Algorithmic Market Making Strategies

FX aggregators: a neat option when choosing between ‘sweeping’ and ‘full amount’ Published on March 12, 2019

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Matt Clarke

Matt Clarke Following XTX Markets 6 articles Like95

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Comment6

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5 Traders seem to like aggregation software. It follows that aggregators are becoming more and more common in FX.

And why not? Unlike a single dealer platform, an aggregator allows every single trade to be competed by all available LPs so the trader can benefit from all their skews. In the illustrative example below the tightest spread from a single LP is one pip and yet the aggregated spread is just 0.4 pips, coming from two separate LPs.

Nuances exist such as increased adverse selection due to over-aggregation -- fewer LPs may in fact deliver lower execution costs -- but this note will take aggregation itself as a given.

'Sweepable' vs 'full amount' The next question is how do you aggregate LPs? Do you ask them for 'sweepable' or 'full amount' streams? Or both? A note first on 'full amount' which is rather confusing terminology because it means different things to different people. If I have 60 mio to trade over an hour and split it into clips of 10 mio each ten minutes and trade each one with a single counterparty, what is that? Henceforth in the article read 'full amount' as meaning 'single clip'. There may or may not be more flow coming later on but each particular clip will only be traded with one counterparty.

LPs will often favour 'full amount' trading and with pretty good reason. The argument goes something like: • • •

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If you trade with just one person that person may be able to hold the risk and better manage the market impact of the hedge. This means they may have a better chance of monetising the flow and may accordingly show tighter spreads in future. If instead you split e.g. 20 mio across six LPs, you might create a race condition in which everyone is incentivised to hedge faster (prisoner's dilemma at work) and the flow may end up looking worse for everyone. You could get a sharp reval curve like the illustrative one below. This might result in all LPs finding your flow sharp and widening your future spreads.

It can also prove very time-consuming to perform liquidity management on 'sweepable' pools: if you put a single externaliser into a pool of risk holders (or an existing LP changes behaviour) they could ruin the outcome for everyone so you might need to regularly monitor market impact of each LP alongside metrics like fill ratio and $ Cost of rejects.

And in practice? Well, it sometimes works. However, the problem is that the situation is a bit chicken-and-egg. The LPs may see a sharp 'sweepable' curve and accordingly the 20mio 'full amount' price they show might not be super competitive. The client might then look at the 'full amount' spreads and observe that 'sweepable' is still tighter. That's a hard sell.

What's the third option? An impressively pragmatic innovation has appeared on a number of aggregator software platforms and is on the road-map at many others. The feature is often referred to as 'price improving FA '. It works like this:

1. LPs give clients two streams: 'sweepable' and 'full amount'. 2. The aggregator automatically compares the VWAP price on both streams in real-time and displays and hedges on whichever stream is the cheapest. 3. It never trades across both streams of course and the user doesn't have to change any workflow or make a binary and static choice between one style or the other. This is extremely neat. It gives LPs a chance to prove that 'full amount' results in reduced execution costs and does not require the client to make a leap of faith as they are always automatically dealing on the best price available to them across either stream. It elegantly sidesteps the chicken-and-egg situation and does not require the client to make an upfront change. LPs can start gently by focusing on particular pairs or sizes and then, if it works as expected, you might expect the flow to iterate such that the majority of activity takes place on the 'full amount' stream -- because that stream proves to be cheaper for the client. The result may be that LPs are happier and clients get tighter spreads because of platform innovation. Some will find this a little too cute but you can even extend the idea by comparing

not just displayed price but effective price. If the 'sweepable' stream rejects 10% of orders on average then you can weight the price it shows by the expected cost of going into the market and covering the remainder. For day one, though, you might find that even a simple price comparison with ties going to the 'full amount' stream gets you a long way. Consider asking your aggregation software vendor if they support option three and doing a little experiment.

Latency floors can be great for venues as well as end-users. So why do we not see more of them? •

Published on June 27, 2018

Matt Clarke

Matt Clarke Following XTX Markets 6 articles Like109

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Comment7

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7 Over the last few years people have been increasingly preoccupied with ‘speed traders’ and questioning whether certain marketplaces would be better off with latency floors to equalise market data speeds across all participants. Primary markets in FX already have latency floors, of course. This is not the case for the majority of central limit order books in equities, futures, rates and commodities. Most market structure arguments – like this one – are generally informed by the author’s frame of reference so let’s be upfront about mine.

