the benefi ts of IP technology. We then bring clients into the ecosystem - Extranet - that is a closed and protected environment.”

Private is key. A private Internet alleviates all the bad things about the public Internet, but enables all the good things in respect of fl exibility TNS wants to offer its clients. For instance, with TNS

having multiple POPs

(Points of Presence) in cities like New York, the vendor can bring in diverse carriers, diverse POPs, as well as diverse hardware onto their network. At that point a client would then go (connect up) to their trading partner/counterparties in the same fashion.

“Our backbone is a fully meshed network, so it has multiple blades in/out and there is no single point of failure,” Schwartz adds. “We don’t put anything in the middle and we provide encrypted packets.”

By contrast to secure and dedicated fi nancial Extranets for users, the public Internet is not only exposed to security issues but access speeds fall during periods of peak use.

Avoiding contentionDave Brown, Senior Vice President, Global Network Operations for IPC, says in relation to FX trading fi rms: “It is imperative to ensure that there is no contention between pricing to and from trading venues and between counterparties. In addition, when streaming prices to customers, reliability, consistency, and scalability are key factors.” TNS’s Schwartz agrees saying: “Given the fact that the FX trading is by its nature very different from the equities world, with no centralized market and individual feeds coming from various broker dealers, FX market participants have a greater bandwidth requirement. As such they do not want to take a chance in having contention or to share [as much].”

TNS is one vendor providing clients trading FX and equities with the option of sharing all their bandwidth with all their trading partners. Customers can buy a “Tier-1 worth” of bandwidth in order to run all of their trading connectivity over it, or a fi rm can decide that this is not the way they want to run it.

Schwartz adds: “In the FX space that is not how participants want to deal with matters. What they want to do is say ‘For each client I want ‘X’ amount of bandwidth allocated to them’. And, part of the reason is down to higher bandwidth requirements.”

There are a number of reasons for this. One centres around the concept of fl ooding the counterparty with high levels of trades or information, and having to compete with another party who sends less information down the pipe and being in potential confl ict (i.e. contention). Also, there is a desire to have “equal or better latency”, Schwartz says. By effectively “carving it out” through a fi nancial Extranet service ensures that this problem should never arise.

Benefi ts of ExtranetsIn terms of the benefi ts of using global fi nancial Extranets and what low latency electronic connectivity services are being delivered to buy and sell-side

FX trading communities, IPC’s Brown says: “The vital benefi ts are enabling access to communicate immediately with trading counterparties, key clients, leading venues and remaining fl exible and scalable for the next cross-asset trading requirement.”

TNS’ Schwartz says that the benefi ts of using global fi nancial Extranets include speed to get ‘on net’, cost reduction and improved latency. “If customers are on TNS today and there is another institution they wish to do business with - it’s almost instantaneous. So, the speed with which you can achieve connectivity is really fast,” he says.

Cost reduction can also be achieved over putting in physical private lines, which was traditionally how things were undertaken at high-end level. “One can claim that it’s better latency, because vendors such as TNS continually provide statistics on the network - all day long.” He adds: “We provide clients with a portal so that they’re able to look at latency rates. There is a natural benefi t in providing that type of service [yourself ] over a private line. And, the odds are that there is virtually no way one can build the same disaster relief connectivity that a provider like TNS could build.”

The value proposition of fi nancial Extranets versus the latest high speed Internet networks, rests in the fact the Internet does not offer the same level of reliability, scalability, security, consistency or provide ‘end-to-end’ Service Level Agreements (SLAs), critical to the demanding requirements of FX trading fi rms.

“There is no visibility on the connectivity,” notes Brown. “Therefore one has no way of determining if the fastest and most direct route that has been taken. And, the unpredictable nature of the Internet makes it subject to frequent disruptions that can impact availability, speed and quality of service.”

According to Brown, a provider like IPC is able to provide direct support with a single phone call, which “in many cases automatically and instantly re-routes traffi c via our resilient, self-healing core optical network infrastructure.”

Security, reliability and speedJerry Brunton, Marketing Director, BT Global Banking and Financial Markets, who is responsible for marketing BT Radianz services around the world, comments: “While we still have customers who may be using


>>>FOREX TECHNOLOGY

Alan Schwartz “The way we defi ne our fi nancial Extranet is in terms of providing clients with access to more or less a private

Internet, with all the benefi ts of IP technology.”


trading applications over a secure VPN on the Internet, the really serious FX trading fi rms want security, reliability and speed. You still cannot guarantee those key characteristics through the Internet.”

New York-based Brunton adds: “The public Internet is not ready to support cloud computing for the institutional trading environment. There may be some last mile access to the public Internet, but what I’ve seen is that people are still getting used to the idea of cloud computing and deciding whether they’re comfortable relinquishing control.”

He adds: “To be honest, our biggest competitors are the ‘DIY shops’ because they want to manage vendor contracts and buy their own capital equipment. Most importantly, they want to be able to manage their own people, on site. The BT Radianz service is not all hardware. Rather, it’s a fully-managed service that offers a 100% guarantee of availability, so that our customers can step away from managing connectivity in order to focus on their core competence and generating revenue.”

Deployment

Turning to what issues are associated with joining a Financial Community Extranet and the deployment timeframes involved, when fi rms have existing ‘on-net’ connectivity with IPC’s network, the vendor claims that the service can be “turned up” in a matter of a few hours – thus facilitating almost immediate trading and access to liquidity.

In fact, most sell-side institutions are already using IPC’s network services and a number of their clients are already on-net, which Brown says demonstrates what he claims as the “longevity” of IPC’s market presence.

For Schwartz, while for most of TNS’ clients they would normally install about a week after the telco leased lines are installed, some territories may not be as fast in terms of pulling fi bre. “That said, even if we go into city where TNS does not provide connectivity directly, we usually fi nd a relatively cost effective way to bring someone into the closest location.”

The fact that the BT Radianz Shared Market Infrastructure has around 14,000 locations/end points globally today that are already set up and connected means that most customers do not require new hardware or a new telecoms service to be brought in.

“As a result of this extensive footprint, chances are that if someone needs a connection to a new service, it’s likely that we will be able to utilise the BT Radianz connection they already have in place,” says Brunton. He adds: “For a new site that needs to be set up, we’ll design a fully redundant connectivity solution which means that we order fi bre from diverse carriers, install redundant routers at the customer site, and route the connections back to separate, redundant data centres.”

Part of the design involves ensuring that the redundant fi bre takes separate paths into a building. For example, BT may have one fi bre path going along 40th Street and another along 41st Street into the same building in case something happens that cuts the line on one of those streets. The fi rm also ensures that these two paths go up in different risers in the building.

And, if there is an explosion or an electrical fault at one of the carrier’s facilities, BT have another carrier that can provide back up. Indeed, such a fault occurred with a customer just this May in New York when an electrical line overheated. Despite losing one of their lines, their Extranet service was unaffected.

FOREX TECHNOLOGY >>>

Dave Brown “The vital benefi ts are enabling access to communicate

immediately with trading counterparties, key clients, lead-ing venues and remaining fl exible and scalable for the next

cross-asset trading requirement.”

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FOREX TECHNOLOGY

Choice of Extranet providerIn terms of the factors that may infl uence a fi rm’s choice of Extranet service provider, there are clearly a number of key factors. They include latency, reliability, scalability in terms of adding connectivity or bandwidth to additional participants quickly and easily, as well as the choice of venues and counterparties. There is also accessing existing market participants and the existing community.

The ability to get dedicated and secure bandwidth that is not subject to the volatility of market conditions found with a shared network infrastructure (such as MPLS) is key too, Brown points out.

“To have a provider that is focused on the fi nancial services market and understands the critical service and support response that is required is fundamental,” stresses BT’s Jerry Brunton. “Global reach is absolutely critical and few fi rms can provide the support and network infrastructure to support the requirements of today’s fragmented global marketplace.”

Schwartz adds: “Service, quality and reputation are defi nitely key factors in the choice of provider. In terms of costs, I would say that the perceived costs of a fi nancial Extranet service are relatively low since we’re not providing the software.”

Financial viability of the provider is also worth noting. “People defi nitely look at fi nancial viability of the provider in question. Over the years one has seen companies claiming to be in the Extranet space that are not really in it. Effectively some have just been ‘quasi’ providers, offering other services and using their Extranet activity as a loss leader in certain instances.”

TNS offers global support to its customer base, running three helpdesks operating 24/7 (in U.S in Europe and Asia). They can all back each other up, but handle regional interests too.

Delivering competitive advantages

Looking at ways by which Extranets offering high capacity network infrastructures can provide competitive advantage to FX trading fi rms, this should be viewed in the context of the fi nancial market place moving at an extremely fast pace and being faced with varying requirements.

“Currently shrouded in a number of regulatory initiatives, trade warehouse initiatives and multi-asset trading initiatives, it’s imperative to work with a network provider that has a global footprint and that can provide the most scalable and fl exible solution as possible,” states Brown. He adds that this is “truly the only way to remain competitive” as time to market and adaptability are key competitive advantages.

Vendors like TNS offer a Managed Extranet solution and also provide TCO (Total Cost of Ownership) savings - with several benefi ts over self-service solutions. These include improving time to market, increased resiliency, minimized risk of technological obsolescence, employee overhead reduction, and risk management amongst other benefi ts.

Reducing latency

Turning to steps that leading Extranet providers have taken to reduce latency to facilitate algorithmic trading and DMA for FX trading fi rms, IPC’s Brown claims that the vendor has positioned itself “very differently” from other fi nancial network providers.

Jerry Brunton “The public Internet is not ready to support cloud

computing for the institutional trading environment.”

>>>

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“By the mere fact that we are solely focused as a fi nancial solutions company, our contention is that we provide best-of-breed solutions that are engineered specifi cally for a client’s application,” he asserts.

Vendors such as IPC can offer connectivity solutions for Direct Market Access (DMA) and can work with the client to select the best carriers, routes and datacentre position for multi-region, multi-city access to trading venues regardless of asset class. Additionally, IPC is able to “custom design” solutions that minimize latency, offer routing agility, diversity and full resiliency to best facilitate effective algorithmic and electronic trading strategies.

Brunton comments on the steps being taken to reduce latency: “We approach latency reduction from two angles: ‘Make it Closer’ and ‘Make it Faster’. On the former (make it closer) we have our BT Radianz Proximity Solution service which takes an FX portal’s trading engine and deploys it in our hosting centre(s) where we also offer hosting space to trading fi rms.” This reduces the distance between liquidity source and trader thus reducing latency.

Making it faster is the BT Radianz Ultra Access service, a dedicated technology solution utilising specialised hardware and DWDM technology. “It’s a highly managed point-to-point connection using both the lowest latency fi bre path and equipment available, and with the least number of network hops - just one.”

Meeting other challengesIn relation to how fi rms can leverage Extranets in order to better meet the challenges of delivering and accessing liquidity and execution data, buy and sell-side trading fraternities have different demands.

Sell-side fi rms must be very strategic in the way they build and deploy their pricing engines. “They must avoid creating latency in the price - before it leaves the fi rm - and is available to the market,” says Brown. “This requires careful consideration in planning and managing their own enterprise networks.”

Buy-side fi rms, most of which will have access to services from many sell-side institutions, tend to remain fl exible in their relationships with prime brokers, sell side and trading venues. “Therefore, using recognised network solutions providers permits them to remain fl exible,” he adds.

Brunton commenting here says: “Sophisticated trading fi rms looking for liquidity in FX must have the widest, most direct access to that liquidity and not be fi ltered through just one fi rm. They need to be able to hit all the multi-bank portals, single bank portals, and FX ECNs to have a complete view.”

SLA’sSo, what Service Level Agreements (SLAs) should FX fi rms be looking to arrange and put in place? Here fi rms should bear in mind that service levels should be specifi c around those markets and venues that people wish to access. And, be specifi c around latency. IPC, for example, works with clients to develop custom solutions that address a specifi c application.


FOREX TECHNOLOGY

“SLAs can be completely customised to maximize performance, only made possible by our agnostic approach strategically partnering with best-of-breed carriers and data centre providers and locations,” contends Brown.

BT’s Jerry Brunton adds: “I cannot imagine that any market participant trading FX products or any other asset class would accept anything less than 100% availability. This is what our SLA provides. Downtime is potentially lost millions.”

TNS’ Schwartz notes that in terms of SLAs and what FX fi rms and others should look for rather “depends” on what they are willing to pay for. “One certainly cannot expect the same SLA over an Internet connection or single-route T1 installation as a fully redundant system.”

He also cites what he refers to as the ‘commitment to change’ theme. “What we found in the FX world is that the window for network maintenance and changes to the clients’ confi guration is very small. So, if a client wants to work with another trading fi rm, they’ll want us to permission that.” This requires TNS to undertake certain work, but it has to fi t with a very limited client time frame.

The TNS executive fl ags up the need for FX fi rms to choose an SLA from a provider that is also fl exible in its approach, that adapt to future changes on the client side and “diagnose issues with them in a very proactive way.” This, he says, is very much a focus of what TNS does in “working through issues, even when they are not our issues.”

Future evolutionIn respect of what new products and services leading providers will be are tailoring for fast moving markets like FX, Brown points to the next stage of “evolution” being around post-trade services. “The ability to support all aspects of the clients’ trade lifecycle is a core goal of IPC network services,” he says.

Looking at how future demand for fi nancial Extranets within the global FX marketplace will develop, given current proposed changes between the OTC and exchange traded/exchange venues, Brown believes that market participants will need “as much fl exibility to access multiple venues in multiple locations”. They must also be able to potentially move their offi ces to other more forgiving jurisdictions and “governmental environments”, if so required. Consequently, “fl exibility, scalability and global reach will be key,” he adds.

Emmanuel Carjat, CEO of specialist connectivityfi rm Atrium Network, picks up on that point commenting: “As connectivity to the foreign exchange market becomes more complex, FX targeting fi rms are looking for scalable connectivity solutions that can grow both geographically and in terms of increased bandwidth as trading volumes rise.”

Atrium Networks is starting to make its presence felt in the FX space and has a number of partners in the shape of ISVs, exchanges and market data providers, as well the likes of HotSpotFX and Currenex. In respect of their Ultra low latency connectivity, the fi rm uses a number of ‘dark fi bre’ providers to take the shortest path between the venue and the client site. Through Metro Ethernet they use a variety of carriers in each location to offer diversity to each client location.

Carjat offers some fi nal words: “The capacity to connect to a simple infrastructure to trade multiple and cross-asset classes and a connectivity solution that can handle and process associated FX market data will ensure that fi nancial Extranets have a great future in the global FX marketplace.”


Financial Extranets: providing seamless and dedicated connectivity for FX

Emmanuel Carjat “As connectivity to the foreign exchange

market becomes more complex, FX targeting fi rms are looking for scalable connectivity solutions that can grow both geographically and in terms of increased bandwidth

as trading volumes rise.”


Regional banks who survived the credit crisis with strong fi nancials are now poised to take advantage of the changing landscape

and use this opportunity to grow their business as the economy recovers. Banks are experiencing rapid expansion through acquisitions and in some instances seeing exponential balance sheet growth in a relatively short span of time. In addition, these same banks are also now able to attract newly available talent due to massive job attrition from the larger banks. These new hires are able to help build upon traditional services

Why regional banks are positioned for growth

VIEWPOINT

The recent credit crisis has resulted in a dynamic shift to the banking industry by opening new opportunities for regional banks. While traditionally focused on serving the domestic needs of local customers, regional banks today are targeting and supplying a broader array of services.

By Igor Gitsevich, Director, Solutions at SunGard Sierra


while also bringing expertise in expanding out new lines of business. Also, the personalized service these banks can offer further differentiates them from larger banks, giving them greater traction in their ability to acquire and retain customers.

Expanding Services

Not too long ago, regional banks did little for their customers on an international basis, such as cross-border payments and FX trading. This was usually done as an accommodation, subsequently executed and processed through one of the larger banks that supported global transactions. Not having the ability to natively handle these transactions, it was never seen as lost revenue. Aside from “giving away” the business to the bigger banks, it also opened a potential threat from the larger banks to slowly encroach upon other services that the regional banks traditionally operated. Today, regional banks are recognizing these lost opportunities and are taking steps to bring these business lines in-house and service both the domestic and international need their customers require. The business has always been there, but the sophistication of the regional banks is fi nally catching up to their customers. These banks are now acting as full-service shops while also maintaining their reputations as the personalized, trusted local banker.

Improving Processing Effi ciency

Along with increased lines of business, naturally come the issue of increased transaction volumes and the need to properly process them. Unfortunately, volume growth does not always translate into increased operational staff. All institutions today, large and small, have limited budgets, resources, and time to market constraints. To help cope, regional banks need scalable treasury solutions that are easy to deploy, offer high levels of automation and straight-through processing, while allowing a certain level of customization.

The treasury solution should support a wide range of asset classes allowing regional banks to compete effectively in today’s environment. Other essential attributes of a treasury solution include: consolidated views across all customer activity, real-time connectivity to trade execution engines, market data feeds, payment systems, compatibility with core banking platforms, and integration with OFAC checking services.

Increasing Customer Satisfaction & Information Transparency

Today’s regional bank customer is more demanding, requires quicker access to information, and is comfortable using technology. Customers want to see intraday activity in order to better operate their businesses in terms of cash fl ow and risk.

