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In Nicholas Pratt ‘s article “Complex but rewarding – extracting the maximum value from FX Liquidity Aggregation” in the October edition of e-FOREX magazine, TraderTools’ CEO Yaacov Heidingsfeld makes the following observations on the FX Liquidity mirage and Best practice guidelines:

Liquidity mirage

“The liquidity mirage is certainly not helped by the concept of aggregation. There is a limited number of banks that are primary liquidity providers in FX and they are the ones that will be aggregated. Their technology clearly has limitations in terms of dealing with this mirage. The banks are happy to stream a price on their single dealer platform (SDP) as well as a number of aggregators and their intention is to limit the prices to a subset of that aggregation. But if they are streaming prices on their own platform and even just one aggregator, that limit is already being breached.”


Macro considerations
“Firstly the investigations into the abuse of fixing mean that banks have taken a step back form market making and risk taking. Secondly, volatility is at an historical low. So now we have a situation where banks are operating on an agency basis rather than a principal basis. And once you are doing that, then two venues distributing the same price is too many.”


Avoiding recycled liquidity of ECNs
“It is not a technology issue but ensuring that the ECN is not aggregating the same liquidity that we are. Our job as liquidity aggregators has become more sophisticated and we have become better at matching unique streams of liquidity. It is relationship liquidity using one-to-one pricing. There are no gold silver and bronze tiers of liquidity based on traders’ creditworthiness. It is an internal marketplace.”


FX – a relationship-based business
“What the technology has done is create a level playing field. Liquidity providers are presenting their business in a light where takers can fairly compete for that price. I think we make it fair. Liquidity providers can compete to go after the customers they want because they are not all competing for every pair. We aim to empower both sides.”


No last looks
“Last look was created as a way to solve a technology issue that had created a business problem – the fact that high speed traders could possibly ‘game’ banks’ quotes. But it is no longer an issue because technology has reduced the legacy lag. The markets will determine whether they want last look or not by voting with their feet.”

Best practice guidelines

“As long as aggregators can win business, they will get away with avoiding best practice guidelines. So I think it’s doubtful that we’ll ever get to the point where everyone follows the rules. And I doubt the regulators will pursue this issue because they have bigger concerns. But if everyone does not embrace best practice, that is to our advantage.”


Non-negotiable principles
“The prices made available to traders have to be unchanged and not with an additional spread on top of the original prices. Aggregators should not be providing an unfair advantage to one liquidity provider because of commercial agreements. If you are, then be transparent about it. The price that the aggregator is getting is the price that it should be showing. It should not be making money on the spread at the expense of the price. In a model where we are acting in a truly relationship-based aggregator, that transparency is inherent.”


Onus on the aggregator
“If we’re offering technology as a service, it is up to us to educate our clients. It is our fault if they don’t know what the benefit of best practice is. One customer told us that the reason they don’t trade on a single SDP or a single aggregator is that they do not get enough liquidity. We explained the liquidity mirage and that they were paying for it by receiving worse spreads. In fact, they were being penalised by the liquidity providers and ended up taking more risk. We said we would talk to each of their SDPs in order to prove that this client was not trading on multiple venues. In return, they got better spreads.”

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