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April 2010

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We have given substantial space in this edition to covering the topic of regulation and how sweeping proposals by regulators may impact on all sectors of our industry.

The FX market is certainly not broken. The Greenwich Associates report on electronic FX which has been summarised for us on page 28, indicates that foreign exchange trading activity worldwide spiked during the crisis years of 2007 and 2008 and although with the decrease in volatility there has been a slight decline in overall FX trading activity to more normal levels, customer electronic foreign exchange trading volumes have increased once again, up 7% from 2008 to 2009. The telephone which has been the dominant channel for FX trading for decades, is fast losing ground to electronic execution and Greenwich expect this trend to continue.

Foreign Exchange remained fully operational and performed remarkably well during the fi nancial crisis. Many commentators and industry participants have therefore argued that it’s both dangerous and unnecessary to “muck around” with the architecture of a well-functioning market like FX which operates on a proven business model and has an effective and robust risk management culture. The current uncertainty regarding the future direction of any proposed regulatory changes is also holding back important business and product development initiatives which is creating damaging operational delays.

Generally speaking, carefully planned and considered regulation is always a good thing so any intentions aimed at warning traders and investors about the risks of trading in the over-the-counter FX market and increasing their overall protection has to be welcomed. However, concerns about applying over-zealous regulation have been voiced in the Retail FX sector where earlier this year the US Commodity Futures Trading Commission proposed a new set of regulations to curtail leverage limits. The US Retail FX brokerage community is up in arms about this and has set up the Foreign Exchange Dealers Coalition (“FXDC”) to lobby against the proposals which many believe could lead to thousands of job losses within the US Retail FX industry and drive clients overseas to the benefi t of many foreign and often unregulated brokers.

Let’s hope that the regulatory authorities will listen and take note to many of the genuine concerns that key participants within both the Wholesale and Retail FX markets have about the damaging consequences of applying disproportionate rules to an important and well functioning industry like FX.

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

Charles JagoEditor

welcome to

e-FOREX

SPRING 2010

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Felix ShipkevichContributing writer

Regulatory Roundup

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Manfred WiebogenFX remains resilient

David PooleRegulatory Arm-Wrestling

Peter D'AmarioSteady growth in

Electronic FX

Frances MaguireProduct innovation inFX Prime Brokerage

Roger Aitken Streamlining post trade FX

Jill CollinsThe importance of

Exception Management

Heather McLeanUsing a Forex ECN platform

April 2010

AAboveNet page 69ACI page 18Advanced Currency Markets page 115Aegisoft page 90Algotrader page 16Alpari page 138Aphelion page 16Apple page 150Argyle Trading Salgos page 84

BBarclays Capital page 19Baxter page 94Beta-Gamma Research page 78Bloomberg FX page 21Bloomberg Tradebook page 89BNP Paribas page 7Boston Technologies page 97BT page 65

CCCL Partnership page 129CFTC page 110CIBC page 45Citi page 101ClientKnowledge page 22CLS Group page 34CMC Markets page 117ComplianceAsia page 129Corvil page 64Correlix page 64Currensee page 12

DDeltaStock page 143Deutsche Bank page 11Dukascopy Outside Back

CoverEEasy-Forex page 150Exponential-e Limited page 112eSignal page 83Eurobase page 51Exidio page 46

FFastbrokers page 39Financial Software Systems page 10Fixnetix page 66FlexTrade Inside Back

CoverForex On The Go page 151Forex Prime page 158Fortex Inc page 121FXall page 49FX Bridge page 109FXCBS page 137FXCM page 37FXDC page 111FXDD page 17FXecosystem page 71FX Open page 148

GGAIN Capital page140GFT page 155Greenwich Associates page 20

IICAP page 34InfoReach page 16Integral Development page 119Interbank FX page 133iTradeMobile page 151

JJP Morgan page 9

KKnight Capital page 13

LLetatalkFX page 72Logicscope page 53

MMAP S.Platis page 131MB Trading page 137MetaQuotes page 158MIG Investments page 27Morgan Stanley page 100

NNordea page 5

OOption Computers page 113

PPFSoft page 31Philip Futures page 93Portware page 95Premier FX page 135

Progress Apama page 81

RRabobank page 105Rapid Addition page 66RBC Capital Markets page 50RCP Consultants page 54Rous Technology page 126

SSmartTrade page 47Societe Generale page 48SSC Technologies page 123Standard Chartered Inside FrontBank CoverStreambase page 64SunGard page 76Symate Capital page 162

T360T page 56Thomson Reuters page 53TMS Brokers page 141Towergroup page 62TraderTools page 57Trading Screen page 88Traiana page 107TS Associates page 64

UUBS Investment bankpage 15

WWallStreet Systems page 55West LB page 46

Dr Abdel El OmariBroker Study

18. FX – Remaining resilient in the midstof crisisEven at the peak of a once in a centurycrisis, the FX market has carried onperforming well. Perhaps more astonishingas Manfred Wiebogen outlines, is the factthat it keeps on attracting new marketplayers.

22. Regulatory Arm-Wrestling: can the FXmarket strike a balance?David Poole looks at whether or not aglobally active, high volume industry suchas FX can oversee itself within the currentframework or will need to alter the balancebetween imposed regulation and self-regulation.

28. Electronic FX: As Global Marketsnormalize, slow but steady growth Global foreign exchange markets continuedtheir migration to electronic execution lastyear and Peter D'Amario reports on how e-forex trading volumes increased despite adecline in overall FX trading activity.

34. The CLS Aggregation Service:taking huge steps towards eliminatingoperational riskFrances Maguire explores how the CLSAggregation Service is heralding a newchapter in operational risk reduction andbanking industry collaboration.

42. Relationship e-trading: A new forceentering the world of corporate FX?Frances Maguire examines whether we havealready entered a new era of ‘relationship e-trading’ where large volumes of necessary,but mundane FX transactions areelectronically executed providing more timefor more in-depth risk managementdialogues between banks and their corporateclients.

52. A tough nut to crack: How can wefurther streamline Post Trade FX?Roger Aitken investigates possibilities to

2 | april 2010 e-FOREX

FOREWORD

LEADER

MARKETPLACE

FEATURES

contents

Companies and organisations in this issue:

Nicholas PrattUltra-low latency FX

connectivity

Jon VollemaereLetstalkFX

Felix ShipkevichRegulatory Roundup

INDUSTRY REPORT

Peter Schabus TraderTalk

Relationship e-trading: A new force in Corporate FX?

Harnessing more intelligent FX Algorithms

Overcoming the hurdles in settingup a Margin FX business

The iPhone App - a powerful new tool for Retail Forex

april 2010 e-FOREX | 3

further streamline the post-trade FX spaceparticularly amongst corporates and Tier3-4 entities.

62. Gaining competitive advantage withultra-low latency FX connectivityUltimately traders must make up their ownminds when looking at low latencysolutions, however as Nicholas Prattdiscovers, there are some general guidelineswhich can usefully be followed.

72. Product Spotlight: The birth of the$3.98T FX Social NetworkJon Vollemaere takes time out fromtweeting and throwing sheep to talk aboutLetstalkFX.com, a new portal for the FXMarket.

76. Increasing volumes in the back-office- the importance of ExceptionsManagementJill Collins outlines why there has neverbeen a more appropriate time in ever highervolume back-offices to maintain an efficientExceptions Management process.

78. Harnessing more intelligent FXAlgorithms for superior ordermanagement and strategy executionNicholas Pratt reports on how many firmsare looking to harness more intelligentalgorithms to enable superior ordermanagement and execution and to taketheir FX algorithmic trading capability tothe next level.

86. Build versus buy: choices fordeploying advanced Algorithmic FXtrading infrastructuresThe buy versus build debate is a classicquestion when it comes to technology soNicholas Pratt sets out to investigate theissues involved when choosing how best toset up and deploy advanced Algorithmic FXtrading infrastructures.

98. Top shops - big winners! What'sdriving improved service and productinnovation in FX Prime Brokerage?The events of the past 18 months have put

credit firmly in the spotlight, giving rise to anew round of product innovation withinthe FX Prime Brokerage space. FrancesMaguire explores how it has also raised theante on improving customer service levels.

110. Regulatory RoundupThe United States Commodity FuturesTrading Commission (CFTC) haveproposed a set of regulations that hascreated a tsunami of outcry in the retailforeign exchange market. Felix Shipkevichexamines the implications of these long-awaited rules.

116. Overcoming The hurdles of settingup a Margin FX businessWith continued volume growth in retailforeign exchange (FX) trading showing littlesign of abating, banks and brokeragesincreasingly have to deploy and ramp upcutting-edge margin trading solutions.RogerAitken canvasses leading margin FX vendorsto gauge the current state of play.

128. Key issues with registration andlicensing of Retail Forex brokeragesGlobal regulation of the financial servicesindustry is a hot topic and Heather McLeandiscovers why the foreign exchangebrokerage market is subject to increasingscrutiny and new rules.

136. Should you consider using a ForexECN platform?Forex ECN platforms sound in theory likethe ultimate utopian environment fortrading but as Heather McLean discovers,there is more to the world of the ECN thanmeets the eye.

150. The iPhone App: A powerful new toolfor Retail Forex Serious traders rely on accurate informationand innovative trading tools. HeatherMcLean explores how the latest Apps forthe iPhone are meeting this requirement.

162. With Peter Schabus, Co- founder ofSYMATE Capital AG

VIEWPOINT

FOCUSTRADERTALK

ALGORITHMIC FX TRADING

RETAIL e-FX PROVIDER

RETAIL e-FX CLIENT


NEWS

CitiFX Prime’s post-trade reporting and portfolio management tool,

CitiFX® Click, has a number of new features. Its’ Allocations functionality has been released and clients now have a very fl exible, intuitive means of automatically allocating and rolling trades as they arrive. Targeted at option users, its’ Analytics functionality uses Click’s intuitive dynamic fi ltering and delivers an array of pricing and risk-management measures with

QUICK Corp, Japan’s biggest fi nancial information vendor, has launched

QUICK FX, a new multi-bank FX trading platform supported by technology from FXall. QUICK FX will now be available to QUICK clients using their existing Astra Manager or QUICK ActiveManager solutions. This will provide QUICK users with electronic foreign exchange trading through a single user interface for the fi rst time, leveraging FXall’s market-leading Request For Quote functionality. QUICK’s clients will benefi t from access to expanded liquidity from more than 70 providers, including several Japanese institutions, through FXall’s platform.

Phil Weisberg, CEO at FXall comments “The appetite for FX services in Japan continues to grow and participants are becoming increasingly sophisticated in their FX trading activity. FXall’s comprehensive and fl exible trading offering makes it a natural partner for a market leader such as QUICK and we look forward to further developing our relationship in a key market for FXall.”

a high degree of fl exibility around parameter-setting and market data.

Real-time margining has always been available in Click, but recently Citi added the monitoring of NOP and DSL limits in real time with alert functionality for all credit events. CitiFX MD and Head of FX Prime Brokerage Andrew Coyne says: “Citi is committed to creating value for its clients through continual investment in client-facing technology.”

CitiFX® Primeexpands capabilities

Quick partners with FXall

Phil Weisberg

Interbank FX has recently launched Daily Trading Edge, featuring transparent and

up-to-date actionable ideas for the upcoming trading session. Featuring Chief Currency Analyst, Raghee Horner, Daily Trading Edge will explain in detail how to set up each trade, demonstrating how she incorporates specifi c

tools and indicators in her set-up process. Each week Interbank FX’s Daily Trading Edge will have two special editions: one will tackle questions from customers and another will focus on education and instruction. To benefi t from Daily Trading Edge, visit http://www.ibfx.com/Education/Daily-Trading-Edge.aspx.

Interbank FX launches Daily Trading Edge

FX Bridge Technologies has announced that AVS Asset Management, headquartered in Dubai, has selected ProTrader Plus™ to provide its

combined CFD, spot, and options trading platform. As a premier investment and brokerage fi rm serving a variety of global institutional and individual clients, AVS Carter recognizes the importance of providing a seamless cross-asset and cross-margined trading environment to it clients, which the FX Bridge platform enables. This kind of offering is further complemented by ProTrader Plus’s comprehensive suite of reporting, analytical and risk-management tools.

James Friedman, FX Bridge’s Director of Client Services notes, “We know our customers need solutions, not just technology. We bring our customers quick and easy implementation and proven experience in managing FX options platforms.”

FXCM has introduced a beta version of its mobile trading platform. Available for iPhone, BlackBerry, and Windows Mobile phones,

FXCM’s mobile Trading Station II provides forex trading anytime and anywhere.* FXCM Mobile TSII gives traders the ability to keep track of their account (balance, equity, and margin), place trades, manage positions, watch breaking market news, and view real-time 5 minute charts. Similar to FXCM’s desktop trading platform, FXCM Mobile allows traders to quickly react to changing market conditions.

CIBC has becomethe fi rst

major Canadian bank to offer a Mobile Banking App for the iPhone. The free App provides greater fl exibility and choice for clients to bank on the go, allowing them to securely check account balances, transfer funds, pay bills, and send INTERAC Email Money Transfers. These transactions can be made at anytime and from anywhere a client can access the internet on their phones.

The App also uses GPS technology in the iPhone to help clients fi nd their nearest branch or ABM based on their current location. The CIBC Mobile Banking App is also available on the iPod Touch using a wi-ficonnection. To view an online demonstration please visit cibc.com/mobile.

“Forex is about capturing opportunities in a 24-hour trading environment. Even today, in our increasingly connected digital world, people spend a signifi cant amount of time away from their desktop. Now they can easily stay on top of the market while away from their computer,” said Michael Buzzeo, vice president of marketing at FXCM. “We are launching our mobile trading platform and a suite of supporting tools to enable traders to get vital information and be able to act on it regardless of location, 24 hours a day. FXCM Mobile users can set mobile alerts through DailyFX.com as well as view rates, explore a daily economic calendar and watch forex videos to help gauge where the market is heading.”

* Subject to available liquidity, the trading desk is open from 5:15 p.m. (ET) Sunday afternoon through 4 p.m. (ET) Friday afternoon.


FX Bridge provides FX platform for AVS Carter Asset Management

FXCM introduces Mobile Forex trading

CIBC offers Mobile Banking App

NEWS


NEWS

Integral recently launched FX Inside Alpha to take on the

challenges of FX Algo Trading. A key part of the solution is an integrated development environment (IDE) that allows for complete customization and extension of FX Inside Professional™. Users can now alter FX Inside Professional and write their own algorithms in standard Microsoft development environments.

TMSBrokers has

introduced a new product under the brand of GO4X. The MetaTrader based GO4X platformenhancesthe trading experiencewith RSS technology. The built in RSS Reader relays the latest market information selected by TMS Brokers analysts. The application also allows investors to include their favorite RSS channels such as Bloomberg or CNN. With additional access via cell phone GO4X investors are in touch with the market 24/7.

The principle elements of FX Inside Alpha include recorded data,

fully functional back testing and live trading

environments, multiple hardware and software confi guration options, access to liquidity and said IDE.

“To have this depth and breadth of features

bundled in one easy-to-use solution is a fi rst for the

foreign exchange industry,” said Harpal Sandhu, CEO, Integral Development Corporation.

GO4X offers an attractive trading environment with minimal margins (1:200) and volumes as low as one micro lot (1/100 Lot). Investors have access to the most popular instruments from the currencies and metals market. GO4X embraces alternative ways of communicating with investors such as Facebook and Twitter. For more information visit www.go4x.pl

Integral opens up FX Inside Professional

TMS Brokers introduces GO4X

Smart Trade adds customizable consolidated Order Book functionality

Smart Trade Technologies has introduced customizable consolidated order book

functionality for its smartTrade LiquidityAggregator™ engine, new functionality that allows for the real-time consolidation of trade, order and quote data across ECNs, bank portals and internalized sources. By implementing LiquidityAggregator’s fl exible, easy-to-deploy functionality, banks, broker-dealers, asset managers and hedge funds gain access to a customizable engine to produce a fully aggregated view of liquidity from both internal and external sources, creating a single order book for single-, multiple- and cross-asset trading that meet best execution requirements.

According to Margaret Bailey, Smart Trade’s VP, business development, North America, “This new functionality provides fl exible management of aggregated views – especially important in FX where different liquidity distribution needs exist - for retail, institutional and corporate clients as well as multi-asset and cross-asset situation.”

Margaret Bailey


NEWS

ESignal now partners with several leading brokers to combine into one convenient, affordable application, powerful real-time data and

advanced charting tools with direct access execution. Offered at US$1.00 for the fi rst month and a low monthly rate thereafter, eSignal OnDemand – Forex has been very well received, particularly by clients of leading Forex brokers, who fi nd the integration of eSignal’s tools with their broker’s fast trade execution especially attractive at these price points.

eSignal OnDemand – Forex provides access to real-time, streaming Forex data by individual contributors, coupled with historical and end-of-day data, as well as decision support tools. The software displays streaming Forex rates in the recognisable Forex dealing grid displaying the fl ags of both currencies for improved recognition.

Banco Continental BBVA headquartered in Lima, Peru, has licensed the Spectrum Treasury System from Financial Software Systems to

manage its Treasury, Capital Markets, Private Banking, and Mutual Fund activities. The Spectrum license for Banco Continental includes a complete range of foreign exchange, interest rate, equity and derivative instruments. All Treasury and Capital Markets transactions are instantly refl ected in Spectrum’s real-time position, cash fl ow and risk management

blotters. Spectrum provides real-time pretrade and post-trade limit checks to help control a wide range of risks. Spectrum also provides true straight-through processing of all transactions in a single database. In addition to licensing the core Spectrum system, Banco Continental also licensed Spectrum’s FX Branch Portal and the Spectrum’s Web Reporting Services. Using secure communications over the internet, the Spectrum FX Branch Portal will support hundreds of bank branches and thousands of tellers.

Wall Street Systems, the global provider of treasury, trading and settlement solutions, has expanded its e-Operations solution with

foreign currency transaction accounts (FCTAs). Using Wallstreet’s e-Operations, banks can offer seamless, integrated web-based services to their customers to aggregate, execute, settle, authorize, confi rm, allocate, split, and net trades. Customers can now manage foreign currency accounts. They are provided with real-time activity logs and statements and can execute payment wires (withdrawals), plus provide execution of other transactions such as FX and Money Markets directly over the web from these accounts.

All customer actions are fully integrated with the bank’s back offi ce operations, complete with extensive audit facilities and controls including real-time balance checking, to minimize operational risk and provide complete transparency.

eSignal integration with Forex brokers

Banco Continental licenses Spectrum Treasury System

Wall Street Systems expands e-Operations capabilities

Customer Foreign Currency Account Statement


NEWS

WestLB AG has gone into production with Quartet’s ActivePivot

software to generate and maintain, in real-time, various position screens across the money market and foreign exchange product. Using ActivePivot’s fl exible and unique object-based, in-memory, real-time aggregation OLAP engine,

WestLB are now able to provide the fl exibility to integrate the trader’s requirements - in terms of both business logic and the ability to slice & dice the data any way they want to see it. WestLB were also able to put in place a SOA tool that has a cost structure compatible with their ROI requirements.

WestLB goes live with ActivePivot

PTmultistation goes social

With its new version of PTmultistation workstation, PFSoft

is announcing a completely new approach to trading — called Co-Trading. This revolutionary combination of a powerful trading terminal and a social community provides a single interactive environment for cooperation between traders. Apart from using regular instant messaging functionality, traders can also share (or even sell) trade signals, giving them a more fl exible alternative to hedge funds. By searching,

connecting, and talking to each other, traders create a social network where they can follow each other’s investment strategies. “With this product, we are basically shifting market power away from brokers to traders, so they can help each other out”, says Denis Borisovsky, CEO of PFSoft. “We are taking another important step towards our vision: global, fair and easy trading”. PTmultistation already allows connection to the most popular brokers and liquidity providers for the Forex, CFD, stocks, futures, forwards and options markets. It provides tools for automated trading

and technical analysis and fully supports the most popular scripts like MQL4, C# and EasyLanguage.

Denis Borisovsky

Currensee, Inc.has announced real-time support for OANDA

utilizing the OANDA API. This secure, automatic connection enables OANDA traders from around the world to join Currensee for free and link their live, OANDA brokerage account. “OANDA provides a transparent and very innovative service to their traders and we’re happy to have them as a partner,” said Asaf Yigal, Currensee co-founder. “We’ve had hundreds of OANDA traders request to join Currensee and access their real-time trade information and we knew OANDA would be a great broker for our network. There are several companies out there using back door approaches to get the data from the OANDA platform but it’s not scalable and, most importantly, it’s not real-time. We worked closely with the OANDA team to bring the power of the OANDA data together with real-time trade collaboration.”

Currenseenow connects OANDA traders

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]


NEWS

GAIN Capital and Streambase Systems have partnered to offer a complete solution for their mutual clients to

quickly deploy FX high-frequency trading algorithms. The deal combines StreamBase’s CEP platform with a direct adapter to GAIN GTX, GAIN Capital’s recently launched ECN trading platform for professional and high-net worth traders. StreamBase’s adapter allows clients looking to build high-frequency FX trading algorithms rapid connectivity to the GTX marketplace. GAIN will also use the StreamBase CEP platform to improve market-making, risk-management and surveillance capabilities of its core retail business line.

TMS Brokers is changing its appearance. Founded in 1997, the polish

broker has decided to undergo an image face-lift. The new logo is simpler yet modern and a planned forthcoming advertising campaign promoting the change is aiming to be bold and creative.

The makeover is complemented by the recent introduction of an additional platform making TMS the fi rst polish broker offering two trading platforms. Client communication mainly focuses on in house recommendations and market analyses which have been appreciated by forex and investment professionals in London. FX Week magazine gave TMS Brokers forecasts 1st place 43 times in their 2009 rankings.

TradingScreen Inc has announced the addition of Société Générale

Corporate & Investment Banking to TradeFX, TradingScreen’s broker neutral community of FX liquidity providers.Under the agreement, Société Générale will offer the TradingScreen Buy Side client base a full foreign exchange execution suite covering Spot, Forward and Swap deal types supported through RFQs and RFSs. TradeFX, offers end users the ability to conduct transactions across the full spectrum of FX electronic trading models and venues, including Full Streaming (FS), Request for Stream (RFS) and Request for Quote (RFQ). This solution enables customers to trade FX as an asset class effectively and simply at a click of a mouse without complex integration across platforms. It also provides them with the ability to view

consolidated quotes, including Spot, Forwards and Swaps, across multiple banks and liquidity systems. TradeFX interoperates real-time with assets classes available through TradingScreen to provide a fully automated Secondary FX capability to hedge exposure originated from trades and positions from other asset classes.

GAIN Capital partners with StreamBase to extend FX ECN

A new look for TMS Brokers

TradingScreen connects to Société Générale for FX Trading

© UBS 2010. All rights resrved.

UBS FX Trader Plus marks the next step forward in the evolution of our

FX trading platform. Its state-of-the-art user interface delivers one-click

functionality that gives you 24-hour streaming, dealable prices in over

40 currencies and more than 400 currency pairs.

That’s one click to deep liquidity, highly competitive pricing and fast

efficient trading.

Learn more about the power, precision and performance UBS FX Trader Plus

offers you. Visit www.ubs.com/fxtraderplus

UBS FX Trader Plus Power. Precision. Performance.

www.ubs.com/fx


NEWS

AlgoTrader, a provider of broker-neutral, multi-asset-class algorithmic trading services,

has implemented a new function in its SpreadHawk execution management system to help traders hedge currency exposures. Using the new functionality on the SpreadHawk EMS, traders can manage currency exposure on cross-currency pairs trades automatically and in real time. Automating this process, says AlgoTrader, reduces costs and eliminates time-lags, thereby increasing both the frequency and the profi tability of potential risk-arbitrage opportunities.

InfoReach now provides connectivity to foreign exchange liquidity from Thomson Reuters, ICAP’s Electronic Broking Services (EBS) and

J.P. Morgan. This brings the total number of FX dealers and ECNs that connect to the InfoReach TMS

(Trade Management System) to 15 of the world’s largest fi nancial institutions. The InfoReach TMS is a powerful, multi-asset class Execution Management System (EMS) that manages equities, futures, options and foreign exchange. The TMS combines rule-based trading, algorithmic trading, real-time position monitoring, portfolio trading capabilities, order management and FIX connectivity in a single, broker-neutral trading platform.

Aphelion is launching their FX auto-trading platform, Quasar, in Northern America establishing a NA headquarters in New York.

Frank Diasparra has been hired as General Manager to head the NA operations.

Mr. Diasparra brings with him an extensive background in business development and management of companies ranging from technology startups to CIO / CTO positions for global fi rms including Fidelity Investments, ING Barings and ABN AMRO.

He has a proven track record of managing the development and deployment of leading edge technologies within the fi nancial services sector.

AlgoTrader tool helps minimise currency risk

InfoReach expands connectivitynetwork

Aphelion launches Quasar in North America

The largest and most liquid market in the world keeps on growing. The Bank for International Settlements (BIS) will announce an updated fi gure

of the global average daily turnover in foreign exchange, in a few months time (April ’07; USD 3.2trillion). As at April 2009, the daily turnover reported by the six largest currency markets was estimated at around, USD 2.55trillion. Should we assume that the activity in these markets is representative of global activity, it may be possible that the global daily turnover has increased again by a few more hundred billions.

The FX market is predominantly an over the counter (OTC) market and scarcely regulated. From an EU perspective, spot and forward transactions which are not considered as derivatives (e.g. for commercial purposes) fall outside the scope of Markets in Financial Instruments Directive (MiFID).

MiFID came into effect towards the end of 2007, and the Committee of European Securities regulators are expected to announce MiFID II later on this year. Even though it may be still some time until it becomes effective, it

is being hinted that the new directive will bring dramatic changes to the OTC derivative

market.

Transparency & Market VenuesThe vast number of participants around the globe, the availability of electronic communication networks and variety of trading venues contributes to liquidity in the FX Market. Moreover, trading venues compete fi ercely for client business.

According to the latest data published by the London Foreign Exchange Joint Standing Committee


FX – Remaining resilient in the midst of crisis

The crisis came and the crisis went and FX kept on functioning well. Even at the peak of a once in a century crisis, it carried on performing. More astonishing, it shows increased resilience and keeps on attracting new market players.

FOREWORD

Manfred Wiebogen, President ACI The Financial Markets Association

(FXJSC), dated April 2009, 62% of the daily FX Spot transactions done in the United Kingdom are concluded over either electronic broking systems (e.g. Reuters) or electronic trading platforms which include both single and multi level platforms (see pie-chart to the right).

Competition, together with advances in technology brought great transparency to the market and ensured that transaction charges are kept low. Indeed retail and commercial clients are nowadays able to obtain equal or even improved prices than banks eventually, would have access to in the interbank market.

Market Volumes and Liquidity Unlike in other asset classes, throughout periods of heightened fi nancial markets turmoil, the FX market remained fully operational. However, liquidity in forwards and swaps was somehow impaired at times. Amongst the potential

explanations given, seems to be that market participants were concerned with their counterparty exposures notwithstanding, the mitigation factors already in place to manage both settlement and credit risk.

To this effect, Counterparty Settlement Systems such as the Continuous Linked Settlement (CLS) performed a critical role in managing FX settlement risk during the crisis and proved to work successfully, during the failure of major market participants.

It is hard to calculate the liquidity provided by the FX Market. The FX Liquidity Index introduced by Barclays Capital and included in the

chart below, attempts to provide an indication of liquidity conditions in the

FX market. A higher index indicates improved liquidity and the chart shows that liquidity conditions bottomed in January 2009, but have since recovered.


>>>

ElectronicTrading:

21% DirectTrading e.g.Phone: 29%

VoiceBrokers:

9%Electronic

Broking e.g.Reuters: 41%

Trading Venues FX Spot (UK market)Source: FXJSC survey

Aggregate FX Spot Liquidity IndexSource: Barclays Capital

The London Foreign Exchange Joint Standing Committee - http://www.bankofengland.co.uk/markets/forex/fxjsc/index.htm

FOREWORD


Market and Regulatory Initiatives Work is currently underway to examine the current fi nancial system, identify problems and introduce solutions to minimise systematic risks. Regulators on both sides of the Atlantic are moving ahead and new regulations addressing specifi c issues will surely be introduced.

The impact of any new regulation is hard to predict. Therefore it is important that any new initiative, carefully takes into consideration the specifi c characteristics of the FX Market. In terms of FX, two areas which are being looked at with particular interest are:

1. Settlement Risk

2. Credit Risk

Counterparty Settlement Risk Settlement risk refers to the capital at risk while two sums of money are being exchanged. CLS Bank reduces this settlement risk dramatically by operating a payment-versus-payment system. Around 75% of FX settlement transactions already eliminate settlement risk. This is mainly achieved through the use of CLS and other similar mechanisms. Therefore, the main priority from the FX community to mitigate settlement risk is to extend the use and coverage of CLS.

At the time of writing, there are 59 CLS bank members and 7070 third-party participants using CLS Bank service. Since the beginning of the crisis, in July 2008, the list of third party participants more than doubled and now exceeds 7,000. Another initiative that the community is looking at is to extend the number of settlement currencies possible on CLS, which are currently limited to 17.

[A recent instance of unsettled FX transactions occurred during the Icelandic fi nancial crisis, of September 2008. Unfortunately, the Icelandic Kuna was not a CLS currency and this led to a number of settlement failures.

On this point, ACI The Financial Markets Association was asked by a number of banks to assist them in unsettled FX transactions with Icelandic banks. ACI sees that point being very critical. Whilst the ‘risk premium’ received on an interest rate contract takes into account a possible percentage of default of a partner it is hard to understand how foreign exchange contracts (with no risk premium involved) were

treated in these days of putting Icelandic banks into receivership. When foreign banks fulfi lled (had to fulfi l) their obligations of a FX contract at settlement the local partners paid not the counter-value and did/could not settle their bond. In this case any incoming payment should have been rejected by the local Icelandic bank.]

Credit Risk

Credit risk in the FX market is currently mitigated through bilateral collateral agreements, namely the Credit Support Annexes (CSA) that form part of master agreements such as ISDA. Regulators seem to favour the introduction of Centre Counterparty (CCP) clearing for foreign exchange transactions.

CCPs have been around for many years; nevertheless due to the specifi c characteristics of the foreign exchange market, their use has been very limited. This is because the credit risk associated with FX is normally limited to the replacement cost; in the event counterparty defaults. Meanwhile, it is estimated that more than 81% of FX transactions are settled within 7 calendar days. Due to this nature of the foreign exchange market, the benefi ts of CCPs in mitigating credit risk for FX are more pronounced in longer-term dated products such as currency swaps. However, most of these long term dated FX products are not standardised, making them less suitable for CCP clearing.

Conclusions

Despite the fact that the foreign exchange market was not disrupted during the fi nancial crisis of the past two years, room for improvements to increase its resilience remain. Of prime importance should be the continuous expansion of payments-versus-payment systems, to mitigate settlement risk. Big players in foreign exchange should be encouraged, also by regulators to become members of CLS whereas for small participants, to participate through a suitable member. Similarly, credit risk should be reduced through a wider use of Credit Support Annexes.

Given the very nature of the FX Market i.e. transparency, mostly short-dated, tailor made and effi cient, an attempt to bring fresh regulations may hinder the resilience of the marketplace and its own development. In particular and as things stand today, the envisaged costs incurred through the use of CCPs, will by far outweigh benefi ts achieved in risk management.

Certainly the professional trading market can point to many examples of effi ciencies that have reduced the settlement, credit and execution

risk. For example, prime brokerages monitor credit and settlement risk on high volume hedge fund trading, CLS has answered Herstatt risk and CME provides a solid central clearing solution. The key question remains whether or not such a globally active, high volume industry can oversee itself within the current framework or will it need to alter the balance between imposed regulation and self-regulation?

Within the corridors of power the concern is that the very same self interest that appears to have kept FX from systemic risk has created bloated back offi ce processing and unmanageable and undetected systemic risk. The argument is not that FX should be excluded as a special case from the review of industry

automated processes that are currently in place.

Identifying concernsThere are two keys concern in the FX industry:

1. That any increased regulation enforced on the fi nancial services will spill over into FX in a manner that is disproportionate and essentially taxes FX on transactions with limited or negative benefi t to systemic risk; and

2. The current uncertainty is creating delays in committing to technology upgrades and business development.

As our research [on behalf of the CME] indicates there are clearly some concerns within the industry; both settlement and counterparty risks are still real risks to the model (see charts). However, these concerns


RegulatoryArm-Wrestling:Can the FX market strike a balance?

The market environment and events over the last two years have brought regulatory concerns around the world’s fi nancial services into the spotlight. There is more scrutiny over the general architecture of the market than before the credit crisis. The regulatory concerns around FX have yet to move beyond political rhetoric into hard business practicalities. At the moment FX feels hard done by. The industry sees itself as having ridden the credit crisis with a robust infrastructure and a self-regulated concern that combines STP effi ciencies with broader concerns for systemic risk as part of the natural evolution of the business model.

LEADER

David Poole is COO of ClientKnowledge

regulation, but that as part of that review it needs to be recognized that FX has the key risk management and reporting pillars to build on. The industry expertise and self interest that protected FX over the credit crisis need to be continually relied upon to build out the FX infrastructure. The aim needs to be on increasing the percentage of fl ow that is dealt with by the end to end


>>>

Systemic risks to the FX market client banks

Systemic risks to the FX market real money investors

Systemic risks to the FX market highly active investors

are being generated from within the industry and are not a refl ex reaction to fear of regulators breathing down their necks.

The research shows, an increase in concern from banks over back offi ce and settlement limitations while, for investors the fear of bank insolvency is the primary concern. The practical implications of these concerns are manifesting themselves in clear ways that evidence the self-motivated nature of the industry in the following ways:

• Back offi ce processes are being reviewed across the industry resulting in system and workfl ow upgrades;

• Increased systematic trading is being deployed to evaluate FX fl ow from banks’ clients;

• Order management process upgrades from investors are being implemented to better record and understand the effect of FX on their investment infrastructure.

