July 2010

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welcome to e-FOREX

SUMMER 2010

egulatory uncertainty and turbulence in global fi nancial markets will not stop the continuous development of Susan Rennie Michael Best electronic trading technology, which takes centre stage in [email protected] [email protected] R Managing Editor Subscriptions Manager this edition. We have created a new section within the magazine devoted to forex technology which will be highlighting a wide Charles Jago David Fielder variety of topics that don’t easily fi t into other parts of the [email protected] [email protected] publication. Articles in this section will be examining core subjects Editor (FX & Derivatives) Features Manager as diverse as Complex Event Processing, Virtual Networking, Cloud computing and new FX Market Data distribution and storage Charles Harris Simon Moss [email protected] [email protected] solutions. Advertising Manager Commercial Manager

Our derivatives feature in this edition is examining how technology Helen Rochford Felix Shipkevich is opening up new trading opportunities and stimulating product [email protected] Contributing writer Regulatory Roundup innovation with electronic FX Options. This article also looks at Production Manager what work is being done towards the development of an ECN ASP Media Ltd for FX Options. There are signifi cant technology hurdles to be Suite 10, 3 Edgar Buildings overcome in designing an electronic ECN which will operate George Street, Bath, BA1 2FJ United Kingdom effectively with FX Options but this isn’t stopping a number of Tel: + 44 1208 821 802 (switchboard) companies who are currently working to solve many of the major Tel: + 44 1208 821 801 (e-Forex sales & editorial) issues involved. Some commentators believe it’s only a matter of Fax: + 44 1208 821 803 time before we see FX Options trading on ECNs so we will be Design and Origination: watching this space closely. Phill Zillwood Design Works [email protected] Our Focus section sets out to explore how new technologies such Printed in the UK by Buxton Press as RIA and development environments such as Flex and Silverlight e-Forex (ISSN 1472-3875) are facilitating the development of a new breed of FX trade delivery is published quarterly in January, April, July and October platforms. The pace of change here is quite remarkable and as www.e-forex.net one of our contributors says, “you can easily fi nd yourself with a Betamax and not a VHS so it’s important that you don’t hardwire Subscriptions Subscription rates (including postage) the technology into the heart of the mainframe.” UK & Europe: £150 per year Overseas: £175 per year Finally, we have put together an article on MT4 Bridging Please call our subscription department for further details: technologies for our Retail e-FX Provider section. Advanced quote Subscriptions hotline: +44 (0) 1208 821 801 aggregation can give brokers an edge and makes a big difference to their profi tability in an increasingly competitive marketplace. This Although every effort has been made to ensure the accuracy of the information contained in this publication the publishers can also applies to risk control and near perfect real time reconciliation/ accept no liabilities for inaccuracies that may appear. The views synchronicity between the MT4 platform and back offi ce systems. expressed in this publication are not necessarily those of the These are all areas in which standard MT4 Bridges have been publisher. designed to provide solutions for. We plan on taking this story Please note, the publishers do not endorse or recommend any further in the next edition by reporting on what products Bridge specifi c website featured in this magazine. Readers are advised to check carefully that any website offering a specifi c FX trading and other developers will be offering for the new MT5 platform. product and service complies with all required regulatory conditions and obligations. As usual we hope you enjoy this issue of the magazine. The entire contents of e-Forex are protected by copyright and all rights are reserved. Charles Jago Editor July 2010 contents

