TraderTools foreign exchange blog

Not all horses are for the same courses

By Ian Tick, Director of Marketing, TraderTools
August 19 , 2013

In the July 2013 edition of e-FOREX magazine, Nicholas Pratt looks at the efforts of liquidity aggregation providers to develop innovative features and the importance of long-term relationships between liquidity providers and takers. TraderTools’ CEO, Yaacov Heidingsfeld, provided the following insights for the article, entitled, FX Liquidity Aggregation – “An old concept with a new face”:


On Aggregation Proliferation

“The essential issue for the liquidity providers,” says Yaacov Heidingsfeld, Chief Executive and Co-Founder of TraderTools, “is how the aggregation technology engages with the liquidity providing bank and in what way the customer engages with that aggregation technology. Is that customer predatory by nature or does the aggregation technology enable the customer to engage in predatory behaviour? Or does the technology enabling the customer to access the best price in a way that is friendly to the liquidity providing banks?”


Says Heidingsfeld, “Not all horses are for the same courses and there are certain aggregation platforms that are more suitable for certain trading types, be they predatory or not, dark or lit. The consolidation I see happening in the market is a result of trying to match the right venue with the right trading behaviour of the customer.”


On Intermingling Liquidity

“I dont believe that the intention behind the EBS move was to curb high frequency trading order flow. I think it was an attempt to create a more level playing field. The Spot market, where most of the low-latency FX trading occurs, is not a homogenous market and participants have different motivations. The traditional EBS customer base was not speed-driven but position-driven so by batching and randomising orders on the platform, EBS is looking to regain some of its former customers,” says Heidingsfeld. “Volumes are down and volatility is down, so high-cost, zero-latency trading is not the only option. What participants are looking for is innovation but they want to know how much the technology will cost to have on their desktops.”


“We dont think there is a single solution in the market that will suit all participants, so you need to make the appropriate liquidity available for the appropriate traders. The arbitrage-seeking HFTs would be best suited to the dark pools, but the market-making, strategy-driven HFTs that use CEP to analyse patterns in the market could continue to use all kinds of venues because they are not predatory by nature. But if you intermingle liquidity in the aggregated prices, you run the risk of damaging credit relationships and winding up with wider spreads as a result.”


“The key to avoiding intermingled liquidity and to ensuring an appropriate match between liquidity types and participants trading objectives is transparency,” says Heidingsfeld. “As far as TraderTools is concerned, its all about transparency. That does not mean that if the liquidity is not transparent, it is not available. Participants that do not want transparency can go to alternative venues or risk getting wider spreads by going directly to the banks. But if you are transparent about your identity and your trading patterns, you are going to get better-quality liquidity with better spreads.”


“Fortunately it is becoming easier to profile the type of liquidity a participant requires. Alternative liquidity sources are clearly able to attract a certain type of business interested in a certain type of trading. In a multi-tenant model, the transparency can be achieved by identification and the process need not go so far as asking participants to declare their trading objectives to aggregation platforms,” says Heidingsfeld.


“The need for greater transparency will also have implications for FX aggregators seeking direct bank connectivity,” says Heidingsfeld. “A credit line will no longer be enough to attract direct bank liquidity. The banks want to know more about your trading style, volume and patterns as well as how many venues you are streaming prices to.”


“The essence of our platform is to customise liquidity sources to the liquidity taker or redistributor. If we match the right liquidity providers to the right customer, we will continue to deliver better spreads to that customer. The streaming APIs from the banks manage risk based on the profitability of every customer using that API. Not only can you can take that information and make it profitable for both the customer and the liquidity provider, its a business model that will win every time. This does not mean that our model is the best for all participants, especially the HFTs. But for a customer prepared to show who they are and willing to work with the liquidity providers to get the fill ratios where they want them, its a win-win scenario. It is cutting-edge liquidity aggregation with traditional values.”

loading more...

No obligation trial

Thank you for your submission. Your request has been received and you will be contacted shortly by our sales team.