Buy-side peer-to-peer (P2P) FX netting service provider Siege FX went live late in February with its first members’ group, promising to reduce execution costs and minimise market impact for clients.
Given that its service has been live for only a few weeks, the firm can’t comment on how P2P trading volumes have been impacted by the market volatility and reduced economic activity caused by coronavirus.
We remove market impact and facilitate resting order rebalancing without information leakage
Marek Robertson, Siege FX
But head of distribution Marek Robertson says there is evidence that the assumption of risk has continued to shift from the sell side to the buy side in spot FX.
“This links to a similar theme around increased uptake of bank client execution algos, both of which support growing interest in peer-to-peer,” he adds.
Based on back-testing of trade data against its early adopter client group using transaction cost analysis, Siege FX reckons its clients could save more than one basis point, equivalent to about $100 for every $1 million traded, across the top 20 currencies after fees.
“This rises to almost $200 per million for less liquid pairs such as USD/MXN, USD/TRY and USD/ZAR,” says Robertson.
“Savings are derived in part from trading off a regulated mid-rate, but importantly for larger orders, we remove market impact and facilitate resting order rebalancing without information leakage.”
Breaking links
Siege FX has a combination of direct clients and those who access the service via bank execution algos, the first of which is Credit Suisse (AES FX).
Siege FX hit the market almost exactly a year after FX HedgePool, which has now matched $1.5 trillion in volume, according to founder and chief executive Jay Moore. Having started out with Standard Chartered Bank, the firm has since introduced six additional credit providers.
[Our] technology … allows banks to offer credit as a service for a fixed, transparent fee
Jay Moore, FX HedgePool
Moore says his firm has restructured the FX swaps market by breaking the link between liquidity and credit.
“We have created the technology that allows banks to offer credit as a service for a fixed, transparent fee,” he says. “This makes their balance sheets available to buy-side clients, who can then allocate trades without negotiating a market price on the FX swap.”
The proposition here is that the buy side can discover peers with naturally offsetting liquidity to match positions at a mid-market rate, while distributing credit to participating banks at their discretion under pre-determined bilateral arrangements.
FX HedgePool executed its first quarterly International Monetary Market (IMM) rolls in March and is working with current and prospective members to build up what Moore describes as a ‘sizeable’ liquidity event for the June rolls (the IMM dates are the four quarterly dates of each year that most futures contracts and option contracts use as their scheduled maturity or termination date).
“Peer-to-peer trading is the only way to completely avoid market risk or the need for a bank to manage positions,” says Moore. “Historically, banks have avoided peer-to-peer as they fear disintermediation. Our model relies on the critical element of credit that banks provide to their clients, creating annuity-like revenue streams while amplifying their market share.”
Best price
Larger institutions are acutely aware of their market impact costs and where risk is held. Matching trades is described as a means of minimising the market impact of a large trade, although the FX market is so big that even a $100 million trade would hardly cause a ripple.
I don’t see how a peer-to-peer service could always offer a better … price
David Wong, Midpoint
The moment a buy-side client tells a bank that they have predictable flow, that bank is in a position to profit – as seen in previous instances of front-running where the party holding the order trades ahead of it.
David Wong, chief executive of FX and international payments platform Midpoint, notes that using a P2P network to hedge these flows rather than hedging them in the open market means the client doesn’t have to take a view on the market three, six or 12 months out, but he questions their efficacy in the FX market, which is often described as the most efficient in the world.
“Clients will ultimately want to know that they are getting the best possible price, and I don’t see how a peer-to-peer service could always offer a better – or at least as good as – price than the client would get in the FX market,” he says. “The FX market is so efficient that it is hard to see how these platforms can make it more efficient by simply hiving off parts of it.”
Vanguard and Eaton Vance were among the first customers of FX HedgePool. However, when contacted by Euromoney, neither would comment on the FX trading benefits they derive from using the service.