FOREWORD Roger Aitken talks to some leading 14. Currency Derivatives: waiting technology vendors to fi nd out more about the latest developments within Manfred Wiebogen John Galanek for the next wave of regulation Currency Derivatives: The search for clarity: the complex world of FX Liquidity Waiting for the next wave Exploring Transaction That lawmakers and fi nancial fi rms are of regulation Cost Analysis at loggerheads over the forthcoming Management. fi nancial regulations is well known. What may be surprising, observes 48. Technology and product innovation: Manfred Wiebogen, is that upcoming opening up new opportunities with FX regulations on OTC derivatives will also Options cover currency derivatives. Where once the more complex options’ structures seemed to be resigned to LEADER remain either RFQ or voice-based, 18. The search for clarity: exploring Frances Maguire discovers how this new frontiers in FX TCA mindset is slowly being eroded as Frances Maguire Roger Aitken Technology & Product FX Liquidity Management: John Galanek highlights how nascent technology advances and the ease of use innovation: FX Options A more pro-active approach demand for Transaction Cost Analysis of options’ systems increases. is bubbling up in foreign-exchange markets and why the need for FOREX TECHNOLOGY transparency into FX costs is starting 60. Beyond the Jargon: The four key to spread to thousands of FX trading elements of technology fi rms. Chip Lowry offers some advice for FEATURES fi rms looking to appoint a technology vendor to optimize their current 24. Risk, Research and Red Tape: FX e-commerce caters for a changing operations or to launch a solution for the fi rst time which involves ordering Chip Lowry Nicholas Pratt demand-side Beyond the Jargon: Optimising FX Feeds: their most important needs into Four key elements of Low latency rate engines Increasing regulation and a renewed prioritized lists. technology focus on risk management, alongside a growing and more demanding buy- 62. Second Generation CEP: laying the side has meant that FX e-commerce foundation stones for enhanced FX providers are enhancing and revamping Trading architectures their platforms. Frances Maguire explores how some of the leading Now that there has been a remarkably players are looking to grow their fast uptake within the FX space for market share. CEP technology among both buy and sell-side fi rms, Roger Aitken quizzes 36. FX Liquidity Management: should leading CEP vendors and experts on Heather McLean Erik Lehtis you be taking a more pro-active the ‘second generation’ landscape and Bridging the gap: Retail Gearing up: High Frequency meets Institutional FX FX Trading approach? where the future lies.

A Citi page 29 FXDD page 149 Marex Financial paghe 17 Standard Bank page 4 ACI page 14 CME Group page 95 FX Training Zone page 158 MB Trading page 139 Standard Chartered Bank Inside Front Advanced Currency Cover page 99 Currenex page 11 FX Transparency page 18 MIG Bank page 23 Markets Morgan Stanley page 9 State Street Global Markets page 60 Advanced Markets page 141 D G Streambase page 64 Aegisoft page 108 DeltaStock page GAIN Capital page 4 N SunGard page 90 Aite Group page 64 Digitec page 16 GFI Group page 51 Nexaweb Technologies page 97 Swissrisk page 77 Aphelion page 121 Gold-i page 128 Nordea page 5 Sybase page 65 Apple Computers Dukascopy Outside Back page 118 Cover Google page 118 Ares International page 10 Dynamic FX Consulting page 164 Grey Spark Partners page 73 O T Atrium Networks page 89 One Zero Financial Systems page 131 360T page 54 E I Option Computers page 43 Thomson Reuters page 53 B TMS Brokers eSignal page 79 Integral Development page 10 page 111 Bahrain Financial Exchange page 96 Tradency Eurobase page 119 Interbank FX page 143 P page 21 Baxter TradeSense IPC page 81 PFGBEST page 8 page 108 FX page 108 TraderTools F ISE page 98 PFSoft page 35 page 41 Bloomberg FX page 69 Transaction Network Financial Software Systems page 115 Philip Futures page 109 page 83 Bloomberg Tradebook page 105 Services First Derivatives page 67 J Portware page 6 BNP Paribas page 25 Finatek page 134 JP Morgan PrimeXM page 125 Bridgetrade page 57 page 7 U Fixnetix page 12 Progress Apama page 107 BT page 85 UBS Investment bank page 32 FlexTrade Inside Back K Cover R C Knight Capital group page 27 Forex Financial Services page 154 RBC Capital Markets page 31 Calypso Technology page 55 Fortex Inc page 101 Rous Technology page 133 Capital Markets Access L Partners page 126 FXall page 13 Leverate page 76 Caplin Systems page 117 FX Bridge page 53 S FXCM page 87 SmartTrade page 39 Companies in this issue CBI China page 163 M