Understanding the FX market structure The depth of this review should not be underestimated. Buy and sell-side are aware that FX is an underexploited business that offers returns from a relatively low capital base. The drive towards complex derivatives has created many distortions in the industry and one of these has been the under-resourcing of FX and there is an industry wide wake up call being initiated to resolve this. Many banks core business relies on FX and whilst a reactive approach has yielded strong revenues at

LEADER


many organisations, there is now an implementation of systems and workfl ows to sustain the business to maximize revenues. This revenue maximization process is being conducted conjointly with back offi ce and workfl ow analysis, such that systemic risk is being addressed as part of the process. This is because much of the revenue gain is focused on core vanilla products that require volume processing and the revenue earned per transaction is marginal enough that these processing costs need to be an essential part of the development.

This compares extremely favourably to examples of derivative product where the front offi ce execution capabilities ran way ahead of the processing capabilities (such as CDS) and keeps FX anchored to a symbiotic development of front and back offi ce processes.

An important danger to this process is either diversion or stalling in order to try and second guess regulatory initiatives that will be overlaid onto the industry.

Market concerns and developmentThe key for most market participants appears to be balancing self-determined action versus precipitous regulatory action spilling over from other asset classes. By improving the clarity of direction from regulators, the FX industry can continue its current drive to deepen and broaden risk management capabilities.

A necessary boost for the industry to lead the initiative is that, the complexity needs to be resolved using a combination of homogeneity and bespoke solutions. If this combination is well balanced, then innovation can thrive in a risk-contained environment. For example, CLS provides a single settlement solution for market professionals, whereas cash management systems present a multi-faceted approach to corporations needs. Standardising technologies and processes is a very effective method of reducing a single clearly identifi ed risk (such as Herstatt in the case of CLS), but a bespoke solution is required for corporate cash management as it is a complex workfl ow solution and cannot be reduced to a single methodology. However, the connectivity can be simplifi ed via application programming interface (API) and this is where the work needs to be to ensure that multiple bespoke systems are able to communicate effectively and in a timely manner.

There are multiple risk management systems using different methodologies and whilst there are a few dominant providers, a single solution is not feasible. As a consequence, the technology space will continue

to innovate to provide solutions that sit amongst and between the major providers. One example of this is aggregation technology that can be implemented as an attempt to provide a more homogeneous experience of pricing, whilst the underlying platforms maintain their bespoke capabilities to allow effi ciencies amongst market specialists.

Product type analysisSo far, we have discussed FX as a product, but clearly most common understanding is that the business comprises of spot, forwards, futures and options. The greater concern for regulatory leakage from other asset classes is with forwards and options. However, as we can see from our survey, the self-regulating aspect of the industry is already having an effect by reducing the percentage of barrier and exotic options being traded in favour of vanilla.

In the forwards market there was clearly a serious dislocation in 2008 which dramatically affected liquidity driven by both credit concerns and basis risk. However, once again we see clear evidence of self correcting behaviour. Many banks have tightened the link between rates

FX options trading by type

>>>Regulatory Arm-Wrestling: Can the FX market strike a balance?


products and FX forwards and integrated the risk management. In fact this learned behaviour was apparent by the banks that managed this most successfully and were consequently able to

continue pricing and able to take advantage of

wide spreads. FX prime brokerage

provides another example of how the evolving landscape is being reacted to. There is a trend to

locate the prime brokerage business

within the clearing function at a bank and at the same time prime brokerage,

along with the wider market, has seen more fl ow product. Both these trends

have happened without regulation (although arguably, with the threat

of regulation with regard to clearing). Part of the reason

for less volume in second generation derivatives

within prime brokerages is due to lack of clarity of

risk ownership for the prime broker and this is where regulators can be of help, but also evidence of the market self-correcting to adapt.

Current needs and future course of regulatory actionThese historical examples do not mitigate the need to examine how the risk management and settlement process can improve in the future, but they do highlight the need for regulation to initially act as a guiding hand and then to examine the results the industry provides for effectiveness.

Within this framework and with the clear messages on regulatory concerns about requirements for deeper clearing house capabilities to mitigate counterparty risk, there is urgent need for clarity. Whilst options and forwards may benefi t from clearing, it is far from apparent how clients (corporations and some investors) would be able or willing to place margin. The question of who benefi ts needs to be addressed and European equities provide a good example of how multiple clearing operations can create complex and expensive problems.

Automation is the way forwardWithin a robust electronic framework having a clearing system is arguably just another electronic message that needs to be attached to a trade, so if it can be systematised then as messages are passed to CLS as part of the trade process, then a message can go to the clearer. The technological implications are apparently straightforward, but the risk management

LEADER


needs to clearly reduce risk and the organizations need to be sophisticated enough to measure the risk mitigation and apply it to their credit model.

One of the aims of regulation is to protect the vulnerable and this means buy-side and particularly retail. Once again as our theme has developed there is evidence of the industry adapting. The retail margin trading model developed outside of banks, but is now starting to have a hybrid position whereby the technology is provided by retail sites, but the risk management of the position (and sometimes the client margin as well) is within the bank.

The FX industry is trying to solve the issues, but needs its own time and space to develop within a regulatory framework that enables technological innovation and solutions to be self-generated. Ticking boxes to satisfy a political process without genuine risk mitigation is potentially reckless, when politicians’ careers will be over and the industry will be left with long term damage.

Lessons from the crisisUndoubtedly, one consequence of the crisis we are still experiencing is liquidity concerns. Bank risk taking clearly has a direct effect on liquidity in the market and applying logic that non-client generated risk taking is destabilising has perverse and potentially dangerous consequences. Clients want liquidity in the market and regulation will fi nd that trying to unpick the threads of risk taking to compartmentalise into a form of benign client mark making and “toxic” proprietary risk taking will be counterproductive at best. Regulation should control the macro risk levels and ensure these are accurately monitored, recorded and acted upon rather than try and micro-manage what will soon prove to be a very elusive defi nition of proprietary trading.

Limbo is not a place to live for very long and if there is a lesson from the crisis, it is that we will continue to experience shocks to the system and holistic oversight of an entire global industry can be done by incentivised market professionals. The need is to utilise the natural self interest for its strengths and enable industry wide initiatives to be run beyond a political term of offi ce.

Summary and conclusionsIn general the FX market did not stop functioning and continued to do business effectively throughout the

crisis. This ability to counter and survive periods of high volatility comes from the self-correcting character of the FX market. However, regulators still have a role, even in a system that works. The concerns we are dealing with here are the systemic, highly unexpected black swans, which require careful considerationfor any new concentration of risks. Accurately evaluating the risk that a bank takes and having effective capital controls

are powerful tools for a regulator to lay down the framework for banks to operate in.

However, regulators imposing solutions to solve current political problems will leave the industry with long-term ineffi ciencies and unintended consequences that lay the groundwork for the next systemic risk to build up in the system. The tools are available and the industry has proved capable of rising to the challenge.

Self-regulation within a broad risk framework may appear risky, but the alternative is worse. So the need of the hour is to give the industry the framework it requires and ensure FX does not suffer from over zealous regulatory leakage from other products.

Customer electronic foreign exchange trading volumes increased 7% from 2008 to 2009. While this growth pales in comparison to the

25% expansion in 2007-2008, the fact that electronic

trading systems were attracting business while the overall market was contracting suggests that market participants continue to actively shift trading volumes to the platforms from other channels.

Worldwide foreign exchange trading activity spiked during the crisis-plagued years of 2007 and 2008. Over the most recent year, volatility has subsided and markets have returned to some degree of normality. Stabilization of global markets led to a 6% decline in total FX volume from 2008-2009. This contraction, coupled with growth in electronic trading, pushed the share of total foreign exchange trading volume executed electronically to 58% in 2009 from 54% in 2008.

Over that period, electronic trading volumes increased 16% in the Americas and by 44% in Asia while remaining essentially fl at in Continental Europe and falling nearly 10% in the United Kingdom. Electronic trading systems now capture 53% of total foreign exchange trading volume in the Americas — up from 48% last year — and 61% in Europe — up from 59%. The shift to electronic execution has been even more pronounced in Asia. In Japan, e-trading increased to 63% of total FX volume in 2009 from 42% in 2008, driven by a huge increase in volume among retail aggregators. Across the rest of Asia, electronic platforms attracted half of total foreign exchange trading volume, up from 40% last year.


Electronic FX:As Global Markets normalize, slow but steady growth

e-FX INDUSTRY REPORT

Global foreign exchange markets continued their migration to electronic execution last year as e-forex trading volumes increased amid a decline in overall FX trading activity.

Peter D’Amario is a Managing Director of Greenwich Associates

Last year’s growth had two main drivers: Around the world, but particularly in the Americas and Asia, electronic trading systems are attracting new customers. At the same time, existing users are increasing the share of their total foreign exchange trading volumes conducted via electronic execution.

Systems attracting new customers in Americas, Asia Globally, the proportion of active FX market participants using electronic trading systems increased to 61% in 2009 from 57% in 2008. While usage was essentially fl at across Europe and Japan at about 70% and 40%, respectively, e-trading systems in other regions were attracting relatively large numbers of new customers. In the Americas, 60% of market participants traded FX electronically in 2009, up from 54% in 2008. Growth was also strong in Asia excluding Japan, Australia and New Zealand, where usage climbed to just more than half of market participants in 2009 from 46% the prior year.

Meanwhile, the proportion of FX market participants

reporting that they have no plans to trade foreign exchange electronically at any point continues to erode. Worldwide, about one third of FX market participants fall into this category of eFX holdouts — down from 35% in 2008. Among corporates, the group of holdouts dropped to 42% in 2009 from 45% in 2008. Even in regions where until very recently relatively large shares

of market participants were reluctant to log on, holdouts are being converted. In non-Japan Asia the share of market participants saying they do not plan to use electronic trading declined to 42% in 2009 from 46% in 2008. In Canada that share fell to 53% from 64%. Only in Japan did the group of holdouts hold steady from 2008 to 2009 at 56-57% of FX market participants.

Across all these regions, new e-trading customers last year included both corporations and fi nancial institutions. In 2008, only 45% of corporate FX market participants traded electronically. In 2009, that share jumped to half. Usage rates among fi nancials


>>>

Percentage of Total FX Volume Traded ElectronicallyNote: Based on responses from 1,497 top tier corporates and fi nancial institutions in 2009, 1,437 in 2008, 1,780 in 2007, and 1,663 in 2006.

Source: Greenwich Associates 2010 Global Foreign Exchange Study

Increase Share of Foreign Exchange VolumeNote: Based on responses from 1,497 top tier corporates and fi nancial institutions in 2009, and 1,437 in 2008.




increased to 71% in 2009 from 68% in 2008. More than 90% of banks active in FX markets now trade electronically, and the share of fund managers and pension funds using eFX increased to 62% in 2009 from 57% in 2008.

Although electronic trading platforms acquired few new users among the world’s most active FX market participants — of which almost 85% already trade electronically — usage rates increased among other participants both large and small. In the former category, among market participants trading $10 billion to $50 billion in FX volumes every year, electronic trading usage jumped to 71% in 2009 from 65% in 2008. Similar growth was seen among participants in the $1-10 billion category and a more modest increase in usage was reported among more infrequent users of foreign exchange markets.

Electronic traders ramp up volumesIn addition to business from new customers, electronic trading volumes were infl ated last year by the growing share of total trading volume allocated to electronic systems by existing users. Current users of e-trading platforms executed two-thirds of overall FX trading volume electronically in 2009, up from 64% in 2008. Corporate users of eFX increased the share of total FX volume directed to electronic systems to 52% in 2009 from 48% in 2008, while existing fi nancial e-trading clients upped electronic execution to 68% of their total volume from 66%.

In Europe, existing users of e-trading systems executed a constant two-thirds of their total trading volume electronically in 2008 and 2009. In the Americas, however, existing users increased e-trading to 63% of total volume from 59%, and in Japan, users upped the share of their total volume done electronically to 85% from 73%. Elsewhere in Asia, electronic trading volume among existing e-traders increased to 56% of total volume in 2009 from 49% in 2008.

Hedge fund falloff

The increase in electronic trading volume last year is all the more impressive in light of a reduction in activity among hedge funds. Although hedge funds have not traditionally been heavy users of electronic trading systems relative to banks and other large fi nancial institutions, they were among the most important drivers of booming foreign exchange trading volumes in the years leading up to the global crisis, and as such, contributed signifi cant amounts of new trading business to electronic systems.

Through 2008, electronic trading systems were capturing almost half of hedge fund FX trading volumes. That share dropped to 44% in 2009, as the total amount of electronic trading volume generated by hedge funds dropped 15%. During this period the share of hedge funds using electronic trading systems was steady to even slightly higher. However, hedge funds that employ electronic trading cut back signifi cantly on their use. Hedge fund users of

electronic trading systems executed 38% of total FX trading volume electronically in 2009, down from 44% in 2008.

Multi-DealerSystems: The dominant FX channel

Multi-bank electronic systems are gradually emerging as the dominant channel for global foreign exchange trade execution. For several years Greenwich Associates has tracked the progress of multi-bank platforms

>>>

Electronic Systems Gaining Customers and Trading VolumesNote: Based on responses from 1,497 top tier corporates and fi nancial institutions in 2009, and 1,437 in 2008.

*Financials includes Banks, Fund Managers/Pension Funds, Hedge Funds/CTAs, Insurance companies, and Other Financials.Source: Greenwich Associates 2010 Global Foreign Exchange Study


as they became increasingly attractive alternatives to single-dealer platforms. By 2008, it had become apparent that multi-dealer systems, with some exceptions and temporary blips in the trend, had surpassed proprietary platforms as market participants’ channel of choice — at least in terms of use and volumes. The 38% of total market trading volume executed via multi-bank platforms in 2008 was not only more than double the share executed on single-bank platforms, it was also slightly larger than the 34% of overall FX market trading volume conducted by telephone. (Note: All volumes discussed in this report are based on customer trading activity; the use of single-bank platforms is higher in inter-bank trading.)

Over the past 12 months, multi-bank systems appear to have seized trading volume directly from telephone-based trading. While the share of total volume executed on multi-bank platforms increased to 40% in 2009 from the 38% in 2008, the share executed via phone transactions decreased to 30% from 34%. Single-bank systems were fl at at 15% of total volume over the period. Multi-bank platforms have captured even larger shares of overall volume in some regions and among certain types of investors. Multi-bank systems account for 47% of total trading volume in the United States, 48% among corporates around the world and 52% among fund managers/pension funds.

Hedge funds execute the smallest share of total volume on multi-dealer platforms, at just 22%, while using single-dealer systems for more than a quarter. Single-dealer systems also attract larger shares of trading volume from the most active FX market participants and — at the other end of the spectrum — infrequent users of foreign exchange. Among market participants generating more than $50 billion in annual FX trading volumes, single-dealer systems capture 19% of total volume. These systems also attract 18% of total volume from market participants — mainly corporates

— that generate less than $1 billion in annual trading volume.

These results suggest an emerging market structure in which multi-dealer systems are used as a primary channel for execution on a day-to-day basis by many market participants — in tandem with telephone transactions — and single-dealer systems are used on a more specialized basis by hedge funds and large fi nancials executing sizeable or particularly complex transactions, and by small corporates who may trade infrequently and are content to execute trades with their primary banks without much in the way of multi-dealer price discovery.

ConclusionIt is becoming increasingly apparent that the telephone, which has reigned as the dominant channel for FX trading for decades, is losing ground to electronic execution of all types in every major market around the world. Less than 30% of FX trading volume is now done by phone in the United States, and in non-Japan Asia that share has fallen to just 21%. In fact, in Asia, telephone transactions have been surpassed by messaging systems on Bloomberg and Reuters as a means of FX conducting FX trades, with these systems capturing 23% of overall volume. We fully expect this trend to continue as electronic trading platforms continue to attract new customers and market participants already experienced in electronic trading allocate increasing amounts of business through electronic systems.


Multi-Bank Systems Replacing Telephone as Primary FX Trading ChannelNote: Based on responses from 1,497 top tier corporates and fi nancial institutions in 2009, and 1,437 in 2008.


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CLS already successfully eliminates settlement risk for over three quarters of inter-dealer trades. However, almost as soon as the

bank-owned CLS launched an industry-wide gross settlement system in 2002, the debate began about moving from gross settlement to settling ‘netted’, or averaged, trades, and the aggregation service has been designed to address this.

The FX market has undergone dramatic growth in terms of volumes traded and the expansion of its community, which now includes hedge funds, algorithmic traders, and retail and institutional participants, many of whom are prime brokerage clients of the banks. With FX increasingly being traded as an asset class, algorithmic traders alone can post tens of thousands of trades an hour.

A pre-settlement service CLS Aggregation Service is a pre-settlement service to address operational risk issues caused by high frequency, low value FX trades attributable to algorithmic trading, prime brokerage and retail aggregators. This is a collective effort to re-engineer and streamline post-trade processing for the fastest growth segment of the market.

The service will reduce operational risk, lower post trade costs and rationalise and consolidate legacy post-

trade processes throughout the global FX markets. As well as further improving the reduction of settlement risk in the light of spiralling FX volumes the service will dramatically reduce the number of tickets large players need to process, and reduce the back offi ce bottlenecks that fi rms had been suffering from in busy periods as only aggregated trades will need to be processed and settled in CLS, alleviating the processing burdens on participating banks by 90+ per cent.

What will happen now is that the tickets will be booked in the front offi ce of the bank, aggregated, and then only one or two tickets will be sent downstream. Aggregation decisions can be made on the size of the ticket. The technology is already available to identify the high frequency/low value tickets or sort by the source of the transactions. The focus will be on taking out the highest volumes in the post-trade, pre-settlement space by aggregation, and those tickets coming from the largest players, in the most active G7 currencies

The biggest requirement from the banks is that they do not want to be in a position where they end up with an averaged trade, independently, that does not match and they need to start reconciling thousands of tickets all over again. CLS Aggregation Service will be a centralised service, which will match every individual ticket, in real time, and aggregate them throughout the day.

Compressing matched tradesThe aggregation service operates by compressing matched FX trades by taking all trades between two trading parties, that have the same buy currency from one party, in exchange for another sell currency to the other party and then adding all the buy sides in the currency and adding all the sell sides in the currency.

The result of the compression are two aggregated trades that represent the cumulative amount of


The CLS Aggregation Service:taking huge steps towardseliminating operational risk

MARKETPLACE

The CLS Aggregation Service, jointly built by CLS Group and Traiana, an ICAP company, went live in January, providing trade aggregation services to participants active in the over-the-counter FX market. Frances Maguire explores how the service is heralding a new chapter in operational risk reduction and banking industry collaboration.

buy currency against the cumulative amount of sell currency, and sell currency against buy currency, between the two parties. The two participants receive information regarding the value of the aggregated trades. The service will match and compress trades between system participants before downstream processing

The difference from ‘netting’ is although one party may have transactions where it is buying and selling the same currency from the other party, aggregation does not net the values of the buys against the sells in that currency.

The founding eight banks that have already committed to the joint venture are: Bank of America, Credit Suisse, Citigroup, Deutsche Bank, Goldman Sachs, J.P. Morgan, Morgan Stanley and Royal Bank of Scotland. This number is expected to grow and participating banks, which are not part of the founding group, will be able to participate in the service, subject to the same pricing schedule as the founding banks.

Support for the service Rob Close, chief executive offi cer of CLS Group and CLS Aggregation Service, says: “There has been widespread support for the service which is endorsed by the eight founding fi nancial institutions. This marks one of a number of steps from CLS Bank to further provide high quality risk reduction and processing effi ciency solutions for the FX community.”

He adds that the most active players in the very fast growing high frequency, low value segment have very particular pre-settlement needs, for which CLS Aggregation Service has been designed, alongside other CLS strategic initiatives on risk mitigation and effi ciencies. Although the banks are already part of the Traiana Harmony network, on which the CLS Aggregation Service has been built, Jonathan Butterfi eld, director of Communications, at CLS Group, says that the participating banks have had to re-engineer their back offi ces to fully benefi t from this interbank service.

He says: “Although it is a relatively simple product, banks do not use the same sequence of steps to process trades. Therefore an inter-bank standard had to be defi ned which has resulted in workfl ow changes for participating banks. Aggregation allows banks to add up the value of the two currencies within a pair across multiple trades against one of three parameters: time, total value, or total number of transactions. The banks

then receive back the two aggregated trades (buy side and sell side) for each currency. So far, so good, but banks need to make this process robust, they need to be able to audit it and they need to be able to reconcile it. So for all the banks that are either live or are planning to go live there have been workfl ow changes, and for some the changes have been a little more material than for others.”

Much of the workfl ow changes have been on the processing needed after aggregation has taken place to ensure the banks’ systems track the trades submitted for aggregation and reconcile the outcome of the aggregation. “There has been no failure of any aggregation but the banks need to have their own record and the trades need to be reconciled,” Butterfi eld adds.

The service launched with eight founder banks and CLS continues to talk to other fi nancial fi rms, generally within the FX prime brokerage arena, about joining CLS Aggregation Service. The sales activity was tempered while the CLS Aggregation Service was built and tested which was completed at the turn of the year, received regulatory approval and is now ramping up as the service has gone live.

Profi le for using the serviceTo use the service the right profi le is needed in terms of traffi c fl ows. The benefi ts of aggregation increase for fi rms trading large numbers of lower value spot trades


>>>

Rob Close “There has been widespread support for the service which

is endorsed by the eight founding fi nancial institutions.”

MARKETPLACE >>>


in the highly liquid G5 currency pairs. Butterfi eld estimates there are about 15 prime brokers that have this profi le and would benefi t from aggregation. Overall the opportunity to gain the effi ciencies that aggregation provides is likely to apply to less than half of CLS’s 60 members.

Butterfi eld says: “Other Members do not trade with their counterparties with suffi cient frequency for aggregation to be economically attractive.”

For this reason, and the fact that changes to fi rms’ back offi ce systems are needed to participate in CLS Aggregation Service, the service is a stand alone, opt-in service rather than being integrated into the operating model for CLS’ core settlement service.

For Butterfi eld, launching the service amidst the fl urry of activity around the euro provided a salutary reminder of why the aggregation service was built. It was exactly the same sort of surges that were causing stress a couple of years ago that led to the debate about how to solve this problem. That debate led to the launch of CLS Aggregation Service. “Those pressures have not gone away and have returned as the market has gained confi dence,” he says.

The joint venture is a CLS subsidiary, 51 per cent owned by CLS Group and 49 per cent owned

by ICAP, operating within the CLS regulatory framework. Operating within the CLS regulatory framework, the supporting technology for the system is provided by market-standard Traiana Harmony network. CLS is responsible for the Aggregation Service, while the technology infrastructure and its maintenance is the responsibility of Traiana. This has parallels with the CLS/IBM partnership for the CLS settlement engine, though CLS Aggregation Service is a joint venture with Traiana, and more than a technology partnership.

Landmark in post-trade landscape

Gil Mandelzis, Traiana’s chief executive offi cer, described the launch as a landmark in the post-trade landscape. “The CLS Aggregation Service has the potential to unlock dramatically greater capacity across the industry, which will open up new trading opportunities for retail and institutional investors.”

So far, all the participating banks already use Traiana Harmony technology. By integrating the Traiananetwork and making it the basis of the trade aggregation service with CLS’s settlement network, the service is leveraging existing connections that the founding banks and others have in place. This accelerates adoption and provides benefi ts to all participants without the need for complex, costly and lengthy implementation.

Jonathan Butterfi eld “Other Members do not trade with their

counterparties with suffi cient frequency for aggregation to be economically attractive.”

Gil Mandelzis “The CLS Aggregation Service has the potential to unlock dramatically greater capacity across the industry, which will open up new trading

opportunities for retail and institutional investors.”

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“There is no signifi cant bank in the FX prime brokerage world that is not connected to Traiana Harmony,” Mandelzis says. However, he does not foresee that banks must be of such a scale or be on Harmony to benefi t from the CLS Aggregation Service. He adds that connections can be built easily and banks of all sizes can benefi t from the CLS Aggregation Service.

Mandelzis says that the need for aggregation has been supported by the biggest players in FX and it is a key component needed to move forward with a much more scalable model to support the future growth of the industry. “An industry solution for a much more scalable model without the need to completely re-engineer all the banks’ back offi ces was needed and the CLS Aggregation Service fulfi ls that need” he says.

It is expected that as banks grow to a certain size they will join the service, primarily because there is no other cost-effective way of gaining these effi ciencies. To gain this level of capacity in their back offi ce and settlement systems would be too expensive without the service. “The service is a very compelling alternative to expensive rebuilds and the bottlenecks that can occur in the banks’ back offi ces.”

Citi is now live on the CLS Aggregation Service. Andrew Coyne, Head of FX Prime Brokerage and eCommerce Products at the bank says that the preparation and integration work was greatly reduced

because Citi already had an aggregation in place as part of the Traiana Harmony network, and the workfl ow had already been optimised for that.

He says: “The CLS Aggregation Service is one of many answers but it is a very signifi cant one. This is another huge step in making the market much more effi cient in processing transactions and brings the cost-base down.”

Benefi ts of joining the CLS Aggregation ServiceFor Coyne, the main benefi t of joining the CLS Aggregation Service is that it helps capacity and in so doing, reduces cost and risk. “It gives us more certainty, it moves us on to the next stage and allows us to rethink the way we do things again. If we keep shifting the way the market operates, to a more effi cient level, we can get to a point where we have a different view of the market and can see other benefi ts and other opportunities. For this reason, it is important to keep the evolution going.”

Many of the FX prime brokers have already built their systems for scale and capacity has been a competitive weapon in the past and they have invested accordingly to capture more business.

The ability to process higher volumes will help banks to grow, but Coyne says Citi did not have this specifi c issue, in terms of capacity built into the system. However, he agrees it is taking pressure off

Andrew Coyne “This is another huge step in making the

market much more effi cient in processing transactions and brings the cost-base down.”

Lee Buck “This will reduce fl ow to the back offi ce

and increase capacity.”

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the infrastructure and driving down the cost of processing.

Lee Buck, executive director, FXEM Business Change Management Team, at Morgan Stanley says that the bank was also already using the Traiana Harmony network prior to joining the CLS Aggregation Service and as well as using the Harmony product for many years, it was also familiar with Traiana’s Harmony NetLink solution, which provides trade aggregation for prime brokerage services.

In terms of preparation work was needed to begin aggregating through CLS, Buck says that a completely new workfl ow had to be engineered to aggregate interbank trades that were not part of the Harmony network. He says: “Development work was required in our front and back offi ce systems to prevent confi rmation and settlement of trades intended for aggregation. We also had to deal with the situation for when a trade intended for aggregation does not match and may revert to gross settlement.”

However, already Morgan Stanley is seeing the benefi ts, seeing compression ratios of 80 per cent or more (every 100 trades results in 20 or fewer trades that have to be confi rmed and settled). “This will reduce fl ow to the back offi ce and increase capacity. We have not completed the work to take full advantage of this but it is in the pipeline,” says Buck.

He adds that the FX prime broker looks to trade aggregation as a key component of growing its business, expecting the use of the service to allow us to substantially increase trade fl ow capacity in the risk systems and back offi ce infrastructure, while controlling costs.

Cost savings

It is too early to know exactly what the cost savings will be for banks participating in the CLS Aggregation Service. Pre-aggregation, the cost of processing a ticket ranged from as low as $1 per ticket for the high volume banks, but scales to $2.50 or even more for lower volume banks. However, the banks spending the highest amount, per ticket, in processing costs are the least likely to have the critical mass to make using the service economically viable.

E-commerce may have freed up banks to focus on more complex deals and product innovation but they still need to manage these relationships

to ensure they understand and meet the needs of their corporate customers.

Takis Spiropoulos, managing director and head of the e-Solutions Group, at CIBC World Markets, says

that the global economic downturn has reshaped the traditional corporate FX landscape in that it decreased the number of bank counterparties that could form a lending syndicate to corporates and put risk management fi rmly in the spotlight. “Corporates are relying on fewer banks, especially the ones they have credit relationships with,” he says.

As a full-service FX provider, he adds, CIBC focuses on a strong dual channel approach, leveraging the strengths of each. Spiropoulos says: “Electronic trading offers price transparency, STP for payments and transfers, and minimisation of errors for both the client and the bank’s back-offi ce. Using the e-channel for those activities provides more time to focus on higher value, two-way dialogue that is essential for managing risks and hedging opportunities as well as strengthening the overall client relationship.”

Challenges facing corporates

Depending on the size of the corporation, the nature of their hedging needs and trade frequency, Spiropoulos says that corporations face a number of challenges. These range from identifying foreign exchange risks, to complicated internal trading approval processes, to complying with detailed reporting requirements. Some clients have the additional task of managing these requirements using older IT systems.

“In addition, establishing processes and getting them approved can take time for clients trying to set up an electronic trading agreement,” says Spiropoulos. “Understanding these challenges and working closely with clients to streamline their operations is essential in saving them time and money. In most cases, one of the fi rst questions that the clients ask is what services we offer for managing their risk.”


Relationship e-trading:A new force entering the world of corporate FX?

FEATURE

Banks and corporates have long relied upon strong relationships in FX where pricing and services are built around the size and type of the order fl ow. However, while the growing use of electronic over voice trading for vanilla trans-actions has freed up banking staff to focus on the higher value, more complex deals and the automation brought by straight through process-ing have lowered costs and brought greater effi ciency, it means there is less daily contact.

By Frances Maguire


>>>

Within the CIBC corporate FX offering, OTC products are used to manage exposure in a risk-controlled manner, and a number of discussions are currently taking place globally on the regulatory specifi cs for fi nancial and non-fi nancial companies. Spiropoulos says: “The fi nal direction of any regulatory change remains unclear but the outcome will likely infl uence the degree to which simpler instruments are preferred to complex ones, or vice versa.”

He believes credit is a key consideration and determines to a large extent the type of relationship

a corporate has with each bank. Smaller corporates tend to have stronger relationships with regional banks, but the bank that has the competitive advantage is the corporate’s lead cash management provider. “Mid-to-large size corporations with multi-bank lenders will deal over multi-bank FX trading venues to prove best execution, but they

willalways do a

portion of their business with their

lead cash management bank. Even in multi-bank venues, when price is the same, it is the relationship that becomes the differentiating factor,” says Spiropoulos.

Platform functionalityOf the eFX platform features and functionality corporate clients are looking for, Spiropoulos says that research is very important, especially for the fi rst call, and clients are increasingly relying on leveraging trade ideas. He believes this is because the scope of the corporate treasurer’s role is widening in today’s environment, and single bank platforms are instrumental in freeing up time to concentrate more on short-term liquidity needs and long term protection of cash fl ows.

He says: “Treasurers are looking for non-generic information, such as insights into order fl ows and what they cannot read in news services. Strategy related, liquidity, or technical analysis ideas usually generate trades. The challenge for the development

Takis Spiropoulos “Electronic trading offers price transparency, STP for

payments and transfers, and minimisation of errors for both the client and the bank’s back-offi ce.”

FEATURE >>>


of e-commerce systems is to integrate research and trade ideas in an easy to use manner that materially adds value. Corporates reward trade ideas by placing orders either on line, or on the phone. Straight through processing is a differentiating factor, but more important for the larger corporates that trade frequently.”

Spiropoulos believes that e-channels enable banks to help streamline the operational part of their clients’ businesses. These services also allow banks to be increasingly pro-active and focused on pre and post-trade value-add services. Often, some degree of customisation is required in order to meet the varying client needs, and approaching the problem as a team with the right mix of specialists ensures that the most cost effective solution is put in place. “Cash management needs are primarily domestic driven, but understanding the client’s overall requirements, including foreign exchange, is extremely important from an e-commerce perspective, so that the right products are designed and marketed,” he says.

E-commerce and banking relationshipsFor Spiropoulos, strong client relationships are critical and that will remain true going forward. As technology evolves, modern e-commerce systems are becoming a more integral part of doing business in a streamlined and effi cient manner. This compliments traditional banking relationships and provides more time to help clients take advantage of high value, strategic opportunities.

Banks are also investing heavily in customer relationship management tools to ensure they are managing this fi ne balance. Per Brugge, director, head of marketing and global business development, at Nordea Markets says that having a strong relationship with corporate customers has never been more important. He says: “We have a fi rm belief that we need to maintain and even strengthen the relations with our customers as more and more business is executed electronically. This places more and more

requirements on our CRM tools and sales advisory procedures, where we invest signifi cantly.”

He adds that Nordea Markets is working hard to endure an ongoing dialogue exists and is placing more responsibility on its sales managers to proactively secure the dialogue with the customer, where daily phone calls from the customer are becoming less frequent. “Giving our sales people suffi cient insight to the customer’s electronic dealing behaviour is crucial to foster a meaningful dialogue. This places very high demands on our data mining and business intelligence capabilities, which is also an area of investment” he says.

According to Brugge, the global economic downturn has emphasised the bank/customer relationship as customers highly value stable and reliable banking partners, and he sees that it is those partners that priced in rough conditions that corporate customers will favour as the economic downturn eases up. He adds: “Access to credit lines has also been more important than ever. Pure investment banks, and Nordic branches of large international

banks, have had trouble providing their corporate customers in the Nordic region with suffi cient credit lines during the crisis, and customers have turned to their core commercial banking partners. It is so much easier to get suffi cient credit lines if you have a solid relationship to build on.”

While Nordea’s core strategy and two-channel distribution model withstood the storm, Brugge notes that some international banks were quick to leave the Nordic market during the crisis but are now making their come backs.

