By Phil Weisberg, EVP of Strategic Planning and Partnerships, oneZero.
Sourcing liquidity in foreign exchange trading is a herculean task for banks, one not helped by an ever-evolving thicket of global regulation and the complicated nature of FX infrastructure and trading.
The traditional way of looking at how to provide the necessary liquidity has been to add a set number of connections between participants and then make additions when there is significant client demand. A third party can help, but it can also act as an information barrier that leads to an incomplete picture and a mischaracterization of overall flow.
We believe that is a myopic lens, one too focused on imposing narrow solutions on a complex market. There needs to be an entirely new approach, one that starts with a wholesale reexamination of this market’s structure – and something we call streams.
What is a stream?
Streams are individual connections in the market. They are a fundamental unit, the quantum upon which everything else is built. The first step in creating an effective network is assembling a large number of these connections. To give a sense of scale, we currently have close to 2,000 streams. These streams are divided by the type of flow they are designed to accommodate, encompassing size, geography and the type of overall flow. Different streams for soft and sharp trading, and for full-amount and sweeping are common.
With such a large pool of connections, it is possible to provide the right offering for individual brokers. For some multi-asset traders this can mean working with several hundred streams, although experience shows most brokers find a couple of dozen to be a more appropriate number. Each stream is unique to you as a sell-side broker, and is curated by a liquidity provider based on its understanding of execution statistics.
Streams and the associated analytics can give brokers a critical edge, allowing a sell-side broker to segment its client base to maximise returns, build customer stickiness and secure volumes. This is vital as quantitative investors are making large strides in developing ever more sophisticated strategies to maximize returns. The right client segmentation for a broker, through its streams, gets the right prices to each of its clients and maximises its revenues. The wrong streams, bringing inadequate client segmentation, can mean missing trades, losing clients, failing to maximise returns as a broker and harming liquidity provider relationships.
From streams comes liquidity
As part of this customized approach, every broker can set up dedicated configurations in their Hub, on our infrastructure and with support provided as a service to individual broker clients. This allows customers to easily construct a pricing and execution strategy for their clients, customising and adapting liquidity aggregation, pricing and hedging strategies as their needs – and the market – evolve.
This isn’t the end of what can be done. Soon tools will be available to help brokers quantitatively characterize part or all of their flow, so it can be securely shared (if a broker chooses) with current and new liquidity providers as part of an effort to foster the best possible relationships with each other. Through proactive suggestions and nudges, technology can help spawn new relationships with other liquidity providers and provide additional benefits.
Building a better mousetrap
This approach is vital to keep pace with this innovation through new products and support, ensuring customers’ capabilities match the imaginations of their smartest minds. Simply waiting for a planned update or for a gap in connectivity to be so noticeable that it requires action isn’t an acceptable response in today’s market.
Rather, brokers need to be able to switch liquidity providers seamlessly and create customized flows for an ever-changing torrent of market events. Streams represent the wave of the future, and we expect more people to see their promise over the course of this year and the decade to come.