2 | july 2010 e-FOREX July 2010

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72. Optimising FX Feeds: introducing FOCUS low latency rate engine services 112. Special FX - building a new breed Nicholas Pratt delves into the of trade execution platform burgeoning vendor market for software Nicholas Pratt explores how a new products and applications designed to breed of trade execution platforms help banks, brokers and traders make are being built for FX and what use of rate feeds that can blended, expectations banks and brokers have of aggregated and optimised to produce their platform providers. a more accurate, spike-free supply of prices. RETAIL E-FX PROVIDER 124. Better Bridge - better broker? 80. Financial Extranets: Providing seamless and dedicated connectivity e-Forex talks to some of the leading for FX MT4 Bridge providers to discover more about how different bridging Roger Aitken explores why FX technologies are characterised and what trading fi rms are increasingly seeking are the key trends in this relatively new, dedicated connectivity - without and specialized fi eld. contention- to their FX trading venues and counterparties and what are the RETAIL E-FX CLIENT benefi ts of using global Financial Extranets to achieve this. 136. Bridging the gap - Retail meets Institutional FX VIEWPOINT Heather McLean takes a look at how 90. Why regional banks are positioned Retail FX providers are bridging the for growth gap between Institutional and Retail FX by providing their clients Regional banks have taken a signifi cant with increasingly sophisticated and Fine tuning order execution strategies step forward in their desire to offer powerful trading tools. more sophisticated services to their customers. The potential is real, and 146. Automated FX Systems: winning Igor Gitsevich outlines why it is space on crowded desktops up to the banks to fully realize the Heather McLean talks to some of the opportunity. leading providers of automated FX FX ON EXCHANGES trading solutions to see what’s on offer and how traders can avoid some of 92. FX on Exchanges: A better way to the pitfalls associated with this type of manage risk? trading. Frances Maguire examines what factors are continuing to drive interest 158. Forex education and training: in currency trading on the leading should you be joining an FX Masterclass? Exchanges and why the demand for Automated FX systems new and innovative FX products from Sion Smith outlines how the forex these venues is likely to increase. educational market has recently been developing and some of the reasons ALGORITHMIC for the increase in popularity of FX TRADING training courses, which can now be 102. Customising FX algorithms: fi ne undertaken via a variety of methods tuning your order execution strategies and at fl exible times. Now that mainstream adoption of LOG-OFF algorithmic FX trading has begun, Nicholas Pratt discovers in what ways 164. Gearing up to meet the challenges demands from traders are becoming of High Frequency FX trading more specifi c when it comes to their Erik Lehtis casts some light on the algorithms and the services needed to demanding world of high frequency support them. FX trading. Optimising FX Feeds

july 2010 e-FOREX | 3 NEWS

Centralised FX dealing Morgan Stanley goes STP from Nordea live with Traiana ordea has launched a true end-to-end raiana has announced that Morgan Stanley is electronic service for centralised FX dealing the fi rst customer to go live with Traiana’s real- Nby corporate treasuries. The tool supports time FX margin solution. Nick Solinger, Chief the operating unit in converting an FX exposure T Marketing Offi cer of Traiana, says “Over the years our report into a series of internal dealing requests to sell-side customers have told us there has been little the centralised treasury unit, based on the corporate innovation in FX margining. Given the signifi cant hedging policy. changes in prime brokerage and retail FX, customers now require a state-of-the-art, scalable, real-time margin solution across FX products and futures”.

Built on the proven architecture and functionality of Harmony, the solution provides real-time margining, and signifi cant processing and through-put capability. The system handles margin, credit, prime brokerage, introducing brokers and retail trading relationships, and can also be used to cross-margin FX and futures. Morgan Stanley’s Todd Miller, Managing Director, says “Over the past few years, we’ve experienced tremendous “Our integrated offering based on our e-Markets growth across all client segments. trading platform and Trezone’s Business To Treasury In order to manage that growth, solution truly minimises manual work and practically we are committed to investing eliminates the possibility of human error in routine in best-of-breed technology. work,” says Per Brugge, head of Marketing and Global After reviewing all options, Business Development at Nordea Markets. we realized that Traiana’s margining solution not only met our needs today but Standard Bank partners could also scale to support our business needs in the with GAIN Capital future”. Nick Solinger tandard Bank Group and GAIN Capital have partnered to launch a collateralized foreign Sexchange trading service, Standard FX Trader. Based on GAIN’s retail trading technology, Standard FX Trader marks the fi rst time a broad based retail forex OTCeTrader prepared offering will be made available by a South African bank. Richard de Roos, for Asia & Americas Director & Head of Foreign Exchange, ast year, BNP Paribas launched OTCeTrader, a Global Markets, single-bank electronic trading platform which Standard Bank said: L allows clients to click and trade a wide range “We are delighted to of vanilla derivatives in interest rates and foreign be able to work with exchange, to clients in Europe. The bank is now GAIN Capital to preparing to deploy the platform to clients in Asia and extend our existing the Americas later in 2010. The platform, which was suite of electronic developed in-house, provides live tradable quotes and forex offerings by highly-effi cient trade execution on interest rate swaps, providing a new options and standard exotics as well as FX options offering to our retail and hybrids. OTCeTrader can be used either by banks customers - greater for liability management or by institutional investors access to trade for yield enhancement. For more information visit: forex.” Richard de Roos globalmarkets.bnpparibas.com