“The value of the relationship has defi nitely been emphasised, and is more important today than a couple of years ago,” he says. And while FX product capabilities and e-FX deliverables are no less important today, Brugge says they have become more commoditised and banks need hyper-sharp offerings to even be invited to compete for Nordic corporate

FEATURE


customers’ business. During the fi nancial crisis there was a clear back-to-basics trend where customers fl ed anything that smelled complexity, but we now see a growing interest for more complex and structured products, he adds.

Single bank platformsWhile the multi-bank portals are still very important to many corporate customers, Brugge believes that the single-bank platforms are gaining ground. He says: “Also larger customers are nowadays seeing the value of single-bank platforms, such as lower running costs, especially those customers having trust in their banking relationship. Some customers are also using several single-bank platforms in parallel, some combine single-bank platforms with a multi-bank portal, and many of the biggest fi rms are still using multi-bank portals as their primary dealing channel. However, the customer size threshold seems to be going up, and the idea that every corporate in the world, independent of size, should use a multi-bank portal is defi nitely dead.”

In terms of FX trading platform features and functionality that corporate clients are looking for, Brugge says that there is clearly a demand for one click / streaming solutions as well as more integrated solutions to achieve greater degree of STP and process effi ciency. “Additionally there is greater demand for integrated trading and cash management solutions, where hedging FX is done as a direct result of cash forecasting.

To this end, Nordea has recently co-operated with system vendor Exidio to offer FX dealing from within the Trezone cash management system. This co-operation, combined with several similar co-operations on the cash management side, has now led to a deepened partnership between Nordea and Exidio, where Nordea offer its corporate customers the Trezone system. In addition to this, Nordea also offer its corporate customers a suite of plug-and-play STP solutions covering all angles of FX dealing as well as cash management towards the mostly used treasury management systems in the Nordic region.

For Brugge, the new era of ‘relationship e-trading’ is already here and to be successful banks need to adopt this two-pronged approach in building strong relationships with corporate customers while also providing robust electronic trading and execution tools. “New CRM and customer intelligence tools must be built. Customers will require larger degree of customisation and will demand further advisory, and that advisory must be closely linked to actual activities.”

Maintaining personal relationshipsChristopher Johnson, head of e-Trading at WestLB, says that although a large proportion of volume is traded through e-channels today, personal relationships still need to be maintained in order to understand the needs of corporate clients.

He says: “Our primary emphasis is on service, both coverage of the client as well as fi nding the optimal solution. Bigger corporate clients tend to trade through multi-bank dealing portals, whilst smaller ones tend to fi nd a solution, which allows them to trade almost every desired product. This applies especially for our scope of German clients.”

For Johnson, the size of the company greatly affects the behaviour of trading. “A multi-national corporation has a natural desire to compare pricing and service of their chosen trading partner. A smaller company maybe just want to trade a simple small amount in spot,” he adds.

For this reason, he believes a broad relationship with corporate customers is needed as although technology offers more and more possibilities to trade and extensive features and functionality, it is still important not to focus purely on this aspect of the relationship at the expense of the ‘traditional’ side of relationship banking.

>>>

Per Brugge “Giving our sales people suffi cient insight to

the customer’s electronic dealing behaviour is crucial to foster a meaningful dialogue.”

FEATURE


Valerie Lee , head of e-business for FX and fi xed income at Société Générale, Asia Pacifi c, says that the corporate culture in Asia strongly favours relationship banking, adding that the impact of the credit crisis has impacted trade fi nance business and it has meant that corporates in Asia have tended to concentrate their relationship banking with just three or four banks.

While larger corporate customers have a larger number of banks lending to them and they tend towards using the multi-bank portals to manage these relationship, relationship banking is still favoured by medium-sized banks and they use a combination of the phone and the bank’s portal.

She says: “In the corporate environment, for traditional banking, we offer lending and fi nance, treasury, cash management and international trade and we have found that corporate customers are mainly looking for a package of services. If they use credit facilities, they will then give some business to treasury or cash management in return.”

Streamlining workloadsAlongside the strong relationship banking, corporates also want electronic FX services to help streamline their workload. For hedging their FX risk in major trade fi nance transactions, they will contact the bank for structured solutions but for day-to-day shipment operations and vanilla FX contracts, they will go through the electronic channel. Lee says: “The e-FX

channel provides the corporate customers with a convenient way to settle payment, account receivables and payables. If they receive payments in a foreign currency that need to be converted or they have vanilla transactions they do this online.”

Customer service is paramount, according to Lee. When on-boarding new corporate customers onto the bank’s portal, she says, companies rely upon their bank partner to train and help them set up the electronic operations. Additionally, she adds, they are not looking for fast, sophisticated trading tools, preferring ‘double click’ to ‘single click’ to avoid errors.

“Corporate treasurers are looking to the bank’s solutions to give them control and use electronic trading systems to give them a clear audit. They also look to the bank to add value to their business, as well as give them ease of use and convenience,” says Lee.

Both relationship banking and e-FX services are important and maintaining the relationship is key to increasing the fl ow of business for the bank. “Asia is very different, particularly in Greater China, Korea, Japan and Singapore where e-trading systems will always complement corporate banking relationships but never replace them.”

Focus on managing costsFor Stamos Fokianos, managing director, global head

>>>

Christopher Johnson “Bigger corporate clients tend to trade through multi-bank dealing portals, whilst smaller ones tend to fi nd a solution, which allows them to trade almost every desired product.”

Valerie Lee “Asia is very different, particularly in Greater

China, Korea, Japan and Singapore where e-trading systems will always complement corporate

banking relationships but never replace them.”

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FEATURE


of FX eTrading at RBC Capital Markets, relationships are an important differentiator in the FX industry. “The economic climate motivates corporate clients to focus on managing costs in order to maintain commercial margins and they respond in different ways. Some reduce their non-core product lines, and others seek opportunities to increase their economies of scale by mergers and acquisitions. More than ever banks need to know their client and understand their business plans in order to help them achieve their goals,” he says.

Corporate treasuries are continuously growing in sophistication and banks need to show competence, consistency, excellent service and client understanding in order to be successful in this environment.

Fokianos believes the eFX market is now mature and offers choices that fi t different trading styles. A corporate will normally disseminate the FX business to refl ect the reasons behind their transactions. He says: “A small value payment division in a corporate will most likely use a single FX channel in order to minimise its payment costs, whereas a central treasury will be motivated by the accuracy and competitiveness of the price, and therefore seek to fulfi l this need through a multi-bank platform or different APIs connected to their Treasury Management System (TMS). Smaller corporates or corporates that operate in countries without licences to operate multi-bank portals will be restricted to single bank platforms.”

But, across the board, Fokianos says that real-time pricing and execution are features that no eFX provider can do without. The research and analytics are in demand and used for strategic decisions that allow for time fl exibility; a foreign direct investment, for example, can be decided in principle but executed when it seems to be optimal for the corporate. “An evolving legislative change that could affect a specifi c product channel or a potential change in a taxation framework necessitates a deeper understanding of the situation. To the extent that a specifi c bank has local expertise, its research and analytics will be a huge value add for the corporate and will deepen the relationship,” he says.

Depending on the risk profi le of the corporate, Fokianos says corporate treasurers have varying needs for different levels in service for options and forwards to manage future cash fl ows and investments, all of which need to be catered for, from straightforward cash forward FX products and time forward cash contracts to access to an electronic options platform that will allow the corporate treasurer to achieve exactly the price they think is the best for their business by paying a premium.

Post trade services

Fokianos adds that post-trade services are invaluable to a corporate client, and timely FX confi rmations by an independent team from the dealing team ensures that compliance rules are followed and that the risk of fraud is low. He says: “Adding STP to the corporate dealing system reduces operational risk as it eliminates manual keying-in and many corporates have connected to their TMSs not just dealing APIs, but also confi rmation APIs with their FX providers.”

For Fokianos, we have already entered this new era of ‘relationship e-trading’. The sophistication of the corporate treasury is continuously evolving and as a consequence, treasurers have realised that they cannot allow the plain vanilla business to limit their vision and the strategic improvement of their risk management techniques. Large volumes of necessary, but mundane FX transactions need to be executed fast and effi ciently through automated electronic means, so that the corporate/banking relationship can grow using a more in-depth risk management dialogue.

He says: “A bank that does not offer this strong foundation, on which a relationship can be built, will have no chance in the future to develop deep and profi table corporate relationships.”

Stamos Fokianos “More than ever banks need to know their

client and understand their business plans in order to help them achieve their goals,”

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The rise of electronic trading over the past decade has led to increased competition in the fi nancial marketplace. Transaction costs have

been reduced and trade execution is more convenient than ever. This, combined with new regulatory demands, has forced both banks and their buy-side customers to seek ways to improve the effi ciency of post-trade execution with enhanced services, greater

transparency, better internal controls, and improved data and operational risk management. The challenge for banks and other market constituents is to acquire tools that help their customers manage FX and other asset class trades post-execution, while facilitating an increase in their own operational effi ciency and straight-through-processing (STP) rates. The challenge for buy-side institutions is to have a more complete, real-time view of their FX trading activity irrespective of execution venue.

Remaining post-trade issuesThere are nevertheless still issues that need to be addressed to improve the effi ciency of the post-trade FX environment. While the recent credit crisis gave the market an unnatural pause, the “wisest heads” at leading banks are already considering gearing up for the next volume increases beyond the 2008 peaks according to Peter Kriskinans, Managing Director of DealHub. He says: “We fully expect FX fl ows to grow beyond the hundreds of thousands of speculative retail margin FX tickets to ’micro FX’ where fl ows of millions of very small tickets are aggregated and the net position booked today in real-time rather than in a batch process.”

Indeed, many leading banks are understood already to be working on capacity planning on the basis that there will to be a 5-10x increase in tickets. DealHub, which has been at the forefront of STP since 1997, has been pioneering low latency solutions for their Tier-1 bank clients who demand ever faster and more effi cient systems. The top fi ve FX banks use DealHub for their STP solutions based on its 100% uptime, resilient infrastructure and full reporting.

DealHub’s STP solutions can process in excess of 2,000 tickets per second. “Currently we’re testing for one million transactions per day,” reveals Kriskinans.


A tough nut to crack: How can we further streamline Post Trade FX?

FEATURE

While post-trade solutions might not be considered to be at the sexy end of the FX trading spectrum and the inter-bank foreign exchange STP piece might be largely “job done” with recent initiatives such as from CLS and others, possibilities to further streamline the post-trade FX space lie largely amongst corporates and Tier3-4 entities. Roger Aitken examines some of the issues.

Roger Aitken

“We’ve banks that have benefi ted from the queue prioritisation work we undertook a few years ago, when the only alternative was an expensive new risk and back offi ce-trading system costing $10m plus.”

Post-trade fragmentationBarring a few exceptions, the anticipated consolidation in trade execution platforms for the FX market has not materialised. Richard Kiel, Global Head of Post Trade Services at Thomson Reuters, says: “Against this backdrop we continue to see post-trade fragmentation and a resurgence in transaction volumes, which only compounds the ineffi ciency problems.”

While STP technology is widely available, the appetite for it is not equally shared by the different constituencies in the FX market. There are solutions from vendors such Logicscope with its innovative and award winning TradeSTP, Traiana, Thomson Reuters with its Thomson Reuters Trade Notifi cation (formerly RTNS), RCP Consultants, DealHub and Wall Street Systems.

Nick Dyne, Head of Business Development at Logicscope, a fi rm that has pioneered post-trade and market data messaging technology innovation for over 15 years now, says there is still a “huge amount of basic plumbing work” required to be undertaken and particularly so at the Tier3-4 level and corporate level.

With broadly three separate constituencies in the FX market (banks, prop shops and hedge funds; real


>>>

FEATURE >>>


money managers and corporates), Dyne says: “They all have different requirements and as such it’s not a one-size fi ts all solution.”

Historically, Logicscope has been successful with the fi rst group – banks, prop shops and hedge funds – connecting over 300 individual end user clients with some 40 trading venues (banks, brokers, exchanges and portals). “The starting point for Logicscope’s TradeSTP technology was developing EBS’ post trade functionality – originally the ASI ticket output product, then Deal Feed”.

Logicscope’s TradeSTP is a complete post-trade STP solution that connects trading venues with their end user customers and enhances post-trade messaging and workfl ows. The solution consolidates, transforms, normalises and effi ciently routes transaction messages - from multiple trading venues and for multiple asset classes - for real-time, guaranteed deal delivery to end users. Their post-trade processing utility is based on an ASP-based delivery model, and the fi rm not only delivers tickets but addresses issues such as allocation, aggregation and affi rmations.

Thomson Reuters continues to be a market leader in the provision of post-trade services to the global FX markets. From the very origin of the TOF protocol,

the original and current standard protocol in the interdealer market and the introduction of STP to the FX marketplace from Thomson Reuters Dealing and Thomson Reuters Deal Tracker, the company has driven post-trade services innovation.

Today, they run the FX market’s largest outsourced trade notifi cation service (Thomson Reuters Trade Notifi cation - formerly RTNS) providing simplifi ed and streamlined connectivity solutions to market participants including banks, brokers, exchanges, hedge funds, corporates and investment managers in over 60 countries. This is complemented by an ever growing set of post-trade capabilities in areas of affi rmation, matching, allocation, enrichment and reporting.

The FX market continues still to support a multitude of protocols, both public and proprietary and there are a growing number of alternative venues for clearing. Whilst it is “in need of standards” and the effi ciencies this should bring, Kiel asserts: “We do not seem to be getting any closer to achieving that shared goal.”

Paul Burgess, Global Head of Strategy at RCP Consultants, a fi rm providing banks resilient STP solutions and expertise spanning some 30 years in the FX and messaging space, says: “The inter-bank foreign exchange piece is largely streamlined in its STP. It has CLS and the ability to aggregate algorithmic trades into CLS. That’s almost job done.”

Where perhaps the largest possibility lies to streamline is, says Burgess, outside this area. “In our experience the corporate FX constituency and smaller banks are fairly badly served by the portal and trading systems/platform providers in terms of post-trade STP. And, that’s a great opportunity missed by the banks.” By contrast, venture into a bank using the trading platforms like a BARX, and “the chances are they’ll have post-trade STP for the confi rmations as a matter of course.”

RCP, who started off working with Reuters to develop the Reuters conversational dealer system (originally Dealing 2000, then Dealing 3000), have a partnership with Luxembourg-based B2Hub, a messaging hub, offering a seamless hosted STP solution designed for almost any market player on a pay-as-you-use basis.

Value-added servicesThe other thing banks seem to have “missed” according to Burgess is the opportunity to deliver

Peter Kriskinans“We fully expect FX fl ows to grow beyond the hundreds of thousands of speculative retail

margin FX tickets to ’micro FX’ where fl ows of millions of very small tickets are aggregated.”

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other services via whatever link they have installed. “Our proposition is that we pop a link into a corporate or a bank. It’s bi-directional. Now, if you have a bi-directional secure link to banks’ customers, what other services can they deliver via that link?” That offers up potential for value-added services.

Illustrating efforts to pioneer new solutions, RCP announced this March a global alliance with 360T, a provider of web-based trading technology for OTC instruments, offering RCP’s solutions in conjunction with B2Hub. It goes some way to reducing post-trade settlement issues and costs, allowing 360T’s clients (corporates, market-maker banks) to receive electronic trade confi rmations from multiple trading venues via single connection, in a user friendly format.

Irrespective of which venue market participants deal with, confi rmations are formatted at the hub to match the input requirements for client’s back offi ce systems. (360T’s clients benefi t too from RCP’s bi-directional facility enabling them to receive other STP post-trade services).

In the trade aggregation space, this January CLS Group and Traiana, an ICAP company, announced a joint venture to provide trade aggregation services to participants active in the over-the-counter FX

market had gone live. Heralding “a new chapter” in operational risk reduction and banking industry collaboration, the service was touted as reducing operational risk, lowering post-trade costs and rationalising/consolidating legacy post-trade processes throughout the global FX markets. Only aggregated trades need to be processed and settled in CLS, providing settlement risk elimination whilst alleviating the processing burdens on participating banks by 90+%.

New developments this yearIn terms of where the market is likely to see new developments this year in FX post-trade aggregation, integration and STP, DealHub’s Kriskinans says: “Banks seem to be fed up with the transaction charge business model that represents a tax on the expansion of their business that comes with higher volumes.”

He adds: “The market should also be cautious where monopoly situations are building up in areas like aggregation, netting and prime brokerage to ensure current or increased costs are not imposed that in fact negate any effi ciencies that are muted.”

Tony White, managing director of banking sales at Wall Street Systems, broadly concurs with this view saying: “Firstly, people want to it to be more cost effective this year.” Wallstreet BackOffi ce’s e-Operations is a web-based integrated system that helps banks and their customers better manage trades post-execution. The fi rm, which services two distinct market segments, provides both large infrastructure to the big bank players (Tier1-2) and a “utility service to the smaller guys”. Last year they created the Electronic Settlement Network (Wallstreet ESN), a post-trade platform for Tier3-4 entities, and have a number clients use this facility. More can be expected.

The latter constituency wants connectivity to the liquidity and rate providers. Not interested in technology projects, smaller FX players wish to buy a solution off the shelf, which is where Wall Street Systems can provide them with a platform on a pay-as-you-go basis.

Noting a lot more interest on the pre-settlement risk side this year, White says the credit alternatives area is a “big focus” for the fi rm in 2010, for example around more sophisticated collateral management and additional issues on tear ups, clearing up and replacing trades. He cites too credit on FX forwards in terms

Paul Burgess “In our experience the corporate FX

constituency and smaller banks are fairly badly served by the portal and trading systems/platform

providers in terms of post-trade STP.”

FEATURE


of methodology around how they are priced up and revalued. He thinks there will “probably” be other players who will offer a similar service to CLS. “We’ve been asked to look this by several banks and so in due course we’ll look at that,” he reveals.

Thomson Reuters’ Kiel says: “There can be no doubt that the need for trade aggregation is top of the priority list for a number of fi nancial institutions. However, these would be the major fl ow banks representing a relatively small percentage of the overall FX marketplace in terms of participant numbers.”

For the broader market, electronic trade notifi cation to begin the STP process is no longer a, “nice to have” he says, but quickly becoming a must have. “Single and multi-bank trading facilities are quickly realising that STP is no longer a competitive differentiator and that integrating hundreds or thousands of clients is not within their core competence.” Kiel adds: “Outsourcing [this] connectivity to a trusted partner with global distribution and integration capabilities

provides tremendous value - both to the price maker and the price taker - and demand for such services have never been greater.”

Logicscope’s Dyne says: “Over time what will happen is that market participants will adopt the post trade workfl ow model already used by the more advanced processors; in essence, enabling simultaneous actions to be applied to a ticket, as opposed to serial processing.

On where technology and automation can help to overcome continuing post-trade bottlenecks due to the complicated workfl ows of ECNs, multibank portals and hedge funds, some of the bottlenecks in this area remain “despite all efforts to overcome them”, Kriskinans says.But even the most manual of processes can be assisted. For instance, DealHub’s Autopricing module for FX Connect v6 is automatically able to populate the FX Connect dealer intervention GUI with rates, allowing sales traders in a competitive situation to price client requests faster.

Richard Kiel “As we’ve seen in other markets, moving the

affi rmation and confi rmation process upstream to the front offi ce can signifi cantly reduce failures, improve operational effi ciency and reduce processing costs.”

>>>A tough nut to crack: How can we further streamline Post Trade FX?


White says: “This business should not be that complicated. It’s an absolute commodity. At the extremes there are some complicated products, but fundamentally the core kind of $3bn-$4bn a day fl ow is really simple. It’s not a technology issue, just negative process issues that need unwinding.”

“We also see increased demand for rapid ticket creation,” notes Kriskinans. “This is whether it be super-fl exible manual entry forms, or automated ticket creation from unstructured text based sources like Reuters Dealing 3000 conversations, where one might have an option and spot hedge trade in the same screen.” He adds: “Banks need to service their clients, and often down to individual hedge fund manager’s requirements like creating a trade out of an email confi rmation or an attachment to that email. And, publishing to them in a format that their internal systems can recognize, but also as an email that can be received anywhere.”

According to Kiel the challenges of these bottlenecks can be “easily managed” by the market adopting a standards-based approach to enable simple interoperability across venues in the pre-trade, trade and post-trade landscape.

“However, whilst this is not immediately realistic,” he says. “Minimising the number of connections by linking to connectivity gateways such as Thomson Reuters Trade Notifi cation greatly simplifi es the connectivity and integration requirements of connecting directly to a growing number of end-points.”

Dealing with exceptions

Even with the most effi cient static data setup and maintenance, there are still have situations where trades occasionally fail for the simplest of reasons. But the industry is tackling the issues associated with exceptions processing and breaks in fl ows, which hamper end-to-end STP. The more electronic the initial trading is, the less exceptions there should be.

Kriskinans notes: “When we implemented the DealHub Routing and Processing Engine at one global bank, we not only had to set up the complex business logic to split and route trades and create back-to-back trades to be forwarded to multiple back offi ce systems, but also to create an ‘Exception Review Queue’ process that was integrated to the bank’s own internal

alerting system, as well as giving them an ability to fi x a failed trade quickly.”

In general he says everyone is working “very hard to kill off these breaks” in the process, and in most cases very high percentages of trades are passing through most banks systems - without the need for further manual intervention. For the inter-bank business the STP rates are very high, probably now 97%-98% and maybe higher for some institutions. The corporate sales area is where some issues remain.

“Where the initial collection of the message is done effi ciently and with all the necessary fi elds that are required downstream identifi ed, there should be few reasons for a trade to fail,” Kriskinans points out.

Dyne at Logicscope says that what will happen going forward is that exceptions as a proportion of overall tickets will reduce since “the opportunity for errors to occur is reduced profoundly as human intervention (people) is increasingly taken out of the equation.” Of around 600 separate connections globally, more than half of Logicscope’s TradeSTP installations are paid for by a ‘sponsoring’ trading venue. And the reason why Tier-1 banks pay vendors like Logicscope to connect their clients to them for post-trade STP? Because of the benefi ts they reap in terms of improved client ‘stickiness’, in turn leading to higher trading volumes and greater profi tability.

Tony White “This business should not be that complicated.

It’s an absolute commodity.”

FEATURE


Wall Street Systems’ solutions are described as a “self-learning model”. Says White: “Our systems looks for where the breaks are and informs users where these are. If the system cannot fi x it, it tells you so. For example, non-STP trades always being from the same source, the same venue and/or the same currency.” Then one has to fi x the workfl ow associated with these issues or the sub static.

Thomson Reuters continues to see technical advances in improving business process automation, streamlining exception processing, and handling errors and breaks. That said, Kiel notes that this continues to be “largely reactive, rather than proactive by nature.” He adds: “As we’ve seen in other markets, moving the affi rmation and confi rmation process upstream to the front offi ce can signifi cantly reduce failures, improve operational effi ciency and reduce processing costs, to name a few important benefi ts. A market-wide shift to such a model would bring massive cost savings along the way.”

Addressing pre-settlement risks

On steps being taken to address pre-settlement risks in FX trading, the market had a chance to test the process in the recent upheaval and proved the CLS model to be strong enough. Kriskinans argues that more work needs to be done to ensure that all market participants are capable of processing extreme volumes of tickets in a timely fashion.

“Most banks now have taken this on board,” he adds. “We believe a small number of banks who are still running disparate STP systems will have seen the value in unifying the process through a single offering that has been road tested at the highest volume levels.”

DealHub awaits the legislative changes that will bring about the entry of multiple central counterparties to the FX market. “Our Conductor solution is ready to handle the complex business logic required for ‘smart ticket routing’ to multiple platforms,” the Dealhub executive explains. “Sending all traffi c to a single platform could be seen as a systemic risk in itself, so we expect that this will be considered in the new landscape.”

Regulatory pressures combined with a growing desire for risk reduction are driving towards centralised clearing in OTC markets, including FX. Central clearing has numerous benefi ts with a broad reduction in systemic risk, whilst individual fi rms will likely also

benefi t by counterparty risk reduction and an increase in operational effi ciency.

“However, this movement is in its early stages and still faces challenges,” Kiel notes. “One issue is that participation is predominantly weighted towards the dealer community with the buy-side not yet fully engaged. Secondly, the market is global and the increasing fragmentation of clearing is being driven locally. The scale benefi ts of this are yet to be seen.”

Confi rmation process

Looking at what steps have been taken to improve the confi rmation process, Kriskinans notes that banks have in some cases “demanded” that STP throughput is fast enough to be able to “invert and re-publish” the trades back to the client in a manner timely enough for the client risk system to run from the confi rmations.

This infers an STP solution that is solid and reliable as the backbone of the operation, and capable of processing thousands of trades per second, particularly where spikes in activity fl ood downstream systems. DealHub offers what they call ‘queue prioritisation’ where certain trades are allocated priority over less valuable smaller trades.

Nick Dyne “If one has a fully auditable route from the initial order entry through delivery to CLS (just payments), then why

does one need to undertake a confi rmation match?”

A tough nut to crack: How can we further streamline Post Trade FX?


Kiel adds: “Electronic bi-lateral confi rmation matching no doubt provides improvement and effi ciencies to the confi rmation process and is a big step forward. However, a radical shift moving affi rmation and legal confi rmation to the front offi ce would he contends “transform the post-trade services landscape in FX and provide the market with the scale benefi ts it is desperately searching for.”

Noting that many people are still keying in trade tickets manually, which is an obvious ineffi ciency point, Dyne points out: “If one has a fully auditable route from the initial order entry through delivery to CLS (just payments), then why does one need to undertake a confi rmation match? It cannot go wrong

and in many cases it’s unnecessary. But the reason it’s done this way is because it’s always been done that way.”

White adds: “For the majority of trades there is no need to confi rm trades. That’s a legacy process. If I trade with you on a multi-bank platform, there is no need to send you a confi rmation after that. People still do. However, most people are realising that with a trusted source and transaction details stored on particular platform, they do not require another confi rmation.”

Driving costs down

In relation to how the latest generation of post-trade processing utilities are offering scalable capacity and driving cost down, Kriskinans says the market will always be driven to process larger volumes, and “so costs will eventually be the main focus in a situation where competition and technology changes between the banks means there is little to differentiate between offerings.”

As this point is reached he does not believe that the current transaction based charging model can survive, particularly where alternative software only charging models offer a faster and more direct alternative. “The banks purchasing decisions dictate the landscape. If one wants to change the landscape you need to change your purchasing decisions,” he contends.

Kiel says that simplifying post-trade connectivity and integration requirements, providing trade enrichment, automating matching and exception processing, and compressing or aggregating trade fl ows are all “signifi cantly proving” to reduce the cost of post-trade processing in the FX market. “And, the ability to outsource much of this on a global basis provides even

greater opportunity to drive down costs,” he adds.

Whilst streamlining the post-trade FX space might still prove a somewhat tough nut to crack, the biggest nut to crack

is not down to technology per se but rests ultimately with some

market participants failing to see the benefi ts of deploying cutting-

edge solutions and re-evaluating their workfl ow and people processes.

The need for speed has long been a mantra of the equities market as aggressive traders look to extract any possible time advantage in the

battle for the absolute best of the best in execution. But is ultra-low latency going to prove to be equally sought after in the FX market where, typically, time is less of an issue for the bulk of participants? Or will the market remain apathetic around the whole latency debate?

“I don’t think latency will be quite the same sought-after trait in FX as in equities where there is a lot of hype,” says Bob McDowall, research director, Europe, for Towergroup. “In FX although there is a lot of trading, much of it has a medium-long term focus where traders are taking a 1 to 3 year view of the world and responding to events. There are some specialist funds out there that are trading on the volatility of the dollar on a daily basis – these funds do exist but they are in a minority.”

There is also the issue of whether the majority of trading systems are properly equipped to cater for high speed, high volume, low latency trading. “When you have so much data going through systems at such high-speed, you have to wonder how suitable most systems are. Apart from those systems that are bang up-to-date, most of them were never designed to take data at this speed. I have heard form clients that their systems experience a chemical reaction where the


Gaining competitive advantage with ultra-low latency FX connectivity

High frequency trading is often referred to as an arms race. While this image evokes all the machismo traits of the capital markets, it also suggests there is a huge amount of overspending on unnecessary tools – after all, what’s the pointing being able to blow the world up fi ve times over? The pursuit of ultra-low latency is one area of high frequency trading where such spending has been questioned. Of course it’s important to have an effi cient and timely trading process but how many milliseconds do you really need to shave off that execution time? Exactly how close to the point of execution do you need to co-locate your servers? And what happens when everyone ends up with the same 0.0000001 milliseconds latency in the end?

By Nicholas Pratt

FEATURE

whole thing goes out of kilter. Firms engaging in low latency trading have to test their systems to ensure that their trading process is equipped for ultra-low latency. Otherwise the whole thing can implode and it can take days to detect,” says McDowall.

Confusion over latencyFor Jon Vollemaere, managing partner Europe and co-founder of FXecosystems, any confusion in the FX market over latency is because the concept is still very new to most participants. “An economist I used to work with would say ‘it’s not important, until it’s important’. This was normally in reference to indicators like non-farm payrolls but here I’d say that it is because it is still a relatively new thing for FX markets. Many participants realise that latency is now an important factor and they have to do something about it fast but are not quite sure who to turn to for advice or where to start. But the market does understand that less is more when it comes to latency.”


>>>

Bob McDowall “Firms engaging in low latency trading have to test their systems to ensure that their trading process is equipped

for ultra-low latency. Otherwise the whole thing can implode and it can take days to detect,”

FEATURE >>>


For any FX trader looking to invest money in exploring the ‘less is more’ concept, Vollemaere recommends they fi rst undergo a comprehensive audit of the current speed or latency they get from their hardware, software and telecom topologies. It is then a case of addressing the different forms of latency – network latency, application latency and, fi rst and foremost, distance latency. “It is simply the easiest place to start in latency reduction. For example, if you’re trading transatlantic at 120milliseconds or more at a busy time and you can cut that down to a constant 69 milliseconds every time, then that’s the fi rst place to start.”

When it comes to application latency, much depends on whether the applications were built in-house or bought off-the-shelf. “If it’s an off-the-shelf application, then most shops are constantly looking at ways to lower friction in the process. The original design is normally focused on making the correct trade rather than the speed of that process. This is just about looking at it with a fresh set of (low latency) eyes.”

Then there is the issue of network latency in all of its various forms – from serialisation to propagation to switching delays and more besides. “All of these can affect the overall total latency (OTL) fi gure an that is why it is important to look at the type of network you’re currently using,” says Vollemaere. “We work with several carriers internationally so we can produce a best of breed combination for each client. For example one carrier can now offer an 18 microsecond hop through their network connection points, where others are closer to 180. For some many hop clients that can make a material difference. Serialisation and Propagation delay is directly related to line speed, it’s the denominator in the equation. If you’re subject to these delays in FX, as most are, then you’re using the wrong technology if you want to trade with low latency.”

Another thing to avoid if you are interested in pursuing a path of low latency is any kind of ‘legacy’ technology, says Vollemaere, because they would not have been designed with low latency in mind and therefore will never perform at high speed. Legacy also affects the telecom links between major destinations as can bandwidth bottlenecks and data infrastructure defi ciencies. But how big an issue is this for FX traders and how far are some willing to go to solve it?

“It’s true that certain parts of the world are ‘hot spots’ such as who has the best link between Chicago and

New York,” says Vollemaere. “But just as important for a global market like ours, there are ‘slow spots’ like long range trading New York to Sydney for example or places that have extra factors like China or Dubai. But it does still come down to which way around the world you send the data. Only one carrier has the fastest route for each city to city link, and that’s the one to use if your strategy is based on arbitrage or multi venue liquidity. The fastest route will always come at a heavy premium however, and for some clients it is worth the extra money. For others there are normally other routes at slightly less speed but far lower cost.”

Justifying investmentIf there is large spending involved, most fi rms will want some evidence that the investment is justifi ed, so what tools are available for measuring latency? Vollemaere mentions a number of vendors - Corvil, Correlix and TS Associates – that offer such tools, adding that this has been an important development in the market. “Before you could ping a venue and that’s about it, and to be fair that’s all you really needed. Now you can constantly compare latency to venues on a dashboard, and even correlate that to the rates you get for a speed versus spread measure – now that has the power to produce some very interesting results.

“There are also vendors such as Trading Cross Connects, Streambase, Aegisoft (now part of Thomson

Jon Vollemaere “If Colonel Custer had listened to the Gatling Gun salesman

it might have turned out differently for him.”

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bt.com / GBFM

FEATURE


Reuters) and Rapid Addition that have some great new weapons for the arms race. Banks, brokers, buyside and even vendors all have large gains to be made by using low latency technologies whether that’s risk or cost reduction or lowering slippage and mistakes. If Colonel Custer had listened to the Gatling Gun salesman it might have turned out differently for him.”

And on the subject of salesmen, what exactly should FX traders be looking for when enquiring about low latency services? “Well, there is a lot of cheap sales talk and claims that don’t stand up,” says Vollemaere. “Luckily we haven’t seen that in FX yet, but I’m sure it will come. I would suggest picking a fi rm that understands the FX market and the nuances of how it works, that’s key. You want a vendor that can offer more than one solution to the problem and who is up with the latest developments rather than just fl ogging legacy. You want one that is focused on this space and not wandering over from another market. You also need a partner who has some credibility when they speak and who is leading the change in this area.”

Migration from EquitiesAlthough Vollemaere and FXecosystem is fi rmly routed in the FX market, the leading low latency providers are coming to the FX market from the equities world, such as UK-based managed services provider Fixnetix. “Traditionally we have been

focused on the equity markets where the challenges around latency fi rst arose and where latency is measured in microseconds” says Alasdair Moore, business development director and founding partner. “However, the evolution of systematic trading in the FX markets means we are signing more and more dedicated FX customers”.

“Traders have the choice of either building their own infrastructure or outsourcing to specialists like us.” Moore argues that the fast-moving nature of the low latency industry necessitates constant upgrading which brings with it considerable cost. “There is no point getting your latency down to a certain level and then



sitting back because what is considered low latency now will not be considered low latency in the near future.”

