Hotspot FX embarks on ‘house cleaning’ to boost volumes and liquidity
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Foreign Exchange

Hotspot FX embarks on ‘house cleaning’ to boost volumes and liquidity

Hotspot FX, the multi-dealer venue owned by Knight Capital Group, has embarked on a process to filter the number and quality of liquidity providers to its platform to attract more volume.

During the past four months, Hotspot has begun weeding out liquidity providers that do not meet its specified criteria, and as a result have reduced the number of market makers streaming prices to the platform by almost 50%, says Hotspot’s global head of sales John Miesner in an interview with EuromoneyFXNews. “We have been going through a house-cleaning exercise in a very diligent way and respectfully asking last-look providers that are not adhering to our criteria of minimum ADVs of $500 million, 80% acceptance rates and timely acknowledgements, to meet our requirements or cease quoting by a certain date,” says Miesner.

John Miesner,
Hotspot FX:
"We have been going
through a house-cleaning exercise in
a very diligent way ..." 

A further 10 of the remaining 25 liquidity providers are under review by Hotspot for their willingness to provide liquidity to price takers, Miesner adds.

Liquidity providers must have an acceptance rate for client bids and offers of at least 80%, they must accept trades within 300 milliseconds of being hit and they need to do at least $500 million of volume per day.

The 300 millisecond acknowledgement time will be decreased by at least 100 milliseconds as part of Hotspot's ongoing effort to optimize the client experience, says Miesner.

Miesner says the decision to thin the herd of liquidity providers on Hotspot was made because the company was receiving complaints from certain clients that, at peak traffic times only, they were experiencing latency in the system.

“One of our major concerns, that is inherent with last look liquidity providers, is the amount of quote traffic that is generated. This quote traffic could possibly lead to latency during high peak traffic times," says Miesner. "Our objective is to stay ahead of this issue before it begins to degrade the quality of the client experience."

“It was nothing terrible, but we looked into it and we wanted to cut it off at the pass, which is why we’re doing what we’re doing,” adds Miesner.

Of the liquidity providers cut from Hotspot, Miesner says the majority were fringe players within its venue, who were not meeting fill ratios or the average daily volume (ADV) thresholds and consistently failed to meet the acknowledgement times on the trades coming their way.

And, within the approximately 25 liquidity providers that remain, around one-third of them represent a good portion of the liquidity being streamed into the Hotspot venue, says Miesner. That one-third of the remaining last look liquidity providers represents 65% of the volume being quoted by last look liquidity providers on any given day.

By improving the policing of its market making, Hotspot says it will be able to more efficiently customize liquidity for its clients. Market makers that easily meet the criteria will be rewarded with more flow, says Miesner.

Alternatively, price-takers who are not getting good fills will have the right to report this to Hotspot so they can be audited and then taken out of the stream.

“If you are giving a bank or buy-side client an option to say 'yes' or 'no' to a trade, we don’t feel internally here at Hotspot FX that asking for an 80% acceptance rate is a very high bar,” says Miesner. “The last-look facility is a very well-policed product and we have a team dedicated to it 24/7.”

What will dictate the reintroduction of previous market makers or new makers will depend on Hotspot’s satisfaction with the quote traffic and whether it is acceptable to its client base.

“We are not at that point yet,” says Miesner. “We still feel as if there is excessive quote traffic that is on the platform at peak quote traffic times.”

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