The larger banks have been addressing this need through the creation of secured customer Internet portals, which provide customers with a way to view their entire holistic bank activity. Regional banks need to acquire the capability to provide this same functionality, because it is an essential value added service that is necessary to compete against other banks and ensure customer retention.

Controlling Costs & Optimizing Resources

Solutions that are effectively provided in an ASP or hosted environment can provide regional banks with needed cost effi ciencies. A treasury platform should provide an IT infrastructure that alleviates the need for the bank to incur unnecessary technology cost, and enable them to focus on their core business.

Providers of hosted or ASP solutions achieve greater economies of scale, and ultimately, deliver those cost savings to the bank. Hosted solutions also offer rapid implementation, time to market, and scheduled updates aligned with new functionality, regulatory and compliance rulings and accounting updates. Some hosted solutions also offer the benefi t of disaster recovery and daily back-ups.

It is also important that the platform be comprehensive, yet component based. This enables a bank to subscribe to and use only the capabilities that is required for their immediate business, with the ability to add functionality as the business changes and grows. This type of scalability is crucial to accommodate changing business needs and faster time to market.

In Summary

Regional banks have taken a signifi cant step forward in their desire to offer more sophisticated services to their customers. The potential is real, and it is up to the banks to fully realize the opportunity.


FX ON EXCHANGES

By Frances MaguireFX on Exchanges

A better way to manage risk?


>>>

The fi nancial crisis brought with it unprecedented volatility and credit concerns that are still having their effects on all global markets, including FX – namely in the form of the widespread fi nancial reforms that are now underway. Aside from the recent fl ight to quality that exchanges experienced throughout the crisis as credit lines and liquidity suddenly dried up, the clear message from the G10 is that, by 2012, a very different landscape will emerge, where as much vanilla business as possible will be transacted on regulated exchanges, or at least cleared through a central counterparty. Furthermore, increased collateralisation requirements will be laid out by the regulators for those instruments that continue to be traded over-the-counter (OTC).

With this level of change facing the industry, many are already reviewing structures and trading decisions in order to comply

with incoming liquidity risk requirements, as well as gearing up for the likelihood that FX options at least, and possibly swaps and forwards will need to be centrally cleared in the future.

Derek Sammann, managing director of Interest Rates and FX Products at CME Group, says that one of the key value propositions of using exchange-traded futures is the credit mitigation facility of a central counterparty.

He says: “When you introduce a central counterparty mechanism you are mitigating the bilateral counterparty risk that exists between any two sides of an over-the-counter (OTC) transaction. Because of this, we, as a Clearinghouse and as an exchange, are able to bring together the broadest possible and most diversifi ed set of market participants to trade with one another. A large part of our business is coming from hedgers and investors who have positions outstanding, not just speculators.”

Open interestOne of the most important metrics used to show the split between speculative day traders and buy and hold participants is open interest, the total number of transactions that remain on the books at the end of the day. According to Sammann, CME’s open interest grew by 87 per cent, to a total of $220 billion (1.8 million contracts) between Q2 2009 and Q2 2010.

“This illustrates the strength and the growth in our FX futures market. We manage the health of business by making sure we focus on the breadth of customer participation, providing products that are interesting to hedgers, investors and liquidity providers across all geographies,” he says.

May 2010 average daily volume in CME’s FX products was US$160 billion, representing growth of 141 per cent year on year, with futures growing 133 per cent and options growing 344 per cent versus May 2009. “When you talk about risk management, investing or hedging, for a large part you are also talking about extended use of options. Options are a tremendously fl exible risk management tool,” says Sammann.

The healthy growth of both FX futures and options is critical, says Sammann, as they complement each other. A very deep and liquid underlying futures market is needed because customers are trading futures against options – the two are very tightly linked.

“When you introduce a central counterparty mechanism you are mitigating the bilateral counterparty risk that exists between any two sides of an over-the-counter (OTC) transaction.”

Derek Sammann

FX ON EXCHANGES


A large part of this growth is that currency by its very nature is deeply tied to the capital markets, both equities and debt, and as capital fl ows move around the world there is a natural currency risk.

Bilateral credit risk

Ever since the Lehman, AIG and Bear Stearns events, there has been a much more heightened awareness of bilateral credit risk and this has been a key driver of our exchange traded FX products growth, according to Sammann. “With an exchange, or central clearing, this counterparty risk is mitigated and neutralised which is a very attractive proposition to market participants. In addition, the transparency of exchange-traded market adds to the safety offered by a regulated marketplace, which is hugely important for global participants. And fi nally, an important driver for growth is liquidity. CME is one of the biggest FX platforms in the world, and the largest in listed FX products. There is a reassurance that comes from that kind of liquidity from a customer’s point of view because they know their entry and exit costs are very small due to the deep liquidity.”

CME also offers the full range of asset classes under a single umbrella: energy, metals, FX, equities, agriculturals, and interest rates alongside alternative investments, such as weather. “This is a huge draw for participants in addition to operational execution, connectivity, relationship of the Clearinghouse and understanding how their business can be done in a single venue.”

CME expanding product portfolio

In terms of products, the bulk of the product portfolio is futures and options on individual currency pairs, but CME is currently planning to expand its global index services. Earlier this year, CME purchased a 90 per cent stake in the Dow Jones Index Services Business. To complement many of its individual products, CME is looking at ways to leverage this relationship and ownership stake to look at index products and basket products in currencies to enable investors

to take a view on a basket of currencies, as opposed to the individual currencies.

Sammann says: “We have skills and expertise in building liquidity, in bringing customers and delivering technology. The Dow Jones Index Services business brings a track record of building index products based on customer needs, so we think there are some exciting opportunities in extending the index services business outside the equities space and across asset classes.”

Additionally, with the rise in options trading, CME is also examining ways to deliver a new product to customers that look at volatility as a tradeable asset, in terms of a volatility index that allows investors to trade and take a position on volatility in foreign exchange.

CME is also planning to extend its OTC clearing services to the FX market later this year. Clearing services will be available for spot, forwards, options and NDFs in a bid to extend the benefi ts of the central counterparty out to the OTC market, across asset classes. Regardless of the fi nal regulatory decision, CME will comply and remain fl exible.

“There is clear distinction between this and migrating products to a central order book where you both

execute and clear. What the market is telling us is that they would like to see a convergence of the bilateral model and the exchange model with central counterparty services provided at the post-execution level to the OTC market. This means that customers will still be able to trade on a bilateral basis on an OTC execution venue, but their trade can be sent for clearing into a clearinghouse,” Sammann says.

Sammann says that the deep liquidity of CME’s products and the transparency of the

mark to market are very important to users with hedging needs. The ability to know, at any

point, what the price is and what the settlement price enables the investor to constantly monitor both the underlying exposure and the hedge in order to manage risk.

>>>

FX COMMODITIES \ INTEREST RATES \ EQUITIES \ ENERGY \ METALS \ WEATHER

$100 billion in daily liquidity.Trusted safety and security.

CME Group is a trademark of CME Group Inc. The Globe logo, CME, Chicago Mercantile Exchange and Globex are trademarks of Chicago Mercantile Exchange Inc. CBOT and Chicago Board of Trade are trademarks of the Board of Trade of the City of Chicago. NYMEX, New York Mercantile Exchange and ClearPort are trademarks of New York Mercantile Exchange Inc. COMEX is a trademark of Commodity Exchange Inc. These contracts are listed with, and subject to, the rules and regulations of CME. Copyright © 2010 CME Group. All rights reserved.

The world’s largest regulated FX marketplace: For FX traders who demand products and services

designed for the rapid pace of a global marketplace,

CME Group delivers. Our high-volume markets offer the

deep liquidity you need, with more than $100 billion in

daily notional value. As the largest and most diverse

regulated FX marketplace in the world, CME Group

offers listed FX products through CME Globex. And

coming soon, we’ll offer comprehensive clearing services

for OTC FX trades through CME ClearPort — an open-

access, platform agnostic, post-execution clearing

service. Learn more at www.cmegroup.com/fx.


On exchange growth elsewhere

Arshad Khan, Managing Director, at the Bahrain Financial Exchange says that the increased volatility in forex markets was driving increased business on to the exchange as market forces generate currency fl uctuations, which make exposure in the OTC market more prone to risk.

He says: “There are also Euro zone issues, which have generated a lower GDP to debt ratio, resulting in the need to divert exposure from the OTC markets to the exchange-traded futures markets, where hedging and risk management tools are more accessible. Finally, the credit crisis has been one of the major contributors in driving participants to use exchange-traded currency futures. Where prior to this, a large proportion of

trades were taking place off exchange with limited risk management opportunities. By routing all trades through central clearing, participants can eliminate credit risk through margining, and the risk of loss due to counterparty default.”

To manage currency exposure, market participants are using both currency futures and options. Currency futures allow the forex investor to hedge against foreign exchange risk. With this type of product, the investor is able to close out of their position, and exit from the obligation to buy or sell the currency prior to the contract’s delivery date.

An option is a contract that gives the purchaser, the right, but not the obligation, to buy (call option) or sell (put option) the underlying reference asset at a specifi ed price level known as a strike price, at any time until an agreed expiry date, or only on the expiry date. In order to lower the risk of currency exposure, either a plain call or put option is used, or else exchange participants are using different combinations of these two options.

Managing risk

Khan says that real-time tracking of margins, mark-to-market loss limits, circuit fi lters or daily price range, exposure limits based on deposits in the form of cash and cash equivalents, ensure that exchange participants using exchange traded instruments are able to effi ciently, and effectively manage their risk. “Institutional investors have exposure in various markets across the globe, and thus are more exposed to FX risk. They enter a market to bet on say a particular sector like equities or commodities and can hedge the FX risk using FX futures,” he says.

All currency contracts that are traded on an exchange usually include futures contracts and plain vanilla options. These contracts are standardised in terms of quantity and quality of the particular underlying currency. Khan says: “Hedging in currency futures enables investors to improve their return profi le against the risk of depreciation or appreciation. It can be a possibility that due to depreciation, an investor’s pay-off is lower or even in negative, when compared with a hedged position.”

The major advantage for investors and risk managers taking exposure in options is that only the option premium is being paid for purchasing option

“There are also Euro zone issues, which have generated a lower GDP to debt ratio, resulting in the need to divert exposure from the OTC markets to the exchange-traded futures markets, where hedging and

risk management tools are more accessible.”

FX ON EXCHANGES >>>

Arshad Khan

FX ON EXCHANGES


contracts, while the possibility to profi t from favorable price movements still exists. When buying FX option contracts, the right, but not the obligation, to buy or sell a futures contract at a given price is obtained. “Therefore when price movements are not favorable, this right will be exercised by the buyer or holder of the option, and therefore the purchase of options provides protection against unfavorable price movements, while permitting to profi t from favorable ones, and this strategy limits the exposure to volatile conditions in global markets,” he adds. Khan says that since the emergence of the credit crisis there has been a marked movement of trading from the off exchange or OTC market to the exchange traded environment. “The key attraction of this form of trading is the removal of unregulated bi-lateral trading where counterparty risk is common. Although there are many participants who will continue to use this, the natural attraction to the on exchange fully cleared environment will prevail,” he says.

New currency contracts

Khan says that the launch of new currency contracts especially in the emerging market segment will be on BFX’s radar, since there has been increasing transactions between banks and non-fi nancial customers in emerging markets, resulting from higher economic growth and trade. Reports indicate that the share of currency trade between non-resident counterparties has increased. Also, the G10 currencies will also be on the launch list due to the growing signifi cance of a global platform and the associated price volatility embedded in global trading.

“Last but not the least, the G10 currencies are considered to be the 10 most liquid currencies in the world, therefore one can expect active participation, if launched on the exchange,” he adds.

Kris Monaco, director of New Product Development at International Securities Exchange (ISE), says there are two signifi cant factors that will continue to push this growth trend: the increasing number of institutions and even individuals that need to effi ciently

manage their currency risk, and the drive to reduce counterparty credit risk.

He says: “Geographic distribution of revenue continues to expand as businesses become more global. Even the liabilities of individual investors are expanding beyond their normal territory. For example, an investor may own real estate in another country where the loan is denominated in a currency that needs to be hedged. That investor can easily hedge that risk using the same brokerage account that allows him to invest in stocks, ETFs, and options on those underlying instruments. Specifi cally in the US, FX options are tradable through virtually every online and full service broker that provides access to the options markets.”

There are a variety of instruments available to

investors at ISE: cash-settled FX Options, currency grantor trusts (which are ETF-like

>>>

“All exchange listed and traded instruments are

cleared through a clearinghouse. The

reduction of risk allows capital to be

used more effectively, eventually lowering

the overall costs of a risk management

program.”

Kris Monaco

FX ON EXCHANGES


products), options on grantor trusts, and futures. FX options are available through a wide network of brokers because the products are exchange-listed. That increased distribution results in competition among brokers, further resulting in lower commissions and innovation in trading functionality (e.g., order types, execution capabilities, analytics, etc.).

Monaco says that effi ciency also comes from centralising and mitigating counterparty credit risk. “All exchange listed and traded instruments are cleared through a clearinghouse. The reduction of risk allows capital to be used more effectively, eventually lowering the overall costs of a risk management program.”

Options are so fl exible

According to Monaco, options are one of the most powerful yet fl exible derivative instruments, regardless of the underlying asset class. Global exposure can be managed with options by employing simple directional trades, or by using multi-legged strategies that can hedge volatility risk.

“Consider an investor that expects to have exposure to a certain currency over a fi xed period. The cost of hedging that exposure depends on the level of protection that the investor seeks and the length of time that the protection is needed. In this case, an options position can be considered synonymous with other types of insurance, such as home or car insurance.

When hedging with options, an investor needs to know the value of the asset at risk, has an understanding of the probability of certain events occurring, and ultimately determines the most suitable strike and expiration. That level of customisation allows an investor to tailor its risk management programs to suit its specifi c needs,” he says.

Although many hedging strategies are simply one-directional, options provide risk managers with more sophisticated capabilities. For example, spread strategies enable risk managers and investors to protect themselves from or gain exposure to volatility in currency prices. These positions can be entered into easily because they are exchange-traded products.

On ISE, investors can execute these multi-legged strategies in a single trade while avoiding legging risk. ISE is planning signifi cant enhancements to its FX options product suite over the coming year, including additional pairs, new product structures, and new FX benchmarks.

FX products set to grow

Monaco believes the demand for new and innovative FX products will only increase and that the number of new instrument types already in use illustrates this. However, he adds, the growth in exchange listed product usage so far has not cannibalised OTC trading as much as it has introduced new participants to the FX market. “In the end, we will see a healthy mix of OTC vs. exchange-listed trading because the lines will become blurred between the two areas. Exchanges will seek to do more to accommodate, and perhaps facilitate, certain trades that are complex or unique enough to require an off-exchange solution.”

The one-size-fi ts-all approach

has become largely redundant and traders are now looking to fi ne-tune their execution set-up to fi t certain trading strategies, functions, time frames, visibility preferences and investment objectives. The benefi ts of moving away from a ‘black box’ approach are becoming more obvious. But what steps should traders take when looking to develop more customisation? Is it possible to customise an off-the-self trading system? Can the customisation be done in tandem with the vendors or can it be done in-house?

And while the benefi ts of customisation may be attractive to fi rms looking to form a competitive edge and mark

themselves as distinct from their rivals, are there any risks associated with this tailoring? Will it become harder to backtest and benchmark such unique and untried trading techniques? Perhaps lessons can be learned from other asset classes that are further along the evolutionary scale in terms of algorithms. Or perhaps it is too precarious a step to blindly translate the properties of one asset class to another.


Customising FX algorithms:

ALGORITHMIC FX TRADING

The FX world has now fully adapted and attuned itself to the world of algorithmic trading and these tools are now being widely employed across the industry as opposed to being restricted to the elite word of high frequency trading populated by technology-driven hedge funds and prop shops. But now that mainstream adoption has begun, it is clear that the demands from traders are becoming more specifi c when it comes to their algorithms and the services needed to support them.

fi ne tuning your order execution strategiesBy Nicholas Pratt

So what order types are proving to be most popular with FX fi rms? “With FX we have seen a slightly different approach than we have seen in equities and the order types do not always translate easily from one asset class to another,” says David Hastings, global head of sales FX at trading software developer FlexTrade. “In FX we are seeing trading in the normal OCO orders, take-profi t orders and moving take-profi t orders. Time-slice orders are proving particularly popular with FX fi rms due to the fact that they are able to send the liquidity back into the market without affecting the market’s fl ow.”

It may have taken a while but the FX world is becoming more accustomed to algorithmic trading, says Hastings. “Traders are realising that whatever they used to do verbally can now be done algorithmically. So when it comes to customising algorithms, it means listening to the client and understanding exactly what it is they want to do and then designing the algorithms accordingly – whether it be maximising alpha or minimising slippage. But it also involves some buy-in from the traders and they have to take a

leap of faith to an extent.”

Evolutionary process

Does this leap of faith extend to moving away from the

traditional black-box approach of the past? “It is

an evolutionary process. When the

black boxes fi rst came out, not many

traders understood how they worked but they

have gradually got more acquainted with them and the

signals they send are now they are being continually back-tested and fi ne-tuned. If you overlay execution algorithms on top of the black boxes you create a very well-rounded execution tool.”