Distance latency is a particularly acute issue for the FX market, says Moore, because it is one of the only true global marketplaces. “As a company dedicated to eradicating latency across the technology stack we

optimise any environment to achieve the optimal solution that can be achieved. Whilst there are a number of vendors who talk of what is possible, our customers, across multiple asset classes, are only interested in performance that is demonstrable where not only can we articulate different fi bre paths but also show them in real-time.”

More effective measures can be applied to end-to-end network latency says Moore who defi nes four specifi c areas – serialisation, propagation, network CPE and service transmission. “Serialisation occurs when packets are transferred onto the wire. The higher the bandwidth of the service, the less latency is incurred hopping on and off the circuit therefore raising the bandwidth of the line end-to-end for the service and decreasing the latency accordingly.”

“Propagation is the result of the physical length the data packets have to travel down the Service line. Assuming most WAN services these days physically use fi bre for its layer one services we can ascertain the additional delay. Light travels at 0.00548ms per kilometre over Fibre. Therefore if the service is located 100km away from the source this will add 0.548ms onto the end to end delay.”

“Network CPE delay is the additional delay incurred by Ethernet Switches and Routers that translate and route the packets from end to end. Each in line device will have a latency cost and this can have a signifi cant impact depending on the amount of devices you have in line. Service Transmission delay is the additional delay incurred by the underlying transmission networks that support the Network,” he says.

End to end designDirect DWDM CPE systems have the lowest latency and can incur sub micro second latencies on some of the newer devices hitting the market. Any service which translates signals from electrical to light and back again will also incur most latency as the transformation from light to electrical and back again has a latency penalty.

Moore comments that, “Whilst all of the above are key aspects to any low latency strategy Fixnetix focus not just on the network where Fixnetix contract with over 18 different fi bre providers but also all software and hardware components. This enables us to deliver a complete end-to-end design of services using best of breed new technology and tune performance from network interface card (NIC) to NIC.”

>>>>>>

Alistair Moore “There is no point getting your latency down toa certain level and then sitting back because

what is considered low latency now will not be considered low latency in the near future.”

FEATURE


“To measure these latencies over and above the traditional IP Networking Management systems, specialised equipment and software is required, which we build into our service offering and enable us to wrap a guaranteed performance SLA around delivery. These systems enable us to measure micro second performance and are provided by our partners such as Corvill and Correlix.”

When it comes to issues such as latency ‘hotspots’ in different global locations, Moore believes this is entirely a telecoms issue. “Invariably there are certain environments where there is no choice of providers so whatever problems reside these cannot be resolved without signifi cant investment. In most cases hotspots or pinch points are where the telco has overloaded or oversold its own network without investing in greater bandwidth. These are relatively easy problems to solve for. When we provide customer connectivityit is dedicated bandwidth to that customer and we never share or sell the bandwidth from under the client. If you want 10Mb-1Gb you get 10Mb-1Gb and it is never contended.”

BT Radianz is a network provider and has been addressing low latency for a number of years in the equities market but, says Jerry Brunton, director for marketing and communications at BT Radianz, it is only in the last 18 months that there have been any enquiries from the FX industry about reducing their latency. “This has mostly been from the specialist hedge funds that make their money by trading extremely quickly and they are now moving into the FX market. They’ve been through the whole latency issue in their equities trading and now they want to know how to apply it to FX.”

Differences between Equity and FX marketsThere are some differences in how latency should be addressed in the FX market in comparison to the equities market. There may still be a lot of one-to-one trading in FX but it is not the same as the single central exchange that we see in equities. There is also a difference in the complexity of the instruments and there is a much lower concentration of derivatives in the FX market. Most importantly, however, there are fewer high frequency traders in FX therefore there is less demand for low latency services and there is much slower progress in fi nding FX-specifi c solutions.

“One of the fi rst things that the industry did in

the equities market to address latency was to break down the trading process into different components – from the trading engine to the marketplace, to receiving a price, to executing – and to see what level of latency was evident at each step,” says Brunton. “But the FX industry is yet to take this step, mainly because the majority of FX fi rms are not driven by high frequency

trading. Instead it is the algorithmic

traders and hedge funds that are leading this.”

The fi rst step that any low latency vendor has to take when engaging with a client is to ask them exactly what their idea of low latency is, says Brunton. “If it is two seconds then they will generally be fi ne with whatever system they already have. But if they are looking for sub millisecond levels of latency, then they will have to look for specialist products. The main objective is to reduce the virtual distance between the trader and the execution venue or counterparty. This can be achieved by a combination of co-location and faster components so that there is a communication path that is as straight



and direct as possible, with low latency switchers and routers that eliminate as many hops as possible.”

Geographical element

Is there a geographical element to latency? Are some less developed markets more prone to latency because of the basic infrastructure in place? Or do the major fi nancial centres experience bottlenecks due to the sheer volume of trading? “The majority of trading is done in the major fi nancial centres and that’s where there is more effort to reduce latency. Having said that, it was only in the last 12 months there has been a fi bre connection between New York and Chicago.”

This delay was down to the legacy of the US telecom industry where AT&T had enjoyed a monopoly for decades before deregulation was introduced in the 1980s bringing different operators for each region. And it is similar situation in Europe where the fi nancial centres of London, Paris and Frankfurt are as similarly spaced apart as New York, Boston and Chicago and suffer a similar lack of direct connectivity. “All of these fi nancial centres want to be competitive and the key to that is connectivity,” says Brunton.

For any fi rm that is seriously focused on low latency trading, they have to be looking at co-location. “It is the only way to mitigate the physical constraints of distance and the lack of international connectivity,” says Brunton. However, he concedes, “if you are dealing with multiple venues, as in the case of FX, you have to consider how important it is to be co-located at each venue and how the expense weighs up against the potential benefi ts. In recognition of this dilemma, BT Radianz offers a proximity solution to clients. We have a number of hosting centres at various international locations and we can co-locate our customers using these centres rather than leaving them to co-locate at each one separately.”

Technology partnersSo what does Brunton believe FX fi rms should be looking for in an ultra-low latency technology partner? “At its most basic level, addressing latency is about fi nding the cleanest, fastest and straightest line between point A and point B but there’s a lot to be said for knowing the market and knowing the business,” says Brunton. “We connect to over 50 portals and we have people that have been in the FX trading business for a number of years. Whatever the industry, it is important for any vendor to recognise that it is about their customers’ business more than it

is about their own product. For example, we schedule our maintenance upgrades around the fact that the FX market is a 24-hour business across timezones. Maybe not every vendor in the FX market does that.”

AboveNet is a leading provider of high bandwidth fi bre optic networks in Europe and the United States. According to Alan Berryman, UK Sales and Marketing Director: “ultra low latency is becoming an important factor in a wider range of asset classes including FX, as the market fi nds equities trading increasingly fragmented and more diffi cult to secure consistently strong profi ts.

“Traditionally, it has been acceptable for trade execution in the FX market to be relatively slower. Participants are now demanding the same ultra low latency performance that they have come to expect when trading equities. And because their portfolios are increasingly cross asset and cross-border, traders are looking for high performance connectivity in order to support their need to be able to trade in multiple assets across multiple venues with transactions that can involve multiple currencies.”

As a result, trading fi rms are increasingly looking to extend their FX requirement to include hedging and arbitrage strategies in tandem with equity trading. “Addressing low latency in the FX market is, however,

>>>

Alan Berryman “If you select a provider that delivers the shortest fi bre path and remove layers of legacy technology,

you can lower latency fairly easily”

FEATURE


not simply a case of repeating what works in the equities market,” says Berryman. “An FX trader will need to consider the fact that they will require multiple local as well as global connections, so it’s important that their connectivity strategy includes a provider who can offer a range of routes with an abundance of direct fi bre capacity. They should also look for evidence of on-net connections to all their key local facilities, banks and trading platforms ensuring that the highest levels of security and reliability are maintained with the appropriate Service Level Agreements in place.”

The area of latency that is easiest to address and improve is the connectivity portion, says Berryman. “Latency is directly affected by the route distance and technology used. Simply put, if you select a provider, such as AboveNet, that delivers the shortest fi bre path and remove layers of legacy technology, you can lower latency fairly easily.”

Underlying architecturesAnother provider of low latency network products is the UK-based Exponential-e. Head of fi nancial markets Mark Cooper points out that although time is merely the distance between two events, not all point to point connections are the same. And he suggests that traders take the time to look at the underlying architecture of their trading connections. “For example, a complex routed, or layer three, infrastructure will introduce latency not there in what is called a single-hop or switched layer two architecture. Layer three users need to confi gure GRE Tunnels to create tunnels across the core network. These increase the complexity and therefore the overheads and latency.

“Single-hop layer two architectures in contrast allow messages to be distributed to all required servers as fast and effi ciently as possible over the WAN. Single-hop layer two networks are essentially a simultaneous broadcast or multicast feature which can add signifi cant value in a high-frequency automated trading environment. Within a fi nancial trading environment the distribution of data, simultaneously between your servers connected over a Wide Area Network is critical when trading across venues in different geographical areas. Look out for network providers who can support multicast natively within the core, allowing you to control messaging groups without any further confi guration overheads and ensuring your data is simultaneously delivered to all sites, allowing you to run many models concurrently.”

Cooper suggests that fi rms also keep a close eye out for network bottlenecks and legacy infrastructure. “They

are not always easy to uncover at the point of purchase. This is most likely to occur at the metropolitan area network level where backhaul network technologies being used aren’t fi t for purpose for use in such an unforgiving sector as fi nancial trading. What’s more many large network providers are still trying to sweat their installed asset so they sell IP VPNs. The trouble with layer three VPNs is that they introduce latency as part of the highly complex way they are engineered.”

ConclusionUltimately traders must make up their own minds when looking at low latency network providers, however there are some general guidelines which can be followed, says Cooper. “Those network providers who can deliver an end-to- end Ethernet solution with an in-built multicast capability are best placed to address the latency issues associated with algorithmic trading.

“Latency fi gures often represent the round trip of a trading route. Some providers show fi gures which are so low that they seem too good to be true, and they usually are. This is because in many cases the fi gure quoted only represents a signal travelling one way, which of course is of little use. Also only those providers with bags of bandwidth should only be considered. Then you can have Gig-E hand offs as standard to minimise the delay caused by any serialisation on the network interfaces. Finally end-to-end SLAs and latency management tools should be offered to deliver guaranteed uptime and the lowest levels of jitter and packet loss.”

Mark Cooper “Look out for network providers who can support multicast natively within the core, allowing you to control messaging

groups without any further confi guration overheads”

Kelly can only check her Facebook during a one hour window in the dealing room each day. Which has me asking the question - Why?

Look what happened when Social Media put on a tie and went to the offi ce - rather a lot.

The proven increase in communication and collaboration across business silos is remarkable, and according to Gartner, “Increasing numbers of businesses will use social networking rather than email as their


The birth of the $3.98T FX Social Network

PRODUCT SPOTLIGHT

Jon Vollemaere takes time out from tweeting and throwing sheep to talk about LetstalkFX.com, a new portal for the FX Market.

Jon Vollemaere

preferred method of communication in the future” and Datamonitor says “It is vital that fi nancial services providers acknowledge that it is no longer an option not to get involved with this medium in some way”

Is that merely the realisation that people actually like using these tools? Or is it because they work very well?

Entering the dealing roomBut, what happens when Social Media tools put on red braces and enter the dealing room? I suspect something far more powerful.

This is exactly what a new digital network, called LetstalkFX.com is doing. Started by seven Foreign Exchange market veterans, it seeks to take the best of the social media tools we all love using ( Facebook, Linkedin, Twitter etc) and adapt them solely for the needs of the FX industry.

“We have been actively involved in the FX market for many years and felt frustrated that current social media tools, while extremely powerful, didn’t suit our specifi c market needs, and that the time has now come to create a Digital Community that will unite the whole FX industry, in one place,” says Stefan Basiuk, co-founder of letstalkfx.com. “All market participants - whether drawn from Interbank, Hedge funds, Corporate, or Vendors require a service tailored specifi cally to their needs, which will enable them to form new trading relationships, discuss, question and collaborate, exchange trade ideas, gossip and promote services, on a global basis,” he says.

To me, this is another example of technology led change in the FX market, only this time it would

appear that FX is leading the charge rather than being the slow follower it normally is. At fi rst, one can’t help but think this will quickly become the ‘virtual bar’ for the FX Market. After all that’s the traditional place where the market goes to talk about trends, strategy, gossip, pass around jokes and tall stories. So therefore LTFX will probably become very popular, very quickly. Especially during Kelly’s happy hour.

“Everyone we’ve talked too about this has been very excited and extremely positive about the idea. We’ve been approached by many major institutions wanting to be involved and a very large number of people have pre-registered, and we haven’t even launched.

It’s remarkable“ says Roland White, one of the seven founders.Why? What value will this bring?

The big C’sSocial Media tools have proven to produce the big C’s.That is increased:

• Communication• Collaboration• Conversation• Customers and Convenience

Which on the face of it are all very good for a healthy, well functioning fi nancial market. But this


>>>

PRODUCT SPOTLIGHT


would appear to be the early signs of an evolution in social media tools – one that does fi nally achieve what the others have not, and that is, actually make money. Social Networks are hugely popular, and that technology has found its way into Business Networks, but this the beginning of a Trading Network, and that is a bit different.

After all, Reuters Dealing 2-1 was the fi rst chat room, Currenex the fi rst price comparison site, and we did effectively tweet our rates to Reuters page FXFX.

In these blog and forum environments, at one end there’s the ability to capture relevant information very quickly. From what service is best, to asking a question of the group, and perhaps most importantly an easy way of keeping vendors on their toes when it comes to customer service issues and feedback to the market about their products and services.

Many non fi nancial fi rms have experienced both the good and the bad when it comes to the speed of information across social networks. Some brands are terrifi ed by what people might say about them and monitor social networks for negative comments. Conversely it can have a big positive affect on the launch of new products and services. It remains to be seen what affect this will have for FX brands, but I suspect something similar. In which case it’s better to be involved in the online conversation rather than try to

block or avoid it. This rather public honest appraisal or feedback will be diffi cult for some to believe and deal with if they don’t have a voice on sites like LTFX.

ConvenienceThen there’s the convenience of having everything in one place (one market, one place is in the logo) rather than across a group of sites. Furthermore the service is perfect for vendors, agents, and even banks to promote their wares, and even have a say in the online conversation about their brand/product/service in the search for new customers.

“There are many non-FX specifi c websites that those in the market follow to access participants or promote their business. It can be time-consuming and costly to both target and maintain a presence across such a large number of non-market venues. Like my peers, I am interested specifi cally in the FX markets: the Letstalkfx.com site provides its members with a single, convenient place to do business and ensures that they are able to connect with one another, wherever they are in the world.” says Basiuk.

The service does remind me of the early days of Linkedin. Built with a transparency in mind, which is now invaluable and for some, head hunters in particular, a fundamental part of their business. All of these mixed elements from the Travel Section – “I’m going to Madrid, where should I stay and where should I take a new client for dinner?” - to the planned ‘LTFX Blogger of the Year Awards’.

That being the bloggers who wrote the most followed, most read, most quoted, most profi table blogs. Would be new and useful tools for the industry as a whole.

The Future? What next?Where I see this potentially going, if well adopted, is far more valuable for everyone. A potential to have a very real way to see the ‘Wisdom of Crowds’ come to life, by that I mean things like real-time sentiment analysis. (62% of Corporate Treasurers see Euro at X, Bank Analysts see it at Y, and Hedge funds say Z)Access to information that has time lags or is not in the traditional media today. A potential, albeit dangerous way, to buy the rumour and sell the fact. We’ve been doing that since Reuters Pigeons fi rst took off.

“A potential, albeit dangerous way, to buy the rumour and sell the fact. We’ve been doing that since Reuters Pigeons fi rst took off.”

Stefan Basiuk “We have been actively involved in the FX

market for many years and felt frustrated that current social media tools, while extremely powerful,

didn’t suit our specifi c market needs,”

The birth of the $3.98T FX Social Network


As well as the birthplace of future products and services for the market. Vendors would be able to obtain customer needs, spot market problems, and therefore defi ne new products, even test and gain feedback, much faster. You could, in theory even service global clients from this one location faster and cheaper than today.

All wrapped up in a slick service, which recognizes that a large part of the industry is ‘boys playing with high tech toys’. Which is why there’s a Fantasy Trading game that allows friendly competition amongst traders that is fully within the compliance rules.

As well as my personal favourite the ‘Tales of the City’ section with gossip columnist Betty ‘Cable’ Grable. Who will share funny market stories from over the years, but also the antics of last night around the world. (names and addresses withheld of course)

The site will also have market commentary from contributing editors Stirling Mark and Marc French. For those old enough to remember using Reuters Dealing 2000 the ODD1 page was always more popular than FXFX.

Horses for coursesIndustry specifi c social networks work well. The success of Currensee and FXvroom for retail FX traders and Mallowstreet for the Pension funds industry will fi nd their mark as long as they stay on target.

LTFX is for professional market participants only. New members are either invited directly or referred by colleagues. But all are vetted to assure that only relevant content is both submitted and commented on in a professional manner. For everything else, email Betty.

One of the problems with Twitter for example is the noise of irrelevant detail. On LTFX I think I’m unlikely to see a post that the Global Head of FX at Bank X is having a “gnarly time dude”. But I could be wrong.

I’d think that many a marketing department will be salivating at the launch of LTFX, as they will now have a way to participate in social media advertising. A lot of brands have, until now, been completely prevented from using or have only a limited presence on FB and the like. Let alone a meaningful one on Twitter. Here’s their chance to access this new way of communicating with customers and suppliers alike.

Much like the existing successful social media sites, I suspect that Monday’s weekend stories and Friday afternoons will be the busy time for LTFX. I personally will be looking forward to reading Betty’s amusing content before moving onto the serious market or industry coverage.

“Did you read the one about the dealing room that had a fi sh tank in the chief dealers offi ce, and one day a disgruntled trader, went and ……..”

I suspect that Kelly’s trading room will allow access to LTFX all day, as it’s a good source of both social and market network communication, and that’s always been a large part of how this market works. BIFN FRDS.

Roland White “We’ve been approached by many major

institutions wanting to be involved and a very large number of people have pre-registered, and we

haven’t even launched. It’s remarkable”

Failure to deal with an Exception can create huge costs. For example, incorrect settlement instructions can result in payments being sent to

the wrong account or perhaps not being able to be sent at all. Not only does this kind of Exception

have a direct fi nancial impact, it also creates a reputational risk and may tarnish the

relationship between a trading fi rm and its counterparty/customer. The time

that it takes for the back offi ce to deal with the aftermath of such

situations has a big upward impact on average transaction

processing costs so it is important that Exceptions

are not allowed to become systemic.


Increasing volumes in the back-offi ce -the importance of Exception Management

As the FX market continues to grow in volume and in participants, it is becoming increasingly competitive on the trading side and much harder to derive the same level of profi t as in the past. As a result, the fi nancial world is facing pressure to decrease the cost of processing transactions. There has never been a more appropriate time to highlight the importance in ever higher volume back-offi ces of the need to streamline operations and maintain an effi cient Exceptions Management process.

Jill Collins, Head of Product Design, Sierra, Capital Markets & Investment Banking, SunGard.

VIEWPOINT

Increasing trade volumesThe advent of FX algorithms and electronic trading platforms have seen the volume of trades increase enormously although fi rms are still typically dealing with not many more counterparties/customers than before, making the reconciliations process all the more important. Counterparty/customer risk has also become a far more important area due to the number of large-scale defaults that have befallen the market in the last two years. Consequently trading fi rms need to be able to assess the solvency and creditworthiness of their counterparties/customers far more diligently, not to mention, more regularly.

Of course the FX market has made huge leaps over the last several years in reducing settlement risk and transaction cost, particularly with the establishment of CLS. And in comparison to other asset classes, the back-offi ce processes in the FX world are relatively straight forward. Nevertheless, the importance of operational effi ciency cannot be overestimated.

All of these operational tasks can be easily managed and streamlined if a fi rm puts the right controls in place. These controls can include the validation of static data so that large volumes of data can be comfortably processed on a straight-through basis, leaving staff free to concentrate on any Exceptional or non-standard situations that may occur. These Exceptions can then be streamlined and where possible be included as part of the fi rms straight-through-processing initiative.

For example, an Exception may arise because the situation has not been recognised by an automated process. Once it is incorporated as such and included as part of the STP environment, then these Exceptions should no longer need to be managed manually, resulting in a substantial saving in transaction cost.

Having a lower per transaction cost also means that fi rms will be in a better position to handle any new requirements. They will have the breathing room to adapt quickly to changed market conditions or regulatory requirements that others will not.

Managing the Exceptions process. This operational streamlining is an ongoing and constantly changing process. The FX market is very fl uid in nature and a fi rm’s appetite for risk can vary according to different counterparties/customers and changing market conditions. Therefore fi rms must

maintain a constant vigilance in terms of monitoring their processes and managing the Exceptions process.

Increasingly we are seeing risk management departments becoming involved in these operational aspects underlining the point that effi cient operational processes can also reduce a fi rm’s credit exposure as well as directly reducing costs by reducing the number of Exceptions and reconciliations and more easily reconciling those Exceptions that do occur.

In the capital markets world there has historically been a divide between the front and back offi ces, with the idea that the front offi ce generates revenue and the back-offi ce is a cost centre. Consequently the traders only notice the back-offi ce’s existence when operating costs begin to eat away at their hard-earned profi ts.

But this need not be the case. When trader’s margins are being squeezed, costs in the back offi ce will be under more scrutiny. Back offi ces can also contribute to the bottom line by becoming more effi cient. Operational effi ciency and improved Exceptions Management are two areas where a fi rm can really differentiate from the increasingly intense competition.


According to Paul Tolman, executive director and founder of Beta-Gamma Research, a UK-based developer of advanced trading models,

there are a number of FX algorithms that are trying to take advantage of various complex FX market parameters such as momentum and velocity factors, moving averages, pricing ratios and news and even-driven behaviour. “The vast majority of algos may be looking at the strategies used in the equities market such as volume-weighted average price (VWAP) and then applying them to the FX market but there are also a huge number of momentum-based trading models out there.

“As for the news and event-driven algos, I think they are more prevalent in the speculative and prop trading parts of the market where traders are looking to take a punt on the direction of the market following a signifi cant news event rather than the pure FX algos which are designed to trade on a more routine basis,” says Tolman.

Changing role of the traderIn regard to these more complex algorithms, Tolman believes there is a core subset in the market that then move around the market as the various quants responsible for them move from fi rm to fi rm taking their intellectual property with them, so in some regard there are as many algorithms as there are quants in the market. The same core subset of models have always been prevalent as long as there have been FX algorithms but the value of these algorithms is clearly evident due to the changing role of the trader in today’s electronically driven market.

“The job of a trader used to involve shouting orders down the phone as loud as possible in order to get some


Harnessing more intelligent FX Algorithms for superior order management and strategy execution

There is always room for improvement. This maxim is evident in some areas more than others, particularly in the capital markets industry where the fi nancial crisis exposed the need for some collective pulling up of socks in areas such as risk management, regulation and governance. On the trading side, the pursuit of continual improvement has been much more apparent. Resources may be restricted some-what due to the current market conditions but, at least in the FX market, fi rms are looking to harness more intelligent algorithms to enable superior order management and execution and to take their FX algorithmic trading capability to the next level.

By Nicholas Pratt

FEATURE

pips off the price but this has evolved now to the point where it is more about placing orders on computers. Now traders have to be able to work with algorithms,” says Tolman.

There are two principle ways that traders are interacting with these algorithms says Tolman. “The fi rst way is very direct in terms of using algos to place their orders and automatically split them up and fi nd the best venues with the best prices. The second way that algorithms help traders is by enabling them to focus less on the operational side of each trade and concentrate more on profi t generation rather than clearing every trade. It is a labour-saving approach in many ways with the algorithms carrying out the trades quicker and more accurately, giving the trader time to focus on other more strategic aspects.”

As traders become more acquainted with working with algorithms and start to lend their own infl uence to the development of the algorithms, these benefi ts may become

larger in number. “We get very good feedback from traders on how to improve

the algorithms so that they are able to add more value and I think this will become an

increasingly important part of their job,” says Tolman.

Black boxesBeta-Gamma offers black-box algorithms, an approach which may be seen as somewhat unfashionable in today’s software market where transparency and customisation is king, however Tolman is clear that Beta-Gamma’s algorithms stand up to the demands of today’s customers. “Black boxes do have that image of impenetrable objects lacking transparency just doing random trades but our algos have very well defi ned instructions. There are very specifi c inputs and outputs so that the trading instructions and the circumstances in which to trade are very well-defi ned. I think this is very important, particularly for execution algorithms. We have some core strategies which are available to customers but we are now seeing more demand for customisation and the algorithms are increasingly modular and confi gurable so

that, essentially, no two solutions are alike.”


>>>

FEATURE


Aggregation has become a big factor in FX algorithmic trading due to the breadth of liquidity providers in the market but one consequence of the electronic nature of price discovery is the so-called liquidity mirage where a single price or offer can be seen on multiple venues. The result is that some aggregators may pick up prices that are no longer executable. “An awful lot of effort goes into aggregation and with the different latencies between price providers and others providing prices to multiple aggregators so the liquidity mirage is a big issue,” says Tolman.

“There is a lot of interest in aggregation but I’m not sure if people can see the wood for the trees. If you buy into the whole idea of price aggregation then you have to deal with the mirage. Sometimes there is a gap between the promise that the technology offers and the reality. It makes sense to look at rates from multiple venues but you have to be clear about what venues you are looking at and be aware of the drawbacks.”

Market impact is also a very important market issue for FX traders, says Tolman, and the algorithms that enable orders to be automatically sliced are simply mimicking what a real trader would do, only a much quicker and larger scale. However, says Tolman, it can be easy to get carried away with just how much resources are employed by the sell-side to second-guess the trading intentions of the buy-side and, consequently, how much energy and technology the buy-side should expend in

protecting their trading intentions. “I don’t know if it is an area that will develop more,” says Tolman. “People talk of a battle of the machines between buy and sell-side, like the Terminator. It is important to be aware of other machines but it can all get complicated and you have to sort out what is important.”

Keeping pace with developmentsOne of the most important things is keeping pace with those market developments that are of real impact. “At the more sophisticated end of our algorithms, we have to cater for the changes in the markets. The market does change and you need to rethink the way the more complex algorithms will be most effective. With all the technology in this industry, it can be easily forgotten that there still has to be an idea, and this an area where the ‘idea’ comes into play.”

Alongside the ‘idea’, there also has to be the proper application of the algo, says Tolman, which can only be improved by the ability to assess and evaluate just how effective each algorithm has been. As a result, the whole subject of post-trade analysis is attracting increasing interest, says Tolman. “We have invested a lot in post-trade analysis – looking at how profi table execution was based on different time-scales and so on. We offer a tool that does exactly that and we are looking at other tools that can marry the execution results against historical data.”

The next potential area of development could be to provide the ability to benchmark algorithms against other algorithms, says Tolman. “Customers will see the value of that but it is very diffi cult to compare different algorithms because they could be doing different things. Some trades are easier to complete than others and there are different applications involved. The main thing is that we are very transparent about our algorithms but it is clear that there is a big industry developing in catering for all the changes in the FX market and ensuring that the algorithms can be made more effective.”

OMSsDespite the changes in the FX market, the development of algorithmic trading still lags behind other asset classes, notably the equities market, and the range of algorithms and related tools on offer is notably less in the FX market. For example, we are increasingly seeing equity traders link their execution algorithms to their order management systems (OMSs) or, in some cases, employing execution management systems. But this practice is less prevalent in the FX market, for now.

Paul Tolman “The vast majority of algos may be looking at the

strategies used in the equities market such as volume-weighted average price (VWAP)

and then applying them to the FX market”

>>>

FEATURE


“Thus far, our experience with clients that use FX execution algos, has been that they deploy them separately from their OMSs,” says John Miesner, global head of sales of Hotspot FX, the US-based ECN for institutional FX traders. “So we run our algos independently from OMSs for now but this may change in the future. The more you can streamline the execution process and the fewer steps there are to deploy, the better.”

Currently Hotspot offers two FX execution algorithms to its buy-side clients – time-weighted average price (TWAP) and time slicing – which are effective when it comes to minimising market impact, says Miesner. Consequently, issues like momentum and velocity trading, moving averages, pricing ratios and news or event-driven pricing behaviour are not factored in as relates to the execution of an FX trade. “Essentially the timing of the execution is a heavily weighted factor in the two algorithms we offer.”

Hotspot is a subsidiary of Knight Capital Group which provides trade execution services across multiple asset classes. Knight Direct, the group’s electronic equities offering, provides over 15 execution algorithms to its clients. “I’m sure some of the factors behind the development of these algos will also become important in the FX market so we should see an increase in the number of FX algos we deploy,” says Miesner. “Client demand is a large infl uence in what we develop but if it is easy to migrate certain algos from the equities market and if it makes sense, then we will defi nitely do that.”

For now though, the focus for Hotspot is on developing execution algos that can focus on minimising market impact. “Minimising market impact while obtaining the weighted execution enables the traders to execute effi ciently. This is the biggest factor that we see. A lot of our clients engage in large block trades and many of them are engaged in cross-asset trading where it is not so easy to hide your trades.”

RandomisationSo what is the key to algorithmically slicing orders and allowing more fl exible and covert execution and the absolute minimum of information leakage? “In a word – randomisation,” says Miesner. “For example, if you are deploying a basic time slicing algorithm for trading $1m over 30 minutes, it will execute an equal amount every 90 seconds. But if this slicing is done on a random basis both in terms of time and value, then it will be very hard to track. I think Hotspot is a big enough exchange with enough liquidity that any

FX trading fi rm that is randomly slicing its orders is unlikely to be detected by its counterparty.”

Just as Beta-Gamma’s Tolman spoke of the importance of the post-trade industry and the ability to assess the effectiveness of execution algorithms, Miesner is also looking to develop this part of the trading process. “Transaction cost analysis (TCA) is a frequently talked about topic amongst asset managers and pension funds. As these tools are developed, we feel that sector of clients will gravitate towards more electronic execution. This will lead to the development of more sophisticated algos.”

“For many of these buy-side fi rms, it is not so much about trading for profi t but more about following a mandate and they welcome any tools that can affi rm their execution. Right now it is still very early in terms of the development of TCA. There really needs to be more venues publishing their volumes for TCA to be effective. We have recently started publishing our volumes and we’ve had tremendous feedback from our clients who say they did not know we were doing so well. I can only assume that those venues which do not publish their volumes have something to hide.”

Bloomberg’s Tradebook is one market offering that features an FX execution platform that aggregates multiple venues and also integrates fully with clients’ OMSs, according to company president Kim Bang. “Very few have found an elegant way to offer clients an average price execution and a single ticket for settlement when trading with multiple counterparties.”

John Miesner “Minimising market impact while obtaining the

weighted execution enables the traders to execute effi ciently. This is the biggest factor that we see.”

>>>

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Currently Tradebook clients’ look for two types of algorithms, says Bang. “One is for best execution and automation of the implementation process. This includes algorithms such as TWAP, Arrival Price, SCALE-in and Trailing Stops. These algos use our proprietary market data, liquidity and trading analytics to capture spread and to extract liquidity with minimal market impact.” The second category concerns those algorithms that are designed for profi t and to buy low and sell high. “For proprietary trading algos we enable clients to leverage Bloomberg market data, analytics and set their own parameters and triggers using our CEP contingent servers and ECO/NEWS-linked orders,” says Bang.

Adding value to the trading processThere are still many ways in which more intelligent algorithms can add value and effi ciency to the trading process, says Bang. “There is plenty of room to add alpha by reducing the cost of trading using an electronic agency broker using DMA technologies and algorithmic execution strategies. Traders who take control of the execution process are able to stealth trade, to capture spread and extract block liquidity.”For example, the use of so-called ‘stealth’ algorithms and the development of other new trading strategies can help traders see through the aforementioned liquidity mirage that exists in the FX market. “Using next generation intelligent liquidity extraction - quoting in the most active venues and liquidity sweeps that look beyond displayed and into dark hidden pockets of blocks liquidity.”

As with most other service providers, Bang is also seeing more interest in post-trade services such as TCA, which has been more of a fi xture in the equities market rather than FX. “We are starting to see traditional equity transaction cost analytics fi rms offering FX TCA analysis. Their fi ndings argue FX aught to be treated as an asset class and warrant front-offi ce best execution processes and procedures.” And if the whole area of benchmarking and transaction cost research develops to the right degree, Bang expects it to stimulate the creation of more intelligent FX algorithms and increasing client demand. “When fi duciaries realize the potential cost savings and alpha pick-up from taking control of the execution process they will quickly begin to ask for more sophisticated trading tools and algorithmic strategies similar to those available in the equity markets.”

Right now, the focus for Tradebook is on the development of a number of cross-asset trading algorithms that will enable clients to auto-hedge or realise trading opportunities, says Bang. “We enable our clients to confi gure a ‘Tradebuddy’ – an alert-based database that functions as an electronic trading assistant.”

Key to developing good algorithmsIt is tempting to ask the likes of Rich Gula and Rich Moore, the two men behind US-based buy-side FX algo traders Argyle Trading Salgos (systems and algos), whether an electronic trading assistant would be a welcome addition. Or if they would already consider their algorithms to be electronic assistants of sorts. According to Gula and Moore, the current algo ‘boom’ refl ects the increased emphasis on developing algorithmic-based strategies in all markets, including FX. “The stress on the world fi nancial systems is making everyone examine how well their tools work and whether there isn’t another tool out there somewhere that works better. Even more challenging is that the basic dynamics of the markets are changing faster than ever. This means that the average useful lifetime of a given algorithm can be shorter than ever. Trading algorithms, like any other model, use a set of key inputs and their relationship to each other to make predictions and there are hundreds or thousand of potential variables that could be used, says Gula.