4 | july 2010 e-FOREX FX excellence in many forms and shapes

Nordea delivers flexible trading capabilities through a variety of leading front-end suppliers. By joining Bloomberg FX dealing platform, Nordea provides another dealing channel in order to meet professional traders’ high requirements for excellent pricing, speed and availability.

With the newly released trading connection between Nordea and the Trezone system for automating corporate treasury processes, multinational companies have practically eliminated the manual work in converting decentralised FX exposure reports into centralised FX cover deals.

Visit us at www.nordea.com/e-Markets Nordea’s vision is to be a Great European bank, acknowledged for its people, creating superior value for customers and shareholders. We are making it possible for our customers to reach their goals by providing a wide range of products, services and solutions within banking, asset management and insurance. Nordea has around 10 million customers, approx. 1,400 branch offices and a leading netbanking position with 6 million e-customers. The Nordea share is listed on NASDAQ OMX Nordic Exchange in Stockholm, Helsinki and Copenhagen. NEWS

FXall adds FX PRIME Growing corporation interest in Xall, has announced FX PRIME Corporation as a new ProTrader client on its diverse platforms. FAs a signifi cant participant in the platform Japanese FX market, FX PRIME Corporation adds to FXall’s existing rokers from as far afi eld as top tier client portfolio in Asia. Australia and Cyprus have FXall’s volumes in Asia Pacifi c grew Brecently been switching to over 22% in the fi rst quarter of the ProTrader multi-asset solution 2010, and the new client increases from PFSoft. Rebranded as FastIQ, FXall’s existing footprint in the Australian brokers, Marketech, are region.FX PRIME Corporation now offering a completely new is one of the leading Japanese platform for their regional stock Phil Weisberg Broker Dealers and is part of market. “We believe it’s a big step ITOCHU group, a conglomerate Phil Weisberg, CEO at FXall, forward for the Australian market, comprising 734 companies and commented: “In Japan, both as our traders have never used such 61,000 employees. FX PRIME volume and accounts trading on a powerful tool for trading,” says Corporation now has access to the our system were up 5% in Q1 James Martin, Marketech CEO. deep pools of liquidity provided 2010 versus Q4 2009. We look “PFSoft have proved themselves as across FXall’s diverse platforms. The forward to offering a signifi cant a reliable and effective partner.” liquidity available to FXall clients player in the Japanese market access Traders Trust (Cyprus) have also continues to grow following the to the range of execution methods gone live internationally with recent acquisition of LavaFX from that meet its sophisticated trading Citi, completed in January 2010. requirements.” Portware FX integrates with Traiana ortware has integrated Portware FX with Traiana’s PHarmony Network.This partnership will allow Portware FX clients to streamline post- trade processing and settlements ProTrader, branded as Smart with counterparties, resulting in Forex. “Competition on the Forex lower operational risk and reduced market today is very strong, and it’s trading costs. Portware FX is built especially diffi cult if you have the same platform as everybody else,” on an open and highly fl exible says Nicola Berardi, Traders Trust trade architecture which allows for Ary Khatchikian Director. “Providing this solution seamless integration with third- from PFSoft was a strategic decision party and proprietary workfl ow need to drive effi ciencies at every which allows us to be one step applications. This fl exibility allows point in the trade. More and more ahead of the competition.” During clients to develop comprehensive companies are selecting Portware the past 2 years, ProTrader has been straight through processing (STP) FX to address their advanced deployed by 15 leading brokers solutions that increase workfl ow trading needs, and our partnership and has proved itself as a reliable effi ciencies. Ary Khatchikian, with Traiana gives users a turnkey solution for a wide range of markets President and CTO, Portware, post-trade solution for automated from Forex to CFDs, stocks, noted: “In today’s FX market, fi rms settlement and reconciliation.” futures, forwards and options.