The extent to which algorithms can be customised is very dependant on the capabilities of the trading fi rm, says Hastings. “Off-the-shelf algorithms can be customised or slightly fi ne-tuned by the traders themselves to fi t their needs without requiring too much knowledge of the programming language and code that it was originally written in. The technology has helped by making it much easier to write

algorithms and it has become much easier to transpose trading ideas into an algorithmic context. And we can provide them with the tools they need to create their own algos and backtest them. However, I maintain that the easiest way to customise the algorithms is for traders to work in partnership with the vendor and explain what they are trying to achieve.”

The proprietary instincts of most traders has led many of them to try to keep the mechanics of their trading and what they put into their buy and sell signals secret from even their vendors, says Hastings. And these instincts also lead many traders to customise their own algorithms. In terms of the risks associated with this do-it-yourself approach, the only real concern that Hastings highlights is backtesting and benchmarking. “With an experienced vendor, they would have run these tests several times whereas traders may be running them for the fi rst time. You have to be very sure that you have ticked every box. It is really about


>>>

David Hastings “Time-slice orders are proving particularly popular with FX fi rms due to the fact that they are able to send the liquidity back into the market without affecting the market’s fl ow.”

Giles Nelson “Typically we don’t know a great deal about

what our clients are doing with the software and they can be very secretive.”

ALGORITHMIC FX TRADING >>>


data assimilation and getting hold of the liquidity providers’ price feeds so that you can create an environment in which you can test how effective your execution algorithms would have been. There are still challenges involved around the provision of the data but it is certainly easier than it was.”

In terms of benchmarking there is an obvious trade-off involved between the ability to compare algorithms and the desire to have algorithms that are wholly unique compared to everything else out in the market. And in the main, it is a trade-off that most traders are prepared to make, says Hastings. “I don’t think anyone changes the bog-standard algorithms without knowing the risks that are involved and the desire to differentiate is still a big driver.”

Legacy technology

Another reason why traders are looking to move on from the black-box approach of the past is the legacy

nature of the technology. Legacy systems have long been frowned upon in the fi nancial technology sector even though they sit at the heart of many banks and fi nancial institutions and have done so for years. However, like any bank employee that has been there for decades, they tend to be infl exible, diffi cult to integrate and largely impenetrable when it comes to working out what is going on inside. For relatively new technology like algorithmic black boxes, this impenetrability is of particular concern, says Giles Nelson, Deputy CTO, Progress Software, a provider of complex event processing technology.

“We had a customer come to us that had been using a black-box that was put together by a couple of in-house developers. It worked very well but after a while they wanted to make some changes only to fi nd that the developers had left and no-one else knew how it worked. They could not change it so they had to throw it away. But now it is possible to buy software and create tools that can be used by business analysts to test and deploy an algorithmic trading strategy that can evolve as fi rms get used to algorithmic trading, market changes and employees leaving.”

As is common among the vendor community, Nelson also feels the proprietary instincts among FX traders are still strong and have an infl uence on their decisions regarding the customisation of algorithms and the relationship with third party software vendors. “Typically we don’t know a great deal about what our clients are doing with the software and they can be very secretive. This might be because they are not regular users of third party software and are keener to develop their technology in-house but I think that is the wrong approach. Why not use a tool that can make you more productive even if it has been developed by a third party? Of course it depends on the institution involved but sometimes these decisions are based more on the protection of jobs in the IT department rather than increasing productivity.”

The interest in customising algorithms is being seen across the market, including agency broker Bloomberg Tradebook. “Bloomberg Tradebook is a broker and a technology company. We pride ourselves in our transparency, analytics, trading algorithms and staff of execution consultants,” says Gary Stone,director of development and trading research & strategy. “A few years ago FX trading technology was all about transparency - helping traders fi nd and extract liquidity so providing them with a deep liquid marketplace



and a market depth screen was the big game. Clients have moved very quickly and now they need much more than that – algorithms, STP and different order types. So our focus for the next year is on continuing to develop algorithms and build fl exibility that enables traders to combine algos together to implement their strategy and trade their idea..”

Self-service approach

This focus has led to an initiative that Tradebook calls its ‘black box within a box’. “Where some clients are going to third party, off-the-shelf FIX engines or contracting with developers to customise their algorithms, that only serves the top end of the market. We are attempting to do that directly on our front-end and through an order API. Customers will be able to mix and match different order types, data triggers and tactical trading algorithms such as trailing stops, laddering/scaling and average price algorithms together or build their own algorithms. It is a fl exible approach that enables a trader to get from idea to implementation rapidly before the market conditions change and negate the strategy.”

As the algorithmic trading market continues to develop and become more accepted in the mainstream, are we likely to see even the most vanilla of FX traders using their own customised algorithms rather than the commoditised products available off the shelf? “The mainstream FX traders may not have the time, funding, expertise or effort to develop algorithms. Even at the high end where high frequency traders are looking to develop their own algos and typically use brokers as a pipe, they are looking for an easy-to-use incubator for proving ideas before engaging in full blown development.” Stone continues, “This is what we saw in the equities market where it started with a ‘their algo-our pipe’ approach. In time, however, the traders recognised that we brokers are more adept at understanding the idiosyncracies and microstructure of the market. We have tactical trading algorithms, smart order handlers that are specifi cally tailored to fi nding and extracting liquidity and a set of execution consultants that can advise of which ones to leverage to seek a better execution. So in the future FX market, brokers will add more value than just a dumb pipe. It will be more a case of their idea and intelligence, our consultants working with for appropriate algo

>>>

Gary Stone “ in the future FX market, brokers will add more

value than just a dumb pipe.”

Jeff Grossman “The diffi culty with backtesting is avoiding back-fi tting.”



selection and our pipes. The client still uses their intellectual property in terms of what to trade and what price but they use our raw materials to interact more effi ciently in the market and let us make the decision on how best to engage the marketplace.”

According to Jeff Grossman, head of sales at Ireland-based Baxter FX, customising the algorithms is the only way to keep pace with the general fragmentation in the market and the mutation of liquidity. But there are several factors that FX trading fi rms must consider when deciding whether to customise their algorithms on an in-house basis or leave it to the provider. “They must consider the importance of any proprietary information and also refl ect on what the true cost of developing in-house will be. In terms of considering the involvement of a provider they must look at the benefi t of support and the ease at which it might be given as well as the reduction in time to market.”

Simulating performance

There are also several steps that must be taken to simulate the performance expected from a customised algorithm. “The key steps are debugging and optimizing by simply running the algo in production type environment. The greatest challenge is actually the replication of production conditions. The diffi culty with backtesting is avoiding back-fi tting.” Benchmarking also becomes more challenging once algorithms are customised, says Grossman, meaning that the greatest risk from customising your algorithms is that you waste resources on marginal improvements or improvements that you cannot measure.

Jan-Folkert Kunst, Managing Director of TradeSense, a Holland-based trading software vendor and algo integrator identifi es a number of steps that should be followed in the backtesting and simulation of a customised algorithm. The fi rst of these involves defi ning the various factors to be tested through written descriptions, case studies and fl ow charts. “Then you have to look at the coding, and the actual testing and the test environment to be used. The tests in production should be done with small amounts and be monitored at all times. The key principle is the documentation and the biggest challenge is fi nding the right test environment,” says Kunst.

Despite the challenges involved in the testing and the risk that customised algorithms may become too specifi c, cannot be adapted for any other use or be compared or benchmarked, Kunst believes that a bespoke approach has a number of different ways in which it can help fi rms differentiate their trading strategy. “The most important aspect is the fl exibility needed for changing market behaviour. Especially now, the greater trading fi rms are able to adapt their strategies in this way because of customised algorithms. Furthermore, as this market matures quickly, we will see specifi c demand arising in less commoditised products, like emerging market currencies and more new order types will be needed.”

Added sophistication

The trend for added sophistication in FX algorithms is something that is being observed across the industry.“What I am seeing is more complex algorithms built on top of pre-existing simple ones; this is a natural progression as the market matures and traders seek to develop advanced customisations on top of proven logic,” says Joey Horowitz, chief technology offi cer

>>>

Jan-Folkert Kunst “..as this market matures quickly, we will

see specifi c demand arising in less commoditised products, like emerging market currencies and

more new order types will be needed.”



of the Athena Transactions Platform at Thomson Reuters. “The basic trading algorithms are also becoming a much more routine and natural part of the system.” Another notable trend that Horowitz has seen is a change in the type of tools that traders are usingwhen building their algorithms. “Many are starting with complex event processing (CEP) tools but thenmove on to 3GL tools. So while CEP is a great technology for algo development, as the traders become more skilled and the algorithms more sophisticated and time sensitive they will often code directly into the execution management system’s API’s.” These trends are generally indicative of a growing familiarity with their algorithmic tools and arealisation that if they invest in better systems they will achieve better results, says Horowitz. “Time to market and faster prototyping has advantages but traders are realising that rather than taking short cuts when investing in their algorithms, in the end result they can make more money by coding them directly.” While there is still a signifi cant demand for the standard, off-the-shelf algorithms from manual traders looking to bring more automation into their executions, the decision to customise algorithmshas been made easier by the fact that it is no longer such a complex undertaking. “You no longer have toget the code from the vendor and extend that logic. The algos are simply an innate part of the system andhave become the default mechanism,” says Horowitz. Furthermore, the algorithms are much more user-friendly and accessible to the traders themselvesrather than their more technically minded colleagues or the supplying vendor. “The vendors have come upto speed and recognize which algorithms are naturally used in particular trading circumstances so thatwhen the trader undergoes a particular action, they will automatically be launching an algo rather thanrequesting one.” Challenges of testing

In terms of the testing process for algorithms, there are a growing number of tools now available that refl ectthe customisation of algorithms and the challenges involved, says Horowitz. “Functional testing iscomplicated and you have to be in control of all of your market data and order executions to create a deterministic and predictable testing environment so that you can be assured that your algorithm is

operating correctly. We provide tools that take into account algorithmic actions within the simulated market so that you can create a testing environmentwhich can monitor any subtle changes that have been made to the algorithm.” Despite the importance of the benchmarking and backtesting process, it is still not as widely practiced as it perhaps should be due to its complex nature and a lack of recognition within the market that there are tools out there to help them, says Horowitz. “It is hard and there is a lot of skill and technique involved. It is also important that the testing tools be directly connected to the algorithmic trading system itself. Ultimately correct testing procedures streamlines the whole customisation and development process because it helps traders understand how their algos will perform.”

Joey Horowitz “What I am seeing is more complex algorithms built on top of pre-existing simple ones; this is a natural progression

as the market matures and traders seek to develop advanced customisations on top of proven logic,”


FOCUS

More and more traders are migrating away from the single asset class strategies of the past

towards either multiple or cross-asset class strategies – a trend which must surely have

implications for the execution platforms they use. Similarly new and more

complex instrument types within FX are becoming increasingly popular which means that trading systems will have to be able to adapt and exhibit enough fl exibility to incorporate these new instruments.

Alongside these new trends there are still the enduring themes that have remained important over the last few years – the increasing need for straight-through-processing and greater connectivity and, more controversially, the demand for low latency

and high speed. The successful adoption of messaging protocols such as FIX has helped in terms of connectivity but is there still work to be done in this space? Similarly is there still a call for low latency or have most traders reached a point where execution can be performed no faster without signifi cant and perhaps pointless investment?

And fi nally what of the technology itself? Can the FX market make use of general trends such as the increasing maturity of the cloud computing or software as a service (SaaS) operating models? And does the whole are of Web 2.0 technologies such as HTML 5 and rich internet applications (RIA) have any place in the FX market? Are these web-based technologies of enough maturity to form the foundation for mission critical trading platforms and services? And are FX traders fully aware of the potential benefi ts on offer and really ready to fully commit to these areas of technology development?

Need for fl exibility“As markets, regulation and the entire fi nancial world are changing so fast in recent times, all parties including software development companies need to react faster and be more fl exible,” says Denis Borisovsky, chief executive of Ukraine-based trading software developer PFSoft. “It is very important to use repayable and advanced technologies like J2EE in order to build a scalable application with reusable code and inexpensive maintenance costs.”

The importance of technology like J2EE is being driven by the growing demand among traders for more performance-driven


>>>

Special FXbuilding a new breed oftrade execution platform

Technology within the fi nancial markets does not stand still for very long and, despite the advances made in electronic trading and execution in the FX market, the next stage of development and the building of a new breed of trade execution platforms are well under way. Nicholas Pratt explores some of the ways that these developments are taking place and what expectations banks and brokers have of their platform providers.

By Nicholas Pratt

FOCUS >>>


architectures delivering scalable and ultra-low latency functionality, says Borisovsky. “There are many factors at work when it comes to explaining this demand. Markets are becoming much more liquid in recent years. Trading algorithms are becoming much more sophisticated and automating trading mechanisms have become popular. The network of integrated parties has increased since the universal STP protocol (FIX) has become widely-used.

All these factors mean a challenge for old fashioned platforms, most of which are going out of business. New platforms have been specifi cally designed to cope with new market demands. They are based on new technologies and on specifi c architecture approaches for much better performance, scalability and fl exibility.” Similarly the move towards cross-asset trading platforms requires a much more accurate approach to architecture design, says Borisovsky. “These platforms should allow different interfaces and models that are specifi c to each market on top of the underlying platform. For example, our product has around six different types of margin models, which allow all main asset classes within a single platform. We also offer at least eight different ways of creating an order within the system: Matrix, Market Depth,

Order Entry, Basket, FX Board, Options Chain Visual Chart, which are based on top of the platform core. All these mean that the requirements for preferences of different trader groups and markets can be met.”

End of the siloThese developments underline the theory that individual product and silo-based trading is fi nally coming to an end as trading fi rms increasingly migrate towards multi-asset class solutions. “This is a basic evolutionary rule. Once people see something better they will use it, and it’s only a question of time. Multi-asset solutions prove themselves in many ways: they are easier to learn and use for both brokers and traders; they are much more reliable than some integrated multiple solutions; they allow consolidated risk management, hedging and user management. Finally, multi-asset platforms refl ect human nature. It is all about trading, and each asset class is just a little different instrument, but its core its always same – and very simple - buy, sell and make a profi t.”

At the same time as traders are embracing multi-asset trading platforms, they are also moving away from multi-dealer platforms that only address single-asset classes, says Paul Caplin, company founder and chief executive of Caplin Systems, a UK-based software developer that specialises in the client delivery aspect of the FX trading process. Caplin says that the multibank platforms that dominated the FX market in the early part of the millennium, such as FXAll and Currenex, are now facing greater competition from the single-dealer platforms they once replaced among buy-side FX traders.

“In those early days the multi-dealer platforms would argue that all clients wanted to see multiple quotes for trading for both best execution requirements and for the ease of use and removing the need for multiple screens and feeds. But this has turned out not be the case,” says Caplin. “It turns out a lot of traders are happy to trade with a single bank much of the time,if the offering is good enough. Having realised this, banks saw the need to offer something better in terms of client delivery and this became an important component in their FX offerings and not just an add-on.”

At the same time banks began to apply the same logic to other asset classes such as fi xed income and FX options and there was a rapid realisation that rather than having lots of single dealer platforms in separate asset classes, it would be better to combine them into

Denis Borisovsky “Multi-asset solutions prove themselves in

many ways: they are easier to learn and use for both brokers and traders; they are much more reliable than

some integrated multiple solutions...”


one multi-asset class, single dealer platform – a layer of software that spans silos within the bank that delivers a high quality, integrated trading screen directly to clients’ desktops. “The technology is quite advanced in this area but adding equities and derivatives to this is still at a relatively early stage,” says Caplin.

Does this mean that FX is an asset class that presents fewer challenges when included as part of a multi-asset class system? “For each asset class you have to connect to the appropriate systems. Some of the FX systems are quite old and they can be quite idiosyncratic. For example, rates trading requires more complex analytics because there are so many more instruments and yield curves and so on. But on the other hand, FX requires faster updates because the price changes so often. And because you are almost always supporting one-click trading of streaming executable prices, you have to ensure that prices are always displayed with very low latency, even when the user is receiving 100 updates per second. Those two factors – the high rate of price changes and the popularity of one-click trading – mean that the need for prices on the user screen to be constantly updated is more extreme in the FX market.”

RIA technologyThe other big factor in the building of trading delivery platforms and applications is the rapid change in the technology that is being used, says Caplin. The Java applets that were so successful in previous years are now much less frequently used – in part because of the demise of Sun Microsystems. In their place has emerged rich internet application (RIA) technology, a sub-section within the much vaunted Web 2.0 branch of technology. “In previous years this was mostly done via installed applications but this is increasingly rare because of the cost of installing them. Now, if you are building a trading delivery platform, you have to go one of two ways – the fi rst is to opt for a heavy client-installed app using either Java or .NET. A small number of banks engaged in high frequency trading are still installing Java-based applications because they feel they will gain an advantage on performance. The rest of the world, though, is using RIA technology,” says Caplin.