I believe the point of markets is ultimately to serve end-users and their agents e.g. asset managers investing on behalf of public pension schemes. It is from that perspective that I’ll approach this topic. Does a given market design feature holistically benefit or harm this group? Market makers are important but only inasmuch as they provide a service to end-users i.e. providing immediacy of risk transfer and taking on time/fluctuation risk in return for spread. Arbitrageurs – who may or may not also make markets – can be helpful as they perform the unexciting but useful service of aligning multiple venues. However, if they introduce negative externalities for end-users whilst doing so, their needs are further down the food chain. A lot further down the food chain. The commercial fisheries example on page four of this paper is an entertaining illustration of how net value destruction can occur due to speed wars.

OK, so how does a typical one-way latency floor work? All aggressive/liquidity removing orders are subject to a speed bump of up to several milliseconds (one millisecond is a thousandth of a second). In some designs the length of the speedbump may be randomised. If the passive/liquidity adding order is still available for matching after the aggressive order has traversed the speed bump you get a fill; if it is not, a miss.

Note carefully this is totally distinct from ‘last look’ in FX, which is sometimes erroneously conflated with speed bumps. With last look, the liquidity provider knows about the order and can choose whether to accept it; with a speed bump the exchange determines the match and the liquidity provider has no knowledge of orders that missed.

What’s the argument for latency floors for end-users on all-to-all ECN? A market that incentivises raw speed is an operational tax on end-users of the market

If raw speed is the determining factor, any liquidity provider who is systematically outpaced will consistently get ‘picked off’ as the fastest arbitrageurs observe quotes move in one venue and race to hit quotes in another a few milliseconds before the liquidity provider receives the same market data and can react. The end result is that all liquidity providers are forced into an expensive arms race. This is a classic prisoner’s dilemma wherein participants are commercially obliged to participate in a negative sum activity due to the participation of others. Liquidity providers are not charities and that additional operational expense is passed onto … you guessed it … end-users via wider spreads than would otherwise be possible. By promoting a level playing field in terms of market data, liquidity providers are more confident in tightening spreads

End-users tend not to be informed on market-making horizons. HFT certainly are. Any market maker on an all-to-all exchange has no idea with whom they will trade; they get a mix of 'toxic' HFT flow and regular end-user flow. The end-user flow is thus subsidising the 'toxic' HFT flow because the spreads charged on a venue are determined by the average quality of flow on the venue. A speed bump normalises market data transport across all participants: if a market ticks in Chicago and a HFT is able to ship that data over to New York (before you can) the latency floor will give you a chance to see and incorporate that tick before the HFT can hit your stale price.

Latency flooring across all participants makes it harder for HFT liquidity taking strategies to pick off liquidity providers and thus encourages market makers to quote tighter (and in larger size) to attract more flow from end-users whose orders stem from genuine economic exposures rather than intermarket races. They reduce barriers to entry and encourage competition

If raw speed is a prerequisite for success in liquidity provision, any participants – especially new entrants, who may not have access to such expensive infrastructure – cannot compete and logically withdraw. We’ve known this since the seventies. This is a shame as such liquidity providers may well have risk absorption appetite and removing these limit orders from the market entirely (because they systematically get picked off each time a related market moves) reduces valuable liquidity. Regional banks in FX are a good example: they are an important source of liquidity to the interbank market.

What’s the argument against latency floors? Any additional complexity is bad

All being equal, simpler is better since end-users and their agents tend to react to change less efficiently than specialists. As a principle this is entirely fair, although it is worth noting that the existing effort of trying to measure latencies and jitter across related venues is no less complex. It slows down price discovery and/or increases risk

It is risky to create a new price point (improve the 'top of book' price) and market makers should thus be incentivised for doing so. This is however a spurious point since passive (liquidity adding) orders are not subject to one-way speed bumps and therefore the market maker does get rewarded with queue position. Some market makers argue that latency flooring the matching process on venues (even by a handful of milliseconds) is bad for the market as it hampers risk management but this also misses the point. That is absolutely true at extremes – imagine a market updating once an hour vs once per second – but we have gone far, far beyond the point of diminishing returns. I do buy the line of thinking that we must consider all this in the context of computing time, rather than anthropomorphising ... however, if a market marker is concerned about an increase in risk holding times of such tiny increments, they’re ultimately acting as an arbitrageur rather than a liquidity provider who absorbs risk for a meaningful period. Whenever an arbitrageur disappears, experience shows another will immediately pop up and perform the task – maybe a few microseconds later. They're at the bottom of the pyramid.

