FX: Tech focus shifts to horde of untapped trade data

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By:
Paul Golden
Published on:

The sell side has largely realized the potential of technology to minimize the impact of FX market fragmentation, although experts suggest it could do more to extract value from the data generated by electronic trading.

There are many reasons why markets become fragmented

For example, regional banks have seen an opportunity to differentiate themselves from larger competitors by specializing by region or even by currency. Institutions that can develop deep knowledge in particular areas can compete against global banks by delivering high-quality execution.

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Jerry Norton, CGI
Technology has helped by enabling sell-side firms to make their processes and businesses more automated, allowing them to lower their fixed cost and remove variable elements, explains Jerry Norton, head of strategy for CGI’s UK financial services business.

Pragma Securities’ chief business officer Curtis Pfeiffer adds: “Sell-side firms have adapted to the highly electronic nature of spot FX by leveraging aggregation software to combine multiple bids and offers simultaneously from multiple venues and using execution algorithms, which can take advantage of the better bid-offer spread that aggregation offers.” 

Constantly changing venue connectivity requirements introduce unwanted and unnecessary system latency, observes David Faulkner, managing director Fluent Trade Technologies. Given the large number of venues, maximizing market access through connectivity and ensuring optimal system performance requires expertise. 

“It is usually the case that the larger the institution, the more complex their connectivity requirements,” he says.

In the past, a sell-side firm might have had between five and 10 liquidity connections; now the typical numbers have risen to between 20 and 50 connections per firm and the increase in the variety of connections – including the introduction of full-amount-type feeds – has further expanded the challenges faced, according to Ayal Jedeikin, co-founder of TradAir.

“Sell-side firms need to be adept at supporting these types of feeds, handling the throughput created specifically around market events and managing the requirements for new functionality to optimize execution against this new liquidity map,” he says. 

“For us, this was an opportunity to address client requests for real-time rules to optimize the quality of execution.”

Sell-side firms have invested in pre-trade, execution and post-trade technology – or partnered with an external technology provider – to ensure they are able to execute in an efficient and orderly manner. 

Deterrent

That is the view of ParFX chief operating officer Roger Rutherford, who reckons randomized matching technology has proven itself to be an effective mechanism for deterring disruptive trading behaviour in the FX market.

Through the use of data analytics, sell-side firms should be able to anticipate and identify customer and market movements and spot opportunities, allowing for the optimization of pricing and margin for the provider whilst enhancing and improving the benefits for their customer. 

One consequence of the electronification of the FX market is that more data is being generated and the falling cost of computing power means this data has never been more cost effective to store or analyze. 

However, this doesn’t mean that banks are taking full advantage of its potential, says Matt Hodgson, founder and CEO of Mosaic Smart Data.

Most trade data go unused and their insights left untapped, he suggests. 

“Data from different venues is captured in different messaging languages, there are different data fields and data is often not shared across silos,” says Hodgson. “Where banks are investing in data science, they often look to create data lakes without having first considered what business problems they want to use that data for. 

“That means that these very expensive data warehousing projects can often lead to limited business-applicable results.”

Ayal-Jedeikin-160x186
Ayal Jedeikin,
TradAir

TradAir’s Jedeikin advocates a combination of technology and business logic. 

“It is a basic requirement for any technology vendor in the FX software space to correctly optimize their FIX engine, messaging infrastructure and execution logic,” he says. 

“However, it is fundamentally important to combine that with conflation protections, quote filtering and robust event monitoring implemented by someone with an in-depth understanding of the market.”

When EBS launched its Live Ultra data feed, it updated five times more regularly, generating five times more data for a bank system to manage, adds Fluent’s Faulkner, who says his firm is often asked to look at improving market data connectivity, processing and distribution.

Encouragingly, there is evidence to suggest that sell-side firms are building data analytics teams and partnering with fintech providers to increase their ability to understand the essential components of their FX franchises, says Celent analyst Brad Bailey.

“This includes pricing engines, distribution algos, market conditions, execution protocols, execution algos, venue conditions, optimization of liquidity across a fragmented venue landscape, best execution metrics and TCA,” he concludes.