Rich internet application technology is still a new area for many banks and it is complicated by the fact that currently there are three competing offerings in this space – Flex from Adobe, Silverlight from Microsoft or native web technology – so banks have to make

>>>FOCUS

Paul Caplin “Those two factors – the high rate of price changes and the popularity of one-click trading – mean that the need for prices on the user screen to be constantly updated is

more extreme in the FX market.”


a decision about which technology to adopt and to train their development staff in while vendors have to cater for all three. “We currently support all three technologies. In the long run, native web technology is the most certain to succeed, though Silverlight is clearly very strong. There is a huge user community behind it and the support of large companies like Google and Apple so there is little doubt that it will go from strength to strength. But in the short term, technologies like Flex and Silverlight are able to offer an easier development environment. One question that banks need to ask themselves is what their time frame is. If they have a short-term outlook, almost all web browsers support Adobe’s Flex so they would be able to get an application up and running very quickly but in the long-term, it is a technology that will be squeezed out by web technology, particularly as HTML5 comes in and adds more power to web technology. We’ve tried to resolve this dilemma by providing a web framework – Caplin Trader - which takes all the pain out of building a native web application.”

Caplin believes that RIA technology will develop very rapidly over the next few years as the initial conservatism from FX traders fades and the technology matures. “FX was the fi rst asset class

to deliver trading over the web, so it is somewhat entrenched in the older way of doing things. But many banks are proving that RIA technology works very well so that caution is evaporating. I think it is particularly suitable because of scale. When you are voice trading there is only so many people you can speak to on the phone in a day. But once you go electronic, you can reach an unlimited number of people. But you need a technology that can be easily rolled out to all of those people.”

Better user experience

The demand for a better user experience in electronic FX trading is inevitable, according to ChristopherKallmeyer, Director of Product Development at trading technology vendor Financial SoftwareSystems. “Users see new services in certain products and then demand the same level of services on otherproducts.” This is particularly true of web-based technology and the whole Web 2.0 area which has been so pervasive at the general consumer level and helped retailers as well as banks to enrich the onlineexperience of their customers and now it is being explored within the FX trading market. “While speed of execution is often a focus, post-trade capabilities are equally important to create the best overall user experience. We are seeing banks, broker-dealers, and prime brokers looking to offer their clients increasingly robust data in real-time to help with decision support and risk management.”

Kallmeyer continues, “Cross asset support is another critical area of improved user experience. Single-bank portals have begun to regain market share from multi-bank portals because of their ability to provide access across an array of asset classes. Some of the banks have opted to build this on their own while others have turned to vendors to provide a speed-to-market advantage. This is an area where we are beginning to see more uptake.” He goes on, “In addition to robust data publishing and cross asset support, the banks are also looking for pre-trade margin and limit checking, real-time alerts delivered to the desk and the client, and full multi-lingual support in the web portal, statements, and other client correspondence. These are all areas we’ve been able to differentiate.”

Scalability without latency

According to Peter Jörgne, partner and chief executive at Sweden-based trading software developer Aphelion, the requirements for latency or scalability differ depending on the trading fi rm. “The technology

>>>FOCUS

Christopher Kallmeyer “We are seeing banks, broker-dealers, and prime brokers

looking to offer their clients increasingly robust data in real-time to help with decision support and risk management.”

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initiatives will differ quite a lot if you speak to a tier 1 bank who has been auto trading for a decade or if you speak to a tier 2 who is just starting they will defi nitely have different plans for the future. From the vendor side however I believe we will see more initiatives to offer complete suites of integrated end-to-end functionality within FX trading and cross asset bundling but it will be driven by the banks reacting to customer demand. The new generation will be based on auto-trading with broad connectivity to multi-bank portals and liquidity pools, with strong auto hedging and algorithmic execution, all performing trades with ultra low latency.” He goes on, “Most banks who have been in the FX business for a while are experiencing volume increases to a level that the systems can’t handle, they need scalability without adding latency. At the same time many banks and hedge funds are coming in to the market on more modern platforms with integrated components where low-latency has been part of the architecture and design from the start. Performance is a key requirement for success as the competition, trade volumes and volatility that the FX market experience requires timely and accurate processing of transactions. Quasar eFX is proving to be the quickest to respond to market quotes with capacity to handle the high volumes of trades with superior

aggregation of liquidity and risk mitigation with powerful autohedge functionality.”

Latency less importantFor others there is a general sentiment that low latency is becoming less important, at least in terms of this relentless race towards an end point of zero milliseconds. “There has been a big push in this area over the last two to three years and now I think you have either got low latency or you are not in the game and we are now into the realm of diminishing returns,” says Carl Martin, chief technology offi cer at Eurobase, a UK-based developer of FX trading software. “At the moment, for the 98% percentile, the performance time for rate generation is 6 milliseconds for the most complex of processes which includes algo processing, credit checking and constructing margins. If this was to be halved to 3 milliseconds, the tangible benefi t would be so slight as to be irrelevant. Most vendors have approached that sub-10 millisecond band and there is very little motivation for them to go any further than that.”

Martin does see far more interest in the demand for multi-asset trading platforms as vendors look to get more out of their customers and these customers look to rationalise the number of systems that they employ. However, as simple as the concept sounds, there are some technical challenges involved for vendors – particularly when considering cross-asset trading, where multiple asset classes may be involved in the same trading process or transaction.

“Platforms are essentially two types – business-centric platforms that have technology bolted on to deliver specifi c technical features or technology-based platforms that understand a bit of business,” says Martin. “The latter group struggle to adapt to other asset classes because of the different business processes that have to be understood. So we have tried to keep the two elements separate – the business engine from the technical delivery side. In a perfect world, traders would have a fully featured front-offi ce sitting behind a fl exible delivery tool. For example, if you have a platform that does spot FX and you want to bolt on a CFD, it is a big job. But if you have a platform that supports the A-Z of products and is delivered via a web page, to then deliver that via an XML feed is straight-forward.” Web technologyTechnology development has also been made easier by the advancements in web-based technology and its take-up by users, says Martin. “It has made it possible to create a much better user experience that was not

>>>FOCUS

Peter Jorgne “I believe we will see more initiatives to offer complete suites of integrated end-to-end functionality within FX

trading and cross asset bundling but it will be driven by the banks reacting to customer demand.”

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Frank DiasparraDirect: +1 941 [email protected]

www.aphelion.se

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possible fi ve years ago, particularly on the retail side where you can create very advanced front-ends with more widgets. We are also seeing a wider use of apps on other devices such as phones and this trend is now being transferred to trading and banking. So the user experience is becoming key. And if you look at the profi le of FX traders, they may all use technology in different ways but they are all concerned about the look and feel of their technology and their tools – just look at their Rolex watches. These are not supermarket employees so there is a lot more pandering to them in terms of the technology they use.

“There has been a massive shift forward in terms of web technology. When we entered the gateway space six years ago, the connectivity options were very varied but now the whole world has centred on FIX. Similarly, when it comes to the technology for frameworks and front-ends, it is becoming a lot more commoditised. For the fi rst time ever, we are seeing mainstream web technology being used in the banking and FX space. The mainstream vendors in this space now all have an FX service or an equities service where they are showcasing their technology for a banking audience. For the fi rst time, banking requirements are driving the technology.”

While Martin states that this development has made it easier for vendors such as Streambase by creating another tool in their armoury, he is also cautious about the rate at which new technology is developed in this area and, as Caplin stated, the need for vendors to ensure that they do not leave themselves committed to a technology that later proves to be out of favour and fashion. Vendors therefore have to approach this new technology with an attitude of openness and fl exibility. “In software there is a general principle of inversion of control – rather than hardwiring any technology, you make it ‘plug-inable’. The pace of change is so fast you can easily fi nd yourself with a Betamax and not a VHS so it has become important that you don’t hardwire the technology into the heart of the mainframe.”

Martin also agrees with Caplin’s earlier assertion that the single-dealer platforms have become more popular at the expense of the multi-dealer platforms. “It has been interesting how it has panned out. Four or fi ve years ago, it became clear that this was going to be the way the market

FOCUS


Special FX - building a new breed of trade execution platform

developed. Multi-dealer platforms had become popular but for the vendors, do they really want to go to market with 30 other users, competing on nothing other than price? As a vendor developing single dealer platforms it is much easier to differentiate or to be fl exible enough to provide specifi c services at a high margin.”

Conclusion

Ultimately, says Martin, the trend for multi-bank platforms will extend to the point where asset class-specifi c systems will be a thing of the past. “We talk about FX platforms and equities platforms and fi xed income platforms as though they are all different systems but in the future, even in two years time, I think we will just be talking about trading platforms. We are already seeing cross-fertilisation among traders – the head of eFX may not have come from an FX background. The underlying prices may still be serviced by the banks but the clients of that bank may be trading in many different asset classes and they want one point of contact at their banks. So the banks are thinking about the electronic trading platforms in a much more holistic way, combining FX with fi xed income, equities, CFDs and even spread betting.”

Carl Martin “Platforms are essentially two types – business-centric

platforms that have technology bolted on to deliver specifi c technical features or technology-based platforms

that understand a bit of business,”

What does a Bridge bridge? Most MT4 Bridges provide some kind of incoming quote handling for price information fl ow into MT4, often referred to as a rate or price feed. The bridge handles various price “mark ups” as well as order execution to liquidity providers, post trade interfacing to back offi ce systems and reconciliation. Many bridges also calculate how much money the broker is


Better Bridge - better broker?

RETAIL e-FX PROVIDER

Excellence in quotes aggregation, latency detection with advanced risk control on the back and front ends, as well as near perfect real time reconciliation/synchronicity between the MT4 platform and back offi ce systems are all becoming critical to broker performance, and profi tability in an increasingly competitive FX marketplace. e-Forex talks to some of the leading MT4 Bridge providers to discover more about how different bridging technologies are characterised and what are the key trends in this relatively new, and specialized fi eld.

making, an item of great interest at higher levels in a typical FX broker operation! Since MT4 has some diffi culty handling certain order types, the the bridge helps additionally with this functionality.

Obviously low latency information on which the client account trades is a crucial initial area. Once the client or their chosen MT4 “Expert” formula issues a buy or sell order the bridge helps to handle and fulfi ll this. Since MetaTrader4 in particular has certain ways of handling partial fi lls, for example, the bridge is able to assist with this functionality.

The order also requires routing to one or a variety of liquidity providers and or banks. Most bridges allow the broker to split clients up into groups, giving him the option of taking varying levels of risk against client accounts. These features are dealt with in more detail later in the article.

“The bridging process is quite simple,” says Francisco Martinez, Managing Director of Rous Technology LLC, a long established MT4 Bridge company based in San Diego. “It is installed on the same server that the


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MT server is hosted on and connects the Metatrader to any counter party with a FIX API. A broker just assigns a group to the Rous Dealer and then any trades from an account from that group will be automatically routed to the counter party of the broker.”

Demand and competitionEighteen months ago there were very few MT4 Bridges available. Now liquidity providers like Currenex have begun to provide their own bridge solutions. While some brokers have successfully developed their own MetaTrader Bridges many have failed and have now outsourced their bridging solutions. Having a bridge helps lower risk and protect the company from runaway position possibilities that in some cases can threaten a brokers existence and client funds.

“We are constantly seeing new platforms that clients want to connect their Metatrader to. We feel that listening to our customers needs and acting quickly to their demands allows us to stay ahead of the curve,” states Martinez.

One Tier One US bank recently indicated that they had a team evaluating no fewer than seven MT4 Bridges. One may imagine that this “team” may be little the wiser at the end of their assessment since they have not actually yet tested these bridges live. Some of the more established bridge companies appear to have had more than their fair share of operating problems, causing brokers to re-evaluate their choice of MT4 Bridge.

Stephen Leahy“A stricter regulatory environment has also been an

additional spur on the demand for bridges, forcing many brokers to STP all of their risk in order to meet capital

adequacy requirements,”

“The arrival of high frequency high volume professional traders and even institutional players in the MetaTrader space has changed the requirements for risk control and effi cient execution in this market,” remarks Clive Diethelm, CEO of PrimeXM GmbH, a Swiss MT4 Bridging solution company out of Zurich.



“A stricter regulatory environment has also been an additional spur on the demand for bridges, forcing many brokers to STP all of their risk in order to meet capital adequacy requirements,” comments Steven Leahy, CEO of Capital Markets Access Partners, marketing partner to oneZero Financial.

Broker prioritiesWhat are the three most important things a broker looks for in a MetaTrader Bridge? We asked several bridge providers this question. They replies are, not surprisingly, similar though there are some differences:

Tom Higgins, CEO of Gold-i, United Kingdom:

1. Low Latency 2. High Reliability.3. High Performance.

Clive Diethelm, CEO of PrimeXM GmbH, Switzerland:

1. Position consistency between the broker and its liquidity providers.

2. Stability3. Throughput

Francisco Martinez, Managing Director of Rous Technology LLC, United States.

1. Stability 2. Flexibility3. 24 hour support

Andrew Ralich, Co-Founder & Principal, oneZero Financial Systems, United States.

1. Stability2. Confi gurability3. Performance

A larger European based broker we spoke to (a client of one of the above companies) highlighted the following features as most important when looking for a bridge:

1. Performance and speed 2. Ability to Confi gure 3. Risk Management and profi t locking.

Markup Control A “Price Feed” or a “Rate Feed” is crucial to the effi cient running of any broker operation. Some brokers will use different liquidity providers for different currencies, according to Francisco Martinez of Rous Technology, with certain currencies better dealt with by different liquidity providers or banks.

If for example the EURUSD trades at an average spread of say, typically, 0.7 pips throughout the European

Tom Higgins“When a bunch of EAs trigger at the same time, your bridge needs to be able to cope with 100’s

of orders per second,”

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day, the broker can decide to mark prices up either to a constant level of, say 1 pip, making an average of 0.3 pips per trade or the broker makes a variable spread with the mark up changing every time the spread changes at the underlying liquidity source. The broker may want to make a “minimum” mark up, thus taking advantage of the brief times in the day when the spread is exceptionally low, especially on an aggregated feed. For example, even though the broker may allow the rate feed to show as low as 0.6 pips, the market may give the broker a 0.1 or 0.2 or even no spread at times, so allowing the broker to profi t from the difference.

“Such low spreads would generally only take place on an aggregated feed,” suggests Clive Diethelm of PrimeXM. ECN Model Clients in general dislike the idea that every time they trade the broker is making a constant markup, especially when, at very brief times the spread at certain ECN’s like TDFX is below zero i.e. a temporary negative spread. ECN “solutions” for MT4 have sprung up from brokers such as MB Trading, FXDD, Deltastock and FX Open. In certain case the broker in many cases provides the “raw bank feed” to the client, only charging commission.

The commission, however, is then effectively the markup, with say $18 per million the equivalent of 0.36 pips per trade. Some Bridges now support the ECN Model.

Quotes Aggregation

Some larger brokers will aggregate prices from a number of liquidity providers and banks. Banks prefer to discourage this practice as they like to have all the fl ow from a particular symbol, which allows for possible netting opportunities.

Certain bridge solutions, however concentrate on aggregation capability more than others. “PrimeXM is particularily strong in the area of quotes aggregation and order routing, both of which have been integrated into the PrimeXM Bridge, giving the broker the opportunity to take full advantage of a range of liquidity providers and banks as well as multi banded liquidity for superior execution,” comments PrimeXM’s Diethelm.

Clive Diethelm “In today’s volatile markets, positions which

are out of balance can be disastrous to a broker. A bridge which does not ensure this balance is

worthless as a risk management tool,”




“Advanced quote aggregation can give brokers the edge and make a huge difference to profi tability - both in terms of better pricing for the broker and their end clients. The PrimeXM based broker can essentially decide whether he wants to hit multiple banks and liquidity providers simultaneously in order to quickly execute at a low spread or take a less aggressive approach and respect more fully the various liquidity bands. In this case, the engine can essentially pick the bank or liquidity provider(s) that supports the best overall price for the size of the trade,” asserts Diethelm.

Tom Higgins of Gold-i tells e-Forex that quotes and best price multi contributor aggregation will be available in the new Advanced Bridge from Gold-i, due in Q3, 2010.

Apart from pure aggregation, the ability to stream multiple rate feeds for different size clients is also important - intelligently quoting for different liquidity bands and then executing according to variable logic. For example, a GBPUSD spread for 3 million will be different for 50 million or 500 million in size, at any moment in time. Contrary to popular belief in the retail market, spreads are higher for bigger size orders. Andrew Ralich of oneZero fi nancial has told us that this is a common requirement at enterprise level brokerages, where different rate streams are more common for larger MetaTrader clients.

Choosing a bridge

Before deciding which Bridge solution is best suited to a brokers particular needs there are a few areas that require examining in more detail. These revolve around Execution, Order management, API’s, and Client profi ling:

1. Execution Once the customer or their “Expert” formula makes a buy or sell decision, the bridges must carry and fulfi ll that order. There are several issues here. One is traffi c. Can the bridge cope with heavy throughput

(i.e. transactions per second) in an effi cient and timely manner?

Can a bridge, for example, placing several hundred EA transactions per second fulfi ll orders in the same number of milliseconds as another bridge? This is a very sensitive issue between the different bridges, so its best to test. And test some more. At what point will the bridge start missing orders, or simply crash? Will clients start to get a “busy” signal, which no doubt does not help client retention levels?

Tom Higgins of Gold-i claims that current testing allows his bridge to process well above a hundred trades a second. Bridges have lost brokers clients through ineffi ciency at this basic operating level. All the bridges interviewed for this article claim to have addressed this issue successfully. We have little doubt some better than others. Some bridges issue the broker client with EA’s so the broker can self test throughput. We suggest the broker conduct their own testing in this crucial area using not only the bridge providers criteria but more especially their own.