But the key to developing good algorithms is to be selective. “Model builders simplify their models by picking and choosing the variables that they think are the most signifi cant. Simplifi cation is a positive thing to do with a model because it can reduce the cost and time it takes to run the algorithms; to improve the understanding and intelligence of the algorithm; and

Kim Bang “Traders who take control of the execution process are able to stealth trade, to capture

spread and extract block liquidity.”

Harnessing more intelligent FX Algorithms for superior order management and strategy execution


to reduce the implementation time involved. But for these benefi ts there is a cost. The simplifi ed algorithm is less able to remain useful as the dynamics of the system measured changes. For FX algorithms this means less accuracy, less profi ts,”says Gula.

The growing number of people that want to use algorithms for trading are getting used to needing to change tactics, plans and tools more often than they ever have before he says, and “as a consequence, algorithms are being created, used when successful, and then discarded when they get stale. Therefore, there is a boom in demand for algorithms as each algorithm ‘hit’ is less able to satisfy the customer for as long as the last ‘hit’.”

“At Argyle, we believe that the constant moving on to the next best tool can be counter productive in the long run,” says Moore. “Instead, each algorithm should be maintained and its success rate should continue to be evaluated and correlated to whatever larger attributes can be associated with market conditions. The ‘best practice’ end-case would evaluate market conditions, determine which algorithms are best for the conditions, and then spread investment activity across those algorithms based on their relative success rates,” he says. With this approach, returns have the best chance to be maximized and risks reduced says Moore. “We have found, however, that market directional strategies add considerable value. Negative momentum termination models ‘push’ algos

to execute into weakness, especially, where liquidity often improves as more emotional sellers panic sell. The opposite of course, works to some degree, but is more challenging to measure.”

Cross-correlation models may help to highlight pairs for trading, with a reliable expectation that if your move them, liquidity will come, says Gula. “Algos that seek volatility may have better batting averages than those that ignore volatility, or see it as a necessary evil. Price rotation algos often show good performance after a sharp price move over a limited time, like two recent February events, the Chinese bank reserve announcement at 5am EST, or the US Fed Reserve rate uptick at 5 pm EST. Both produced very large magnitude moves in major currency pairs like the EURUSD and the so-called backwash became very tradeable.

“We wonder who got caught in these large and fast moves but we doubt there are reliable algos that will anticipate such announcements, although the old days of primary desk trading might have purported to have inside information on such moves and profi ted from them. Lacking such information access, volatility tends to increase at such announcements, and the cross-correlation models do their stuff to focus trading on the most volatile pair, assuming liquidity will follow. Ultimately, we feel that the most fruitful area for research and trading models emphasise market parameters like momentum, velocity, and futures trading factors derived from the equity futures markets where ‘gaming’ is always part of the fun,” says Gula.

Rich Gula “Even more challenging is that the basic dynamics

of the markets are changing faster than ever. This means that the average useful lifetime of a

given algorithm can be shorter than ever.”

Rich Moore “Negative momentum termination models ‘push’ algos

to execute into weakness, especially, where liquidity often improves as more emotional sellers panic sell.”

Sullied Shakespeare soliloquies aside, the buy-versus-build debate continues to resonate in the fi nancial technology space. “It’s the classic

question when it comes to technology and banks,” says Giles Nelson, chief technology strategist at Progress Software, a provider of complex event processing technology. In the past, the answer to the questions has often been predicated by the size of the institution in question. The large banks have used their own considerable IT teams to produce their

own systems while the smaller institutions have opted to seek help from third party vendors. But this is changing, says Nelson. “The big banks have vast IT resources and many would like to use these resources as much as possible. So in terms of FX algorithms they may want to look after the business end (the actual algorithms) themselves. But we have an increasing number of big banks that use our systems.”

It can often depend on the culture of the banks rather than their size, says Nelson. For example, the likes of Morgan Stanley and Goldman Sachs are well-known for wanting to build everything themselves but the benefi ts of opting for a third party vendor are becoming increasingly attractive. “You get access to research and development and technical expertise. And why would you want to spend lots of money reinventing the wheel? Having said that, most businesses want to be able to implant their own intellectual property on a trading platform and to put their own business logic into the system so this means that they no longer want to use a black box,” says Nelson.

By opting to buy rather than build technology, fi rms are able to do things more quickly, says Nelson. “This option also enables fi rms to protect themselves from a member of their own IT team walking away with the secrets to the technology they have developed and various other ‘legacy’ problems that we have seen come up in the past.” It also puts the onus on the technology vendor to meet each clients’ demands rather than selling a mass-produced off-the-shelf product with little customisation available, says Nelson. “The biggest differentiator for many vendors is the connectivity they offer. Can they connect the client to the venues they want? It is also important that clients are able to build the algorithms and decide on the trading strategies themselves and that they are able to see what is going on. This helps them to


Build versus buy: choices for deploying advanced Algorithmic FX trading infrastructures


To buy or not to buy. That is the question. Whether ‘tis nobler in the mind to suffer the slings and arrows of outrageous vendor hype or to take arms against a sea of troubles by build-ing an FX algorithmic trading system with your own in-house resources. Ay, there’s the rub. Nicholas Pratt investigates.

Nicholas Pratt

build the algorithms more quickly. For example, you can have different dashboards for different users – for traders, for quant analysts and for risk managers.”

In today’s software market there are systems being set up based on service-oriented architecture (SOA) where everything is component-based and while this may be good in certain areas, it is not a suitable model for FX algos because there are too many overheads which creates too much latency, says Nelson. However, we are seeing a greater use of hosted solutions and the software as a service/cloud computing model that is becoming so prevalent in the capital markets and other industries.

“This model simply means that the technology or infrastructure that a bank uses is maintained somewhere outside the bank and by a third party. This means lower cost and more fl exibility and I see no reason why FX trading won’t be infl uenced by the cloud computing model in the same way that other


>>>

Giles Nelson “The biggest differentiator for many vendors

is the connectivity they offer. Can they connect the client to the venues they want?”



parts of the capital markets have been. In some ways it already is – for example, the single bank portal that is accessed through a web browser is another example of cloud computing. I think this model can reach the point where even the algorithms themselves are maintained off-site because there are various ways that the intellectual property can be protected without everything needing to be held on-site.”

Hosted SolutionsHosted solutions have certainly matured in the last 10 years and, in most instances, are far more appealing to trading fi rms than the application service provider (ASP) or service bureau model that were previously marketed to them. Back in these days, such models were principally aimed at the small and medium type of institutions that did not have the budget or resources to build their own system or to install and maintain a vendors’ system. The ASP model allowed them to effectively rent a system that could be maintained by the vendor. But such was the level of customisation that many clients demanded and such was the burden of ongoing maintenance that vendors found themselves overstretched and unable to make the economics of this new arrangement prove effective.

However, today’s hosted solutions represent a better deal for both vendors and customers, argue many

software vendors, so that clients get both a reduction in price and also an increase in quality. “You get a solution very quickly and one that’s tailored to your business needs. And the technology is now able to match any volume. It is a solution that does not fi t all sizes,” says Philippe Buhannic, co-founder, chairman and chief executive of Trading Screen, the US-based provider of multi-asset electronic trading solutions. The market conditions have also changed in ways that further support the case for a hosted solution says Buhannic. “If a bank decides to build its own solution it will have higher costs and more salaries to pay at a time when there is a great deal of cost pressure.”

As with many technology developments, both hosted solutions and algo trading have reached greater maturity in the equities market but they are still in their infancy in the FX market. “A lot of people in the FX industry are only just discovering algos and the providers of hosted solutions are still catering for a lot of customisation. But there are only so many ways to skin a cat, so to speak, and I think this will become simpler as the market matures and more algo trading toolkits become available that can cover all of the customisation that a client may want,” says Buhannic. As the solutions themselves improve, FX traders will also fi nd the economics more compelling and the idea of building their own algo trading solutions

Philippe Buhannic “The FX market is a lot darker than the equities market and this makes it more diffi cult to build

algorithms. You have to have prices from multiple sources covering different regions and lots of information

about trading fl ows and market movements.”

>>>

>>>Build versus buy: choices for deploying advanced Algorithmic FX trading infrastructures


will become less appealing. Furthermore, traders will be able to try out the hosted solution approach in a modular fashion rather than suddenly entrusting all parts of their trading operations to a third party. “There are different options available,” says Buhannic. “You can have your network hosted, or your infrastructure or specifi c applications. Right now I don’t see many fully hosted solutions being used in the FX market.”

Hosted algorithmsBuhannic also feels it is unlikely that FX fi rms will be willing to use hosted algorithms quite yet. “The FX market is a lot darker than the equities market and this makes it more diffi cult to build algorithms. You have to have prices from multiple sources covering different regions and lots of information about trading fl ows and market movements. The intellectual property involved in the process is very important and this is what most trading fi rms are likely to want to keep in-house.”

In the equities market, however, the algos are becoming more and more similar, which means that hosted solution providers are focusing increasingly on the implementation and the infrastructure around the algos in order to differentiate themselves. But the nature of the FX market, with its OTC relationships and multiple liquidity sources, means that there is still plenty of room for innovation when it comes to developing execution algorithms, says Buhannic.

Buhannic is less enthusiastic about the role of new technology such as CEP and .Net. “I think they are nice-to-have tools but there are lots of buzzwords about when it comes to technology. I don’t think the whole process is that complex and perhaps vendors can sell their products for ten times the price by putting three letters in front of the system name. Technology can help but it is not the most important factor. It is no good if nobody wants to use the algorithm – that is the key objective, to make the best mousetrap. The advantage in today’s market is that the same algorithms can look very different for different clients. Everyone uses them differently and has different architecture and infrastructure and supporting technology.”

Service-oriented architecture is becoming a much-used term in the software world but Buhannic says that it is not a model that can really be applied to algorithmic trading because of its component-based properties. “We are using SOA in some areas such as integration and communication but it tends to be quite slow

because of all the different parts and in algorithmic trading, the last thing you want to be is slow. We are using it for the stuff that is not time-critical – for pre and post-trade processes but not the trading itself.”

Properties to look for in technology providersSo, for FX traders looking to employ the services of an algorithmic trading technology provider, what are the key properties to look for? “You have to look at the reliability of the provider,” says Buhannic. “Do they have a reputation for service? If you pick the wrong partner, it can be disastrous. I have seen a lot of providers that take a long time to implement their systems, leaving fi rms to pay a lot of consulting fees. You have to make sure you know exactly what the system is doing. You don’t want to undergo a massive process that in the end produces very little. The smaller providers are usually better at this but you cannot be sure that they’ll always be around. People don’t like to admit their mistakes so it can be diffi cult to ascertain what vendors are to be avoided. Ultimately you have to do your own research.”

If this research is carried out correctly, fi rms can end up with signifi cant advantages, says David Hastings, global head of FX sales at FlexTrade, a US-based developer of broker-neutral algorithmic trading platforms. “The biggest benefi t of migrating to a

David Hastings “A lot of our clients do not have the expertise of

integrating with other technology. It is a very complex area and it is continually changing, so for a fi rm looking

to do this themselves, the platform can become very cumbersome or expensive to maintain”



hosted solution is that the whole thing will run by experts. The clients do not have to be experts in Linux or C++ coding and they can access a low latency system at the fraction of the price that would be involved in building or hosting their own platform. It is all about the benefi t that comes from sharing the platform with other customers.”

A further diffi culty for clients looking to build or manage their own platform is that they will typically be using a range of technology from different providers and will have to make sure that it all works together in one harmonious trading environment – a task that cannot be underestimated. “A lot of our clients do not have the expertise of integrating with other technology. It is a very complex area and it is continually changing, so for a fi rm looking to do this themselves, the platform can become very cumbersome or expensive to maintain. By outsourcing this responsibility, they enable themselves to concentrate on the fi ne-tuning instead,” says Hastings.

So if the economics of hosting their own platform does not tend to work out too favourably for trading fi rms, what makes the numbers work out for vendors? According to Hastings, the main advantage comes from having multiple customers. “The vendors operating in this space have to be cost-effective to be there in the fi rst place and this is dependant on them having multiple customers.”

The advances in technology have also helped, says Hastings, particularly the development of the fi nancial messaging protocol FIX. “We can use FIX to communicate with multiple users and to adapt the system to the specifi cations of each individual client. This allows us to have a more bespoke approach.” Technology is also helping with the ease of implementation and the ongoing fl exibility when it comes to customising the algorithms. “We can use a common interface based on Java or C++ and use remote servers to enable clients to access the algorithms when they want to through a simple GUI. This gives them more fl exibility in terms of customisation and also puts all of the algorithms and the links to liquidity providers all in one place.”

Of course, some fi rms can choose to retain the control of their algorithms by hosting them in-house and then look to a third party vendor for the links to the liquidity providers, says Hastings. But, he says, this still necessitates some technical expertise on their part. “Do they have that Linux coding capability, for example? Are they able to run the required disaster recovery capability such as the three separate lines of power supply? Do they have the right set-up for low latency? All of these things are costly.”

So what kind of strategies lend themselves to the hosting model? “High frequency and high turnover

Joey Horowitz “We haven’t offered hosted solutions in the past but it is something that we can now do because of the Thomson Reuters merger and the fi nancial

backing that we now have.”

>>>


trading is perhaps more applicable to the hosting model but the same distribution process is involved with any type of trading. It really comes down to what the IT resources are.” And what should trading fi rms be looking for in a potential technology partner? “You have to be sure that they are able to meet your current requirements and also your future requirements,” says Hastings. There are also more technical aspects involved in the selection of a technology partner. “How much is available straight out of the box? What interfaces does it support? How open are the algorithms and how customisable are they?”

Benefi ts of a hosted solution

According to Joey Horowitz, the chief technology offi cer at Aegisoft, a supplier of algorithmic trading software and direct market access, there are two primary benefi ts to a hosted solution and they can be applied to both large and small organisations. “If you are a large trading fi rm with a large number of users and several different offi ces in different regions, it can be a very complicated process to install a new trading system what with all the servers and all of the maintenance that is involved. A solution that is hosted by a third party makes this process much more manageable. It also allows clients to have much better control over the proximity of their trading system and servers, particularly if a fi rm is trading FX as part of a cross-asset strategy. So the benefi ts are both operational and strategic.”

“A hosted solution is a choice that we will be able to offer our customers as a result of the investment that Thomson Reuters will be making following the recent acquisition of the assets of Aegisoft,” added Horowitz.

Of course, as well as the fact that hosted solutions are becoming increasingly attractive, the task of building your own algorithmic trading system is becoming increasingly challenging and time-consuming. “Developing your own algorithmic trading system is diffi cult to do,” says Horowitz. “Firms want to focus on the algorithm and not the plumbing but so much of it is plumbing. I know of lots of customers that think a simple spread algorithm is easy to come up with but it takes months to make that algorithm competitive and that’s before even getting to the platform.”

>>>Build versus buy: choices for deploying advanced Algorithmic FX trading infrastructures


For example, says Horowitz, many banks offer a price band so algorithms can sweep the book but are only able to trade one band at a time, so how do you work out whether it’s better to base on it on the book or the different bands? “A lot of this will depend on the level of technical expertise at each fi rm but you have to remember that the important point is the intellectual property – fi rms won’t want to share that or have anyone else develop it for them. Having said that, I think every other aspect of the algorithmic trading process is potentially ripe for hosted solutions – the market data which is accurate, aggregated and up-to-date; the connectivity and communication; the logic used to co-ordinate all the different liquidity sources.”

Challenges of building an in-house trading systemIf a fi rm is engaged in high frequency trading, then it simply has to go with a third party platform, says Horowitz. “There is no way I’d start from scratch if I was an FX trading fi rm. To take this option, you have to be a fi rm believer that you can do a better job than those people that have been doing it for years and without having to spend loads of money. fi ve or six years ago the only people building it themselves were the smaller fi rms going after one or two venues and picking up the cheapest technology parts. But I would never recommend taking this approach in today’s market. There is so much continual investment

involved today that I can’t imagine anyone deciding to do this. I can’t remember the last time a prospective client decided to develop their own.”

Harrell Smith, head of product strategy at trading software supplier Portware, agrees that there are enormous challenges facing an FX trading fi rm that wants to build its own trading system. “First and foremost is the creation of a liquidity aggregator, which acts as a centralized FX trading portal – accepting and normalizing numerous data feeds, feeding that data into algorithmic engines, and receiving orders and routing them out into the marketplace. The process of aggregating and normalizing liquidity from various banks, dealers and ECNs is very complex and time consuming,” says Smith. While most liquidity providers have adopted FIX as their standard communication protocol for FX, exact specifi cations vary from fi rm to fi rm and are constantly being updated, he says.

“Second, fi rms need access to real-time and historical FX data. Algorithms for listed products rely on the statistical analysis of reams of historical trade date, coupled with real-time analysis of current market conditions, executions, volumes, etc.

Harrell Smith “In today’s market there really is no competitive advantage

gained from doing all of the development internally.”



In the FX market, liquidity is fragmented among various non-public execution venues, so fi rms can’t rely on the same kind of information that is available to them in the public markets. Third, fi rms need a powerful, event-based trading system that also provides a fl exible algorithmic development environment. The latter allows fi rms to easily create and back test algorithmic strategies, and dynamically respond to changes in input variables and results.”

Maintaining links

Another challenge facing fi rms that decide to take on the burden of building their own trading system is managing and maintaining the links to the all the various liquidity providers, says Smith. “All dealers’ and ECNs’ feeds are different. Some rely on FIX, while others rely on proprietary messagingtechnology. For those that have proprietary feeds, incoming message traffi c and outgoing orders must be handled by customized API’s and routing engines, respectively. Certifying, maintaining and aggregating all of these different quote feeds is a major undertaking for individual fi rms.”

Of course, aggregation is only part of the battle, says Smith. “Once these feeds have been aggregated, fi rms must still integrate them with their algorithmic engines, and/or connect to a front end so that traders can see a consolidated view of all liquidity at various price levels. This requires signifi cant customization of an existing front end, or the creation of an entirely new GUI. Neither option is particularly attractive, given the lack of fl exibility in legacy trading architecture, the performance limitations inherent in these solutions, and the ineffi ciencies and costs associated with creating an entirely new FX trading interface.

“Today, however, fi rms can deploy a complete vendor trading solution that incorporates an FX aggregator,

a fully customizable GUI and an algorithmic development environment. This approach offers fi rms the best of both worlds: extremely powerful out of the box functionality, the fl exibility to customize any aspect of the system and the development tools necessary to create proprietary algorithmic strategies.”

Building a high performance FX algo trading solution from scratch is an enormous undertaking, says Smith. And given the quality and reliability of vendor solutions on the market today, fi rms who would have previously chosen to build in-house, including some

of the largest and most sophisticated quant funds, are going with advanced vendor solutions

instead. “In today’s market there really is no competitive advantage

gained from doing all of the development internally.”

Nevertheless Smith agrees that fi rms

dedicatesuffi cient

time and effort to the selection of their technology partners. “It is very important that fi rms select vendors based on their long

term commitment to supporting clients. In terms of

general system support and maintenance, this goes without saying. Just as important, however, is whether a vendor can be relied on to provide long term support for more advanced development and customization projects. Anything less is really considered outside the norm for established technology providers today.

“In addition to core performance metrics, technological sophistication and functional capabilities, fi rms need to carefully consider less obvious factors. Among these are a vendor’s reputation in the industry, platform reliability, long-term value, and the extent to which a technology provider will be a true partner. The last issue is particularly important for trading fi rms who want to focus their energies on their core competency – developing profi table algorithmic strategies – as opposed to running self-contained IT shops, which is something that nobody is interested in doing.”

FEATURE


Top shops -big winners! What’s driving improved service and product innovation in FX prime brokerage?

The reshaping of the FX prime brokerage market, as both prime brokers and customers reassess their exposure to counterparty credit

risk, has led to much greater emphasis on margining and limit monitoring in real time, as the market places greater focus around the management of risk and collateral.

“Prime brokers are managing risk themselves by ensuring that their counterparties are safe. Likewise, as the whole issue of risk has increased in focus, algorithmic traders now have the ability to monitor what they are doing in real time,” says Gil Mandelzis, founder and chief executive offi cer of Traiana.

Andrew Coyne, managing director, head of FX Prime and G10 e-Commerce, at Citi says that there is still a focus on credit and many clients are still looking for increased security around their assets held at banks, which Citi is providing, and there is a greater awareness of credit methodologies employed and the amount of collateral they are required to hold. “Prime brokerage clients are managing their collateral more closely, which make a lot of sense in the current climate,” he says.

“Eighteen months ago, the fi rst question a potential prime brokerage customer would ask was about price. Today that is far down the list. Now the fi rst question is ‘what is your credit rating?’ They want to know how safe their funds are and whether they will be in a segregated account,” says Peter Plester, head of prime brokerage at Rabobank International, who says the most marked difference following the crisis has been the focus on credit.

Credit crisisThe credit crisis has had a profound impact on the FX prime brokerage market. As a result, organisations

with aspects of their business where they cannot demonstrate real time risk monitoring have had to reduce the amount of risk that they can take with these types of clients and have been unable to on-board additional clients. According to Mandelzis the re-evaluation of credit has also given rise to the prime-of-prime model, where FXPB providers have turned clients or introducing brokers, has been growing in a very meaningful fashion in the past few months. He says: “These are second tier organisations, that are prime brokered by the fi rst tier banks, and then they are prime brokered by second, or third, tier players because balance sheets are just so valuable now.”

While the fi rst tier banks have been focusing on fi rst tier players, the mid-tier banks, who used to be prime brokers themselves, when credit was cheaper, are now becoming the clients of the fi rst tier banks, providing algorithmic services to the third tier players.

But despite this shifting landscape, Mandelzis says there is still much product innovation in the FX prime brokerage market. Three years ago, there was very severe price competition in the market as players, in some cases, were effectively buying market share and this put huge pressure on the sustainability of the FX prime brokerage model. Today, he says, the focus on risk management has opened up a whole raft of new opportunities and this is also leading to the provision of cross-product capabilities.


>>>

The events of the past 18 months have put credit fi rmly in the spotlight, giving rise to a new round of product innovation within the FX Prime Brokerage space. Frances Maguire explores how it has also raised the ante on improving customer service levels amongst the leading providers.

Andrew Coyne “Prime brokerage clients are managing their collateral more

closely, which make a lot of sense in the current climate,”

FEATURE >>>


“The FX prime brokerage market is extremely vibrant and growing,” he says. “There are new participants coming from the asset management community, which had previously shied away from FX prime brokerage. Now asset managers recognise the exposure they have and the difference large balance sheets can make. Because of this they are opening up to the business of FX prime brokerage and the prime-of-prime model. As a result, from a product innovation perspective, there is a lot happening.”

Now that all of the leading banks offer FX prime brokerage services, Mandelzis does not believe there will be many more new entrants into prime brokerage however he does believe that new players will enter into the prime-of-prime brokerage space, and that many new clients will enter into FX prime brokerage. “We are seeing a continuous stream of algorithmic players from the equities and futures world that are starting to participate in trading FX as an asset class and we will continue to see many players from the asset management side come into FX prime brokerage,” he says.

He adds that another impact of the credit crisis is that a lot of the retail aggregators are moving from an agency model to a principal model, and when they do so, they stop being the counterparty to every trade and become prime broker clients. He believes this move away from bi-lateral relationships to the

prime brokerage model will continue due to increasing regulation and the rising cost of credit.

Multi-prime revisitedThe collapse of Lehman Brothers made prime brokerage clients seriously rethink their counterparty credit risk exposure and as a result the shift towards the multi-prime model in a bid to diversify credit risk has been revisited.

Not surprisingly, the need to diversify counterparty risk by appointing more than one prime broker has made the FX prime brokerage even more competitive. Edward Pla, Global Head - FICC Prime Services at UBS, says: “Many clients have quickly become interested in having more than one FXPB provider in order to diversify counterparty risk. In addition to the traditional criteria used to evaluate an FXPB, this puts a premium on prime brokers with scalable front to back infrastructure and a highly organised and effi cient on-boarding process.”

Pla believes that the demand for multi product prime brokerage is clearly increasing and as this trend advances banks will offer clients an increasingly integrated service across client on-boarding, client service, reporting and margin management.

The spotlight is very much on the management of risk in prime brokerage but according to Citi’s Coyne, the need to consider diversifi cation into multiple prime

Gil Mandelzis “There are new participants coming from the asset

management community, which had previously shied away from FX prime brokerage.”

Martine Bond “We have seen a move away from the single prime

broker model with most clients, large and small, adding a second or even a third counterparty.”

FEATURE


brokers is nothing new. “It will depend on a client’s business. Typically, if a client has multiple prime brokers it is two, occasionally, depending on the size and the scope of the client’s business, they may employ three, but that is rare. However, for most fi rms, the more prime brokers you add, the less effi cient the model becomes.”

But for Martine Bond, global head of FX prime brokerage at Morgan Stanley, the move towards a multi-prime environment has been one of the biggest trends to emerge over the past two years. She says: “Until two years ago, a signifi cant proportion of the larger hedge funds and broker dealers would consolidate all of their risk with one counterparty. This was particularly evident in the FX prime brokerage community, however we have seen a move away from the single prime broker model with most clients, large and small, adding a second or even a third counterparty.”

She adds, however, that moving to multi-prime brings additional considerations from a client’s perspective. There may be additional operations and IT requirements to maintain an effi cient multi-prime model, and there may be some fragmentation of margin if clients hold a trading portfolio across multiple counterparties. In general, however, the security and back up offered by an active second prime broker is now considered by clients- and their investors- to be an essential component of prudent post-crisis business.

Morgan Stanley has had an FX prime brokerage business for a number of years. However the business was traditionally focused on servicing clients of the fi rm’s equity prime brokerage offering, and for whom FX activity is usually more limited and solely for hedging purposes. In early 2009, Morgan Stanley moved to aggressively expand and augment its FX prime brokerage offering, spending the last year creating a broad and comprehensive FXPB platform, which is now successfully partnering numerous standalone FX clients.

Bond says: “Morgan Stanley is a relatively new to the FX prime brokerage market and so we have been able to shape the business around our experience and in line with clients’ needs today. As a result of this new trend towards multi-PB, the most important consideration we have built into our FXPB platform is the fl exibility to create the smoothest possible integration process for our clients. We have multiple connectivity solutions, broad capabilities in terms of the types of reporting we can send back to clients,

and full connectivity with a full spectrum of industry standardised tools. This complete fl exibility means we can really help clients, which are using the multi-prime brokerage arrangement by not forcing them to have to change their existing workfl ow to fi t us. We are completely adaptable and can comfortably fi t in with our clients’ workfl ows.”

She says that a lot of clients use Traiana’s Harmony and integrating with this network has been very successful but, because Morgan Stanley has built it’s FX prime brokerage model to offer maximum fl exibility, even if clients are not using industry standards, Morgan Stanley can still work with them to integrate any format they need to make the FX prime brokerage offering seamless for them.

Multi-asset offeringsMorgan Stanley’s FX prime brokerage has also been built with another trend in mind – the growing interest in cross-asset class trading – and the offering is cross-product with seamless access to trading platforms for listed derivatives, fi xed income instruments, FX and equities instruments, alongside OTC clearing services for credit derivatives and interest rate swaps.

Bond says: “If you are a client looking for a prime broker, not only can you receive Morgan Stanley’s expertise in each product, but you can also access a wide range of instruments and experience the full breadth

Ed Pla “Clients will increasingly look to partner with providers who can provide comprehensive market access for both

multi venue execution and clearing.”

>>>Top shops - big winners! What’s driving improved service and product innovation in FX prime brokerage?


of Morgan Stanley’s services. Our client tools are really seamless, so there is one margin call, one set of reports, and one website which provides access to everything.”

At UBS, the continued investment in front to back FXPB capabilities has meant a recent focus not only on continuous improvement in areas such as client reporting, collateral management and exception management, but also on further integration with other parts of UBS Prime Services, such as Equity Prime Brokerage, Exchange Traded Derivatives and Fixed Income Prime Brokerage.

Pla says: “Clients will increasingly look to partner with providers who can provide comprehensive market access for both multi venue execution and clearing. The latter will grow increasingly important as central clearing initiatives gather momentum and co-exist with traditional OTC clearing services.”

The trend towards multi-asset prime brokerage, and the need to access different markets, such as interest rates, fi xed income and futures products, alongside FX, has given rise to a demand for cross-margining, according to Coyne. “If the client’s business needs access to different markets, the most important requirement they have is cross-margining,” he says.

Citi has evolved, and continually improved, its FX prime brokerage offering to meet these demands and uses a Value at Risk model to margin across multiple asset classes. Coyne says: “We have been improving the margining models over the years and although the cross-product margining has been in place for some time we continue to improve that as well.”

But Coyne adds that not all clients are looking for multi-product solution and for this reason, Citi focuses on bringing the products together to make it work like a single service.

Aligning with client needsChris Hansen, global head of Deutsche Bank’s cross asset client clearing business, dbClear, says that the bank is refl ecting its offering to align with its clients’ needs for things such as deep and liquid direct market execution, access to assets, and a robust clearing and settlement solutions, within an integrated platform. “We are trying to mirror the needs of our clients from a platform and asset gathering perspective,” says Hansen. “This positions us differently from other players and away from their siloed approach.”

“We value the client from front to back. It is not as if each silo has to be a separate revenue generator we

look at the total contribution of the client fl ow from front to back.”

Last year, Deutsche Bank began a major restructuring initiative across its Autobahn trading platforms, FX and listed clearing business, and post trade services business, merging its sales coverage teams and infrastructure into a single unit aptly named Global Client Solutions. The FX prime brokerage business is a key component of this combined business line.

Jason Vitale, head of FXPB at Deutsche Bank, says that the bank has merged its offering to suit any number of client types and requirements. The Deutsche Bank FXPB platform is intricately linked with DB’s listed futures and options business and Deutsche Bank’s managed account platform, dbSelect. “This means that clients are not taken off into individual service silos,” says Vitale. “Under one umbrella, we can provide them access to assets, multi product execution, FX and listed clearing, and unique cash management solutions.”

“We have moved from a very segregated approach where we were offering FXPB in isolation. Now we are fully leveraging other areas of Deutsche Bank’s global franchise, providing one cohesive state to the client. From servicing pension funds and hedge funds to high frequency algorithmic traders or retail aggregator accounts, we have various tools and services which clients can mix and match to create an intelligently

Chris Hansen “We value the client from front to back. It is not as if each silo has to be separate revenue generator we look at the total contribution of the client fl ow from front to back.”

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packaged solution. Once you have those core businesses all working as one, the incremental services are relatively straightforward to add.”

Deutsche Bank also offers an integrated cash management solution with unique FX delivery capabilities through its FX4Cash platform. “It is a growing need from all of our clients to have a FX delivery component in their cash management solutions included in their clearing relationships,” Vitale says.

Vitale adds that providing a one-dimensional offering and competing around price alone is no longer enough to succeed in FX Prime Brokerage. “If you just want FXPB, of course, we will be that one-stop shop. But the reality is that our clients demand more from their banks and expect us to be there across the entire product range.”

Says Vitale: “Now that we have put together an infrastructure that can look across all of the services we are able to fi nd new ways to help clients monetize their relationship with us more effectively. By this I mean delivering value added solutions beyond FXPB clearing. Services such as portfolio fi nancing, margin optmization, post cleared execution services and cash management can all be packaged to meet a clients needs.”

Product innovationThere is continuous innovation in the market, whether it is through more clients accessing more anonymous liquidity sources, such as EBS and Reuters, or whether it is coming from clients building out multi-prime brokerage platforms and needing to improve operational effi ciency across multiple counterparties. Other industry initiatives, such as the new CLS Aggregation Service, will enable prime brokers to continue to improve their effi ciency.

At Morgan Stanley, Bond says the FX prime broker has a 99.95 per cent STP rate for spot FX trading but she says there is room for improvement in STP rates for options, where not all banks and dealer are sending via Harmony, which is the industry-wide platform. “As volumes continue to increase, prime brokers have to manage their capacity and increase capacity hugely, and this is an area we are focusing on, to make sure we stay ahead of that capacity curve,” she says.

For Bond, FX prime brokerage alone, on a standalone basis, can be an extremely profi table business so long as the correct investment in technology and operational infrastructure is made to get the required

levels of STP. But more importantly, Bond adds, FX prime brokerage is an excellent access point for clients into the rest of the fi rm.

She says: “Usually this means that FX prime brokerage clients are going to increase the amount of e-commerce or voice trading execution that they do with you in FX. Also, where you have a multi-asset prime brokerage platform it is a great way to introduce clients to other asset classes, whether it is interest rate clearing or equity prime brokerage.”

For clients, Bond believes product innovation is at the top of their list of priorities and Morgan Stanley is constantly looking out for new services to deliver and new client facing technology and reporting tools. Client service is also hugely important to the fi rm and an area where Morgan Stanley has traditionally excelled. She says: “Morgan Stanley takes a holistic view of the client and their overall relationship with the fi rm.

“One illustration of this is in the way we have sought to optimise margin effi ciency for our clients. For example, we have a lot of clients trading currency futures on the Chicago Mercantile Exchange and who also trade spot FX. Much of this client base will be engaged in arbitrage activity between the futures and cash markets, and so we offer some very creative margin regimes that enable us to margin the client, on a portfolio basis, across those two asset classes, and in real-time as well as providing all the reporting and collateral in one suite.”

Jason Vitale “We have moved from a very segregated approach where we were offering FXPB in isolation. Now we are fully lever-

aging other areas of Deutsche Bank’s global franchise..”

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Citi’s Coyne too is in little doubt that FX prime brokerage is still a technology play and there is still a drive towards processing gains. “There will always be another way of looking at workfl ow and speeding up the real time processing aspects of what we do, in reducing potential marker risk exposure for our clients. There is always something that can be done to make the whole process as hands-free and as risk-free as possible,” he says.