End-users, on the other hand, have long-run economic exposures; it may take several minutes for an asset manager to process an order internally and they may hold the position for weeks or months. Speeding up the process by a millisecond or two at time of trade is of little to no benefit to them so why should they pay the tax?

Why, then, don’t we see more experimentation with latency floors in listed products? This is the right question to ask!

From an exchange CEO’s perspective, any change is risky – even when it will demonstrably benefit end-users. If your top five brokerage payers are speed-focused HFT and they all hate speed bumps (they would as it would have the effect of levelling the playing field) it takes real confidence to implement one. If you’re right, you’ve improved the business and end-user client experience; if you’re wrong, you may lose your job! This doesn’t mean that exchanges haven’t deeply considered adding latency floors. See this patent for example. This is because there are also great benefits to exchanges of latency flooring. Any exchange would much rather have their revenues diversified across many participants than have 50% come from the top 10 as this exposes them to less ‘key client’ risk and allows them to develop products broadly without being beholden to a small special interest group. Furthermore, because the top participants typically receive meaningful volume discounts on brokerage, exchange revenues would be higher if the same volume were spread across many (individually smaller) liquidity providers. Finally, it would improve conditions for end-users of the exchange. Let’s not forget them since they are, after all, the whole reason for markets existing!

How can venues experiment? Well, the easiest thing to do is to experiment, thoughtfully. Each venue and product has a different set of conditions (tick size, participant mix, regulations, proxy venues etc.) so design decisions need to take these factors into account. In some cases – like one-tick markets, where the bid-ask spread is practically always at the minimum tick increment – there may be preparatory work required. Determine a list of market/liquidity quality criteria and try adding a speed bump in a subset of smaller products. Do the data indicate conditions have improved and holistic costs reduced for end-users? Do activity levels change? Is brokerage income more diversified? If – and only if – it has the desired effects, continue to experiment more boldly and roll-out on major products. It really cannot get much worse than the current situation whereby market participants are trapped in a prisoner’s dilemma of wasting collectively hundreds of millions annually on networks, whose only effect is to speed up intermarket price discovery by a few milliseconds … which is of no practical economic benefit to end-users of markets but for which they must implicitly pick up the tab in the form of wider bid:ask spreads.

2017 in review: FX market structure •

Published on December 13, 2017

Matt Clarke

Matt Clarke Following XTX Markets 6 articles Like73

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Comment5

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6 I’m always surprised when I hear folks say that 2017 was an uneventful year in FX.

Volatility and revenues It certainly feels like we are living in ‘interesting times’ from a macroeconomic perspective with Brexit, Trump and China’s continued ascendency. Yet it is absolutely true that volatility in FX (as in all asset classes) was rock-bottom again this year. The VIX is currently hovering near its lowest recorded levels.

As everyone knows, FX revenues are highly correlated with volatility. Accordingly it has been a down year for most FX divisions. Those in growth mode or with a large corporate franchise or exposure to bespoke FX risk management products have fared relatively better but, across the market, revenues have been challenging. On the other side of the accounting ledger many mature institutions find they have an already pretty optimised cost base that cannot be meaningfully reduced from here without pulling out of core activities. If history is any guide, volatility cannot stay down here indefinitely but those who designed their business on the assumption it might are looking smart. Exacerbating this has been the work required for MIFID II. This has been a huge focus at most institutions and has sapped resource from new business initiatives. This is likely to continue into H2 of 2018. After that life should be a bit more fun as focus returns to new ideas and products.

Regional banks One bright spot has been the improvements that banks outside the traditional top 10 have made. Often boasting strong corporate franchises and excellent credit ratings, these institutions are in many cases using third-party vendors to outsource non proprietary aspects (connectivity, credit checks etc.) and are thus able to launch high quality eFX client offerings at a fraction of the

upfront or maintenance cost that a DIY approach would’ve required, even just a few years ago. Anecdotally this seems to be bearing fruit.

The Global FX Code One defining feature of the year, unfortunately, was a number of high profile fines for historic FX conduct activity. It will be a relief when the last of these is out of the way and the industry can focus on the future instead of the past. Promisingly the zeitgeist of 2017 was animated by one such forward-looking initiative: the Global FX Code.

