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FLASH FRIDAY: FX trading platforms in a nutshell


FLASH FRIDAY is a weekly content series about the past, present and future of capital markets trading and technology. FLASH FRIDAY is sponsored by Instinet, a Nomura Company.

In the August 2012 article titled “ECNs Hot”, new exchanges kept popping up. Around this time, the number of new exchange platforms exploded and traders had access to faster and more transparent transactions.

It’s been 10 years since then and ECN brokers (Electronic Communication Network brokers) continue to be among the fastest emerging brokers in FX. But can the market support all available sites?

Howard Tai

Howard Tai, Director, Frontline Global Markets, said that in the near term, the future of FX trading platforms is “looking bright” as both the continued increase in electronic/algorithmic trading since the Covid-19 pandemic, in amid the return of FX market volatility had all drawn commercial interest to the forex market.

“The recent fall in cryptocurrencies (i.e. Crypto Winter) has also played a role in forex market returns, taking some of that limelight back into its trading/investment portfolio,” he said. -he declares.

FX trading platforms are increasingly differentiated based on the quality of their workflow, according to Francois Lamy, Chief Strategy Officer, FXall, Refinitiv’s FX platform.

“As buy-side institutions carefully consider and partner with these platforms that can accelerate their digital transformation and journey to appropriately sized and more productive trading operations,” he said.

Pierre Perras, product manager at Finastra, said simplification is key to delivering the best service to customers. “Access to the best liquidity must be accompanied by smooth service delivery,” he said.

TMS-integrated platforms (such as eFX for Kondor) have the advantage of providing seamless integration with financial institution solutions, he said.

Types of Forex Brokers

For retail trading, there are four different types of FX brokers that have a different way of handling trades and executing orders: no-dealing desk, market making (or deal desk), straight-through processing (STP) brokers and ECN brokers.

Thomas Moser, Forex Platform Manager at Interactive Brokers, said that in general the differences between STP and ECN brokers are “small, and the terms are sometimes used interchangeably.”

“ECNs often provide access to a pool, in addition to routing to existing pools where customers can match customers using that ECN,” he said.

Moser said the benefits of the ECN model include quick access to additional liquidity with less market impact.

“Interactive Brokers has always offered an ECN-like Forex platform for this reason, as well as to provide transparency at low cost,” he said.

Hitesh Mittal, BestEx Search

Meanwhile, according to Hitesh Mittal, Founder and CEO of BestEx Research, institutional traders execute as follows: Bilateral (Part A) (client to dealer, eg Citi, Deutsche Bank, JPMorgan, etc.). Licensees earn margin on; to an ECN (e.g. Reuters, EBS, FastMatch, etc.). Mittal said that to run an ECN they need a prime broker in the middle (e.g. Citi). The order flow to an ECN is Client -> Prime Broker -> ECN.

Mittal explained that in an ECN, transactions take place between two Prime Brokers and the Prime Brokers face their clients. “Each Prime Broker can say which Prime Brokers they want to interact with. So if you are represented by a smaller prime broker, you might get less liquidity,” he said.

Finally, dealers can hedge their risk on ECNs themselves by trading among themselves, or directly among themselves or by trading with electronic liquidity providers (e.g. XTP), Mittal said.

He added that on the institutional side, the trend is to use algorithmic block order execution rather than manually trading with multiple dealers.

There are three types of algorithmic execution model, according to Mittal.

  1. dealers themselves. The problem here, according to Mittal, is that dealerships cannot effectively access liquidity from other dealerships and would provide better liquidity to a customer than to competitors. “So while algorithmic execution is convenient, it can compound the liquidity problem in this model,” he said. “The other problem is that the resellers offering algorithms act as an agent and also as a reseller, so although they all claim to have China walls, there is the problem of information leakage and conflicts of interest,” he added.
  2. Internal Algos: A handful of top hedge funds build their internal execution algos so they can reap the benefits of having an algorithm while addressing liquidity issues. The problem, however, is the cost of building in-house algorithms and maintaining the algorithms and that’s why only a few top-tier hedge funds are opting for this model, Mittal said.
  3. Dealer Neutral Algos: This is the model that BestEx Research belongs to. “This solves liquidity issues and eliminates the cost of internal construction for institutional clients,” Mittal said.

Future trends

In terms of future trends, Moser expects some consolidation of FX platforms in general, due to regulatory requirements, economies of scale and the need to manage multi-asset portfolios from a single platform. .

“While a Forex-only platform may have its merits, I wouldn’t be surprised if the trend shifts towards multi-asset platforms that excel at offering all asset classes, much like Interactive Brokers “, did he declare.

Perras added that in the business services world, there are established players such as Fx All, Currenex and 360T.

“Smaller suppliers could be affected if the foreign exchange market contracts,” he said.

Tai said M&A-driven activity is common across all industries, and the FX brokerage space is no different.

“Economies of scale are crucial, especially in today’s ultra-competitive world of global finance, so it’s inevitable that there will be more consolidation to come,” he said.

Tai further stated that in the long term, continued structural changes in the market will play a significant role in how the FX trading platform plays in facilitating FX trades.

“Specifically, greater transparency must shine on FX trading, along with increasing electronicization beyond Spot FX (think FX swaps, NDFs, FX options, the ability of sites to facilitate clearing of FX transactions, etc.) all play a critical role for future success in determining the viability of FX trading platforms,” he said.

Meanwhile, from an institutional perspective, Mittal believes there will be a rise in Dealer Neutral algorithmic platforms for FX.

Whereas for exchange-traded products (stocks, futures), banks can create algorithms that access liquidity in exchanges, for FX, which is largely a bilateral (OTC) product, it is essential that the algorithmic trading provider is neutral so that they can access all sources of liquidity (dealers and ECNs) on behalf of their clients and also offer all the benefits that algorithmic trading brings, he said. declared.

“That’s why we’re building this model at BestEx Research,” he pointed out.

The offering will include algorithms, smart command routers and TCAs under a single Algorithmic Management System (AMS) umbrella, Mittal said.

“Clients will be able to customize which dealers and ECNs they want to source cash from and measure performance through TCA, which is fully integrated into the system,” he said.