The additional of asset classes to the FXPB offering means that a whole new round of fi ne-tuning and fi nding processing effi ciencies has begun. Coyne adds that each market has its own unique differences and yet there are many lessons learnt in FX that are applicable in futures, and vice versa. He says: “It is a good idea to learn and get to understand to processes in the different asset classes, how they relate to each other, and what benefi ts can be had from combining them.”

Technology a differentiatorCoyne believes that a successful prime brokerage model relies upon technology, which is still a differentiator, overlaid with staff expertise and good servicing. He says clients will judge the quality of a prime broker on a few fronts but technology, and commitment to technology, is still top of the list.

Pla, at UBS, believes that transaction processing and clearing lends itself to continuous improvement so he does believe that FX prime brokers will fi nd still more effi ciencies in the process, and the improvement in straight through processing rates for exotic options is, for him, one example of where the FXPB industry has made signifi cant progress.

Pla says the drive for product innovation in FX prime brokerage is coming from the evolving needs and service expectation of clients. He says: “The requirements that result from the ongoing development of our clients’ businesses remain a

signifi cant source of product development inspiration. The key elements of our FX PB

service -- our technology, business processes and people -- refl ect the substantial

cumulative experience we’ve collected from serving a global, multi-segment

client base.”

As a relatively new entrant to the market three years ago, Plester

says Rabobank has not had to make any adjustments to

its FX prime brokerage offering in the current

climate as it was already priced and

positioned as a safe, secure

service from a bank with

excellent

credit ratings. “Rabobank is very well known globally as a leading F&A bank. It is also prominent as one of the strongest and largest fi nancial institutions out there.

“We provide many large companies and fi nancial institutions with the tools they need to help them control risks. Our FX prime brokerage service is one of those tools helping our clients achieve best execution by giving them access to the tightest pricing and deepest liquidity. Asset managers and pension funds for example can now get direct access to the market instead of outsourcing as they have done in the past.”

The bank has started white labelling its prime brokerage services for other platforms and has recently added some new platforms including the multi-bank trading platform, FrontierFX, bringing the total number of connections to ten different trading venues offered.

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Customer serviceThe increasingly competitive landscape of the FX prime brokerage market has placed customer service fi rmly at the top of a prime broker’s priorities and this is something that Rabobank, as a mutual bank, prides itself on. “Our focus is fi rmly aligned to our clients and how we can help them achieve their goals”.

Plester says: “As a bank we have access to fantastic pricing and liquidity, and to be able to keep these standards high, a lot of work is done to ensure we offer the best products and service that we possibility can. Giving the customers what they need to make their business a success is our core function as a prime broker. We ensure they defi nitely notice a huge improvement in customer service with Rabobank.”

A relatively new trend in the market has been the growth of the multi-prime brokerage model and Plester believes that Rabobank is the fully integrated and sole prime broker for the vast majority of its clients. There has been some interest in the past few months from customers looking to Rabobank as a second prime broker as they seek to diversify concentration and operational risks following recent events in the prime brokerage market. He adds that while some customers do run the multi-brokerage model, others eventually choose one after a period of time and go with one broker.

This is partly down to the fact that costs and the gains from operating effi ciencies are still an issue. The number of tickets put through is still a cost and Plester

says that the bank’s offering of netting of tickets for customers is the biggest increase in operational effi ciency the bank has seen. “Our system allows our clients to net tickets across multiple venues, net the tickets at the time that they choose, and as frequently as they need to, and gives them control over their processing volumes and associated costs,” he says.

Straight through processing is offered for all trades going through Rabobank’s prime brokerage service and if it does not go straight through then users can net the tickets to decrease the workload. They also have the ability to monitor ticket fl ows, positions and P&L in real-time with everything displayed on one screen.

Plester says that new FX prime brokerage customers are coming on board as their business grows as once fi rms get to a certain level of volume there are big benefi ts in using a prime broker. Additionally, if fi rms want to access different venues a FX prime broker becomes a necessity rather than maintaining connections to multiple venues in-house.

He says: “It depends very much on the customer type. For fund managers it is about broadening their access to prices with a larger number of counterparties. For banks, its all about access to prices and rather than setting up numerous credit lines they can plug into Rabobank and concentrate their exposure to one counterparty, which is triple A rated. There is a huge amount of costs involved in reviewing hundreds of different limits, for different banks, every year. Using a prime broker cuts down on the cost, back offi ce workload and maintaining so many credit limits.”

New entrantsJust has the prime-of-prime model is gaining traction, Plester also believes there will be still more new entrants to the FX prime brokerage market, as a big area of growth is coming from ex-traders from banks, who, by becoming prime brokerage customers, can get the same access to prices and credit.

For UBS’s Pla, the increase in FX market participation is encouraging further investment among service providers, in order to capitalise on new perceived opportunities. “FXPB is among these areas of investment,” he says. “ It is fundamentally a credit intermediation and clearing service that naturally complements the relatively fragmented FX execution landscape in which we operate. Stability and scalability of all trade processing and client service elements, combined with the benefi ts of an integrated cross-product prime brokerage platform, will distinguish the leaders in FX PB going forward.”

Peter Plester “Giving the customers what they need to make their

business a success is our core function as a prime broker.”

The purpose of the Farm Bill, and the ultimately the purpose of these rules, was to provide adequate customer protection in what has been

unfortunately called “a loosely regulated market.” Like children waiting for their birthday gifts, registered US foreign exchange brokers have been impatiently waiting for these rules to legitimizing the industry by imposing registration requirements on introducing brokers, CTAs and CPOs. Their impatience, however, was dubiously rewarded with a set of proposed regulations that, if enacted, would ultimately drive most of these Forex brokers and their clients abroad. In an economy already facing with historically high unemployment, the set of proposed rules was intended to bring legitimacy, reputation and growth to an industry that was already damaged due to the lack of regulation and legal loopholes that allowed fraud to fl ourish in the fi rst decade of this millennium.


Regulatory Roundup

January 13, 2010, is a date that many of us in the world of Forex regulation will not soon forget. On that day, the United States Commodity Futures Trading Commission (“CFTC”), after almost two years of deliberation, proposed a set of regula-tions that created a tsunami of outcry in the retail foreign exchange market. These long-awaited rules were a product of the 2008 Farm Bill that intended to require registration of US introduc-ing brokers, commodity trading advisors and commodity pool operators. Instead, these 192 pages of densely-worded legislation created an international uproar due to the CFTC’s efforts to curtail leverage limits to historic lows.

by Felix Shipkevich


Clarifi cation of CFTC jurisdiction Let’s step back and remind ourselves why these rules were proposed in the fi rst place. After a number of adverse decisions against the CFTC in two federal appellate circuit courts, the Farm Bill intended to clarify the CFTC’s jurisdiction over the retail foreign exchange area. This legislation specifi cally sought for the CFTC to promulgate a set of industry rules in order to effectively regulate the retail FX market as well as provide the necessary customer protection to its clients.

After years of fraud, countless Ponzi schemes and unregistered solicitation activities by introducing brokers, money managers and commodity pool operators, the US foreign exchange dealers have lobbied in support of these registration requirements. The purpose of these rules was to provide the CFTC

with the necessary tools to put the bad guys away while allowing reputable and well-capitalized FX brokers to fl ourish in this land of opportunity.

The rules that were meant to benefi t the industry instead caused a major public and industry outcry, particularly against the proposal for limiting leverage to 10 to 1. Just a few months ago, the CFTC’s designated self-regulatory organization, the NFA, has set forth leverage limits at 100 to 1 for the major currency pairs and 25 to 1 for minors.

The CFTC then opened a 60-day comment period for the public to address these proposed rules. In the fi rst few weeks, over 6,000 comments were received by the Commission. Additionally, major US industry brokers have formed the Foreign Exchange Dealers Coalition (“FXDC”) to lobby against the proposed leverage.

The FXDC (http://www.fxdc.org/) has already made signifi cant strides in lobbying against this insensible proposal, and has set up a website (www.fxdc.org) encouraging the public to voice their opinion by emailing the Secretary of the CFTC. Similarly, most of the Coalition members have encouraged their employees and clients to do the same. As one industry CEO has recently stated, this proposal looks more like a typo rather than what the actual requirement should be.

Reduction of leverageIn the past four years, the number of foreign exchange brokers in the US has decreased from over 40 to just about a dozen today. The FXDC has argued that a reduction in leverage to 10:1 would further eradicate this industry in the US. Ultimately, most US clients as well as foreign clients who currently do business with US foreign exchange brokers will likely rush to open accounts with foreign and often unregulated brokers. While some of the regulated jurisdictions already include a cap on leverage, none have imposed such a drastic limit. Some jurisdictions--like the United Kingdom, a comparably regulated jurisdiction compared to the United States--currently do not enforce leverage limits in FX.

If the proposed leverage were to go into effect, many retail clients will take their business to places like the United Kingdom rather than forfeit their ability to trade FX in the US. Consequently, US brokers and their US-based employees will be harmed as well. The industry currently employs thousands of employees, contractors and vendors in the United States. According to FXDC, the industry generates


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over $1 billion of revenue. This means that with a 10 to 1 leverage cap, thousands of jobs and over a billion dollars in annual revenue will be lost. In today’s economy, this is not something that the US government can afford to lose to other jurisdictions.

Although leverage has been a focal point of this regulatory overhaul, a number of other proposals will also signifi cantly affect the US FX business. The current US administration has emphasized the importance of harmonizing the rules throughout the fi nancial sector. This harmonization, unfortunately, is nowhere to be seen in the proposal to require all introducing brokers to be guaranteed by RFEDs, since the same is not required by futures and commodities IBs.

Registration requirementsIn 2010 it is diffi cult to comprehend that a registration requirement for FX introducers, money managers and commodity pool operators has not been codifi ed into law. Arguably, millions of dollars have been stolen, misappropriated, or misled by unregistered solicitors in the US in the last decade. Without these registration requirements, US FX brokers are left with the task of policing the activities of their introducers and money managers on their own. In fact, one NFA supervisory rule specifi cally holds FX brokers’ supervisory principals personally liable for any wrongdoing by these unregistered entities. Somehow, the CFTC wants to expand this personal liability to RFEDs’ Chief Compliance Offi cers. The only difference, however, is that this personal liability would extend to Chief Compliance Offi cers for supervising the activities of their respective brokers.

Specifi cally, each Chief Compliance Offi cer would be required to certify annually to the CFTC that its respective RFED has in place policies and procedures reasonably designed to achieve compliance with the commodity exchange act and the CFTC rules. Surely current and future Chief Compliance Offi cers are scratching their heads today, wondering whether their positions are worth keeping under this rule that can potentially jeopardize their career.

While RFEDs are lobbying against this leverage cap, another industry group would be affected by these proposals as well. The CFTC seeks to require IBs to be guaranteed by RFEDs, with each IB being guaranteed by only one RFED, which means that they can only exclusively do business with one broker.



Rule harmonizationThis again brings us to the principle of rule harmonization. Following the fi nancial collapse of the US banking system, the Obama administration put emphasis on the need to harmonize the rules across various fi nancial sectors. However, the administration’s harmonization agenda was not followed in this proposal. As mentioned above, such a restriction is not mandated upon the futures and commodities industry IBs, so restricting Forex IBs to do business with only one RFED clearly falls short of this harmonization effort. Furthermore, this restriction will only discourage IB registration and will likely push this sector to move abroad.

IBs should be availed an opportunity to introduce their clients to more than one RFED. The argument that clients would be better protected by dealing with a guarantee rather than an independent IB does not hold water. IBs are defi ned as fi nancial institutions and, as such, their clients should be allowed to open accounts with more than one brokerage, as each broker may provide different platforms, products and types of services to suit the individual needs of their respective clients. Restricting IBs to deal solely with one RFED will leave their clients with fewer options in selecting different types of services, products and pricing available from other RFEDs.

Requiring IBs to be guaranteed by RFEDs does not justify the CFTC’s customer protection argument. IBs, like other NFA members, are subject to the CFTC and NFA rules and regulations. There is no explicit or apparent reason why an RFED guarantee will provide better customer protection for retail clients. On the contrary, without much economic and fi nancial reason to be guaranteed by RFEDs, it is likely that US IBs will follow suit by moving their business abroad, thereby defeating the purpose behind regulatory customer protection.

Risk disclosuresThe proposed retail client protection rules have other aims, as well, and there are long sections of proposals that will likely take many pages to properly explain. A proposal to require specifi c risk disclosures from FCMS, RFEDs and IBs, for example, has particularly

raised eyebrows. This section in part requires these entities to provide their retail clients with a risk disclosure statement indicating the number of non-discretionary retail Forex accounts that might be obtained by them, the percentage of such accounts that were profi table for each of the four most recent quarters, and a statement about past performance not necessarily being indicative of future results.

While the good intention to warn retail clients about the risks of trading in the over-the-counter FX market is a vital part of the proposed regulation’s customer protection goal, it isn’t clear why the CFTC felt it would be necessary for the RFEDs to disclose the number of profi table accounts for each of the four recent quarters.

Disclosure of risk is an integral preamble of engaging in any fi nancial transaction with retail clients. Though often ignored by retail clients, risk disclosure is a necessary stepping stone to warn the sophisticated and unsophisticated investor alike that fi nancial transactions akin to Forex are risky, urging them to think twice before chasing a dream that can sometimes end in a painful reality. In my years of practising as an attorney in the equities, commodities, futures and Forex market, I have yet to see a

regulator requiring such disclosure of profi tability (or unprofi tability) to justify its customer protection goal. Arguably, the good intentions to protect customers in FX may have gone too far here. Yet again, these rules will likely overly burden and unnecessary harm the retail FX business in the US rather than protect its clients.

ConclusionThe proposals discussed above are just the tip of the iceberg, and for the most part they will probably do more good than harm. While the public and the industry are highly critical of certain parts of these proposals, the aim of what they seek to accomplish must be acknowledged. Historically, US regulators have been considered leaders of fi nancial reforms, and their good deeds in these efforts were often followed by other jurisdictions. Let’s hope that the same will be said about the current CFTC proposals, which the FX industry dearly takes to heart, yet hopes that some of their critical yet harmful rules will be codifi ed in a more reasonable form.


As the retail FX trading customer base globally surges forward exponentially rate and volume growth for the segment in the U.S. alone is

registering an estimated rise of more than 20% per annum, banks and brokerages are unsurprisingly attracted to offering up new services to satiate the demands of clients trading FX products on margin.


Overcoming The hurdles of setting upa Margin FX business


With continued volume growth in retail foreign exchange (FX) trading showing little sign of abating, banks and brokerages increasingly have to deploy and ramp up cutting-edge margin trading solutions to effi ciently manage their retail FX customer positions, retain and win new business and stay on top. Roger Aitken canvasses leading margin FX vendors to gauge the current state of play.

The potential in this market appears vast. Today the retail FX market in the U.S. generates about $1 billion in revenues a year, and trading volume has been increasing on the back of small investors (retail) tapping the loosely regulated $3.2 trillion-a-day currency market. By end of 2006, average daily retail trade volume reached over $60bn (c.2% of the entire FX market).

Effi cient client servicing

Yet with that tantalising growth comes a heavy burden on banks/broker systems, staff and processes to ensure effi cient client servicing. A retail FX customer base is very different from the traditional institutional and corporate demand, with a far greater number of customers producing small ticket FX trades. FX margin brokers and banks still have their work cut out to calculate trading multiples based on a certain level of posted collateral.


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Marc Aspinall “Whenever I speak to clients there are essentially

four key areas that I always concentrate on: Technology, Support, Product and Execution.”

A report from independent research fi rm Aite Group recently endorsed the “limitless” potential view, but according to founder Sang Lee the success of retail FX fi rms depended on their “ability to develop and support reliable and comprehensive front-to-back offi ce operations.”

The multiples offered will depend on factors including the quality of the

client, which FX products they want to trade - from straight forward spot FX, FX forwards through to vanilla and exotic FX options. Retail investors in U.S. can open accounts and start trading with as little as $100 using leveraging ratios currently around 100-to-1 (c. up to 500-1 in the UK), but the average size of most accounts is between $2,500 and $3,000 industry estimates suggest.

In terms of the key features and functionality considered as core requirements for a comprehensive margin FX trading business, Marc Aspinall, Director of Partners Distribution, CMC Markets, in London, says: “Whenever I speak to clients there are essentially four key areas that I always concentrate on: Technology, Support, Product and Execution.”

With CMC seeing up to 250,000 trades a day being funnelled through its systems during busy periods, the key is having scalable, robust and extremely stable technology.

On price and execution, Aspinall states: “Clients are looking for consistency when the markets are moving and there is heightened activity. As such they will always return back to the provider they know can secure the price and execution.”

In the current market there are effectively two main solutions offered by providers. These break down into: (1) Turnkey solutions, and (2) An integrated technology and liquidity solution, where brokers have invested in their own technology and are looking to concentrate their resources and focus on a single

platform that they can control (seeking other products provided through API connectivity).

CMC Markets, which provides a number of margin FX trading solutions, claims it has invested over $110m in the last fi ve years into its technology in this space and has in excess of 200 broker clients in over forty countries globally trading some 80 currency pairs.

Turnkey solutionsIn respect of turnkey solutions - in essence an ‘out-of-the-box’ offering - Aspinall explains that CMC will provide brokers with a platform that CMC would host, thereby giving the client access to the global market, FX products, CFD equities, indices and commodities. The obvious benefi ts are speed to market and reduced reliance on existing technology.

This, Aspinall says, enables them to maintain a trading/operational relationship with the broker and for the broker to provide that product at no cost and no R&D expenditure to their end client. He adds: “Access to our platform can be provided to the broker in question on a branded basis, or we can provide a complete ‘re-skin’’. The latter option allows for the same kind of deep functionality in terms of tools, but the broker has the ability to incorporate their own brand identity into it.”

RETAIL e-FX PROVIDER >>>


Another provider is SunGard, with its Sierra product line for FX retail margining. Jim Dennelly, senior vice president at SunGard’s Sierra business in Philadelphia, says that currently FX retail margining and FX STP is the number one business for the Sierra product, a solution for front- to back FX trading.

“First and foremost one requires a really good margining engine that is capable of generating your margining calculations and risk limitations in real time,” says Dennelly. “On top of this good connectivity out to more than one platform or trading venue is required. The system has to be extremely fl exible so that a fi rm can provide services out to multiple platforms as well as Introducing Brokers (IBs).”

He also notes the need for a “very strong” fees and commission engine is becoming increasingly important, so that when using white label introducing brokers allocation of fees can be made accordingly to them.

With some of these relationships sometimes being two or three layers deep, it is critical to know exactly how much will be allocated in IB commissions as every trade gets routed into the system. This can be fairly complicated with high volumes. While in order to secure IBs, broker fi rms can basically give software away so they can get IBs on board. An alternative option for clients is to either partner with or purchase an FX margining platform.

Dennelly adds: “Generally speaking, we’re seeing a lot of people as they start in the business, going with liquidity platforms/fi rms that give away the software for free. As their business grows they realise they’re giving up too much in terms of profi tability and they don’t have the ability to manage risk if they want to. Then they revert looking at purchasing a solution”.

In the case of Sierra’s ASP model, the fi rm provides all the technical infrastructure. What this means is that they will deliver the solution via an ASP. The management of the hardware, the databases, support of all the back up and replication, connecting to all the links and then monitoring and maintaining and monitoring these links is all provided.

“So, from a business perspective the client can really focus on building up their business in terms of securing new accounts and not having to worry about the IT side,” says Dennelly. SunGard’s Sierra-link product, which is basically a post-trade feed solution and brings the trades in, has over 65 connections out

of the box on the FX side. (At least 25 of them are FX post-trade feeds).

He adds “Clients have the ability to go to FXall, Baxter or UBS and say ‘I’d like to be a White label partner on your platform’. They just plug in the solution and in 24 hours they can access that liquidity stream. That’s powerful.” With liquidity platforms and prime brokers having slightly different protocols or formatting issues, these have to be coded and mapped. “Again, if the solution you go with has them already pre-built, that signifi cantly reduces your risk,” he adds.

Key features requiredViral Tolat, co-founder and CTO, Head of Trading Solutions, at Integral Development Corporation (Integral) based in Mountain View, California, says a number of key features are required in making a comprehensive retail margining FX business: “Consideration fi rstly must be given to access and availability. One needs to be able to get real-time rates into the system and have the fl exibility to pick and choose sources of liquidity that will allow the best rates to be provided to customers, whilst also allowing the broker to make money.”

Secondly, customer fl ow has to be effectively managed. “Inherently what happens with customer fl ow, both in terms of risk management and order execution, is

Jim Dennelly “First and foremost one requires a really good

margining engine that is capable of generating your margining calculations and risk limitations in real time”



Viral Tolat “Whether you call the dealer or the sales support

person, they need to be able to see what the customer sees and know what is happening with

the customer on a real-time basis”

that you have to be able to handle that processing,” adds Tolat. “And, in the retail space one has to be able to handle literally thousands of tickets per seconds. We innovated so that Integral’s solution is capable of addressing these key points out of the box.”

FX Power Trader, Integral’s retail margin solution, provides fl exible on-demand FX trading solutions through a managed service business model, supporting all market participants with the solutions they need to conduct FX trading themselves or deliver branded trading services to their clients. Since last summer, FX Power Trader has had functionality incorporated to execute MetaQuotes Language 4 (MQL4), which allows for a seamless integration of user-generated Expert Advisors (EAs).

All of Integral’s solutions are delivered as ‘Software-as-a-Service (SaaS) model so that FX trading providers can enter new markets quickly without having to own and operate any IT infrastructure. FX Grid, Integral’s ‘multi-sided’ trading platform, brings together liquidity takers and liquidity makers. And, all of the provider’s solutions - including FX Power Trader – run on top of that. Integral offers an entire value-net/ecosystem, not just a stand-alone technology solution.

As a result, Integral does not just talk about a “front end” as some other vendors do but rather an integrated solution with some of the features residing in the front end and some in the network. Through a 2009 initiative called TrueFX, Integral provides retail FX brokers with direct market access (DMA) to the interbank market.

Tolat refers to the customer support element of FX margin broker businesses as being a “critical” aspect.

“Whether you call the dealer or the sales support person, they need to be able to see what the customer sees and know what is happening with the customer on a real-time basis,” he stresses.

When FX rates are shifting violently in short periods of time - as witnessed recently with pressure on the Euro over Greek sovereign debt concerns, systems and FX broker business will need to step up to the plate. “Inevitably such large movements in the Euro will hit stops and will hit limit orders, and in some cases that may stop out customers,” says Tolat.

That’s a signifi cant issue in the retail space. It’s real money with people trading on margin - not on credit. Any margin broker who wants to set up a business needs a system able to deal with the realities of these issues.” If the market moves in an adverse direction against their customers’ positions, the system will automatically shut them down and start to execute hundreds of trades (i.e. autocut).

With thousands of retail FX customers, systems cannot be anything else than highly automated to handle margin requirements and haircut calculations on a range of currencies and currency pairs. He adds “We analyzed such issues carefully to make sure that our customers have a robust technology in situ to allow a customer support representative to fi eld the



phone calls, to be able to drill into the customer’s profi le, orders and information literally within seconds to see what is happening and then help that client do whatever they need to get done.” This whether it be opening another position, closing a position or just understanding what the client’s margin is. “Failure here only means poor customer service.”

Keeping processing costs downFrom the bank/broker perspective, it is not only important to provide straight-through-processing (STP) for tickets, but also to have the sophisticated mechanisms for netting opportunities of seller tickets in order to keep processing costs down.

There are a host of companies providing margining and real-time risk management technologies for retail FX trading activities, but not all are equally robust. SS&C Technologies (SS&C), is one that delivers

investment and fi nancial management software. By virtue of its acquisition of MarginMan, the fi rm now offers collateralised trading software to many of the leading global players in the FX marketplace. MarginMan fully supports collateralised FX trading, precious metals trading and OTC FX options trading.

Peter Kelleher, Product Manager for SS&C’s MarginMan, who deals solely with the margin trading business at the fi rm, says: “By and large they [solution providers] have typically just offered a very simple 5% or 10% leverage calculation. However, clients are seeking more information and on a real-time basis, as well more aggressive netting and lower calculations in terms of the margin requirement.”

MarginMan’s USP is that it is highly scalable, rich in functionality and fl exible in terms of the rules in calculating client exposure. But this should hold true for all robust FX risk margining systems that a broker or bank seek to deploy in the retail space. Traditionally MarginMan was developed for banks that are catering for a private client base, but more recently they have come to look at the retail FX market and hedge fund side of the business in terms of prime brokerage or give-up trading.

Standalone or Managed ServicesReferring to choices on standalone or managed services that brokers face when deciding which trading technology strategies to adopt, Kelleher says: “While MarginMan supports both, traditionally we would have gone down the standalone route, where we would install the product at a bank site and then hook that into their front-end trading engine.”

Kelleher notes that managed services are something that is becoming more popular. It refl ects the fact

Peter Kelleher “Clients are seeking more information and on a

real-time basis, as well more aggressive netting and lower calculations in terms of the margin requirement.”



that many brokers are not IT houses and do not wish support the technology that underpins the products and services they offer. Their focus is and should be on providing the service and letting all their software solutions (or as much as possible) be managed or hosted off site.

As a global company, SS&C (MarginMan) can host such solutions. The provider has a signifi cant site for hosting outside Toronto, one in London and another in Asia. “If one looks at the retail FX market, turn around time is absolutely critical,” Kelleher says. “We’ll host a solution for our clients virtually on their doorstep, which assists considerably with issues related to turnaround time (latency), being able to perform credit checks, booking deals and turning information around.”

MarginMan has a number of European clients that it provides a hosted solution for in two parts of the same continent. The right location for certain applications is highly pertinent and depends on what part of the world you are trading. For example, Swiss secrecy law specifi es that data (and thus IT solutions) must be hosted within their borders.

Integral’s Tolat adds: “When you get into the detail it’s painfully obvious which option - standalone or managed - is better. The licensed software route requires so much up front capital investment and resources internally from IT people and expenditures. So, it’s obvious for many that they should opt for a managed service provider like Integral.”

“And, for anyone contemplating starting a new FX margin business today, they would fi nd it fi nancially painful to make all the investments that other people have already made in terms of the technology and systems in order to get going,” adds Tolat. “On the contrary, they should aim at benefi ting from it by joining shared infrastructure services like FX Grid.”

The other part, he says, is choosing a service provider - not just a technology”, and “making sure that the people you work with are ‘market neutral’ in that they will allow you to decide which other providers in the forex space you want to use that support best yourbusiness strategy.”

Integral does not “dictate” which liquidity providers [LPs] their customers should take liquidity from. Customers should have a choice he says, picking the “best of breed providers and the one that offers the best deal for their business.”

Integrating an FX margin solutionTurning to issues needed to be addressed with regards to integrating an FX margin solution into existing legacy systems, CMC’s Aspinall says: “What we’re tending to fi nd right now in terms of legacy systems, is that many brokers will often have an outsourced GUI (Graphical User Interface), but look for an integration into their back offi ce reporting systems.”

He adds: “What you’ll have here typically is a client trading on CMC’s front end, which is branded into a particular broker, but then we would integrate through their API a certain amount of technology ‘[resource] to provide real-time reporting for operational risk, regulatory and general portfolio management into the broker’s back offi ce system.”

Factors governing how quickly an FX margining business can be set up and clients on-boarded largely depends on the nature and complexity of the installation. With turnkey solutions where brokers partner with a provider, there are a number of levels that determine that speed of deployment (e.g. whether it spans either front-end integration, back offi ce or both).

Whilst not necessarily recommended in terms of speed to market, CMC have “delivered” a broker in less than a week, including education, client support and marketing strategy. Tailoring and customising trading systems deployed to cater for individual business models (both for IBs and White Label brokers) can be undertaken on a “matrix basis” says Aspinall. Through CMC’s web front-end, broker platforms can be altered


for a certain “look and feel”, such that it appears like existing platforms within the broker’s portfolio.

“On top of this we can tailor the product offering. Some broker clients might want to offer certain FX markets such as G8 currencies only to their end users, while others might want actually choose the entire portfolio of CMC products,” he adds.

Brokers can also break down a particular client tiering and manage a “multi-regional” centre where perhaps their London operation only allows western/European products to be offered within the time zone (whilst their Asia operation might handle any specifi c Asia offering).

Dennelly agrees that for a quick rollout, the simplest solution is to go with a managed service. SunGard Sierra was able to provide a start-up client in just days with everything in place for a couple of their accounts.

“They needed to be able to generate statements right out of the gate,” Dennelly notes. “We were able to get them up and running in two days for their initial few clients. Complete installation for the solution took around sixty days, with work on mapping the general ledger and exactly how the client wanted their entity structure set.”

Regulatory and compliance requirements

In terms of how margin FX solutions are helping brokers meet the increasingly stringent regulatory and compliance requirements, leading FX margin vendors are closely monitoring proposals coming up on the

radar. Only this February the Commodity Futures Trading Commission (CFTC), the U.S. industry body, aired proposals to limit leverage available to retail FX customers down to 10-to-1 from 100-1.

Whatever the eventual outcome, FX margining systems will have to proactively cope with any such regulations. Some providers have already tweaked their offerings to accommodate regulatory oversight. Some retail FX dealers in the U.S. fear that such proposed rulings could force them to scale back operations, sending millions of dollars in trades abroad.

“We’re watchful and concerned by all such developments, but the regulations will be what the regulations will be,” says Tolat at Integral. “They may be related to capital requirements or force shrinking execution sizes, but our customers know that through our technology we already have the means in place to support any of that.”

He adds: “The benefi t of someone using our technology is that as the regulations come out, we’ve traditionally shown that we can be extremely fast to adapt. We’re always following what the regulations are doing, even at the proposal stage, so that we are ready, ahead of their actual role-out.”

Integral, which has been solidly in the FX space as a service provider for the past eight years, clearly illustrated its foresight on this score back in July 2009 when it addressed the National Futures Association’s regulations and the Rule 2-43 ahead of time through enhancements to FX Power Trader, its complete white label retail margin trading solution that includes strategies, advanced order types, charting and market news.

The provider was able to make the necessary programming changes thanks to their ‘Software as a Service’ delivery model. Specifi cally, compliance Rule 2-43(a) prohibits a Forex Dealer Member (FDM) from adjusting executed customer orders, with two exceptions. Integral became the fi rst white label trading system provider to announce NFA compliance ahead of a stated deadline (31 July) by around month.

With the addition of an option for non-hedged FIFO transaction to FX Power Trader, brokers could now choose the appropriate strategy that best fi tted their needs and that of their customers. While other providers will be monitoring events on the regulatory horizon, no FX margin technology can ever be complacent.

Overcoming the hurdles of settingup a Margin FX business

The Rous Multi Account Manager (MAM) is designed for brokers to offer their money managers access to an integrated software

tool to execute block orders with one click under a master account arrangement and conveniently automate trade allocations to customer accounts.

About Rous Technology Rous Technology LLC (www.roustech.com) is headquartered in San Diego, California.

The company was founded by Francisco Martinez and Ryan Nettles. Originally used commercially by a Swiss FX broker and a German Bank, the Rous FX Bridge has since then been made available to brokers at large. According to Ryan Nettles, Director of Operations, “We originally had no intention of selling our software until we have seen what was available in the marketplace at that time and felt our bridge can provide brokers with

a more reliable and stable solution at competitive prices. We now have customers in USA, Germany, Switzerland, Finland, Cyprus, Russia, Ukraine, and Singapore and never needed to raise any investor capital to support or grow our business.”

Roux FX Bridge This provides brokers with the ability to automatically off set foreign exchange exposure helping to control risk in realtime and satisfying risk requirements from regulators. The removal of the manual dealing desk can also reduce dealing desk costs signifi cantly as well.

“Our main fl agship product, Rous FX Bridge, connects MetaTrader 4 to institutional platforms such as Currenex, Integral, Lava, Hotspot or other trading platforms,” declares Francisco Martinez, Managing Director of Rous Technology LLC.

There can be more than one bridge running, so that brokers can connect simultaneously to different liquidity providers for different currency pairs. The bridge sits on the same server as the Metatrader server is located.

The Rous FX Bridge is highly MT4 integrated and can work with all order types such as stops, limits and market as well as with unique MT4 order types such as “Close By” and “Close All” . It is also compatible with Instant and Market Execution mode settings in MetaTrader 4.


Rous MT4 FX Bridge and Multi Account Management Solutions

SPON

SORE

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ATEM

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With the ever increasing attention regulators are paying to monitoring risk, automation and real time reporting and execution are critical factors. The Rous FX Bridge allows a broker to automatically submit MT4 trade requests to the liquidity provider of choice and wait for a confi rmation prior to sending an accept or reject message to the client.

Installation time can take as little as one hour according to Rous and, assuming testing is successful the platform can be installed to go live the same day.

“There is no software GUI or interface at this point. It‘s all server side but we are working on that,” states Martinez. “In future, clients may be able to administer the bridge directly from the MetaTrader Manager, rather than having to go to log into the Bridge Settings on the server to confi gure.”

Rous Multi Account Manager (MAM)“The one thing that’s unique about our MAM software is that it’s installed on the same server as MT server is located. All our competitors use a plug-in so they do get errors that happen now and again. These can create nightmares for the broker. We wanted to create something that was integrated completely within MetaTrader and not a plug in,” says Martinez. With the widespread use of Expert Advisor’s (EA’s) the Multi Account Manager can be a useful tool, allowing managed accounts can be traded from a single MT4 client terminal application.

MAM allows allocations to clients even for micro lot sizes has low as 0.01 of a lot (1000 currency units). Additionally, the Multi Account Manager manages Monthly, Quarterly and Annual client reports via

the MT Manager, as well as allowing monitoring commissions and performance in realtime.