To get hundreds of private and public institutions across the world to work together and agree on best practices is an achievement in itself. The most contentious topic was pre-hedging in the last look window (‘Principle 17’) with a robust debate on whether this was or wasn’t acceptable best practice. Following a comment letter period, it was agreed that this was not in line with best market practice and the Code’s language will be updated this month to reflect this. Although it may seem subtle, this is a huge victory for FX market consumers and will put an end to one of the biggest rent-seeking activities in today’s market structure. The big challenge now is adoption. It seems certain that all major banks will sign up but a question remains on how to deal with major HFT who market make on anonymous venues and may wish to remain unencumbered by industry best practices. In their comment letters a number of institutions argued that the Code should go further and ban last look entirely. It seems unlikely that this will happen since, unless there is a third-party matching agent in-between the LP and its client, the LP will always need the right to reject a trade. Why? Because it is the LP who must determine the contract is within credit and position limit thresholds. Nonetheless it does seem that last look’s overhang on the market is set to reduce.

TCA One reason for this is the increased use of TCA in the market. There are now a number of high quality independent providers and the uptake amongst the buyside in 2017 has been unprecedented. This can only be a good thing. Certain ECN’s are also bringing a new level of transparency to their platforms with several introducing analytics that show their clients their cost of rejects and market impact for the first time. What gets measured gets managed and it seems inevitable that once consumers see the cost of rejects they’ll vote with their feet in cases where the cost is disproportionate. For various reasons, systematic approaches to portfolio management - whose practitioners have always been at the forefront of the market in terms of execution analytics and quality - appear to be in favour with investors at the expense of discretionary global macro traders, who were typically a huge part of G10 FX client volumes over the last decade. Due to the vastly different execution styles and business requirements of these two types of participant this is quite a pivot and the sell-side is cautiously adjusting its personnel to accommodate this shift.

Interbank venues and market data The second headwind for last look is the faster data from primary markets. This changes everything. Over the last year primary market updates have sped up meaningfully: in some cases from 100ms to 5ms. Now LPs looking at the primary market to perform an ‘on market check’ in EURUSD or USDJPY can do so in 5ms or less. Just as a drop in oil prices must eventually result in cheaper petrol at the pump, so last look times are being slashed to reflect the step change in the underlying interbank market that powers price discovery. Incidentally one interesting development in the interbank market is the conscious tying of market quality to market data: in some cases, one must contribute (i.e. provide liquidity) in order to receive the fastest market data. The faster interbank market data has had another effect: the number of quotes generated on secondary venues or single dealer API has exploded. Some executives have gone on record as saying quotes are increasing at over 30% compound each month! This puts extraordinary pressure on systems at a time of low revenues, since an increase in quotes does not result in an increase in matched trades. Expect to see more focus on this in 2018 as end-users (whose systems may also struggle) and ECN’s begin to evaluate the cost of processing these quotes. It seems likely that the business approach will be to measure quotes generated:traded volume ratios for each LP and offboard those who generate a lot of quotes without adding much value by being top of book and winning trades. This is likely to spell hard times for liquidity recyclers who generate a huge number of quotes whilst rarely trading.

Clearing and NDF trading

Credit has always been a defining feature of FX market structure. Clearing in NDF continues apace and next year might reach the tipping point of >50% of dealer-to-dealer volumes being cleared. Increased adoption is important as it drives unit economics with the relative cost of clearing decreasing versus the alternatives with each additional % gained. Dealer-to-client activity is different entirely and is likely to remain bilateral for the foreseeable future. The infrastructure required to trade NDF electronically has also blossomed over the last 12 months with the market rapidly transitioning from a manually risk-managed and priced product set to an electronic one.

There are a variety of clearing initiatives beyond the existing NDF market. Whilst compression services and repapering have been effective in alleviating some of the pain faced by banks’ forwards desks, there is a gradual path of regulation-mandated deadlines that mean that each year we are likely to see an increase in clearing of FX products. As before - once economic tipping points in terms of unit costs are reached, expect to see a rapid acceleration in uptake.

Bitcoin I can't even.