2. Partial Fills and Limit OrdersSome older and more primitive bridges are essentially unable to address this issue and all orders are only capable of being fi lled at market. This poses a problem as certain customers will naturally place large limit orders - to be fi lled at that price or better. How the bridge works with MT4 to report these “partial fi lls”

oneZero Financial Web Reporting System


is clearly crucial, as MT4 is not optimally set up to cope with this order type. The companies interviewed in this article all support partial fi lls, but in different ways. Its is therefore best to assess this - once again - via extensive questioning to broker requirement and testing.

3. Server or Manager API? Gold-i have chosen to use the server API rather than the Manager API. The Manager API connects in remotely. “Its a small subset of the Server API,” says.Tom Higgins. “Whilst you can do a lot of things in it you cannot take pretty much complete control of MetaTrader as you can with the Server API. Because its remote its much slower because it has to go across the network in and out of the server. With the Server API your programme actually becomes part of the server, so when something goes on in the server (like an order request) you get notifi ed of that immediately rather than having to go via a message.

This allows you to stop MetaTrader doing the things you don’t want it to do and make it do the things you do want it to do. And you can make it much much faster. We are talking three or four milliseconds compared

>>>Better Bridge - better broker?

Francisco Martinez “We are constantly seeing new platforms that clients

want to connect their Metatrader to.”



to hundreds of milliseconds,” he says.

Andrew Ralich of oneZero Financial comments that, “We’ve found that there are specifi c advantages to both the Manager API and Server API. We use both in our Bridges. The Manager API is useful for decoupling the processing of trades from the MT4 Server, while the Server API gives more precise control of the internals of

MT4. Depending on the needs of our clients, we can utilize both APIs simultaneously to achieve the best results in terms of control and processing power.” The advantages of both solutions are further illustrated by the fact that Rous Technology uses the Manager API, while PrimeXM uses the Server API.

4. Client Profi lingIn some brokerages larger “A” stream clients’ orders are STP’d and smaller clients’ orders can in certain cases be placed in the “B” stream, with the smaller orders fi lled at market prices by the broker on his own books. Most bridges reviewed here are able to separate these two streams as specifi ed by the broker.

The ability to separate clients into “A” (STP) streams and “B” streams (broker takes position risk) is a feature supported by most advanced bridges now. The grouping can become more advanced, with some

bridges allowing clients to be separated by symbol, size or even time of day.

Client profi ling is a hot issue. Too much interference in

separating client orders or taking positions against clients can be

Andrew Ralich “The product doesn’t offset risk unless it’s doing it 100% of the time and it’s not a tool you can rely on unless you know

its up and running at all times,”

oneZero Financial Bridge GUI

>>>

counter productive, as the broker moves from a pure netting functionality to actually taking a view on the market and betting against individual client positions. With several years of experience in low latency arbitrage, Diethelm has built latency protection into PrimeXM’s execution algorithm. He comments: “We have extensive experience seeing clients trying to hit off-market prices. In order to properly protect our

broker clients, our bridge maintains real time statistical profi les on each customer providing a fair and level playing fi eld across the board.”

Conclusion

Ultimately, all the bridges discussed in this article offer advantages in their own way. Different brokers require in many cases similar but different custom solutions. The variety of choice and the clear dedication of the above teams is readily apparent, and should provide brokers with a variety of willing options and alternatives. If one word summarizes the assessment process in this area, that word would have to be to ask all the questions from all angles and then do extensive testing. PrimeXM claims that one enterprise level US broker testing one of the above bridges recently had over a dozen people working in a simulation environment just trying to “break” their bridge (unsuccessfully),

showing just how seriously some brokers are taking their bridge testing. Ralich claims that the oneZero Bridge has “never” crashed to date in a live environment. While this article was being written, Gold-i was conducting extensive simulation testing on its bridges performance claiming the ability to push through over 100 trades a second via Hotspot’s simulation engine. The competition is on.

g

MetaTrader 4

Server

Gold-i FIX API Plug-In

Generates FIX messages (no

FIX session)

LP FIX

Gateway

Gold-i Gate Bridge

FIX Engine (QuickFIX).

64 bit Windows Service

Trading Sessions &

Quote Sessions

(FIX messages)

Feeder -

Price

Interface

Orders / Execution Reports

(FIX4.4 messages)

Logs

Rates

MT4 Admin

Bridge Rules & Setup

MT4 Client

Logs

Persistance Files

Persistance Files

BackOffice FIX

Gateway

Back Office Session

(FIX messages)

Client Back-Office Systems LP Execution Systems

Gold-i Gate Bridge Schematic



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White Label Solutions


Andrew, why was there a need for myForex On-Site?When it comes to online FX trading, “Retail” doesn’t mean “small” anymore - especially now, when the population of individual FX traders, both professionals and amateurs, has grown exponentially. Increasing numbers of larger players are entering the Retail FX trading space and others are evaluating this attractive market. Their software choices are to either acquire a Retail FX company with existing trading platform, to license a white label platform from the Retail FX market maker, or to build software from ground up. Each of the above strategies has its own drawbacks and limitations:

• acquisition is expensive and most likely will come with proprietary or limited scope software not compliant with business and technical requirement of large company

• dependency on the white label provider limits business profi ts and fl exibility of customizations, plus it can be a serious security concern

• adapting the existing institutional style trading platform is not a trivial matter due to the huge design differences between interbank and Retail trading models

• developing a fully featured and scalable Retail FX platform could take years and signifi cant investment.


myForex On-Site

PROD

UCT

REVI

EW

FinaTek (http://www.fi natek.com) is the provider of the myForex Trading Platform. Since 1996 the founders of the company, Alexander Ryvin, Anatoly Tkach and Andrew Sinitsyn have been engaged in the design, development and supervision of proprietary trading platforms for leading Retail FX industry players like MGFG, FXCM, FX Solutions, and others. In 2002 they got together to create the next generation enterprise grade Retail FX trading platform. In February 2003 the fi rst release of the myForex platform was successfully launched for CMS in US. Currently myForex is being used by Retail FX market participants all over the world, thus demonstrating that FinaTek’s fl exible and scalable technology solution is ready to be adopted by the leading FX market players.

The fi rm has recently introduced myForex On-Site a new solution designed to satisfy the demand from larger market players for a Retail FX trading soft-ware platform. Online Retail FX trading has enjoyed exponential growth since its inception and attracted attention from a multitude of banks and brokers. myForex On-Site is the fi rst market proven, enter-prise grade, turn-key software solution suitable for well established companies with high technology standards and strict security policies. Today we in-terview Andrew Sinitsyn - the lead system architect for myForex On-Site, and FinaTek CTO:

We believe that the best and the most cost effective approach is to acquire a trading platform site license from a reputable vendor who understands a clients’ specifi c market needs, adheres to technology standards and policies, and is fl exible to adapt to rapidly changing market requirements. myForex On-Site is a perfect fi t for that purpose. It’s creation was based around 15 years of experience covering multiple FX broker-dealers and their diverse business requirements.

What led you to offer myForex On-Site?Historically we were oriented towards an application service provider model, or a so called SaaS (Software-as-a-Service) type of service. With the SaaS service model, myForex Platform is delivered from and supported in our data centers. We fi rst received a request for trading platform migration and in-house installation when IG Markets was in process of acquiring our customer - FXOnline Japan. The whole process required quite a few system-wide changes along with the necessity to comply with strict internal policies and procedures – all in a tight schedule. Finatek also passed technical audit by PriceWaterhouseCoopers. After successful completion of the deployment and data migration to IG Markets data centers, and helping to run the platform in-house for over a year, we are now completely confi dent in our ability to offer the same type of On-Site installation to all interested companies.

What makes myForex On-Site attractive for prospective clients and how it compares to your current SaaS service model?From its very beginning, the myForex core architecture was built on leading enterprise technologies to deliver a reliable, scalable, and fault tolerant FX trading platform solution. Its cluster based implementation supports tens of thousands of concurrent users and millions of transactions per month. myForex provides virtually unlimited integration possibilities with external products and services. The myForex Platform is based on the standard set of technologies and infrastructure typically used by most fi nancial companies. Its support and expansion wouldn’t require any unique skills and can be done with existing IT resources.

Both SaaS and On-Site solutions share the same reliable and proven architecture, as well as the trading functionality. The major difference for myForex On-Site is its licensing and support approach.

The SaaS licensing model is based on transaction fees. This pay-as-you-go approach eliminates signifi cant initial investments for small FX broker-dealers thus

allowing them to stand against the competition. This model relieves the customer from the trading platform development and support burden thus allowing them to concentrate on business development and to save time and money by outsourcing technology needs to professionals.

However not all Retail FX market participants, especially those with established IT departments, are willing to outsource their technology needs primarily due to operational and data security concerns. They are looking to have the trading platform deployed in their own data centers with complete control over technology. At the same time, they cannot afford to invest years building it from scratch. The On-Site licensing model is designed specifi cally for that purpose: a one time fl at licensing fee, knowledge transfer to the in-house IT team, optional annual support and upgrade fee, full access to the Platform source code and documentation.

Are you going to continue to offer the SaaS service model?We are very well aware of how diffi cult it is to build and support data centers with full data redundancy and failover. That’s why not all customers are technically capable of running the trading platform internally, or could afford to pay for the platform license upfront. Our hosting offering is one of the most reliable and cost effective in the FX industry, so the SaaS model is not going away. At the same time, with the introduction of myForex On-Site our customers can start with the SaaS model and switch to an On-Site license later when they expand their business and acquire expertise necessary to support the platform internally.


For further information about myForex On-Site please contact:

info@fi natek.com

RETAIL e-FX CLIENT

Different breeds?

Ross Ditlove, CEO of MB Trading, says his company sees little difference between professional and semi-professional, also known as very active retail traders, other than committed capital. As a result, MB Trading’s professional grade technology platform services both retail and professional FX traders alike. “It was a long standing industry belief that larger accounts should receive tighter spreads. Our fi rm considers this a preposterous notion and one which

has no relevancy in today’s forex market place,” he states.

John Moran, COO at Advanced Markets, states that never before have retail traders and investors been exposed to such a high level of technology, liquidity and brokerage options in foreign exchange. He notes: “The retail space has become a highly sought after segment for banks and brokers alike.

MAREX Financial has been drawn it to the retail client world now because of demand. Previously, it was in the business of servicing and facilitating the needs of prop traders, notes Farooq Muzammal, Head of Foreign Exchange and Bullion at MAREX Financial. He says that until recently, this was done only for Financial Futures traders, while the foreign exchange division of MAREX traditionally catered solely to institutional customers such as banks, hedge funds and other fi nancial institutions.

On MAREX’s retail client base, Muzammal remarks: “For these customers we have developed a private client group of seasoned professionals who know the retail client world very well. It is their remit to offer these customers the same high quality service that we offer our institutional customers. We are not looking for short term, small deposit and highly leveraged customers, but are offering whatever services are needed to maximise the longevity of our customers. We are looking for long term relationships; this is why we look to protect clients’ interest by not offering margin levels that are unrealistic for long term success.”

Within the retail space, Muzammal notes there are two distinct types of customers. “There are those that we consider true ‘retail’, with small deposit sizes, usually looking for leverage greater than 100:1, who are consequently high risk and have a high propensity to lose their deposits. Then there are which we at MAREX term ‘professional’ private clients; they will have a higher deposit, may ask for 100:1 / 50:1


Bridging the gapRetail meets Institutional FX

The retail forex trader segment is now a client base as highly sought after as the institutional market. Banks and brokers are bending over backwards to make these smaller players feel like part of the forex family, providing them with the tools of the trade more commonly associated with institutional traders and investors. Heather McLean takes a look at how retail providers are bridging the gap between institutional and retail.

Heather McLean

leverage, but will very rarely use it and have a disciplined approach to trading. MAREX’s typical customer is the latter.”

Muzammal notes that retail clients rarely have the same access to charting, news and back offi ces that an institutional trader will have, so for that reason, retail platforms have to offer these functions built in. “We have seen from our own customers that the more sophisticated ones will in the end get their own, more complex, charting packages, and use our professional stand alone back offi ce system. For these customers the cost of execution is key, so we offer MAREX FX Black, a multi-bank, multi-liquidity source platform that make sure that our retail customers are not the poor cousins of their institutional counterparts.”

Moran adds a word of warning in light of traditional institutional services being fi ltered down to the smaller end of the trader market, however: “Increased levels of transparency and technology provide the tools to make every retail investor feel as though they can be successful and beat the street,” says Moran. “That being said, there is a cost, or barrier to entry. Whether it is educational seminars, signal software or developing an API or FIX connection to a slick home-based trader, professionally built operating and hardware systems are becoming the norm. But the cost can be high; in the tens of thousands to trade FX liquidity.”

Tools of the trade

On how retail FX brokers are providing innovative institutional FX pricing and leverage structures to give retail traders more precision and trading power, Moran states that retail clients are only now grasping the positive impact of direct market access (DMA) and what that can mean to their liquidity and execution. He says they are migrating away from a ‘broker trading against’ model of the dealing desk, because they know that their broker is on the other side of every trade they execute.


>>>

RETAIL e-FX CLIENT >>>


Moran notes: “The DMA model has afforded the retail investor complete transparency direct to the interbank market, and in some special cases to bank-only liquidity portals, such as Advanced Markets. The bank participants in these portals embrace the fl ow because it is a natural liquidity source that they have not had access to previously through their normal distribution. This mutually benefi cial environment allows the banks to price the bank-only DMA pool very aggressively, commit to very limited slippage, and complete all fi lls. The backend order management system (OMS) plumbing benefi ts derived from the years of capital and time that the banks have invested, makes the routing of trades untouched, straight through the settlement process.”

OMS were originally developed to handle post trade activity, but over the last 10 years OMS has increased effi ciency and returns as a front end tool, to capture trade fl ow from one piece of technology to a broker or settlement engine. Moran remarks that retail brokers have had to develop interfaces to accept trade activity from the more highly sophisticated technology drivers, but also be able to handle a simple fl at fi le download.

“This has given retail clients the ability to create a more cohesive, low-touch trade entry option that dovetails well with DMA technology. While this option has its obvious advantages for the retail space, it can be a daunting task for the less sophisticated trader to manage the intraday trade and settlement activity,” says Moran. “In an effort to effectively manage trade fl ow, access to a front end application, trade blotter or GUI, is still a necessity. Retail brokers now offer many connectivity options including multiple front and middle offi ce applications. We feel this will continue to morph as retail clients’ increase their reach into DMA liquidity.”

Reducing latency

Retail FX brokers are also pioneering advanced and low latency trade execution for retail forex, Moran continues: “The entire DMA model was built to level the playing fi eld for retail traders. It brings a completely different product to the market; I equate it to using dial up internet access versus internet access through a t-1 line. There is no comparison. Retail brokers have looked at gaining the edge with the retail segment by offering value added services, such as research and news services. While those value-add services are a nice to have, there is nothing that beats tight spreads and instant execution. The DMA model offers the best of both worlds; a value-add service, but with direct access to a multi-bank, unobstructed liquidity portal.”

Prior to the advent of DMA in the world of FX, retail traders had very limited, if any, access to the interbank market. DMA has created an E-Harmony, match-making style environment, where it matches approved broker clients to approved bank liquidity. This is only accomplished through a strong communication conduit between the retail clients, anonymously vetted, with a strong interbank partner, says Moran. This type of transparency ensures that clients are not deliberately trying to harm the liquidity pool, while at the same time giving them an environment that is anonymous, provides deep liquidity and uber

Farooq Muzammal “We are looking for long term relationships; this is why

we look to protect clients’ interest by not offering margin levels that are unrealistic for long term success.”



tight spreads, all afforded by participating banks and managed by the broker.

There are several factors that have played a role in reducing latency to the end retail clients that Moran separates in two parts: what measures have the brokers used to reduce latency for retail clients; and what steps the retail clients have taken to reduce latency to their brokers. He explains: “The brokers have used proximity to bank servers, wider bandwidth and more sophisticated technology in the API, but perhaps the most critical factor is and has always been how long the broker holds on to the trade.

“Retail clients that use a GUI have also increased their bandwidth to speed their internet connectivity, and additionally invested heavily in bypassing the GUI completely. They have developed FIX connectivity direct to the broker systems. This bypass not only gives them better access to liquidity and execution, but allows them to use more sophisticated signal or algorithmic technology, previously available only to the most sophisticated investors.”

Control with an ECN

The MB Trading model is designed to give the client the most control possible, says Ditlove. This design is based on

the notion that full transparency to the marketplace is the only way to interact fairly. MB Trading aggregates liquidity from multiple sources, which includes: banks, automated trading systems, and dark pools of liquidity. The best bid or ask price at any moment can come from any combination of these sources, says Ditlove.

In the 1990s, MB Trading was part of the movement from exchanges to ECNs in Equities, to put the power of execution in the hands of the traders. Its forex system was designed to be a non-deal desk (NDD) system from the start. MBT then aggregated STP executions with its bank partners and added ECN components into the mix by showing the customer the full Limit order book. By maintaining a centralised order book, including stop and trailing stop orders, and keeping Limit orders on the ECN directly, the business lowers the latency of trading considerably. Further, says Ditlove, MB Trading offers software development tools, API’s and FIX 4.4 integration. He says this allows more technologically advanced clients to write their own trading software and to interact with the company’s systems in a fully electronic manner.