With the capacity to trade and allocate to hundreds of accounts with a click, MAM promises to be a valuable tool for today’s currency manager and Metatrader broker looking to enhance professional execution of EA’s for clients with managed accounts.

SupportRous multi-lingual support is provided by chat. We tried it a couple of times and the response was very fast and available 24/6, according to Martinez. Since the team is small and knowledgeable, the chat support is spread to different time zones, and one of the team is always available to answer questions. If the question requires a verbal interaction it the support or sales enquiry can always be upgraded to a Skype or telephone call. Rous Live Support is currently available in English, Spanish, Russian, Latvian, Arabic and German.

ConclusionThe Rous team appears to be impressive and very service oriented. The software promises to provide stiff competition and product enhancement in the Metatrader marketplace.


For more information about Rous Technology please contact their switchboard on:

+1619 5953177 or e-mail [email protected]

On what issues are creating pressure for changing the existing regulatory compliance requirements of forex brokerage fi rms within Europe, Asia and North

America, Dr. Stelios Platis, founder and managing director of MAP S.Platis, an independent Cyprus-based centre of excellence in the support of fi nancial institutions operating or wishing to operate in the EU, states: “I am sure that, especially in the aftermath of the recent fi nancial crisis, the fi rst thing on the minds of the regulatory authorities in developed economies is investor protection.

“This, combined with the ease with which money and clients in the retail forex business can fl ow from one jurisdiction to another, has surfaced the need to narrow down this regulatory arbitrage gap in the global fi nancial system,” continues Dr. Platis.

Increasing volumesThe forex over the counter market has increased its volumes dramatically in recent years. Many new players have entered the market, both companies and clients, and as barriers to entry have been very low, access to forex services has been easy, with most EU and Asian countries practically unregulated. Yet in the last few months many rules and regulations concerning the licensing of FX brokerages have emerged within these different regions, particularly in Asia. Dr. Platis says the differences between regions run from not only the licensing process, but also in the operation of FX brokerages among these regions.


Key issues with registration and licensing of Retail Forex brokerages

Global regulation of the fi nancial services industry is a hot topic. Following recent developments and disasters in the economies of Europe and the US, the eyes of everyone, from those directly involved in the markets, to Joe Bloggs on the street, are focused on who oversees what, why and how. Heather McLean discovers why the foreign exchange brokerage market is subject to increasing scrutiny and new rules.


He adds: “Of course, there are jurisdictions, especially within the EU, where FX brokerage is more adequately regulated than others. There are jurisdictions in which part of the FX business is regulated whilst part of the business is not. Within these regions there are also jurisdictions where this business is regulated as an investment trading product, and where in others as a transaction leading to delivery of currency. At the same time, given the developments in the sector, I have no doubt that we are, today, on a long and diffi cult path towards a more harmonised regulation globally.”

Pressures for changeOn what issues are creating pressure for changing the existing regulatory compliance requirements of forex brokerage fi rms within Asia, Alex Duperouzel, managing director of the Hong Kong offi ce at ComplianceAsia, a consultancy fi rm that specialises in providing regulatory and compliance consulting services to fi nancial institutions in Asia Pacifi c, comments: “For fi rms in leveraged forex in Asia, the biggest driver is the extent of the untapped marketplace.

“Middle class Asian investors are relatively forex savvy compared to their US and European counterparts, and there have been a number of new entrants into the retail and high net worth leveraged forex space in Asia over the last three years.

“Regulators in the region are faced with two key issues; fi rstly removing the less than optimal and sometimes fraudulent smaller players, and ensuring that the current drive to attract a larger client base is not going to result in miss-selling or breaches of the rules regarding holding client securities,” Duperouzel continues.

European regulationIt is perceived that fi rms in EU member countries are set aside from all other jurisdictions. Asian and North American jurisdictions may move to follow the EU example, but it is a time for bedding down the effects of the new EU legislation and seeing how well it actually works. For the FSA in the UK, there are many issues currently unresolved, but expected to be resolved over time. Europe, as represented by the 27 EU member countries, is perceived as leading the

world in respect of regulation of retail forex brokerage businesses that are not an integral element of larger organisations, such as banks.

While in such countries there has been a statutory requirement for compliance under regulatory supervision for anti-money laundering purposes since 2004, it is only recently that legislation handed down from the EU in Brussels has led to stand alone fi rms of this sort becoming subject to a new ‘conduct of business’ style of regulation.

Peter Brown, senior consultant at The CCL Partnership, a consultancy and training fi rm that has been guiding companies through FSA compliance for regulation for over 20 years, comments: “In the UK, stand alone fi rms had to be registered or authorised by the UK fi nancial services regulator, the Financial Services Authority (FSA) by 1 November 2009 unless they qualifi ed for transitional arrangements.

“The terms ‘registered’ and ‘authorised’ distinguish between two different levels of FSA supervision; registered fi rms operate solely in the UK and also have lower maximum turnover fi gures, refl ecting the values of transactions dealt. Authorised fi rms have no upper limit on the aggregate value of transactions dealt and they may also choose to rely on the EU law provisions for ‘passporting’ their activities into other EU countries,” adds Brown.

Have passport will travel“So far, passporting out of the UK into other EU countries is seen as simple and straightforward, as it is intended to be. However, there are reports of it being much harder, and in some cases not yet possible, to passport out of some other EU jurisdictions,” continues Brown. “Indeed, some fi rms established elsewhere in the EU are seriously contemplating establishing UK subsidiaries so that authorisation can be gained in the UK together with the benefi ts of relatively easy passporting out.

“As a general rule, the home state regulator’s responsibilities will prevail although, in matters such as anti-money laundering compliance, obligations born of local statutes are likely to prevail. In jurisdictions other than the EU member countries, local law, regulation and


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practice will prevail; then, each other jurisdiction needs to be assessed on its own merits, or otherwise as the case may be,” Brown claims.

The EU approach of handing down Euro-legislation for implementation by its member states inevitably leads to detailed differences in the locally enacted statutes; the substance of them shows commonality, the like of which is not understood to exist outside of the EU countries, notes Brown. “But even in the EU countries there is a period of grace required to let the new regime get bedded in before any reviews and further developments can be expected to come about.

“The UK’s own regime for retail FX brokerages is still new enough that not all fi rms have yet gained authorisation or registration, although it is well known that not all fi rms who are relying on transitional provisions are legally entitled to do so,” Brown continues. “Some are seen as being ‘economical’ with their reading of all the conditions to be met to qualify for taking advantage of those provisions, particularly the requirement to have been trading prior to 25 December 2007.”

While Dr. Platis says: “Within the EU and under Markets in Financial Instruments Directive (MiFID), it is indeed possible with any such license issued by any of the Regulatory Authorities of any of the 27 EU Member States to passport such license to any, or all, of the other 26 Member States, without having to comply with any additional requirements. This applies to the presence of representative offi ces, branches or via the cross-border provision of services. Outside the EU, there is no mutual recognition of licenses, at any large scale. The principle is that one has to receive a separate license from the relevant local authority for every single jurisdiction one is physically active in (with the exception, of course, of the 27 EU Member States, amongst them).”

Application rigoursDr. Platis says in his view, since November 2007, the EU, with the implementation of the MiFID includes the most appropriate jurisdictions to obtain a globally recognised and respected license. “However, make no mistake,” he warns. “Licensing is a cumbersome and complicated process, fraught with obstacles for the less experienced, through which, potentially, many structural changes will need to be undertaken by the prospective licensed fi rm.”

For those fi rms that have already gained authorisation or registration in the UK, or are in course of doing so,

the rigours of the application process are the greater for those seeking authorisation, agrees Brown. He says the smallest of fi rms seeking only registration have a relatively simple process to go through and thereafter the expectation of ‘light touch’ regulation and supervision; costs are therefore lower both at the application stage and ongoing thereafter.

Brown adds: “It is suspected that some may have opted for this cheaper route when not entitled to do so. It is too early for any such exceptions to have been brought to light but it must be presumed that they would thereafter fi nd it the more diffi cult to satisfy the FSA that the fi rm and its principals were ‘fi t and proper’ candidates for upgrade to full authorisation.

“Applicants in the UK are currently known, in some cases, to be motivated by client expectations to gain authorisation or registration now rather than taking legitimate advantage of transitional provisions,” continues Brown. “General public awareness of the new regulated regime has meant some loss of business by fi rms who are not already under FSA supervision.”

Getting licensed in AsiaAs to what steps fi rms wishing to operate within the retail FX market can take to improve their chances of becoming registered and licensed in Asia, Duperouzel states: “Licensing of a retail focused, leveraged forex operation in both Singapore and Hong Kong requires

Peter Brown “..some fi rms established elsewhere in the EU are seri-ously contemplating establishing UK subsidiaries so that authorisation can be gained in the UK together with the

benefi ts of relatively easy passporting out.”



strict adherence to the guidelines and procedures in various circulars and other materials issued by the regulators.”

Duperouzel adds: “At the top of the list at present is the requirement to show solid competency at the senior management level, a clean regulatory history in another major jurisdiction, strong fi nancial resources and a robust back offi ce control environment that will protect client assets. Regulators are also looking for a robust and up to date process of disclosure of information to clients and a complaint handling process. Achieving compliance is a process that involves understanding current rules and regulatory focus, planning and monitoring compliance procedures and responding quickly to breaches or areas of weakness.”

A further complication in Aisa is a branch structure, adds Duperouzel. He says in the Asian region, a branch structure only really works for banks, unlike in the EU where MiFID enables passporting between Member States. Duperouzel claims non-bank forex fi rms should have specifi c subsidiaries for specifi c jurisdictions to ensure that the wide disparity in individual rules can be complied with on a local basis. “While branch structures are in theory possible, they are actually quite diffi cult to manage from a regulatory perspective, whatever the tax benefi ts that come from a branch arrangement.”

When a fi rm enters a marketplace it is best to seek legal advice on the type of license required and the

type of conditions and obligations under that license, Duperouzel advises. “As we are not a law fi rm, this is not what we do. After a fi rm has legal advice they typically need assistance in preparing an application to the regulators. This is the work that we do. In addition to the actual licensing process, new entrants are likely to need company incorporation and secretarial services, management accounting services, audit and tax consulting and clearing arrangements with major banks.”

On the leading specialist fi rms offering forex advisory and support services that can help companies become licensed retail FX brokers in Asia, Duperouzel says: “In Singapore and Hong Kong, in addition to our own fi rm, there are a number of major law fi rms who are well placed to provide advice to new entrants. In my personal view the major law fi rms would include Clifford Chance, Sidley Austin, Slaughter & May, Deacons, Mayer Brown JSM, White & Case, Baker & McKenzie, Allen & Overy and Linklaters. Smaller fi rms include Tanner DeWitt, Rajah & Tann, Allen & Gledhill, and Shook Lin & Bok (the last three here are Singapore only).”

Big bucks for small fi rmsThe licensed and prospective licensed fi rm in any globally-recognised and respected jurisdiction will undoubtedly need to have in place, amongst others, certifi ed personnel, adequate infrastructure, independent and in-house control functions, systems and procedures to ensure investor protection, and of course the necessary capital adequacy, notes Dr. Platis. Operating as a licensed fi rm in a globally recognised and respected jurisdiction is defi nitely not cut out for the smallest players, due to the scale of operation required to fulfi l all the requirements to become licensed, he adds.

Commenting, Brown notes that the cost of complying with registration is high for smaller fi rms: “For most of the relevant fi rms in the UK, the costs of gaining authorisation constitute a signifi cant expenditure for them; classically they are one-man or family businesses that are not really ‘cash rich’, and frequently begrudge the unavoidable costs of the authorisation or registration process, even before the opportunity to contemplate involving consultants and other advisors comes into the reckoning. “Such fi rms commonly have engaged the services of a professional accountant for bookkeeping and tax purposes, although they rarely are obliged to engage them as auditors. UK laws waive obligatory audits for fi rms judged to have small turnover fi gures and this means many fi rms escape the statutory audit obligation.

Dr Stelios Platis “Licensing is a cumbersome and complicated process,

fraught with obstacles for the less experienced”



“Nevertheless, as bookkeepers, the accountants will probably be used by applicant fi rms to generate cash projections – for a fee – for their clients,” Brown continues. “The larger accountancy fi rms are believed to have been seen as too expensive to even warrant enquiries being made. There are not known to be many other fi rms in the UK that have openly offered the necessary advice and consultancy services; the UK Money Transfer Association, of which some hundreds of relevant fi rms are members, has had links with the CCL Partnership, which fi rm has been able to assist a number of applicant fi rms,” notes Brown.

Timeline for licensingOn the factors that may infl uence the timelines involved in achieving compliance with regulatory requirements, Dr. Platis states that the licensing process is, in itself, the fi rst step in the compliance process. He says the entire application route is a process with which the applicant will need to demonstrate their ability to operate under the relevant and applicable fi nancial laws, related to the license, supported by the presence of specifi c processes and procedures.

Timelines, in this respect, can vary from jurisdiction to jurisdiction, ranging from three months to more than a year, depending also on the consultant and the size and complication of the applicant’s business model. “For example, taking our case, we have had MiFID licenses given by EU regulated authorities as fast as within three months from when the application has been submitted, and also as late as seven months,” Dr. Platis comments.

Licensing the only way forwardBenefi ts of compliance are great. The obvious benefi t of gaining a license is the ability to market to prospective and existing clientele as a regulated and licensed fi rm. But in this, the jurisdiction plays a signifi cant role, as this determines the level of adequacy of the company’s systems and controls which relate to investors’ protection. Dr. Platis says this is also one of the reasons why Cyprus is increasingly receiving so much attention from the sector.

“Having said this, however, I will go a step further and say that my view is that the future of the business belongs to the regulated and licensed fi rms. Given the fi erce competition out there, investors demand and are being offered increasingly the level of comfort that only a duly licensed fi rm can offer. So, in reality, operating without license is no longer a long term strategy or, indeed a, viable option,” adds Dr. Platis.

In Cyprus, MAP S.Platis is a specialised consultancy fi rm supporting the EU fi nancial services sector. Dr. Platis notes: “In fact, we are the only fi rm, to date, that has succeeded in obtaining licenses for retail FX brokers and market makers in Cyprus since the implementation of the MiFID. Globally, and in other EU states, this industry is segmented where such services are being usually offered by a number of legal fi rms and even accounting fi rms.”

Increasing oversight?As to what ways current efforts by regulatory authorities could increase oversight within the retail FX market’s impact on current forex licensing, compliance processes and procedures in parts of the world, Dr. Platis says: “Our view, overall, is that the FX business can only grow fast and sustainably through the necessary and globally-consistent legislation. We, as a specialised advisory fi rm in the fi eld, strongly believe that the sector can only benefi t from an improved global regulatory environment. “This will create a level playing fi eld for the existing regulated retail FX business, and, most importantly boost retail investors’ confi dence in the sector. At the same time it needs to be stressed that it remains a rather diffi cult task to accomplish, mainly due to the technology involved in the business, which makes regulatory oversight more complicated, as well as the presence, still, of jurisdictions where this activity is not adequately regulated.”

However, Duperouzel notes: “The primary danger at the moment from regulators in the Asian region is the possibility that any new rules will add to the cost of doing business without a corresponding regulatory benefi t. Broadly, we are seeing a reversion to more localised rule-making, than alignment with rules issued by either the SEC or the FSA in the UK,” he continues. “Given the signifi cant corporate failures in both the US and the UK over the last two years, it is understandable that Asian regulators are less likely to adopt all SEC or FSA proposals, but it is also a form of protectionism to create new local rules and that protectionism will ultimately harm growth and recovery.

“Having said that, the US, UK and European regulators need to get their heads out of the sand as well, and think more globally about harmonisation of rules across borders. Current politics, however, suggests that nobody should hold their breath in that respect, and this will mean that when you are running a global operation there are going to be more local quirks in the regulatory framework that need to be addressed in order to keep licenses in tact in far off locations,” sums up Duperouzel.

RETAIL e-FX CLIENT

It is important to fi rst defi ne the term ECN. Traditionally ECN stands for Electronic Communications Network,

a term that came from the (then) new electronic means of connecting to the NASDAQ market place. Since FX lacks both a central global exchange and market handling rules, brokers have begun to stretch the defi nition to ECN to suit their particular systems.

What is an ECN?Vladimir Kisyov, head of business development at Deltastock, adds to the defi nition: “The ECN basically provides a marketplace where individual and institutional traders, market makers (MM), prime brokers and banks trade against each other by placing competing bids and offers, thus generating liquidity into that electronic system. The ECN environment allows clients’ orders to interact with other clients’ orders. All trade orders are matched between counterparties in real time.”

The FX ECN model can be described as a two way bridge where the broker is the traffi c coordinator in


Should you consider using a Forex ECN platform?

Forex ECN platforms sound in theory like the ul-timate utopian environment for trading. They can provide a place where orders are matched in real time in a collective bubble of liquidity provided by each of the market’s participants. However, as Heather McLean discovers, there is more to the world of the ECN than meets the eye.

Heather McLean

the middle of the bridge, says Layth Sanjaq, head of operations at FXCBS. On one side, there are the banks quoting prices into the client terminals through the broker’s platform. On the other side, there are the traders (clients) performing trades on those streamed prices. Each trade goes through the broker’s platform to the corresponding bank that quoted the price and gets executed using the liquidity provided by the bank.

To fi nd out if you really are trading on an ECN, says Ross Ditlove, CEO of MB Trading, there is a very simple test that can be employed. Ditlove explains: “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.” Without displaying your order immediately or at all for everyone in the system to see and act on, your broker is somehow manipulating the quote behind the scenes, says Ditlove. “MB Trading’s revenue is generated from the commission we charge the retail client, and thus we offer full transparency without manipulating the spread or quote,” he continues.

Why DD and NDD?The reason some brokers now offer both dealing desk (DD) and non-dealing desk (NDD) FX trading facilities, says Giuseppe Zagara, managing partner and the co-founder at Fastbrokers.com, because NDD


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“The FX ECN model can be described as a two way bridge where the broker is the traffi c coordinator in the middle of the bridge”

RETAIL e-FX CLIENT


is the answer to the growing number of FX traders demanding more transparent and fair pricing.

He comments: “Retail Forex is today a mature product and traders understand its logistics (including the fact that pricing and trades are often handled in a market making environment). While there are still a few brokers using ambiguous statements about the nature of their retail forex system, most brokers are now offering a variety of trading environments to satisfy the growing demand of alternative products, often in place of the classic dealing desk.”

“The logical consequence has been to see brokers offering an ECN-style environment. However, few brokers really allow their clients to trade these products, but simply made a major switch from the ‘fi xed’ spread model to a ‘fl oating’ spread pricing which they marketed as a ‘NDD’ or ‘multi bank’ feed. Unfortunately these are merely DD-based systems which simulate or replicate the fl oating bid and ask of a true ECN model, but execute orders on a DD basis,” states Zagara.

Andrey Vedikhin, CEO of Alpari (UK), agrees that most brokers would like to be in a position to offer NDD execution because it allows for a much greater level of automation when matching trades. However, NDD execution is relatively diffi cult to achieve

because it requires advanced requirements in terms of technology, an excellent IT infrastructure and can bear high development costs, he adds.

Changing expectations“Today, we see a signifi cant change in terms of clients’ expectations,” Vedikhin points out. “Clients from all backgrounds, including retail, are becoming increasingly demanding with regard to the suite of services they are being offered by their broker. All traders are now requesting institutional-level execution speeds, and NDD execution helps us to deliver on that. While approximately only 5% of retail clients trade via ECNs today, we expect this to grow to over 95% within the next few years. The benefi ts of ECN trading, including transparency, deep liquidity, market depth and NDD execution, will then become available to everyone.”

On brokers offering both DD and NDD FX trading facilities, Kisyov says the number of NDD FX trading facilities (either STP or ECN-STP brokers) has notably increased in the last couple of years or so. He comments: “The shift from the DD to NDD business model has accurately addressed the growing needs of the forex trading community for greater liquidity and best execution, thus explaining the major migration of retail clients from MMs to ECN-STP brokers. Nonetheless, the DD model still provides advantages to traders.”

Giuseppe Zagara“..most brokers are now offering a variety of trading

environments to satisfy the growing demand of alternative products, often in place of the classic dealing desk.”

Vladimir Kisyov “The ECN environment allows clients’ orders to interact with other clients’ orders. All trade orders are matched

between counterparties in real time.”

>>>

Sanjaq continues: “I believe that brokers who are offering both DD and NDD are actually DD brokers trying to catch the trend by promoting NDD trading for their clients. The DD-NDD dilemma is ethical and can not be taken as a variety of services. Since an ECN broker’s role is to give individual traders access to the interbank market, they do not benefi t from the spreads or the losses of their clients. Therefore, they usually charge a commission fee per transaction proportional to the trade size. Besides, banks usually charge the ECN broker commission fees for transaction executed on their end.”

Wolf in sheep’s clothing?While Ditlove comments: “This is an example of a wolf in sheep’s clothing. If your broker does not immediately display your bid or offer for all other clients to see, if your broker maintains minimum fi xed spreads, if your broker knows information about your order that is not fully transparent to the rest of the marketplace and retail traders alike, then you’re not getting a fair deal. Just because someone calls themselves a NDD-ECN does not make them so. Frankly, it’s laughable.”

Yet the debate about dealing desks and non dealing desks (NDD) is a red herring, claims Glenn Stevens, CEO at GAIN Capital. He says as a retail trader, your primary concern should be your ability to get into a trade quickly and at the rate you request, and where your orders are fi lled. These things can positively or negatively impact your trading results; where your order is ultimately routed does not.

Stevens explains: “Our belief is that NDD’s came about in response to complaints about the poor execution quality at some of the retail brokerages. Promoting themselves as a NDD was a way for brokers that entered the market late to differentiate themselves. It’s fairly well known that when the fi rst NDD fi rms came on the scene there were several fi rms with poor reputations for execution, especially where they fi lled their client’s stop loss orders. Also, some brokers prefer the NDD model because it’s much easier to take a price feed from a bank, mark it up to the retail customers, then push all the trades back to the bank, than to act as a MM and manage risk internally while providing the best client dealing experience possible.”

Continuing, Stevens states that GAIN Capital believes an experienced, professional trading desk is the real benefi t to its retail clients at FOREX.com. “We don’t

have an arm’s length relationship with our clients; we take full responsibility for the prices we quote and where we fi ll orders.”

Confl ict of interestIn a pricing basis model, also known as a MM model, the prices are streamed from data vendors directly to the client terminals. Clients perform trades on the streamed prices, but the trades reach a dead end, which is the MM’s servers. Meanwhile, the dealers of the MM are trying to negotiate execution for the favour of the MM and to minimise the profi tability of their clients. Sanjaq states this model creates a huge confl ict of interest between the broker and their clients, as the loss of the client is considered as pure profi t for the broker.

He states: “As a client trading on MM’s platform, when you are buying a currency pair, the MM is your counterparty (selling to you). Therefore, if your buying order goes in profi t of $1000 for example, it means that the MM is losing $1000. It’s as simple as that, unless the MM has a risk management policy that it applies to offset your order with a different counterparty at a certain point. Slippage and requotes are techniques used by MMs to minimise the profi tability of the client. Scalping is usually not allowed by MMs because it gives the client higher

Andrey Vedikhin “While approximately only 5% of retail clients

trade via ECNs today, we expect this to grow to over 95% within the next few years.”



RETAIL e-FX CLIENT >>>


chances of closing in profi t few pips away from the opening price, which is inevitable loss for the MM.”

Vedikhin states that some FX brokers are criticised by retail investors for having a confl ict of interest when executing client orders; they sometimes have to become the counterparty to their own clients’ trades. However, most of this criticism is unwarranted, he claims, because the majority of clients trade with brokers that are fully licensed and regulated by various agencies such as the FSA and NFA. “Regulated fi rms like Alpari (UK) must abide by rules regarding best execution and treating the customer fairly at all times. This prevents any wrongdoing on behalf of the broker because regulated brokers are put under immense scrutiny by their respective regulator,” he says.

Stevens agrees: “One of the biggest myths promoted by NDD brokers is that DDs are somehow ‘trading against’ clients. This is hype. At GAIN, we’re a hybrid model. We offset a potion of our trades immediately in the interbank market. Everything else is our ‘net customer exposure’ and managed on an aggregate basis. We maintain strict position limits and hedge our exposure in the interbank market as needed, according to our risk management guidelines. We process well over 100,000 trades a day; it’s not feasible that we

would or could trade against individual clients,” Stevens concludes.

Not robbersOn possible confl icts of interest in order execution that can occur with MMs, Kisyov says: “Market makers literally make the market for traders. They sell to buyers and buy from sellers by quoting fi xed spreads. Unfortunately, most of the MMs quote variable spreads now. Market makers have been growing in number since the dawn of retail FX. I don’t think they could have survived if they had robbed clients’ accounts, especially in this highly regulated environment, where clients’ interests have been strictly protected.”

While Jesse Richards, a registered broker and a principal at Fastbrokers.com, comments: “When the broker is on the other side of each trade, there is a confl ict of interest as that broker will lose money if the client profi ts (if the broker does not hedge its risk), therefore the broker may be more profi table if the trader makes bad trades. I believe that the majority of deals done at NFA-regulated FDMs are done so on an ethical basis, however there are many unscrupulous brokers that actively manipulate the price to their advantage and to the disadvantage of the trader. The confl ict of interest manifests itself in the execution of orders. The two most common forms of manipulation

Layth Sanjaq “Scalping is usually not allowed by MMs because

it gives the client higher chances of closing in profi t few pips away from the opening price,

which is inevitable loss for the MM.”

Glenn Stevens “..some brokers prefer the NDD model because

it’s much easier to take a price feed from a bank, mark it up to the retail customers, then push all the t

rades back to the bank, than to act as a MM ...”

RETAIL e-FX CLIENT >>>


traders complain about are stop hunting and spread widening.”

Richards adds stop hunting is the practice of a MM moving the price to hit a large number of protective stop orders, even if the price may not have reached that level through competitive pricing. In this scenario the MM pushes the price up or down by a few pips momentarily with the intent of stopping out traders and booking profi ts for the dealer. Spread widening is the practice of artifi cially widening the bid/ask spread when accounts are in a profi t, to eliminate said profi t or even forcing accounts to incur a loss due to margin issues, says Richards.

Ditlove says MB Trading holds its liquidity providers to fairly specifi c terms that if they are showing a price, they have to execute a certain amount at that price. He adds that obviously, there are scenarios such as news releases where more orders are being fi red at them and they also want to execute less. But compared to years ago when a deal desk could slip a customer 100 pips because of the non-farm payroll data releasing, things have come a long way, he claims, adding: “Does every fi ll occur on the visible bid and ask at the time you click the button? Probably not under fast market conditions, which is no different then an NYSE specialist who is charged with maintaining an orderly market.

“That being said, the way to combat this circumstance is to add more liquidity venues to our system,” Ditlove continues. “MB Trading is an aggregator of liquidity; if we fi nd that there is less then optimal liquidity we add more banks as sources. But that doesn’t change the fact that our routing algorithms are very fast and our liquidity provider relationships are fairly deep, so the system will generally fi nd a way to get a fi ll in a timely manner. The main point that I would focus on is that any slippage that occurs on our system is a function of global supply and demand, as opposed to a DD that refuses to give a retail client a fair deal in order to maximise their own profi t.”

ECN settlement

On how the FX ECN model works and how it operates on a settlement rather than pricing basis, Richards says because forex is a non-centralised market, there are two ways for retail traders to access it; either through a MM offering marked up liquidity from one or several liquidity providers, or through an ECN-style system.

“Now, it should be noted that while banks, prime brokers and large institutional traders may operate on a settlement basis utilising a true ECN environment, most retail forex ECN style accounts still operate on a pricing basis even if they are STP, NDD accounts,” Richards explains. “On a retail forex ECN style system, while it may operate on a STP basis, the counterparty to the client’s transaction is ultimately a prime broker, who is not aware of the identity of the client. Instead, the prime broker has a credit relationship only with the broker counterparty, that is, the company you would normally open an account and deposit your funds with. Retail ECN models eliminate the inherent confl ict of interest that exists with a MM, but do not truly operate on a settlement basis.”

Costs and fees to trade on ECNs depend on different factors, according to Zagara. Generally speaking, he says the trader is offered an ‘all inclusive’ commission quote which includes the broker’s profi t and fees. The broker then pays its fees to the prime broker and to the ECN itself, which charge a transaction or clearing fees, similarly to futures exchanges. Some of these charges do not apply to what Zagara considers to be ‘home made’ ECNs. Also, he notes that while more brokers are embracing the forex ECN style, we can expect to see a growing commission battle among brokers, which will eventually benefi t the traders; a similar path that the electronic futures have followed in the past.

Jesse Richards “The two most common forms of manipulation traders complain about are stop hunting and spread widening.”


RETAIL e-FX CLIENT

However, Kisyov adds it is the individual trading style that matters when choosing a trading model, in terms of the potential impact on trading performance. “It is always about costs involved and execution when elaborating on the choice of a trading model. With variable spreads, the difference between the bid and ask prices of a certain currency pair fl uctuates in a range. On the other hand, fi xed spreads are predetermined under all market conditions.”

Kisyov states that Deltastock’s fi xed spread on EUR/USD is 2 pips, while it goes down to 0.1 pips in the ECN/STP module. The company has utilised direct pricing with no mark-up or mark-down from its liquidity providers, and the only fee that applies for ECN-STP order execution is 0.3 pips for trades as low as 10,000 base currency units. So, assuming a EUR/USD order is executed at 0.1 pips spread, the bottom line for clients will be 0.4 pips total transaction costs.

MT4 bridging issuesBringing ECN trading to the retail trader, many fi rms offering ECN trading now claim to bridge to the ever-popular MT4 platforms. On issues with bridging an MT4 platform to an ECN, Ditlove says MB Trading spent more than a year fi nding out. He states: “The short version is that MT4 is half a decade old at this point, and MetaQuotes is busy working on MT5 now. When MT4 came around, there were no ECN forex brokers. It’s a round plug in a square hole. We

had to meticulously consider every part of

how MT4’s architecture worked and strip out pieces

that simply didn’t make sense in our current execution model.

There are now a lot of brokers that claim to be FX ECNs with

MT4, but we review what they are claiming and know that at best, they are simply routing orders out to one destination and again failing the transparency test.”

Most of the issues are technology related, although the prime reason for there being issues is because FX ECN’s and MT4 have vastly different trading philosophies, says Vedikhin. The biggest challenge, he warns, is to be able to match client orders from MT4 with liquidity from an ECN. ECN’s show market depth but MT4 does not, so it is important to resolve the issue of execution when an MT4 client wants a trade executed immediately at the best possible price. “In MT4 it is not possible to provide partial fi lls, but ECN platforms often execute client orders at slightly different prices subject to available liquidity at a particular price. This core difference in approach can cause issues when bridging liquidity,” he comments.Zagara says Fastbrokers.com explored MT4 bridging


in late 2007, when more clients started to demand a real ECN execution delivered on the MT4.

Fastbrokers.com concluded that clean bridging seemed to work only in theory. Zagara says: “It is a very tough task to achieve in a live environment, mainly for the nature of the MT4 infrastructure, where its core, in my opinion, is mainly designed for a dealing desk usage only. Furthermore, each ECN has is own trading and order rules, different API specifi cation and FIX-communication issues. Our tests reported problems with split fi lls (which MT4 wasn’t able to handle), off quotes caused by latency (trades were passed while the price on the ECN had changed), which made possible the use of a bridge in a hybrid model but it was not possible to make it work in a true STP-only model.

“For that purpose we dismissed the MT4-ECN project and switched to focus our custom software to fi ll this gap,” explains Zagara. “I am sure now things have changed; there are different and more powerful bridges. However, in my opinion, I am still very sceptical when I see a broker claiming is offering an MT4 through an ECN. I would scrutinise both the bridge and whether the ECN it connects to was specifi cally designed or modifi ed to handle MT4-like platforms, to the extent that the benefi ts of a regular ECN may have been compromised to accommodate the needs of MT4,” he warns.

Richards adds: “There have been many challenges getting this marriage to work. As, in my opinion, the MT4 software was never really meant to execute through an ECN. Currenex, through its executable streaming prices model, is another company making headway in retail ECN trading. If a broker signs on with Currenex they will have true STP-NDD accounts available for their clients,” he claims.

ECN or not ECN?On what factors may ultimately govern whether a trader should consider using a forex ECN platform or not, Zagara states that while some traders, when delivered a true ECN product, enjoy the liquidity and volatility of these feeds, they are sometimes quickly overwhelmed not only by the commission charges, lower leverage, and higher balance required, but especially with the less user friendly trading platforms that allow you to trade on it. Zagara comments: “That reason led us to develop Pathfi nder Trader, which includes trading on different ECN’s but delivered on a front end with the most advanced features, such as, powerful charting, auto execution, back testing, pattern recognition, and any

other advanced functionality you would expect from a modern trading platform.”

Vedikhin comments: “At Alpari (UK) we believe that over 95% of forex retail trading will go through ECN’s within the next fi ve years, but there are some obstacles in the way. The fi rst is that ECN trading is often too expensive for the majority of retail traders. Account opening requirements are usually much steeper compared to traditional FX trading, while leverage is much lower. The other obstacle is complexity. ECN’s often come across as too complicated and ‘institutional’ for retail traders. We believe that over time ECN trading will become progressively simpler as users become more informed and educated about its potential. Cost of entry and complexity are both obstacles that can be overcome.”

While Ditlove notes: “We would obviously argue that not using a true ECN platform is at some point detrimental to the trader, but there are still people who view it differently. Our goal is to have a transparent display system that prohibits games, and for some people that have been around a while, the importance of that is lost. Can they make the argument that with a fi xed spread, no-commission model it is easier to know what you’re getting? Maybe. Is it cost effective and better in the end? I would question whether that is the case. Simply stated, transparency in a market place brings effi ciency and effi ciency brings value.”