Transactional FX With business conditions poor in institutional FX markets it is unsurprising major players have invested in and focused on consumer payments i.e. physical FX. Valuations (often based on

relatively small notional investment rounds) look seriously optimistic for tech entrants, who are having the effect of repricing consumer FX from circa 300bp to 50bp (or less) from mid. It is likely these tech entrants will never reach meaningful profitability but their existence will nonetheless be a drain on retail banking franchises over the next decade since they’re likely to have to reprice defensively. This transactional FX business is of course totally benign in profile and largely uncorrelated with institutional FX revenues. With cross-border retail increasing at circa 25% compound annually and 85% of transactions still involving physical cash the received wisdom is that there’s plenty of room to grow the payments pie.

Anyway... If you got this far, congrats, and I wish you a relaxing and enjoyable break. Look forward to catching up with you in 2018!

Top 10 Trading & Market Structure Reads •

Published on August 31, 2017

Matt Clarke

Matt Clarke Following XTX Markets 6 articles Like75

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Comment14

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10 Someone asked me last week on Twitter what my favourite trading-related books would be. As I mentally made the list I remembered how much I'd enjoyed reading a number of them; and, after hearing back from someone who read one of the books and also really enjoyed it, thought I'd share them. Without further ado and in no particular order here are my top 10. Would love any recommendations from you in return...

1. A Man for All Markets: From Las Vegas to Wall Street, How I Beat the Dealer and the Market The Godfather of quant finance. Amusingly written autobiography of the man who invented a system to beat Blackjack and then - after being effectively barred from Las Vegas and bored with academia - launched the convertible arb industry, inventing the options pricing formula later published by Black-Scholes and refining the early Morgan Stanley stat arb and factor models. Would be great at dinner parties.

2. Make The Trade That rare thing: a book written by a current practitioner. Incredibly candid - almost inadvisably so - and heavy on folksy Kansas wisdom, this is the quintessential HFT origins story of a humble pit trader who automated his strategies and ended up surfing the wave and becoming a billionaire with a huge firm that trades a meaningful % of all US equities. Worst cover photo ever.

3. Market Wizards A series of mid length interviews with a number of the world's most famous traders : Bruce Kovner; Paul Tudor Jones; Ed Seykota etc.. Because the author, Jack Schwager, trades himself the line of questioning is great and you get a real insight into how each of these hedge fund guys operates and thinks about the market. Schwager does a really good job of editing and distilling succinct ideas and fun anecdotes from what is typically a very guarded crowd.

4. Dark Pools A journalistic account of the electronification of US equities markets. At its best when it tells the story of the fun characters like Island's Josh Levine and the SOES Bandits. Some of the unusual features of the market become obvious when you understand the patchwork context in which they evolved and this book is good at telling that story. I also finally learned why ITCH/OUCH are called that (Levine was poking fun at NASDAQ, the acronyms don't stand for anything).

5. Inside the Black Box : a Simple Guide to Quantitative and High Frequency Trading A kind of 'Dummy's Guide' to setting up a quantitative or market making strategy, running through all the basic concepts with intuitive examples and managing to avoid making the reader do any maths. Made credible because Rishi - and more prominently his brother, Manoj, who helped with the book - ran Tradeworx, which was another large US equities HFT. The final chapter in which he attempts to justify HFT's role in society is boring and weak but the practical explanations and schematics on things like transaction cost models, alpha models, portfolio

composition etc. are well structured and clear. Again: very rare for someone who is still (sort of) in the industry to share this kind of information.

6. More Money than God Please look past the ridiculous click-bait title as this is a great book. It runs through the evolution of hedge funds, all the way from Alfred Winslow Jones to Jim Simons. What is great is that the author demystifies their strategies. There's no macro guff about reading the tea leaves of the world economy or having a 'feel' for price action. You see in each case a clear 'edge' that each manager enjoyed at the time from being able to short (when everyone else was long-only) to using leverage (when it was uncommon) to taking on block executions (when markets were inefficient) to using statistical techniques and computers (when others did not). He is perhaps not as critical as he might be and the style is journalistic but the book is well researched.

7. Reminiscences of a Stock Operator A common favourite book for many traders and market structure types, it is often named as the book that made many 'want to go into trading'. Published in 1923 this fictional (some convincingly argue semi autobiographical) account of a young man's journey through the bucketshops and brokers to speculative fortune is full of wisdom and insights that are as relevant in today's markets. The fictional format works beautifully - you'll not put it down - and by the end you'll want to start speculating on sugar and soybeans yourself!