Forex traders were previously limited to three basic order types when working with a deal desk: Market;

Limit; and Stop. In addition, many deal desks brokers would not allow a trader to place a Limit or Stop order if it was too close to the current market price. This is done to allow the brokers

John Moran “The DMA model offers the best of both worlds; a value-add service, but with direct access to a

multi-bank, unobstructed liquidity portal.”



dealing desk to see the orders on their

books well in advance of moving their prices.

This still happens today, but many brokers have become a bit trickier, remarks Ditlove. He says: “Some now call themselves ECN’s when they are not. We have a very simple test that we employ and use to help clients understand how a true FX ECN like MB Trading’s operates. Find any currency pair on any broker’s system. For simplicity, use a pair with a three or more pip spread. Let’s say the Bid is 100 and the Offer is 103. Now enter an order to Buy at 101. If you and everyone else on your broker’s system do not immediately see your new Bid at 101, thus making the market now 101 by 103, then you are not on a true ECN. It’s that simple.”

Ditlove adds there is no delay or manual intervention between when a Limit order or bank quote arrives, and when it appears on MB Trading’s quote depth for others to see. “Our proprietary routing system, which has won awards in the equity arena for years, is able to route a customer order to whichever source of liquidity is the best price and most readily available at the time. Our quote system integrates the various sources of liquidity and displays a full montage with size at each level of price for all to see. The most

effi cient execution is a matter of fi lling against these price levels in a systematic fashion.”

Auto and algo

On devising new tools and solutions for retail FX traders to undertake more advanced automated and algorithmic trade execution, Muzammal comments: “We wanted algorithmic trading to be available to a wide subset of clients, some of whom do not have the experience to build their own algorithms. Marex Black was designed with these traders in mind. The low latency infrastructure, built in algorithmic capabilities, and FIX connectivity is ideal for these clients. FIX access and hosting options allow even more fl exibility for clients demanding more.”

Moran states that the bar on automated and algorithmic trading continues to be raised for retail investors, but not always with the desired result. He explains: “Their desire for added sophistication is insatiable. Every new piece of technology that comes to market is slightly different, in some cases better and some cases worse. An added layer of sophistication is now being derived by very intelligent and sophisticated developers globally.

“Rocket and nuclear scientists, from obscure technology havens such as the Ukraine or Kazakhstan, have become more mainstream,” continues Moran. “Their products are being designed specifi cally for retail investors. Their products and sophistication are

Your FX bridge should be integrated with your CRM system.


RETAIL e-FX CLIENT

making some retail traders much better at what they do, but in some cases, it is like putting a nuclear reactor in the hand of a third grade science teacher - no disrespect intended for elementary school teachers! My wife is a wonderful kindergarten teacher, but given a nuclear reactor...one can only wonder.”

New trading relationships

To develop new trading relationships that more closely align the interests of both trader and service provider, MB Trading has recently launched MBT World, its new online community. Here, traders can talk and chat with support representatives and with each other, can request new features they would like to see MBT develop, and vote on other people’s suggestions. One of MB Trading’s new platforms, MBT Lightwave, allows traders to create strategies. “We want to hear from our clients, and obviously, we use our technology to give them the tools that they need to accomplish this. MB Trading continues to support clients in their endeavours. We understand our success is completely based on our clients’ success,” comments Ditlove.

MB Trading has created a central hub that acts very much like a stock exchange does today. It has successfully centralized a great deal of retail liquidity. The more clients MBT has, the more level and effi cient the playing fi eld is for all, claims Ditlove. As MB Trading continues to grow, its spreads get tighter and its cost to transact falls, Ditlove continues; last year MBT passed on a 40% reduction in commissions to its clients. “Many incorrectly believe that such a model prevents the smaller retail trader from fairly participating; nothing could be further from the truth,” he continues. “Mini-sized orders, routing to all banks, sub-pip increments, and fairness in quotes were all once believed to be something reserved for the large trader. We have shown this to be a fallacy and thus available to all our clients.”


Muzammal adds: “As clients get more advanced, they expect more from their broker. We see this as a good thing. Our key strategy is to build long term relationships with all our clients. We therefore provide a range of tools to meet their ongoing requirements. We have a platform available with built in algorithms allowing them to trade based on their view of the market. We also allow clients to connect using systems with expert advisors, allowing them to easily plug in their own trading strategies. For more advanced clients we are able to provide API access to enable them to plug their own trading application directly into the MAREX Black liquidity hub.”

On how brokers are devising new tools and solutions for retail FX traders to undertake more advanced automated and algorithmic trade execution, Ditlove comments: “All three of our platforms (MBT Desktop Pro, MBT Lightwave, and MetaTrader 4) have different versions of scripting languages. Obviously, in a liquid, 24 hour market like forex, the ability to write scripts that behave appropriately is critical to everyone, from the small retail trader to the big funds and systems traders.

“We also feel that it is important that we make it easy for traders to connect to our execution and account systems in whatever manner suits them best. We offer an SDK kit, Quote API, and FIX 4.4 connectivity to developers so that they can concentrate on what matters most to them, which is taking their own vision of a trading system or frontend GUI and connecting it to the marketplace. The underlying foundation is that clients trust that MB Trading is facilitating real time market executions without intervention,” sums up Ditlove.

Raising the communications bar

Looking after the client is the key to brokers raising the bar in retail FX service provision, observes Moran. “In many cases it does not matter how much investment you make in trading technology, it comes down to how you service the client. While automation has changed the way we communicate, it has not changed the fact that people want and need to communicate. Brokers today do not just need to

have call centres, 1-800 numbers, or email; they want instant messaging or Skype.

“When you have a trade that is about to reach a resistance level and you are having trouble with your platform, you do not want to have to wait in a call queue or send an email; you want to hop on Skype and tell the representative ‘get me out’ of a trade. Traders want to feel like they have a direct, real time connection with someone sitting at a desk that can get them out of the trade if necessary,” concludes Moran.

Bridging the gap - Retail meets Institutional FX

Ross Ditlove “We want to hear from our clients, and obviously,

we use our technology to give them the tools that they need to accomplish this.”

RETAIL e-FX CLIENT

Rise of automated tradingAuto trading has gained in favour over the last few years for many reasons, not all of which are obvious, James Green, managing director and chief compliance offi cer at FXDD, notes. Having the ability to manage one’s account, rather than having to trade one’s account, provides psychological support to those whose time or interest prevents them from learning how to read the structure of a market on their own, he notes.

“Thus the availability of Expert Advisors and other assorted algorithms has provided a boom to third parties and made market participation more readily available,” comments Green. “Whether the algorithms or Expert Advisors provide the hoped for profi t is another question. Some of the more interesting innovations with automated software include sophisticated programmes that permit traders to assess


AutomatedFX Systems: winning space on crowded desktops

Over the last few years we have witnessed explosive growth in automated forex trading, for the obvious advantages it offers over manual trading, including overriding emotional factors and trading strategy consistency. Heather McLean talks to some of the leading providers of these automated FX solutions to see what’s on offer and how traders can avoid some of the pitfalls.

signals on a more detailed basis, similar to the multiple data point criteria that a manager would use in determining which trader should be allocated funds.

“These programmes provide deeper statistical insight than a simple historical listing of wins and losses, like baseball box scores. Even more interesting than statistical analysis, however, are the programs that are self-healing. These programs can adjust on the fl y to changing market conditions so that resting orders can be cancelled and replaced or cancelled altogether. In addition, these programs can repopulate executed orders, set them to scale in and put them in stealth mode under predetermined market conditions,” Green notes.

Auto trading is increasingly popular on the broader retail level because it offers a less demanding entry into the market, accompanied by the underlying desire to rely on the work of others, claims Green. The economics of auto trading programmes has lowered the barrier to entry for many who would otherwise not have either the confi dence or the skills to trade on their own, he states.

“As these programs gain in sophistication, however, they will spawn changes in dealer’s risk management operations and in underlying business models,” Green continues. “In order to accommodate the growth in auto trading, many fi rms have developed specifi c skill sets for supporting customer service. The ability to work directly with customers who have more sophisticated needs in programming and strategy development has also greatly increased customer interest in and participation in the markets.”

Rise of the con men

Yet the rise of automated trading has also led to a rise in “con artists”, warns Matthew Klein, president of Collective2.com, a fi rm that provides objective, third-party reviews of trading strategies . “They are like a set of twins from an old 1950’s horror movie, the mirror images of each other, one good and one evil. On the ‘good’ side, there has been a massive penetration of forex trading at the retail trading level, and a simultaneous acceptance of the idea of automated trading. Ten years ago, if you polled the readers of a general circulation fi nancial magazine and asked them

about forex trading, you’d get a lot of blank looks. The notion of automating forex trading would be even more remote and preposterous. Now, almost all people who fancy themselves as traders or investors are familiar with forex, and are comfortable with the idea of automating their forex trading.

“And that’s where the evil twin enters the scene,” observes Klein. “Now that the world is comfortable with automated forex, the scammers and crooks have showed up. That’s why we traders are deluged with junk emails promising ‘2% per day’ forex EAs, guaranteed income, holy grail systems, and more. These are things that any real trader knows in his heart are impossible; there is no such thing as risk free trading or guaranteed profi ts, let alone 2% per day.”

Klein continues: “It’s an old story, of course. The con men only bother to arrive at a party when the other guests have shown up and are ready to be exploited. And what these con men are exploiting now is the universal human desire for making money without work and without risk. Twenty years ago, they touted ‘work at home addressing envelopes’ plans. Now they sell forex EAs. So, while the technology has changed, human nature has not.”


>>>



What traders want

As to what key features and functionality traders are looking for from Expert Advisors and robotic trading systems, Klein says what people claim they are looking for and what they actually choose are often two very different things.

First the obvious answer, Klein states: “People claim they are looking for an automated system that is ‘low risk’ and can be traded with a minimum of capital. Simple enough, and perfectly reasonable. The problem is that human beings are very poor judges of what is actually low risk. I’m not talking only about retail traders, by the way; this weakness extends to the so-called sophisticated money managers, too. If you have any doubt about this, look at what happened in the past two years to the mortgage-backed securities that sophisticated investors had rated as ‘triple-A’, that is, essentially risk free.

“So we in the automated forex business face a bit of a problem, and it’s not something we like to talk about,” notes Klein. “The problem is that our customers have

no real capacity to understand the true risk of an automated forex product. And because of this, their actual purchase criteria (the real reasons why they decide to trade one method over another method) have very little relation to their stated objectives (low risk).”

While Green says: “Many customers want their auto trading platforms to function as forward thinking predictors or as nimble (read: automatic) means to adjust trade structure to changing market conditions. As orders become more complex, this generation of retail traders will demand greater fl exibility and a far wider range of functions than are currently available. “Other traders are looking for more direct access to the markets with a greater ability to place large orders, and know they will be fi lled at or about their price. Having the ability to automatically select from a catalogue of strategies with the click of a mouse will give traders more fl exibility in adapting to market changes. One feature that all traders want is an auto-kill feature that detects when a programme is not functioning as it should, and automatically kills all orders and alerts the trader remotely that there is a problem,” continues Green.

Spreading the risk

For both novice and experienced traders alike, the requirement to spread the risk is essential as it provides traders with a smoother equity curve, observes Greg Hay, vice president for business development and co-founder at Tradency, a leading automated Forex software provider. He adds that portfolio balancing using the same currency pair, but on a different timeframe, is also becoming very popular. “Traders feel by using system that offer intra-day trading, combined with mid term and long term trading, creates a blend

of uniqueness therefore they are not exposed to the views of one strategy alone.

“In the past, traders tended to use one signal provider or expert advisor. With thousands of systems on offer on current mirror trading platforms, the ability to diversify has become so much simpler. Additionally, within the portfolio, traders can add or remove new strategies at the push of a button. Automated trading has never been so easy and traders have so many tools and resources at their fi ngertips,” says Hay.

James Green “Many customers want their auto trading platforms to function as forward thinking predictors or as nimble (read: automatic) means to adjust trade structure to

changing market conditions.”

RETAIL e-FX CLIENT


Yet gambling and girls are what this sector is really after, Klein observes: “The dirty little secret of our industry is that most customers like action. That is, Las Vegas-style action. You see, the problem with automated trading is that if the product actually works, there’s not much for a human being to do. That’s the fantasy, right? Turn it on, let it run, collect profi ts. Lather, rinse, repeat. But while we humans think we like that idea, we actually don’t. It’s boring. At a minimum, we want something to watch. We want to be entertained. And so the trading methodologies that people choose tend to be those where there’s always some action. In other words, trading systems that trade a lot.

“And hey, guess what? The forex brokers, their introducing agents, and even the guys selling the EAs and ‘systems’, are all compensated on a per-trade execution basis. And so they tend to love, and to prodigiously market, the ‘systems’ that trade a lot, too.”

Klein says this makes everyone involved happy, at fi rst. But ultimately the game comes to an end, because

these systems tend to all exhibit the same performance profi le; they work quite well for some period of time, making small consistent profi ts, then they blow up, losing whatever winnings were initially made, plus much of the starting capital.

On what key features and functionality traders are looking for from Expert Advisors and robotic trading systems, Hay notes that systems that have demonstrated profi table past performance in various market conditions, and systems that can adapt immediately to changes in volatility, trends and liquidity, are sought after. “A truly mechanical system such as an Expert Advisor or algorithmic system needs to be self-adaptive and show market robustness,” he comments. “Traders who develop their own trading system can fi ne tune the system to meet their trading requirements. Also, traders can use various models for different market conditions.”

Auto versus algo

Hay points to a division between systems that can be categorised as either algorithmic (such as Expert Advisor or Tradestation code) or automated. He remarks that although the two systems sound very similar, the differences are substantial. “The fi rst category is using an algorithmic system to take buy-sell signals on the trader’s account based on programmed metrics inside the code. The second category uses technology that delivers signals from one trader to another and is auto-executed on the clients’ account. The signals that are being executed on the client’s account may be manually created signals from the system provider. So while case one is signals from an algorithm, in case two, the client has automated execution of signals from a manual signal provider or automated provider.”

Yet Hay states traders have realised that even with mechanical algorithmic systems, their trading does not meet expectations. “This has driven them to use strategy sharing techniques, whereby they copy trades from another successful trader,” he explains.

Customisation

Customisation of automated systems is now possible by more experienced traders with programming capabilities. Hay comments that high level traders with experience in programming have the ability to modify certain aspects of the code to personalise the system.

Mathew Klein “The dirty little secret of our industry is that most

customers like action. That is, Las Vegas-style action.”

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Hay says: “In order to design and test an automated system, traders will need to deploy the use of a strategy development platform; the likes of Ninja Trader or TradeStation would suffi ce. These platforms require high level programming skills to write code from scratch. Even to modify an already written code would require an experienced programmer. Within retail forex, this only accounts for a small percentage of traders and most prefer to use automated solutions from the programmers themselves. The consensus from the vast majority of retail forex traders is they do not have the time or the inclination to develop and test their own strategies. In addition to this, due to the high number of profi table strategies available for trading, they have many to choose from already at their disposal.”

Yet the range of customised trading is infi nite, states Green. Manufacturing synthetic contracts, such as outrights and multi-legged spreads, whose

pricing can be expressed and priced in any currency, whose ratios can be reduced to the granular level for maximum trade exposure, and that can function in either a market making or stealth mode so as to avoid detection, are just some of the customised programs now available, he notes. Green adds: “Everyone boasts high frequency and low latency. These characteristics will soon be expected rather than demanded. Most of the innovations in algorithms and trade logic will occur in prop shops and the rest of the world will know little about them. One of capitalism’s characteristics is to sell to the masses. Proprietary traders do not share that view. In the retail world, as soon as an algorithm or Expert Advisor has any type of reasonable track record, it hits the internet because the developer wants to share it with the world. The development in this arena is much more predictable because retail traders do not write directly to banks or other portals. Thus the development in proprietary shops is retained in house and is virtually unlimited.”

Third party execution

The modern functionality of current automated trading software allows for the instant delivery of trading signals to a third party execution platform, states Hay. This fl exibility and technology allows third party system developers to push signals for automatic execution across a wide range of clients in various brokerages.

“Integration is a one step process and straightforward. This allows strategy developers to showcase their system across a large trading audience instantly. This solution also allows clients of the strategy developer to choose whichever broker they prefer to trade with. In turn this allows forex traders to mirror the trades on their account from an algorithmic programmer. So the client can sit back and relax whilst trades are being automatically executed on their account,” Hay remarks.

Klein agrees that nowadays, people are much more willing to use a trading system that was created by a third party developer. Yet people who discover automated forex trading for the fi rst time always follow the same, doomed to ultimate failure, trajectory, he notes. First, there is an initial rush of enthusiasm for do-it-yourself automation. People learn that there are these wonderful tools out there which let them develop their own systems, so they do. They


Automated FX Systems: winning space on crowded desktops

Greg Hay “The consensus from the vast majority of retail forex

traders is they do not have the time or the inclination to develop and test their own strategies.”

RETAIL e-FX CLIENT


develop, they backtest, and they optimise, spending many, many hours creating their own system.

