WHITE PAPER - FX banks challenged

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FX banks may need to rethink the way they manufacture and distribute liquidity, entailing benchmarking their trading and revenue capture from clients.

This article appears courtesy of Global Investor.

A discussion paper, "Liquidity Management – a fast moving story", from Justyn Trenner, chief executive of the London-based research and advisory firm, ClientKnowledge, says sell-side firms are experiencing various challenges surrounding trading revenues, client spreads, speed of price change and technological issues.

The research paper is available for download at www.smart-trade.net through Smart Trade Technologies, which is also distributing the paper at the 27th Annual Securities Industry & Financial Markets Association (SIFMA) Technology Management Conference and Exhibit in New York from June 19 to June 21.   

Trenner says banks will need to address a range of integrated technology challenges that will radically overhaul the human and technical infrastructure of the sell-side's major global, regional and domestic providers.  To address these issues, he adds that banks need to have the right human, business, technology and client franchise in place. 

An integrated solution for distributing liquidity that aggregates and pools market data from inter-bank systems, single- or multi-dealer hubs and portals and a bank's own book might be a solution.  "It allows one system to pool liquidity inputs in a single order management system (OMS) and then net, creating a single position and set of net orders.  Finally, through a single execution management system (EMS), it permits a systematic management of resultant orders intro liquidity outputs, skewing prices to clients appropriately and accessing deeper sources of market venues."

Harry Gozlan, CEO and founder of Smart Trade, commented that fast time-to-market and time-to-execute APIs are all essential FX bank management's operational considerations. "The FX market has become highly fragmented and commoditized," he said. He said his own transaction platform has the ability to address this market on a single-asset basis, handling spots, for example, or a multi-asset basis, such as spots, forwards and swaps, to create an internal market within the financial institution.

"Doing so allows banks to aggregate prices from multiple sources, such as ECNs and liquidity providers, among others; internalize orders to achieve best execution under MIFID and for the bank's own profits; smart-route orders to multiple venues; and create a global distributed FX liquidity structure addressing latency challenges."