8. Trading and Exchanges : Market Microstructure for Practioners Yes, it is a textbook; but it is fantastic. Still the best cross-asset market structure education you can get on paper. Edge givers and demanders; rebates and incentives; taxonomy of trading participants; quote and order-driven markets; matching logic; market manipulation; volatility and liquidity; circuit-breakers; market efficiency ... it is all there and clearly explained with plenty of real-world examples and sufficient detail. Provides a great framework for thinking about market structure.

9. Flash Boys Contentious but it has to be on the list. Nowhere near as entertaining as his best book - Liar's Poker - and hated for its reductionism by many equities market makers. Nonetheless Lewis has a talent for taking esoteric subjects and making them readable for the masses : how many people outside the narrow world of finance, before this book, cared or knew about about 'hide not slide' orders? It is also an important part of the current zeitgeist, precipitating a live shouting match on CNBC which forced BATS' then president to resign and all the subsequent furore

about IEX's exchange status and 'magic shoebox' which has dominated US equity market structure of late.

10. The Internet I'm cheating a bit by subsuming this into one entry but, what the hell, it's my list.

1. Cliff's Notes (now renamed, did he get sued?) is an archive of posts from AQR's outspoken founder and quant king, Cliff Asness. The writing is hugely entertaining - always read the footnotes - and he brings a lucid and intuitive but rigorous approach to bear on a variety of investing topics. As you'd expect given AQR's background, has a lot to say on factor investing. 2. James Simons' Numberphile Video Interview offers a rare insight into the workings of the world's most famous quant fund, RenTech. From 1994-2014 it averaged a >70% annual return and since closing to outside money has minted several billionaires. I find Simons a bit pompous at times but he's worth $18 billion and has both a proof and an asteroid named after him so I guess if he can't be pompous, who can? At his most interesting when he describes the general approach to the success behind RenTech: how to hire great researchers and build a conducive environment for them (he favours collaboration rather than competition). 3. Memos from the Chairman is the archive of Howard Marks' memos on markets and investing, dating back to 1990 so these really are memos and not posts. Oaktree and Marks have always taken the long-view and he believes patience (and patient capital) provides an edge. Wonderfully lucid throughout, I really enjoy reading some of the past memos, knowing with hindsight what happened next ... they age well. Jump to: Select option Skip to searchSkip to main contentClose jump menu LinkedIn

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Five predictions for 2017 •

Published on January 5, 2017

Matt Clarke

Matt Clarke Following XTX Markets 6 articles •

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I think there is a world market for maybe five computers IBM President (supposedly) in 1943

Committing predictions to writing is a wonderfully effective way to appear foolish at some future date when they’re reviewed with the benefit of hindsight. Still, there’s no fun in sitting on the sidelines. Here are five topics that seem important as we begin 2017.

1.

Clearing of FX swaps

With voluntary NDF clearing picking up steam and cleared IRS already a huge success, 2017 may be the year this finally happens. I’m not the only person to think so: last year saw an exchange group purchase a major OTC venue and publicly announce plans to extend the product suite. Banks, who may historically have been lukewarm, are now looking at the ROE of their swaps businesses, post implementation of the Leverage Ratio rules, and are likely to be supportive of such a move. Expect the market structure to look like it does in Rates where large interbank institutions clear amongst themselves but corporates continue to hedge exposure bilaterally with their banks. Keep an eye out for key ECN launching electronic swaps offerings in 2017: clearly electronic volumes would explode upon the market moving cleared.

2.

Volume growth

After a subdued macro environment (uniformly low rates; depressed realised volatility with episodic crashes) things are looking more lively. The geopolitical environment seems likely to provide sustained volatility whilst interest rates are rising and will begin to diverge, which ought to see more carry trade activity. Secular shifts across fixed income and equities alongside increased corporate hedging should both contribute to increased overall FX activity. Expect 2017 to be a good year for those that remained committed to the FX business and look for the CLOBs to be outsized beneficiaries in periods of heightened volatility when internalisation drops.

3.

The year of the regional bank

A constellation of factors are working in favour of regional banks. Key real money accounts and global corporates, attracted by the credit ratings, are enquiring how they can work together more closely. The technology required to run a scaled eFX business – with internalisation, analytics and so on – is now available from a number of SaaS providers at a fraction of the price it would have cost to develop in-house several years ago and comes already battle-tested in the market. Finally, experienced talent is available as a number global banks reshuffle their businesses. Elsewhere but related, ever more sophisticated prime of primes are poised to onboard institutional clients that the tier one prime brokers no longer wish to service.