“But their efforts typically end in frustration,” Klein warns. “You see, it takes a long time to develop your own system, and then you run it for a while, and it may even work for quite some time, but then it stops working as the market regime changes. So you’re back at square one. When traders reach that point, after they’ve spent all that time developing their own system that has a very limited window of effectiveness, if any, they suddenly become very open to using systems created by third party providers.”

Benchmarking the best

As people become more willing to use third party systems, there is growing need to fi gure out how to compare and rate those systems in some objective fashion, adds Klein. Collective2.com is just one solution out of many to rate systems, he states. “Our business model is to integrate technology very closely with various brokers, so that we are able to report the actual trade executions received by real traders using the real systems. We need to work diligently to convince system developers that it is in their best interest to appear on the Collective2 platform, because

while we report real results, warts and all, and while that may sometimes work to a system developers’ disadvantage, ultimately it benefi ts them, because when they fi nally have a good system that really performs well, customers will be able to trust the results.”

On benchmarking systems, Hay says there can be no substitute for real time trading results over a long period. Traditionally, back-testing of trading systems provided the initial results that enabled a trader to start a system on live trading, but back-testing of systems can only be considered a rough guide to a system’s actual performance, not a substitute for real time performance tracking, he says.

Due to sheer volume of trading systems available, system providers need to demonstrate exceptional performance to achieve a high ranking. In the past, novice traders would measure a systems performance by the profi t or pips achieved by a particular system. Yet as technology improved, scoring mechanisms for systems has improved in parallel.

Hay notes: “When selecting trading systems, there are many metrics for a client to assess before opting

for a system that is right for them. The list is endless, mind-boggling and ultimately confusing to the average trader. In order to address this, at Tradency we have developed a unique scoring mechanism that combines the critical elements of metric performance to provide a single ‘T-score’. This score allows clients at a glance to identify the best currently performing system, ensures system developers are utilising good risk-reward trading styles to achieve a high ranking status, and moving forward, that system developers are designing systems that are trading in a responsible and well behaved fashion.”

Future evolution

On how we can expect to see retail FX automated trading solutions evolve, Klein comments: “On the technical level, you’re going to see a move toward radical simplifi cation. The market of people willing to install EAs, and keep a piece of software running on their home PC, is a market that has been pretty much completely mined. There ain’t much opportunity left there; only a small portion of the population of investors has the gumption to deal with the hassle of setting up and running automated trading under that paradigm. So instead, you’ll start to see more sites like Collective2.com, where trading is managed on a website, from a browser, where there’s no software to install and run; you just point and click.

“On the business side, you’re going to see brokers and liquidity providers try to move into the adjacent strategic space of providing systems and money management services to clients, because the brokerage business is a “dog”. It’s commoditised and margins are being competed away down to zero. So it wouldn’t be surprising to see most brokers morph into pseudo money management fi rms, or at least to provide those services, like automated trading platforms, system

optimisation, black boxes, and the rest, to their captive customer base. These will be interesting times,” sums up Klein.

Hay adds: “Retail traders started to investigate the use of automated systems a few years back and the growth was exponential due to code sharing. As the market is maturing, there has been a fl ood of poor algorithms that are being marketed very aggressively. A saturation point will be reached and code developers will keep good strategies to themselves as code piracy increases.”

While the evolution of retail FX automated trading solutions will continue to grow wider, but not

necessarily deeper, says Green. This is a comment on the end user rather than

a limitation on the designer, he adds. “The retail market

is driven by the same characteristics

that drive all retail trading

markets; fear and greed. That isn’t

to say that retail traders don’t want

information, they do. However, the ability to use the data in a productive manner has the potential to be

overwhelming because of the sheer

volume.

“Automated trading, with particular reference to third party systems, will continue to gain popularity because algorithms can manipulate data into trade logic, perform calculations for trade selection, are easy to use, eliminate fear of making the wrong decision and thrive on the enticement of greed.

The next generation of auto trading platforms will take on characteristics of sophisticated portfolio management where traders can pick and choose models, test them, rate them, compare them to other models and ultimately click a mouse to select the combination of trade logic that fi ts their individual appetite for risk or particular comfort zone for trade timing,” summarises Green.


Automated FX Systems: winning space on crowded desktops

Rory, how would you describe the core business activities of Forex FS?The core business of Forex FS is to provide broking and advisory services to clients in Forex and precious metals. Our clients can take full comfort in knowing that Forex FS acts as a pure broker between its clients and its banks and does not hold any proprietary positions. Forex FS offset all its trades back-back directly with the top tier FX banks (in the world), securing its clients extremely tight spreads and superior execution. The vision of the fi rm is to provide the highest level of service to our clients, keeping in mind that every client is unique with differing needs, requirements and expectations. Our decisions and recommendations are always made with the client’s best interest in mind.

Forex FS is a holder of an Australian Financial Services License. How rigorous is the licensing process in Australia and how important is it to obtain an AFS license?

Australia has one of the most rigorous and regulated fi nancial systems in the world. The carrying on of a fi nancial services business without an Australian Financial Services License (AFSL) is a criminal offence. An AFSL holder has extensive obligations in relation to disclosure when operating a fi nancial services business. There are ongoing requirements once the license is obtained which include; fi nancial requirements comprising of net tangible assets and cash fl ows and maintaining risk management systems and policy. In addition the licence holder must implement a code of conduct, fraud policy, training policy, human resources policies, investment policy and procedures, due diligence procedures and complaints policy and procedures. The licence holder is also subject to an annual compliance & accounting audit.

What steps has Forex FS taken to achieve the high level of personal customer service you are able to offer to clients?


Forex Financial Services: bringing a more personal approach to FX brokerage

e-Forex talks with Rory Kennedy, Director of Forex Financial Services (Forex FS), a leading Australian based fi nancial services company which was established in 2008 by a group of former investment bankers, IT specialists and currency dealers.

BROKER STUDY

Rory Kennedy

Forex FS prides itself on its customer service. Every client is assigned their own personal account manager. Our premium and professional accounts have access to our top level industry specialists. Our industry specialists have no less than 10 years experience and derive from institutional banking and broking fi rms. These individuals are seasoned professionals that understand the markets and the needs and requirements of professional traders.

What types of trading account does Forex FS offer and what conditions have you applied with regard to account sizes?Forex FS offer trading accounts for all level of traders:We start at micro accounts which require a minimum initial deposit of $500 with minimum lot size of 0.01. Standard accounts require an initial deposit of $2,000 with minimum lot size of 0.1.

For more experienced traders, we recommend our professional and premium accounts. The initial deposit for professional accounts is $10,000 with minimum lot size of 0.1. Spreads start from 2 pips for major currencies. Our premium account holders must maintain a minimum

account balance of $100,000 and spreads start at 1.8 pips on major currencies. For less experienced traders, we are allied with Lifestyle Investor Services who provides training on how to invest and trade. Lifestyle Investor Services are leaders in their fi eld with a goal to support and teach our clients the correct principals for trading.For our professional traders we provide them with access to our top level industry specialists. They also


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MetaTrader 4

Auto Pilot

BROKER STUDY


receive free access to real time newswires powered by Dow Jones. Dow Jones is a leading provider of global business news and information services worldwide.

What trading platforms are available with Forex FS?Forex FS offers its clients the choice of three trading platforms. MT4 is our primary platform. As of today, MetaTrader 4 is one of the most innovative and powerful trading platforms. It outperforms and stands out from competition. MetaTrader 4 combines an accessible, user-friendly interface with a wide range of powerful functions, making it a highly fl exible platform. These advantages have made MetaTrader 4 the most popular trading platform in the world.

Forex FS partnered with Tradency to be the fi rst Australian broker to launch Tradency’s mirror trading platform under the name Autopilot

Tradency’s Mirror Trading Platform is a revolutionary trading tool, designed to provide a service for Retail Forex clients that has previously only been available for institutional clients. Tradency’s platform is the fi rst of its kind, Mirror trading platform. The mirror trading platform allows traders to use the knowledge of experienced traders for their own trading. Mirror Trading presents Forex traders with an opportunity to quickly and conveniently select one or more Forex traders’ strategies and mirror their trades in real time. Forex FS also offer an alternative for those looking for some different features. Focused on eliminating trading system pitfalls, Avalon developers have produced one

of the fastest, reliable and most stable online currency-trading platforms available. The Avalon FX Pro system features are designed to maximize the traders’ online Forex trading experience and give them more control and fl exibility so that they can focus more on trading and less on stress management.

Why do you think the MT4 platform continues to remain so popular with both brokers and traders alike and are you considering adopting the new MT5 platform?

MT4 is very popular with traders due to the Expert Advisor functionality. The charting package on MT4 is also very popular due to the expansive list of indicators and tools available. MT4 has traditionally been used by dealing desk brokers. Trading directly with a dealing desk poses a confl ict of interest because the broker can profi t from trader losses if the trades are not offset. Forex FS chose to integrate MT4 into No Dealing Desk execution so client orders are executed back to back with a global bank. This also means you can use any self-trading or expert advisor strategy, even scalping. Forex FS will wait acquire the MT5 platform should there be the demand from our client base.

What functions does your client terminal have to assist traders to test and deploy their own systems and strategies?Forex FS offers its clients extensive resources to back test and forward test their automated strategies.

Back testing: This method requires you run a built - in feature within MetaTrader called Strategy Tester which enables you to test your strategy against the already saved history data. Back testing is less accurate than forward testing but takes minutes for you to determine if it’s a good or bad strategy.

Forward testing: In this method you test your strategy in a demo account day by day for a suffi cient period of time before you decide if it is a successful strategy or not. This is a much more accurate method than the back testing but it may take months for you to get assured results.

Avalon FX

Forex Financial Services: bringing a more personal approach to FX brokerage


Forex FS recommends forward testing and we implement the following protocol to assist clients on our demo/test environments:

• We apply the same data feed to our demo/test environment as to our live environment.

• Account options are exactly the same as on the live environment.

• Even the swap points on our demo/test server are updated regularly.

In this way, we mirror the live environment on our demo accounts to allow clients to receive the most accurate and precise results when testing their strategies.

Automated Trading continues to attract more followers within the Retail FX space. How is Forex FS positioned within this space?Forex FS is aware that Autotrading is the fastest growing market within the retail Forex industry. Leading the Autotrading revolution is “Expert Advisors” which allows full automation of the analytical and trading processes on the MetaTrader4 platform. The other growth area in Autotrading is mirror trading. The mirror concept involves trade duplication of experienced traders. We already have the market leading platform for automated trading in MetaTrader4 but, having identifi ed the continuing shift in our own client base towards automated trading, we partnered with Tradency to be the fi rst Australian broker to launch Tradency’s mirror trading platform under the name Autopilot. Forex FS continues to look for opportunities to further secure its position as a leader in products for automated trading.

Does Forex FS currently offer any White Label or Introducing Broker partnership opportunities?Forex FS offers outstanding partnership opportunities. Our partnership programs support brokers (“IBs”), traders and industry participants in creating or enhancing a lucrative Forex business. Many companies and individuals have built lucrative IB, and money management businesses with Forex FS, enjoying the benefi ts of monthly revenue payments while letting Forex FS manage the expense and maintenance of back offi ce systems and trading software. We equip IBs, agents and money managers with all the necessary tools to run their business. These tools include BackOffi ce access for IBs and agents and MultiTerminal for money managers and those handling several accounts.

In what regions are most of your existing clients located and does the fi rm have plans to attract a wider client base from overseas?

Most of our clients are located in the Asia-Pacifi c region, with the majority in Australia and New Zealand. There are no immediate plans to attract more clients from overseas but Forex FS is seeing an increase in interest from overseas. This is mainly due to our unique offering of direct interbank liquidity and policy of not trading against clients. The possibility of changes in the regulatory environment offshore, combined with Australia’s rigorous regulatory system and strong economic position, have also contributed to international awareness.

Looking further ahead, why do you think increasing numbers of clients are going to be trading with Forex FS?As clients become more informed and sophisticated they will realise that there is more to a brokerage service than tight spreads. Forex FS continues to increase its client numbers for the following reasons:

1. No competition with our clientsForex FS is a riskless principal broker. Clients can take full comfort in Forex FS, which does not hold any proprietary positions and is therefore purely acting as a prime broker between its clients and its banks.

2. Our Clients Trade DMAForex FS is among a small group of brokers offering true Direct Market Access (DMA) services for the Foreign Exchange and Precious Metal trading products. The benefi ts of a DMA broker are transparency and effi cient execution. DMA brokers operate under the premise that the interests of both the client and the broker are aligned.

3. Protection of Client FundsFor additional security, all clients’ funds are kept on the Segregated “Clients Trust Account” with National Australia Bank. Accordingly, in the unlikely event of default, client funds are protected\ and cannot be used to the benefi t of creditors.

4. Industry SpecialistsForex FS targets the best from the industry and has assembled a fi rst-rate team, which includes experts in all areas of the business. These individuals that make up our team are seasoned professionals that understand the markets and the needs and requirements of our clients.


Retail Foreign Exchange Trading has been on the rise for the past fi ve years and remained fully operational during the fi nancial crisis, outperforming most other asset classes. As a result of this, the Forex Educational market has developed and is now set to take centre stage in the next growth phase. One of the fundamental reasons for the increase in popularity of FX training is that it is available to a wider scope of trader, from the beginner to the seasoned professional, and can be undertaken in a variety of methods and fl exible times, something that has enhanced its popularity among both retail and professional institutional FX traders.

The day to day trading and investment skills of Retail FX traders can be improved by the ever increasing range of online education services.

One of the most effective and popular methods is improving trading strategies through watching online videos and analysing professional trade reviews. Professional FX training companies publish video tutorials about understanding the markets and how traders can profi t from using a number of different strategies. Online videos tend to be free of charge and readily available on a number of sites such as ‘You Tube’. Furthermore, the viewer has the freedom to pause, rewind or repeat anything that they have seen,

Forex education and training: should you be joining an FX Masterclass?

RETAIL e-FX CLIENT

By Sion Smith of Fx Training Zone


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which in turn allows them to fully absorb and learn the content. These videos provide a cross-section and give examples of success stories of automated trading systems (Expert Advisors).

Community tradingThe world of Retail FX Traders is becoming united due to the growing popularity of community trading, which offers a group approach to trading. Traders are actively sharing knowledge through such networks as trading positions are published, which enables the trader to further their knowledge through the expertise of others. A number of Forums and discussion boards are now being used to share information about commercial trading strategies this further helps organisations share knowledge and understanding. Through such sources traders are able to receive advice and guidance from more experienced traders. E-Learning enables both retail and professional institutional Forex traders to learn at their own pace and gain an insight into certain areas of interest. A sense of independent learning and confi dence is achieved through E-Learning which is provided through a series of articles ranging from

basics to complex market theories. Users of Automated system-based trading can benefi t from various types of trading advice. The main obstacle to Retail FX Traders in using an automated trading machine, due to the vast choice available and the fact that each system caters for and takes advantage of a certain market environments, is which to select. FX Training Zone subscribers benefi t from the advice that the best way to get a true refl ection of the system is by analysing past performance and statistics. All system providers should publish unbiased statistics via recognised third party statistic providers such as MT4Stats. Users should also be made aware of the maximum possible draw down period which that particular system can endure.

Tailored trainingThe Forex industry has experienced rapid expansion in the past 2 years with education providers now providing tailored products to suit all levels of FX trader. To ensure the trader gets the most out of

their selected training programme it is vital that their knowledge and market experience is assessed. Specifi cally tailored questionnaires are now being used to accurately gauge the level of market exposure, trading strengths and weaknesses that the trader possesses – and the results of these questionnaires are used enabling the education provider to tailor the training given for each individual trader. FX Training Zone is leading the way in offering a number of training programmes which cater for these differing levels of experience and base their training on teaching traders to understand how and why the market has moved in a certain direction. It is also now possible to book one-to-one tuition programmes which enables the trader themselves to drive the direction of the education and receive a personalised service.

Good providers should always put great emphasis on their teaching methods, not enforcing a limited number of trading strategies which will no doubt fail to work in 6 months’ time. It is important that the trader understands how new technical indicators work so that they can apply them to their desired trading style in confi dence. Many people tell us that they simply do not have the time to sit in front of the charts all day long looking for that elusive entry, it must therefore be up to the education provider to understand this basic requirement and provide a sustainable solution based around their desired trading life style. We have also been approached by a number of fi nancial directors of multinational blue chip companies to help educate them about the possibility of using FX options to minimise the companies’ risk exposure to currency fl uctuation.

When choosing an FX education provider there are some key things you need to consider:

1) Provider’s Exposure: Traders should be aware of the provider’s company profi le, who will be teaching them, the extent of their Forex experience and how long they have been teaching. Note: Good traders do not always make good teachers.

2) Research Provider: Be aware that certain providers target traders’ naivety by offering extremely profi table strategies. Such strategies are almost always too good to be true, if they worked 100% of the time then everyone would be using them – they are simply unsustainable in the FX markets.

3) Continued Support: Many providers will simply sell you a trading course or Ebook, which will contain irrelevant material and offer you nothing in the way of on-going support. By choosing a specialist FX education provider you will receive succinct, relevant material and an online support website which offers continued learning and development.

4) Education Material: The provider should publish the course content so the trader is aware of what they can expect to learn during the training programme before purchasing.

5) Online Presence: All professional providers should have a website which regularly publishes material on popular content sharing websites such as ‘YouTube’. Spend some time going through some of their content and assessing how helpful other traders have found it? Also it is worth checking if the providers are using social networking websites as this can be useful to receive regular updates of the services they provide.