Ross Ditlove “There are now a lot of brokers that claim to be FX ECNs

with MT4, but we review what they are claiming and know that at best, they are simply routing orders out to one destination and again failing the transparency test.”


ECN/STP ServiceThe FXOpen ECN/STP service, available since late 2009, bridges top liquidity providers into one MT4 platform offering an ECN price feed and ECN/STP execution. The ECN amalgamates quotes from a wide variety of sources. The Level2 window on the demo account shows just the best bid/ask for each currency, whereas the best bid/ask for the live accout shows a “fi ve deep” band, with liquidity and volume at that price.

Pricing, Spreads, Liquidity Banding and Pair Coverage Pricing is clearly competitive. During the main

sessions, pricing as low as 2 pips for GBP/USD was typical in the lowest volume band going upto 6 pips in the highest band shown. For the EUR/USD the spread was at half a pip in the lowest band going upto fi ve or six pips in the highest band. 22 pairs were covered at the time of writing.

Currencies covered and best bid/ask at miniumum size (which is what most customers deal at) spreads shown at the time of writing include (at lunchtime European time zone on a typical trading day) AUD/JPY 2.5 pips, AUD/NZD 6 pips, AUD/USD 0.5 pips, CAD/JPY 2.5 pips, CHF/JPY 2 pips, EUR/AUD 1.5 pips, EUR/CAD 2 pips, EUR/


FXOpen – now providing a new MT4 ECN service

SPON

SORE

D ST

ATEM

ENT

Incorporated in The Republic of Mauritius FXOpen boasts 137 thousand active “Standard Accounts” and over 85 thousand active “Micro Accounts” with over $65 billion in monthly turnover. Its clear that FXOpen strives to provide a professional level of service many brokers reserve for larger customers. Now FXOpen has added an ECN/STP solution to is range of Metatrader services, making its offering even more attractive, as well as a new money management platform called PAMM.

CHF 1.5 pips, EUR/GBP 1 pip, EUR/JPY 2 pips, EUR/NOK 15 pips, EUR/SEK 18 pips, EUR/USD 0.5 pips, GBP/CHF 3.5 pips, GBP/JPY 2.5 pips, GBP/USD 1.5 pips, NZD/USD 2 pips, USD/CAD 3 pips, USD/CHF 1.5 pips, USD/JPY 0.5 pip, USD/NOK 15 pips and USD/SEK 19 pips.

Customers wishing to fi ll orders upto $100 million may do so without re-quoting. As is standard with all professional ECN dealing services, larger orders are subject to bigger spreads in the higher liquidity bands.

For the ECN account, minimum trade size is one mini lot and the minimum initial account funding size is $1000. This compares with a $1 account size for non-ECN micro lot accounts. Commission charged is based on turnover for ECN accounts at $35 per side per million units of currency traded which decreases to $23 per side on certain volumes/deposits. Customers can deposit money to FXOpen via WebMoney, Liberty Reserve, Alert Pay, Perfect Money, cashU, c-gold.com, or regular wire transfer. FXOpen also provides accounts for Islamic traders with Sharia compliant swap free accounts.

PAMM serviceFXOpen’s multiple account manager service, called PAMM (Percentage Allocation Management Module),

allows managers of multiple forex accounts to manage these accounts from one master account. An unlimited number of Investors can join under one Manager account. The account manager can effectively organize all of his clients together in one MT4 terminal. FXOpen point out that PAMM is an effective solution for allowing investors to keep control of their accounts in terms of deposits and withdrawals, and authority to trade and money managers get their disbursements automatically to their accounts. FXOpen also shows the performance charts, typically showing account equity, daily profi t, daily gain, total gain, max draw down, max relative profi t, Sharpe ratio, etc. Performance charts provide an unbiased and many-sided analysis of the Manager’s past performance and trading style. The information is presented in an easy-to-understand manner, so both sophisticated and novice investors will fi nd it easy to choose the best manager for themselves.


Or more information on FXOpen and its range of trading products please contact [email protected]

RETAIL e-FX CLIENT

Today, both handset manufacturers and network operators are battling to keep up with user demand for more applications for both

business and pleasure. This year will see the fi rst mass-market Smartphones for the lower end of the market, and the real crunch for network carriers, who are now

fi ghting fi res on the network as data usage chews up valuable bandwidth. Yet the industry is still in awe of the iPhone. Why? Because it came fi rst, because it provided a brilliant end user experience, and because Apple is a marketing machine that has trail blazed the way for end user awareness of Apps and how to use your mobile phone as the ultimate status symbol. The concept of the App is now pervasive in developed countries around the world. Even the world of foreign exchange is now available as an icon. Click and trade.

Forex AppsForex Apps are becoming more and more popular on the iPhone. Forex mobile applications are making inroads into application storefronts across the marketplace, comments Michael A. Moschides, head of institutional and partner business, worldwide, at Easy-Forex. He says: “The most popular platforms being the iPhone, Android and BlackBerry. As of today there are over 50 different types of FX applications available to traders on the iPhone alone.”


The iPhone App: a powerful new tool for Retail Forex

With the advent of Apple’s iPhone, the entire mobile industry changed. From having mo-bile handsets to make calls on and send text messages, users were able to use their mobile device to access the internet, download ap-plications for both work and play, and discover new ways of doing business and staying in touch with each other. Communication has en-tered a new era thanks to Apple’s development, as every other major handset manufacturer quickly followed suit and began developing new ranges of Smartphones and launching applica-tion stores, while network carriers bundled data packages onto voice and text tariffs as end us-ers became more familiar with the mobile web.

By Heather McLean

Forex On The Go App.

On the signifi cance of allowing FX to be tradeable on mobile handsets, Cole Flournoy, CEO, Forex On The Go (forexonthego.com), comments: “Mobile trading means traders can go about having a ‘normal’ life. It means you are no longer trapped behind a computer screen; it allows you to go out and about and still be able to stay up to date on the market and place and close trades.” While Sergey Popov, senior web developer at Dukascopy, Swiss Forex Marketplace, says: “In general these applications are quite handy when it comes to the concept of staying connected or informed of situations as they arise and these tools can prove to be crucial for many traders. They are particularly important for dynamic and very active forex traders who want to do everything, everywhere at any time. Even laptops are not always accessible or easy to carry everywhere. Your mobile phone is always with you!”

A supplement to desktop tradingYet Amy Lo, marketing manager at iTradeMobile, adds that she does not see mobile FX trading taking over or working completely independently from PC-based trading: “It has always been our philosophy that our iTradeMobile platform is a supplement to desktop trading software. It was never our intention to replace desktop trading software. Honestly, there is still a combination of hardware and software limitations on the mobile that means we feel all forex trading analysis should really be done on a computer; with faster processing power, a bigger screen, and the availability

of more software, the trading experience is so much better on a computer.”

Lo continues: “As forex is virtually a 24 hour market, not everyone wants to be stuck at home all the time just because they have some positions opened. With the availability of iPhone and other internet-ready mobile phones, we feel confi dent that we can give these traders their freedom back, by providing an


>>>

DealBook trading App

Cole Flournoy“Trading on an iPhone is already creating very

substantial increases in trader activity.”

RETAIL e-FX CLIENT


intuitive mobile trading platform that enables them to perform critical trading functions while they are on the road.”

Why iPhone?On the pull of the iPhone, Lo states: “The beauty of the iPhone is it provides a level battlefi eld for all software vendors, big or small, to penetrate the forex market. Success will belong to those who can provide an innovative solution to forex traders, and be able to go to market quickly to get marketshare. As of now, all the brokers either have released or are planning to release a mobile platform to retain their customers. But they need to keep in mind that technology is advancing on a daily basis, and they are forex brokers after all. So instead of trying so hard to keep up with the latest technology, we believe it is in brokers’ best interests to partner with software vendors to provide joint venture solutions. This allows the forex brokers to concentrate on growing their forex business, while leaving it to the software vendors to come up with the next generation platform.”

Forex and mobile technology need to go hand in hand, comments Lo. “Users have high expectations on what they can do with their iPhones already, while on the move. If they can only trade forex at home, they will give it up and do something else. So if the industry as a whole wants to stay competitive against stocks, funds, bonds, and commodities, it needs to keep up with mobile technology. Being able to trade

everywhere also promotes more transactions.” The iPhone is particularly interesting as a platform for development because of its inherent capabilities as a device, says Popov. However, he adds: “On the other hand, some choose to offer limited functionality in order to reach the majority of users over devices other than the iPhone. For our iPhone projects we knew exactly what we wanted to create, and also our creation possibilities and limits. If this would have been created for all types of phones, general considerations would have been imposed, forcing certain concessions, especially regarding connection speed, interface design and quality of data. General applications target every mobile phone and therefore they have to consider slower devices and others with less capability.”

Apps mean usersThere are many iPhone owners who trade forex currency, but there are even more iPhone owners who do not know what forex is. Lo says the Apple App store does not only serve as a distribution channel for installing forex iPhone Apps, but is also a marketing channel, exposing the ever-expanding iPhone user base to the world of forex. “The technology of iPhone certainly helps drive the future of the forex market,” she notes.

Flournoy states that iPhone Apps for trading are encouraging more FX retail traders to start up: “Trading on an iPhone is already creating very

Sergey Popov “In general these applications are quite handy

when it comes to the concept of staying connectedor informed of situations as they arise”

Amy Lo“It was never our intention to replace

desktop trading software.”

>>>The iPhone App: a powerful new tool for Retail Forex


substantial increases in trader activity. Having a mobile device in your pocket that can allow you to monitor and trade your account allows traders to feel

more comfortable trading, when they otherwise would not. For example, we’ve found a very large portion of people don’t trade solely because they cannot monitor their orders while they are at work or school. Now with Forex On The Go and the iPhone, these users can suddenly trade, and manage their account at work or school, right from their iPhone.”

iPhone Apps for trading may encourage more FX retail traders to start up due to the wider publicity, agrees Moschides. He states: “We expect mobile App stores to attract new traders from around the world that don’t rely on desktops as a main communication tool, but rather their mobile device. The importance of allowing FX trading from a mobile device is the transition of enabling traders to trade on the go. Mobility removes walls and restrictions created from a desktop requirement, while enabling traders to monitor market activities and accounts anytime and anywhere.

Moschides continues: “Again, it has the potential for bringing those individuals without desktops to the FX marketplace, creating a larger market opportunity. The signifi cance of this trend is we are bringing FX traders the same mobile opportunities and conveniences that traders in other asset classes, particularly equities and futures, have had on handsets successfully for many years now.”

However, Moschides says that while the publicity of an iPhone App may spark interest in new users, it will not necessarily result in hordes of fresh faces in the market. “Our expectations are that users will continue downloading mobile applications primarily based on internet research and mobile application reviews. Thefi nancial markets, from equities, options and futures to forex trading, involve substantial risks, and we see many current clients using the iPhone App as a supplementary tool. Being able to make timely trades is what it’s all about. And that’s exactly what Easy-Forex iPhone App allows. That’s a huge benefi t to traders. By providing resources and support services here, we see client relationships growing even stronger.”

Popov concurs: “Investors may not necessarily base their decisions of choosing their ECN, bank or FX broker because of their iPhone application. Yet an attractive platform can be an additional added value service and be considered as a good support tool.”

What can you do?“Application types range from FX news, information tracking and education through to real time trade

Michael A. Moschides “As of today there are over 50 different types of FX

applications available to traders on the iPhone alone”

RETAIL e-FX CLIENT


analysis and execution,” continues Moschides. “For example, the Easy-Forex mobile application enables traders to monitor live currency rates, view real time charting, receive market news and review FX calendars as if sitting at a desktop. We also give access to our proprietary tool, Inside Viewer, which provides unique market insight into the popularity of currency pairs being traded, average stop-loss and take profi t orders. The variety and availability of these applications enable traders of all experience levels to access the FX market from a mobile smartphone, which is one of the fastest growing marketplaces in the world.”

The iPhone is truly a ground breaking device that has set the bar for all other mobile devices to beat, says

Flournoy. With ‘Forex On The Go Lite’ (available free from the App store) you can have full access to any MT4 account and place and manage all order types, says Flournoy. He adds: “You can even open and close orders while viewing a live tick chart, just like MT4 on a desktop computer. Forex On The Go Lite is one of the top listed Forex applications on the iPhone because of its robust features and also because it’s ease of use. Even users that don’t have an MT4 account can still view large charts, keep up to date with economic news events and use the integrated tools and calculators.”

Flournoy says that with Forex On The Go Lite, in addition to executing live orders, users can obtain the Easy-Forex Inside Viewer TM

Forex On The Go App

>>>The iPhone App: a powerful new tool for Retail Forex


and video news synchronised with the Dukascopy TV web channel. “We made sure that the application was easy to use by the general public and can connect anywhere, through any type of internet connection,” he notes. Dukascopy is preparing a second App for imminent launch, which will exclusively cover trading activities. The new App will be free service to Dukascopy clients.

“Dukascopy’s developers and IT engineers create all IT products in house,” says Popov. “This saves time on communication with third party developers and adds a competitive edge in the creation process.”

iTradeMobile is an Apple iPhone App that provides a mobile trading platform to FXCM, dbFX, and MF

Global FX account holders. Lo notes: “The idea of developing a mobile trading platform has long been planned by our team since the initial launch of Apple iPhone 2.0; but realistically the mainstream GPRS/EDGE mobile network was too slow, so we felt the market was not ready for our product. We continued our production development until the introduction of iPhone 3G. With 3G, there is enough speed to ensure critical trading functions

can be executed in a timely manner. That is when we released our product to the general public.”

Trading and Non-trading AppsGary L. Tilkin, president and CEO at GFT, comments that his company is experienced with the two primary types of forex Apps available on the iPhone; trading Apps and non-trading Apps. He says a trading App offers the convenience of taking your forex dealer with you, no matter where you are. Tilkin states: “Trading is a dedicated endeavor, but traders don’t spend all of

latest FX news, trade real and demo accounts, view account balance and summary information, view and modify existing positions, change stop loss and limit, view, create, modify, and delete entry orders, view closed transactions and take advantage of charting capabilities.

On what type of FX trading Apps are being made available on the iPhone, Popov says Dukascopy’s fi rst application, Swiss Forex, includes all related market info

Dukascopy Swiss Forex App

RETAIL e-FX CLIENT


their time at their desks. Traders are pulled in so many different directions, but now they will have more time because they can trade effi ciently with our new DealBook trading App,” Tilkin notes. “The benefi t is that you have the opportunity to not only track the markets, but you can check and maintain your trades. And, with the latest version of the iPhone, you receive improved security and data delivery speeds so you feel confi dent about price and trade execution.”Many of the primary features offered in an online trading software platform can be found within GFT’s DealBook iPhone App. For example, the company offers a free Dow Jones newswire service with the App. Users can also view available equity, margin requirement, fl oating P&L, as well as margin details. The orders window provides the details as they relate to trades, and users can also close and protect open positions.

Tilkin adds that a non-trading App typically offers the latest markets news, commentary and technical analysis. In addition, some Apps even offer real time price charts, an economic calendar and trade signals. GFT has tried to incorporate as many features of its forex portal into its FX360 iPhone App, as it can. FX mobile applications are being offered by trading platform providers, like Easy-Forex, coupled with banks with forex services, FX education fi rms and FX charting and signal sources. The actual development of these applications range from in-house technical teams, mobile technology partners to outsourced third party programmers.

All of iTradeMobile product development is done with its internal development team. Lo says the company feels that having a dedicated team is critical in terms of providing quicker go to market features, making emergency releases for new regulatory support, and most importantly to arm traders with technical knowledge and support.

App pricingDevelopers can set there own prices and use various mechanisms for charging for Apps and App usage, depending on the nature of every product. On free Apps, some developers sell ad space within the application. Since Apple has released the iPhone OS 3.0, it has been possible to offer in-App purchase service features, allowing developers to sell additional services and content. This option is rarely used at the moment, however. Popov comments: “When

Gary Tilkin “with the latest version of the iPhone, you receive

improved security and data delivery speeds so you feel confi dent about price and trade execution.”

DealBook trading App

The iPhone App: a powerful new tool for Retail Forex


it comes to brokerage fi rms and other iPhone FX products, most fi rms tend to have the same approach as Dukascopy and offer their complex applications free of charge as a form of added value service tool.”

FX mobile applications are divided between free and fee-based models for download and use. Currently most FX trading applications, those with live trading features and functionalities, are offered to traders free of cost.

Moschides comments: “It is expected that billing methods within mobile App stores will continue to evolve and adjust to marketplace demands. FX application providers will monitor such developments and execute different price strategies, whether free, one-time purchases, recurring monthly subscriptions or even pay for single use. The potential for a free lite-FX application, complimented by a premium

application that requires a monthly recurring subscription model, is a trend that has already been established within the equity markets; a trend that when applied to FX can be successfully achieved.”

While Lo adds: “In terms of pricing, we try to keep it simple. Eligible traders may actually subscribe to our iTradeMobile platform free of charge if they open a new trading account under our referral. Others who are not eligible, like the Micro account holders, may still sign up through our monthly subscription program, currently priced at US$7.95 per month.” Forex On The Go Lite is free to download and the live trading features are also available free by setting up with one of the fi rms associated brokers (FXCM Ltd, Forex.com Ltd, IKON Royal, AVA Fx, and more coming soon). Users can also use Forex On The Go to trade with any other MT4 broker by paying a monthly $19.95 fee.

Smartphone futureOn where iPhone Apps are going, Popov notes: “We will need to see the evolution of these technological devices, but again the current capacities exceed all the expectations and conclusions made several years ago. We should also bear in mind that as mobile phones are becoming more powerful, trading applications are becoming more attractive, comprehensive and sophisticated. “We have already displayed the types of services that could be included ranging from live news, quotes and charts to videos all integrated in one simple operating system,” Popov adds.

New and updated FX mobile retail applications are coming to the marketplace regularly. Trends within the FX market, trading technology developments and mobile platform advancements will make new and interesting applications possible. Moschides comments that the upgrading of existing mobile applications to offer traders identical trading features and functionalities of desktop applications is anticipated.

“With the right data plans, advanced billing platforms and mobile video streaming standards, we foresee the merging of real time streaming FX video market commentary with advanced technology trading. Serious traders rely on accurate information and innovative trading tools; we expect mobile Apps to model and expand these traditional requirements, while continuing to bring forward options to the iPhone and mobile smartphones across the board,” concludes Moschides.

Editor’s note: e-Forex will shortly be launching a major new Mobile FX Trading Resource Center on the e-Forex website where visitors can access a wide variety of forex trading Apps.Forex On The Go App

Dr Omari when was Prime Forex established and what main fi elds of expertise does the company specialise in providing?Prime Forex started providing online trading services in 2005. We take pride in delivering a unique and individualized service to Forex traders worldwide. Prime Forex is a fast-developing company with a business focus on the provision of fi nancial services to traders and investors. Our company now offers a wide range of fi nancial products including FX, Metals, Futures and CFD .

What benefi ts do clients get from choosing to do business with Prime Forex?If you are a client trading with Prime Forex you gain a lot of benefi ts including high leverage of up to 1:500 and spreads as low as 2 pips for all majors. You also benefi t from fast execution with daily analysis and commentary focused on the FX market. Prime Forex also has a client member area on our website which

helps clients to manage their deposits and withdrawals and enables them to send any request in a very secure way without wasting a lot of time.

What types of account do you offer to your clients?The account types we offer are designed to suit the needs of all types of trader and institution. Prime Forex currently offers four types of account: Mini, Standard, Premier and Institutional.

Your trading platform is based on the popular MT4 platform. What advantages does this platform give your company in terms of the quality and level of service you are able to offer clients?The MT4 platform is one of the best online trading platforms which offers many advantages to our clients including:

• a friendly user interface with multi-lingual support

• built in help with comprehensive trading terminal user guide

• opportunity to run operations with different fi nancial market instruments (FX, Futures, CFD) in real-time mode


Prime Forexoffering a unique and tailored service for forex traders worldwide

e-Forex talks with Dr Abdel Rahman El Omari, Regional Manager of Prime Forex LLC, (www.prime4x.com) a leading online FX trading service provider which is based in Dubai.

BROKER STUDY

Dr Abdel Rahman El Omari

• operations’ security policy (128 bit encoding is used)

• unlimited number of charts which can be plotted at various time intervals

• full set of technical analysis tools provided

• the possibility to create and use Scripts which enable automatic execution of custom programmed trade operations by only one instruction

• the opportunity to manage a local database of quotations history with editing and export/import functions

• the opportunity to receive online fi nancial market news;

• a useful internal e-mail service

Prime Forex Mobile Trading is a unique service you have developed to allow clients to trade and manage their accounts using mobile devices. What are the key features of this service?

Yes Prime Forex offers a mobile trading platform as an additional service to clients which allows them to trade and manage their accounts in safety from anywhere in the world at any time using their PDA. Some of the key features available with this solution include:

• The ability to trade in and view prices for Forex, Precious metals, Stocks and Energy markets

• The ability to view real time account summaries and historical account information.

• Support for 30 technical indicators, including Moving averages, Bollinger Bands, Parabolic

• The ability to receive sound alerts which inform about changes in the market.

• The ability to place Trailing Stops

• Multi-language support which allows switching between languages of the mobile terminal interface and working with all features of the terminal in a native language.


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Does Prime Forex charge any fees?

No Prime Forex doesn’t charge any fees or any hidden commissions. We only charge clients the fi xed spread that we offer over all the pairs.

In what ways does your fi rm assist novice traders or beginners who are just starting to trade forex?

Prime Forex assists novice traders and beginners by giving them access to the extensive educational sections of our website. These are full of valuable information and tips on trading strategies and the psychology of trading.

We also provide all of our traders, both expert and beginners, with commentary three times a day illustrating the support and resistance points for more than 12 currency pairs and where to buy or sell as well as where the stop loss or take profi t should be.

What facilities does Prime Forex offer for traders and investment managers who need to manage multiple accounts?

Prime Forex now offers a MultiTerminal solution which is intended for the simultaneous management of multiple accounts. It is very helpful for those who manage investors’ accounts and for traders working with many accounts simultaneously.

MultiTerminal permits users to work with any amount of accounts, receiving quotes for any symbols, placing

all types of orders and viewing history for all accounts. Moreover, within this application fi nancial news can be delivered in a real-time mode.

The new terminal delivers powerful functionalities that facilitate more effective trading with multiple accounts and offers exceptional usability.

The program interface is similar to that of the Prime Forex Client Terminal. It is a very simple solution to use and any trader using the MetaTrader 4 Client Terminal can easily get acquainted to this new program within a few minutes.

What partnership programmes do you provide for companies and other brokers who are interested in working with Prime Forex?

Prime Forex offers three types of partnership which are as follows:

- An Introducing Broker (IB) programmeOur Introducing Broker (IB) program allows brokers to expand their client base and revenue streams by offering their customers access and education with the Prime Forex platform.We support our IB partners by offering our expertise on how to run an IB offi ce, we help in training of IBs’ staff, and we conduct joint seminars to promote IBs’ business.

- A White Label solutionThe client interface can be customized to your needs.

Prime Forex – offering a unique and tailored service for forex traders worldwide.


It includes full charting capabilities and position monitoring functionality.

In addition, our margin monitor screen provides a unique real-time histogram of client account information, as well as real-time customer reports that are customizable for any trade period.

We can also provide customers with a dealer/back offi ce interface, allowing them to monitor their client’s activity and print key reports.

- A Friend Referral programmeThis encourages traders to invite their friends and colleagues to join Prime Forex and offers rewards and bonuses for their loyalty to Prime Forex.

Prime Forex is very focused on satisfying the trading support needs of your customers. What support services do you offer which they particularly value?

Prime Forex won the Best Forex Broker 2009 Award via online voting that took place at the Forex Expo held in Dubai, on November 17th last year. This award refl ects the trust clients have in us.

We do our best to repay their support by offering a wide range of online customer support services including a regular Newsletter and comprehensive messaging and e-mail services all designed to make contact with our clients more effective, swift and easy.

What steps are you currently taking to expand the range of FX trading tools and services that you offer?

We are now preparing to introduce the new MT5 Platform to compliment the existing MT4 Platform. Our IT department is also working on developing the Prime Forex web based platform which will help clients to trade from any PC without having to download the software application.

Looking ahead, where do you see opportunities to grow the client base of Prime Forex and achieve even more success with the company?

The key objectives of Prime Forex have always been geared towards offering a secure and reliable online trading environment for our clients whilst providing them with one of the most competitive and feature-rich trading environments in the industry. We aim to continue to offer a wide range of fi nancial solutions focused on addressing the needs of large corporations, institutional investors and private clients.

Peter when did Symate Capital commence operations and how is the company organized?Symate Capital AG was founded in May 2009 and is based in Zurich. My co-founder, Jannis Nitsios and I commenced operations in October 2009 by launching our fl agship fund: Symate G-7 L/S currency fund. The Zurich based legal entity is the investment advisor to its subsidiary Symate Capital Ltd (Cayman) which is the investment manager of the fund. We have decided to go for an SPC (segregated portfolio company) structure which will enable us to add more funds in the future and therefore offer diversifi cation to our investors via new strategies, expanded currency underlyings and other time frames. Symate Capital is also in the position to offer tailor-made solutions via Managed Accounts.

Who are the other key principals of the fi rm and how do you split your day to day responsibilities?The co-founders are myself and Jannis Nitsios. I am responsible for Engineering & System Development trying to exploit new technical trading systems, methods and tools. Together with Jannis we are both heading the Portfolio Management division with the main focus on trading and risk managing the Fund as well as Managed Accounts. Another key person is our Risk Offi cer, Patrick Haag. Patrick has developed a proprietary risk management and reporting tool that delivers mark-to-market valuations and VaR calculations. He is also overseeing our trading activities and controls our risk parameters.

Both you and Jannis previously had very successful careers in trading and portfolio management. Why did you decide to take part in setting up Symate?We had both been working for two major investment banks in Switzerland and were very successful in our roles. We are fascinated about FX and took a major step by founding Symate Capital: a start-up hedge fund focusing on a purely systematic trading approach within

the FX space. By having founded our own company in one of the most challenging times in the fi nancial sector we actively took the risk associated with this decision, but also underscored our confi dence as well as our long term orientation. Being part of such a young company is extremely exciting in all respects. We are fully committed to what we do and will do our best to achieve our mission.

What factors do you particularly like about FX as an asset class?The growth in foreign exchange shows that it has almost been unaffected by the global credit crisis. Indeed, many of the world’s largest banks are focused on FX as an asset class with continued growth while other asset classes decline.

What we particularly like about FX is:


TraderTalkWith Peter Schabus, Co- founder of SYMATE Capital AG

Peter Schabus

TRADERTALK

high liquidity, low correlation to other asset classes, almost no opening gaps (stop loss management), narrow spreads and is 5 x 24h tradable.

How would you describe the fi rm’s mission and currency management style?We would best describe our mission in these words:

“By adapting our disciplined way of strict money and risk management we attempt to limit drawdown and to deliver asymmetrical risk-return characteristics. By

taking long/short positions in the most liquid G-7 currencies’ spot market we aim to generate alpha in different business and/or market cycles.”

Our currency management style can be taken from our name:

SY = SYstematicalMA = MAthematicalTE = TEchnical


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Meaning we are systematic traders with a pure technical approach. We do not rely on any fundamentals, news or any macroeconomic events.

What currency products does Symate Capital offer to investors?We offer to our investors the opportunity to gain FX exposure, either via managed accounts or directly via our fi rst fund which is called ‘Symate G-7 L/S currency fund’. The aim is to grow the current asset base and strengthen our product offering by adding more funds to our SPC structure. The vision is to have a complementary product offering and to trade a portfolio of strategies which offer true diversifi cation.

What sort of investors are you seeking to attract?Our current clientele consists mainly of High Net Worth (HNW) individuals and independent Asset Managers. However, one of our long-term targets is to attract institutional investors. In order to reach this target we need to grow our asset base at a reasonable time. We are convinced that the FX market will attract investors and that from an asset allocation point of view the market share will increase over the coming years.

In what ways do you go about achieving minimum draw-downs and asymmetrical risk-return characteristics?Our main focus lies on risk- and money management and not on achieving the maximum possible return with the highest risk involved. We are very risk-averse traders and trade on multiple time-frames from intraday to swing trading. The models use a volatility fi lter which ensures the correct weightings between the different time layers. Thus, we adapt our risk parameters / risk per trade according to market volatility between the multiple time-frames. Furthermore our proprietary momentum indicator signals pretty fast if momentum is vanishing. If the indicator signals a loss in momentum we might close out the trade soon after opening it and wait for the next entry signal where risk / reward is in our favor.

How do you balance your trading between technical and systematic methodologies?Our trading is 100% technical. We trade purely off the charts and look for patterns on the price itself,

but also on our proprietary indicators. In order to get rid of the noise during

major fundamental

Jannis Nitsios

Patrick Haag

TRADERTALK


announcements we have created an indicator which keeps us out of the market half an hour before and after such events. This is particularly helpful for trading the short-term intervals. On the longer time frame we almost trade 24 hours. There is just one overnight time slot in Asia where we ignore any new entry signals. Nevertheless, existing positions will always be secured with an initial stop loss or if already in profi t with a trailing stop.

Our approach is 95% systematic with a clear and precisely defi ned set of rules. The systems tell us where and when to enter and exit a position and what stop and position size to use linked to the current market volatility.

What components make up the formula for your proprietary trading signal indicators?Well, as you know most if not all technical indicators lag price. We have tried to fi nd a formula which eliminates the lag as far as possible and reacts to price changes in a quick way without too much noise. The main component of the indicator is historical and actual price action on which we calculate some Standard Deviations and Volatility measures. We have combined momentum, trend and volatility in one indicator to prevent an information overload on our charts by using multiple indicator panels. Too much information is just misleading and slows down your decision making

process. Therefore, our indicator is able to show trend direction, momentum and how stretched the current price action is.

Do you use FX algorithms as part of your program trading activities and if so, are these designed and built in-house of supplied by external providers?As of today we do not use FX algorithms in our daily trading. But we plan to do so in the not too distant future and are in talks with some providers. We are defi nitely following the developments in this area and are aware of the added value. The capital investments into such technologies are contingent on our asset growth over the coming years.

In what ways do you leverage trading technologies to help you deliver more stable alpha returns?We mainly trade electronically over platforms with very tight and competitive spreads. One of our next challenges will be to evaluate an in-house order book. The signals generated by the trading systems will be watched in-house until the price moves to our target entry or exit. A pending order will then be executed at market best. We simply want to avoid all of our signals (i.e. orders) becoming visible and then being watched by our banks/brokers.

What steps do you take to limit trading risks?As previously mentioned our systems tell us everything we have to do. To limit trading risks anything in the investment process is checked by two persons – from signal to order book status and risk parameters. We have

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built an in-house position keeping system which issues ‘red fl ag’ alerts if one of the risk parameters is broken. Every single trade is limited with a volatility adjusted hard stop-loss and trailing stops are moved along to protect gains. The sum of our net open positions does not exceed 3x the portfolio’s total equity and we are avoiding excess concentration risk.

Do you think some currency managers tend to ignore operational risks and how do you go about mitigating these?We are trying to outsource all non-core related business activities which allows us to focus on our trading competences. A ‘red-fl ag’ report has been put in place linked to open positions and ensuring correct profi t/loss attribution. We have an an independent and accredited fund administrator who is reconciling our trade activities on a daily basis and also calculates the NAV of the fund on a weekly basis. On the other hand, we have a solid custodian where approx. 70% of the assets is held in cash.

Steps are being taken in various parts of the world to signifi cantly increase the regulation of the capital markets, which may also include OTC derivatives. In what ways might increased regulatory oversight effect the currency management landscape and your own activities?Regulation is the important issue of 2010. One key thing to realize is that regulation will be by EU-wide rules and will be done by EU regulators. The proposed Alternative Investment Fund Managers (AIMF) Directive will impact the hedge fund industry. However, at this stage the effect of this on our business is still vague. Especially as the proposed directive is built on the proposal to regulate the hedge fund managers rather than the funds. We are, of course, following the developments on the regulatory front very closely.

Looking to the future how do you plan to expand your business and the value it offers to investors?Well, if talking about the future of Symate we should probably differ between Business Development and new Trading Systems Development.

Business Development:Our mission in life is performance. Symate is geared to deliver the best risk adjusted returns. What all investors want is capital protection and to maximize returns. In our view, hedge funds are able to satisfy the demands of capital preservation because they can actively manage the downside risk compared to long-only funds. What happened in 2008 made investors very nervous about markets in general, but they are defi nitely starting to re-invest. For 2010, we believe the industry will recover and will be starting to gain market share as investors realize the value it provides. Our strategy returned 14.19% net of fees in 2009 at an annualized volatility of 8.06%. Of course many long-only funds have done better than hedge funds last year, but investors recognize

that hedge funds will have much less volatility in the long run. In this context, we will try to match our investors’ needs and offer them effi cient solutions to gain exposure to the FX market – either via a direct investment into the Symate G-7 L/S currency fund or via Managed Accounts.

Contrary to long-only investment strategies, those based on trend-following programs are currently facing a tough market environment. Especially due to the high intraday volatility which is challenging for the trade management of a position. During the end of the year 2009, developing trends got repeatedly interrupted by short-term corrections. This is the reason why our fund fi nds itself currently in a draw-down phase. Nevertheless, we are convinced that systematic, non-discretionary investment and risk management processes will lead to out-performance over discretionary investment styles in the long run.

Trading Systems Development: We are currently working on a new trend-following model and another trading approach where we eliminate the time scale from trading. The concept of the trend-follower is to trade off the daily charts and capture the main trends of an underlying currency basket during the year. The system will be fully automated and will also consist of Emerging Market currencies. The second project we’re working on is to eliminate time from trading. We’re trying to focus on pure price action.

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