4.

Last look

As more and more market data products offer real-time (or very close to real-time) feeds, the case for last look as a tool for market data equalisation protection erodes – certainly in G10 currencies. The second stage of the Code of Conduct will be released in 2017 and this, too, should harmonise key players’ approaches. Keep fingers crossed for standardised metrics and analytics that permit like-for-like comparisons – such as Cost of Rejects – to be provided by major ECN and multidealer platforms and for responsible market makers to provide clear disclosures on how they operate last look i.e. whether they are active within the last look window and on rejected orders (ideally: no and no).

5.

MIFID II : the Great Unbundling

As the world prepares for the implementation of this wide-ranging legislation in early 2018, expect to see changes working through the marketplace. Spot FX is of course not technically in scope; however institutions and venues that offer multiple products (the majority of which are in scope) are likely to take a belt and braces approach. Expect more transparency and a greater unbundling of services : especially where dealing and research currently intertwine. Already we are starting to see a ‘platform’ approach whereby trading venues partner with independent algorithm and TCA providers in order to offer their clients an open choice. As we’ve seen in the consumer world (Facebook, Amazon, App Store etc.) early adopters whose platforms reach critical mass are difficult to catch up with and enjoy great forward multiples.

The views expressed on this blog are the author’s personal views and should not be attributed to any other person, including that of their employer. Report this

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2y John Farrell

John Farrell 2nd degree connection2ndNever

argue with an idiot, they will bring you down to their level and beat you with experience Prime is one to watch.. will disruptive techs eventually remove this requirement? LikeLike John Farrell’s commentReply

2y Jon Vollemaere 尊波理梅 Jon Vollemaere 尊波理梅 2nd degree connection2ndCEO

at R5FX

Always a good strategy to begin with a disclaimer Matt.....But fully agree on all 5 points. Many long lasting trends in there. Nice one LikeLike Jon Vollemaere 尊波理梅’s commentReply 2 Likes2 Likes on Jon Vollemaere 尊波理梅’s comment Load more commentsShow more comments on Matt Clarke’s article

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FX aggregators: a neat option when choosing between ‘sweeping’ and ‘full amount’ Matt Clarke on LinkedIn •

Latency floors can be great for venues as well as end-users. So why do we not see more of them? Matt Clarke on LinkedIn •

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Top 10 Trading & Market Structure Reads Matt Clarke on LinkedIn •

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The true cost of rejects in $PNL •

Published on December 8, 2016

Matt Clarke

Matt Clarke

Following XTX Markets 6 articles Like52

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1 There are probably six main things anyone who operates or sells an FX aggregator should know and look out for. Here we’ll run through one of the most overlooked and yet most revealing.

USD opportunity cost of rejects Everyone knows to monitor response times and acceptance % of each LP or venue and kick off poor performers. Are all rejects equal, though? Clearly not. Imagine an LP or venue who fills you in normal markets and rejects s-l-o-w-l-y during NFP, during which the price ticks a big figure higher. That particular reject would be super expensive, even if they filled you on the other 99.9% of trade requests.

The at-a-glance metric to track is USD opportunity cost of rejects.

Compare the move in (mid)price from the time you sent the order to when you got rejected and must presumably re-attempt to trade … now multiply it by volume requested … that’s how much that LP or venue’s rejects cost you in hard cash terms. You’ll be quite amazed at how much the results differ across LPs and venues, whose rejection figures and response times would otherwise look extremely similar. The obvious next question is : who or what caused these rejects and how can they be prevented?

The views expressed on this blog are the author’s personal views and should not be attributed to any other person, including that of their employer. Report this

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2y Amit Raja

Amit Raja 2nd degree connection2ndVice

President; Electronic Equity Sales Trading

Interesting read on a topical subject. Thanks Matt LikeLike Amit Raja’s commentReply 2 Likes2 Likes on Amit Raja’s comment

2y Troels Estrup Troels Estrup 2nd degree connection2ndHead

of eFX at Danske Bank

thanks Matt LikeLike Troels Estrup’s commentReply 1 Like1 Like on Troels Estrup’s comment Load more commentsShow more comments on Matt Clarke’s article

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