6) Trading Psychology: Trading success is dependent on your psychological state of mind. If you’re a trader just starting out, where do you fi nd the initial confi dence to pull the trigger? FX training providers have now turned to NLP (Neuro-linguistic programming) as a tool for developing the perfect mindset of tomorrow’s professional traders.

Benchmarking servicesThe specialist FX training providers have now started to help traders in selecting the correct programme by benchmarking their services against other available products. This is being done to bring transparency back into the industry after it was fl ooded with a number of scams offering automatic Expert Advisors which had a limited shelf life. By providing professional training the industry is hoping to clean up its reputation and draw back traders who have been put off by false promises. Before selecting any provider you should ask to see course critique questionnaires and reviews which have been submitted by past attendees. These will give you a vital insight into what other traders in a similar situation as yourself thought about the content and more crucially how effective they found the teaching methods of the trainer.

If you are looking for solely online based services forexpeacearmy.com is a great place to start, here


RETAIL e-FX CLIENT

you will fi nd reviews and comments posted by current and past customers which allows you to build a comprehensive profi le around the material you will receive. In my mind, any programme undertaken should offer continued online support in which the provider can assess the trader’s performance therefore helping to drive future material requirements.

With the increasing rise in popularity and quality of interactive online video conferencing websites, FX training providers now have the ability to deliver live training over the internet to thousands of people at once. These conferences also known as webinars, allow traders to interact with the trainer in a live market environment without the need to install any specialist software onto their computer. Joining a live webinar is extremely benefi cial and easy, enabling the trader to view a live video feed of the trainer’s screen, hear audio explanations and even record certain sections of the lesson. The trader has the ability to ask questions and receive live feedback on market theories as well as improving their ability to create specifi c trading plans. Being involved in such an interactive webinar dramatically improves the experience for a trader developing their trading skills as they can relate to other attendees who have a similar skill set to their own. Specialist FX training companies are also using the power of popular video sharing websites to publish a series of video lessons / presentations allowing traders to build their knowledge base at their own pace. Next time you log onto your preferred social media platform, do a search for FX Training; you will fi nd a number of providers publishing live news and even trade recommendations.

With the increasing popularity of mobile trading, FX Training providers are now developing products and services which take advantage of the increasing complexity that the platform can offer. Leading providers have incorporated their news, technical and educational based articles actually inside the trading platform itself, thus enabling the trader to digest the latest economic data together with market analysis in one program. This in turn allows them to make informed trades far quicker and easier. Social based trading has also leapt in popularity due to the development of easy to install Expert Advisors, which

communicate directly with websites like Currensee.com. This means that it is no longer just the trader verses the market, but a ‘trading community’ working together that are able to view the live positions of similar traders to themselves. Furthermore, traders have the ability to follow trader leaders who are certifi ed professionals, allowing them to effectively mirror each trade. The education provider then rewards these leaders through programs similar to Introducing Broker contracts (IBs).

Support servicesOnce a trader has selected what they believe to be their best personalised training approach there are a number of additional value added support services that the training provider should offer. As an FX trader you want access to up to date relevant information about the markets you’ll be trading, the provider should either supply you with a detailed resource list of where you can obtain such information or give you access to an online support website. This support should offer continued guidance in understanding the current market profi le, and both regular professional technical and educational articles. Look for such services when selecting your FX Training provider as this can really help you in the transition from demo to live trading. Attending a live webinar can help you gain the vital confi dence you require to succeed in the live markets. Something else worth noting is how accessible the trainer(s) or EA creator is via email or instant chat, if such a service is offered be sure to check for any hidden costs.

FX training programmes dramatically range in price. There are two main categories: 1) Self learning

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162| july 2010 e-FOREX

products, range from £100 - £300 and can include E-books, automatic trading robots (Expert Advisors) and typically video tutorials published on DVD; 2) Professional classroom based training programmes range from £400 - £2000 or more depending on the level of training given. To put this in context, a good quality beginner FX training programme would cost around £500, whereas an expert one would be upwards of £1500. Before selecting any FX training material ensure you understand the positives and negatives of each approach and make your selection based on your learning style. Once you have made the selection, stick to it!

The increase in demand for quality FX training has opened the door for professional providers to start offering affi liate and reseller programs. These kinds of programs are proving to be very popular as both parties benefi t greatly, with the training provided receiving greater exposure of their material and the affi liate being able to offer a more comprehensive service to their existing customer base. FX Training Zone is currently in deep discussions with a number of larger brokers throughout Europe, India and the US to provide them with a white label education service that they can offer to existing customers in an effort to separate their platform from a very saturated

market. Other ventures, which are anticipated to result in, a continued income for the affi liate includes ‘online signup referral’, in which the affi liate is rewarded with a monthly percentage for every successful subscription. Another option, is to resell automatic trading robots known as Expert Advisors – these can simply be installed on a traders platform and pre-programmed to run at designated times. The appeal of this is heightened for the reseller as they are only responsible for the actual sale, not the success or maintenance of such an EA.

ConclusionThe best FX training providers consist of a set of experienced traders who are able to educate others using their own wealth of experience and past exposure of the Forex markets. A good trader, does not necessarily make a good teacher. Having teachers who have made the same mistakes as the trader somewhere in their career

puts them in a far better situation to explain how complex market analysis actually plays out in a live environment. It vitally important that the FX Training provider teaches the trader to understand the markets, rather than enforcing a systematic approach of a certain trading strategy. Every trader is different, each will have their own trading strengths and weaknesses, which need to be indentifi ed and addressed by the trainer.

I was once asked to explain what the forex market looks like; the best description would be that of a rainforest made up of thousands of different living organisms each relying on one another in an ever changing environment. To go about harvesting the power of such an entity you must fi rst understand the basics of how the environment can change – Babypips.com is a great place to start giving traders a free insight into what and how something can affect the market. To fi nd the most suited organism to your trading style I would also recommend forexfactory.com that has thousands of proven FX trading strategies & EA’s, which you can research, and test with yourselves. To gain the confi dence and understanding of knowing when your chosen organism will thrive companies like FxTrainingZone.com will provide you with the understanding and guidance you need in a live trading environment

RETAIL e-FX CLIENT

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Having been in the FX market in one role or another since around 1980, I’ve seen the market expand (California-based bank

trading desks and investment bank participation in the interbank market in the 80’s, non-bank participation via prime brokerage in the 90’s) and contract (closing those Calif.-based branches in the late 80’s, bank merger mania, Y2K and Euro fear in the late 90’s), volatility highs (during the 80’s) and lows (the mid-late 90’s), cycles of coordinated central bank intervention to knock the dollar down (the Plaza Accord in 1985) and to prop it back up (the Louvre Accord of 1987), and the impact of technology on how business is done, starting with Reuters Dealing (1981), EBS and Reuters matching in the early 90’s,. However, nothing in my opinion has had the transformative impact on the FX marketplace the way that high frequency trading has, and in particular HFT participation by non-bank proprietary trading fi rms.


Gearing up to meet the challenges of High Frequency FX trading

As fi nancial markets move into a phase of heightened regulatory attention in the securities industry, high frequency traders are eager to explore new areas of opportunity. For many, foreign exchange is the New World. Offering the deepest liquidity of any market, along with tremendous volatility and fascinating currency-by-currency characteristics that make each trading pair unique, FX is a fantastic world to explore at any frequency. However, be forewarned that unlike the New World of old, this one is already well-populated with savvy, well-funded and well-established participants, undisturbed stretches of golden opportunity are rare, and success is far from assured. Some of the challenges are common to HFT, but others are unique to FX. So let’s explore some of these, to better prepareyou for your exciting journey into HFT in FX.

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By Erik Lehtis


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Liquidity transferIt truly was the growth of the non-bank high frequency community that gave the FX market a much-needed shot-in-the-arm starting around 2003. Volatility in the market had become moribund beginning in the late 90’s, as fear of Y2K systems failures, the advent of the Euro, and the massive bank consolidations all worked to shrink opportunity for traders. The old risk:reward equation no longer seemed to hold sway, as the market lost any ability to follow through directionally, and slippage due to poor surface liquidity became hazardous to the bank traders who had to make a living making markets on large transactions. The high frequency community arrived and brought the ability to transfer liquidity from areas of over-supply to those areas of under-supply. The market came to life, dynamically transformed.

Beginning around 2000 with the launch of the Currenex, FXall and Hotspot platforms and the ensuing exposure by EBS of their platform to API access in 2003 and Reuters Matching in 2005, automated trading in FX has changed the way liquidity is provided and by whom. Prime brokerage has been an essential element all along, due to the bilateral counterparty settlement model that underlies the very foundation of the interbank FX market. All the aforementioned ECNs operate within that context—there is no central clearing counterparty-oriented platform in spot FX. Without banks serving as prime brokers and giving clients access to their balance sheets and the ability to trade in their names, non-bank participants would not be able to have direct access to the FX marketplace, and would instead have to get their liquidity from a salesperson on a bank FX desk.

HFT and FX trading venuesA few notes about the various trading venues and the market segments they serve: EBS and Reuters are at the top of the heap from a volume standpoint. They form the backbone of the interbank liquidity pool, having supplanted the voice broking network and the direct-interbank dealing conventions that dominated liquidity until the mid-90’s. Due to their long presence in the market, they offer less functionality for screen-based traders, which are almost exclusively bank traders, and they have the most restrictions on access for API traders.

They nevertheless are the most important pools of multi-participant liquidity, and they serve as the de facto primary sources of price discovery. The manner in which liquidity is divided between them is also unique: EBS has the market cornered for liquidity in the non-Commonwealth majors (EUR/USD, USD/JPY, USD/CHF, EUR/JPY, and EUR/CHF), while Reuters remains the primary liquidity for GBP/USD, EUR/GBP, AUD/USD, USD/CAD, and NZD/USD, as well as the other Asian pairs, USD/MXN and the other Latin American pairs, and the Eastern European and Scandinavian pairs. Most of these situations owe

Erik Lehtis is the President of DynamicFX Consulting (http://dfxconsulting.com), a practice that draws on his expertise to assist banks and exchanges operating in the high frequency space in foreign exchange.

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themselves to long-standing convention and the unspoken determination of the interbank market to preserve both platforms, so that neither can develop a monopoly.

The other major platforms, including Currenex, Hotspot, FXall, Integral, 360T, FXCMpro, and Bloomberg Tradebook, are to one degree or another geared toward the needs of the buy-side community, which includes corporate treasury, hedge funds, fund managers, and retail aggregators. (FXCMpro is a white-labeling of the Currenex platform). Many HFT fi rms will want to extend the reach of their market-making operations to these platforms, interacting with a wider spectrum of buy-side customers. But beware: HFT, both bank-side and non-bank, can often run into each other on these platforms, and therein lies a commonality between FX and other asset classes--trades between two HFT fi rms usually end up with one of them being unhappy.

Lessons from other asset classesIn fact, many of the challenges faced by a fi rm seeking to enter the high frequency FX arena are familiar to those with a HFT background in other asset classes. Setting aside any assumptions about this familiarity, here are the specifi c challenges that will need to be met in order to participate effectively in this very competitive marketplace.

First and foremost, there needs to be a substantial holding of intellectual capital. This is essential—without a clear and pertinent idea about how you intend to trade profi tably in FX, you simply will not. Algorithms that have demonstrated a track record of consistent success in other asset classes are not necessarily suffi cient in this regard—they must be cognizant of and attuned to the unique characteristics of spot and forward FX, and currency futures.

Therefore, you must have a solid working knowledge of:

• the settlement process• the prime brokerage model• the Net Open Position calculation used by

PBs and the ability to perform that calculation in real time

• how daily currency cash fl ows are calculated and managed

among other FX-specifi c fi nancial details.

Your algorithms will take into account these facts, and will also take note of the FX trading landscape: each venue is unique in how it formats rates, its minimum trade sizes and trade size increments. Each exchange also has its own message policy: they vary widely and can be unexpectedly restrictive to the newcomer from equities. Failure to take heed of the exchange-imposed throttles on your behavior will result in undesirable trading consequences and in some cases steep fi nes. Most exchanges provide FIX connectivity for order management, but each implementation has its unique characteristics. Request For Stream, order ladders, two-sided quotes, and other complex order types are all implemented to one degree or another by the various exchanges.

Market dataEach exchange has its own unique distribution of market data as well. They vary from exchange to exchange but all have one thing in common: to the equity trader, they are paltry. They range in cost from free to exorbitantly expensive, and will test the patience of the experienced quant with their sporadic nature and limited scope (not one exchange publishes every trade, even in aggregate). Modeling the liquidity of the market by building a consolidated order book is not diffi cult, as the inter-exchange discrepancies in price publishing formats are easily normalized, but the fact that most prices are pulsed at regular intervals, rather than streamed, makes for some uncertainty as market snapshots age—the fact you haven’t received an update

FX Venues Competitive Landscape (As of end of 2009) Source: ECNs, Aite Group

does not mean the true state of the order book hasn’t changed, and actual trades tend to be published (if at all) by the exchange well in arrears of the order book snapshot refl ecting the aftermath of those trades. There is some data cleansing that needs to take place as well, because much of what is published can be redundant.

On top of all that, there are the single-bank e-platforms. You can trade directly via a GUI interface with over a dozen banks, and many will now also permit connectivity via FIX API. These banks are becoming more interested in, and technologically capable of, handling the fl ows from high frequency traders. One must be careful, though, in that this is a relationship business, and no one likes his or her liquidity being aggregated. A HFT fi rm that attempts to exploit bank liquidity will soon fi nd that it has lost access to that liquidity.

Development environmentsIn order to properly and confi dently develop to this unique distributed execution environment, the HFT fi rm’s algorithms will need to demonstrate they can interoperate correctly. This means establishing a simulated environment that mimics the production environment soon to come. Among other things, a realistic Sim environment will account for expected inter-locational latencies as well as the specifi c trading characteristics and requirements of each exchange.

Trading engine logic and performance are not the only elements of the trading system that need to pass certain benchmark tests at this stage: the fi rm’s risk management framework should at this stage also demonstrate its ability to keep up with trading

activity across the global deployment. Real-time positions, P&L, and other risk metrics should prove their accuracy now. If your strategies are latency-dependent, you will want to have advanced network monitors tracking network performance in real-time, with particular focus on the connections between your feed handlers and gateways, and the relevant exchanges.

The software development environment is of course one of the most critical aspects of the enterprise, and in almost every case will constitute more of the fi rm’s intellectual capital than any other single aspect. Without attempting a full-blown discussion of the various characteristics of that environment, it may be worth noting here a couple of things that are common to all successful HFT fi rms, particularly in the FX space. First, each fi rm will have a tightly integrated feedback loop between the technical and business portions of the trading team. Full and free communication between these functions in an atmosphere of mutual respect is sometimes taken for granted but cannot be over-emphasized for the success of this particular endeavor.

A dysfunctional development process will produce a nonfunctional trading system. The stress of developing a high-performing trading system in an ultra-competitive environment should not be overlooked, and when the participants are individuals who may have spent their careers developing their non-interpersonal skills, it is normal for diffi culties to arise. Failure to manage these confl icts can be fatal to an incipient trading operation.

Second, the fi rm needs to establish a rigorous, formal process for software development. It has been said

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High Frequency Trading in FX Source: ECNs, Interviews with bank and high frequency trading fi rms, Aite Group


that trading fi rms are really technology fi rms, and there are no successful technology fi rms that don’t have a well-defi ned and subscribed-to production culture. Your developers must adhere to professional software production standards of some kind if work is to be performed with any degree of consistency in quality or timeliness.

Deployment issuesProviding the entrant has achieved a solid understanding of the unique post-trade settlement, back offi ce, and exchange-specifi c characteristics of the FX market and has baked all this into some kind of multi-layered trading system cake, physical deployment issues can be addressed. The question of co-location is not an “if ” but a “where”. Most of the exchanges you will want to connect to have matching engines located in the greater NY-NJ area, and offer proximity location connectivity at Equinix in Secaucus, so that is a very logical and widely chosen option. CME’s Globex platform is in Chicago, naturally, and Reuters has their matching engine in London. Additionally, EBS has matching engines in London and Tokyo, and for the ambitious global player, co-location at the Equinix sites in those centers as well will be mandatory, due to the advantages accrued executing as close to the matching engine as possible.

Therefore, high-speed circuits connecting all of these

centers for the purpose of transporting market data and order traffi c is essential (and costly).

Having secured rack space, powered up and cooled down their servers, leased all the appropriate circuitry, and tested all the connections, the fi rm can now begin the task of testing interoperability. This is where the trading engine logic is harmonized to the deployment framework, and things are demonstrated to work in their production locations as expected based on outcomes in the Sim environment. Once trading engines, feed handlers and gateways have all been installed at the various sites, a comprehensive suite of unit tests should be conducted. This suite will encompass simple functionality, stress testing and various forms of imaginable extreme market conditions, and a range of test trades that should deliver the full spectrum of expected trading opportunities.

Once the tests all pass with green lights, the system is go. From that point forward, it is all about analyzing actual trades, fi guring out what went wrong, as well as what went right, and isolating issues that need to be focused on. Then it’s just a matter of scaling up and out. You are now well on your way to discovering the world of high frequency trading in foreign exchange.

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