6 | july 2010 e-FOREX

NEWS

TNS and EZX provide PFGBEST sees increased demand FX Trading solution for Typhoon inancial market participants oreign exchange clients of can now strengthen their PFGBEST are fl ocking to FForeign Exchange market Faccess Typhoon, a “liquidity data and trading capabilities aggregator” that PFGBEST created thanks to a new partnership a few months ago to allow the between connectivity provider world’s largest banks to compete Transaction Network Services with the best bids and offers for (TNS) and EZX, a leading trading both retail and institutional traders. software fi rm. The new partnership Typhoon gives individual investors, will see TNS and EZX create a CTAs, hedge funds, money premium, low latency FX market managers and institutions equal data and trading aggregation and anonymous access to the true service. This FX trading solution interbank foreign exchange (FX) will offer fi nancial institutions marketplace, optimizing trading the opportunity to connect to Alan Schwartz opportunities for all traders. multiple trading venues, via TNS’ the industry today and offering Secure Trading Extranet, seeking this new, premium, off the shelf vital market liquidity to serve the trading solution will enable us growing demand in the FX market to help meet the requirements of place. the fi nancial industry, providing a seamless solution for the end Alan Schwartz, President of TNS’ client. EZX has a vast amount of Financial Services Division said, industry knowledge, and through “The partnership with EZX opens both our software capabilities, up many new avenues for TNS. we can offer a technologically FX trading is one of he largest competent solution, playing a growing market segments in crucial role for FX traders.”

Russ Wasendorf Tradency introduces new “Typhoon ensures straight-through processing, so that all orders are Mirror Trading platform automatically matched to the best available bid or offer without dealer radency has desk intervention. This model introduced a ensures effi cient, transparent price new Mirror discovery and order execution in T the world’s fastest-growing market, trading platform which is a gateway to a which is global foreign exchange,” wide range of qualifi ed said PFGBEST President and and tested Forex Chief Operating Offi cer Russ trading strategies. It Wasendorf, Jr. enables automatic real-time execution, to assist traders in making based on the trader’s educated trading decisions. In individually selected addition, Tradency has developed strategies. the T-Score which analyzes the execution. The platform offers strategy’s performance data, while The Tradency platform uses cutting innovative trading tools such paying extra attention to risk and edge technology to provide traders as smart fi lters, potential risk reward. A high T-Score indicates with a user friendly interface, rich indicator, and comprehensive, real- that the strategy is performing well graphic indicators and robust time strategy status cards, designed under current market conditions.

8 | july 2010 e-FOREX SIPC), Morgan SIPC), Stanley Asia Limited and Morgan Stanley Japan Limited. Issued and approved in the U.K. by Morgan Stanley & Co. International PLC, regulated Morgan(Singapore) Pte. Stanley. 2010 by © the FSA, and in Singapore by Morgan Stanley Asia Investments services and offered securities by afliates Morgan of Morgan including Stanley Incorporated Stanley, Co. & (member

The Foreign Exchange market is evolving at a breakneck pace. For further information, Exactly the speed at which we operate. please contact: [email protected] Today’s highly complex environment requires trading solutions engineered to respond to your ever-expanding needs. Our proprietary FX Prime Brokerage platform was built with a vision toward efficiency, speed and flexibility. Whether you wish to trade directly with Morgan Stanley, another counterparty or anonymously through one of the major electronic networks, our architecture facilitates complete customization and seamless integration. Let us help you navigate the FX market with confidence — today and beyond. NEWS

Cosmos Bank to adopt Gaitame.com chooses Ares FX system modules Integral res International Corp. has recently signed a aitame.com Co. Ltd, Japan’s largest retail contract with Cosmos Bank to assist the bank FX broker, has rolled out a new global FX to adopt the deposit and foreign exchange Gliquidity aggregation platform. The platform A provided by Integral Development Corporation allows modules of AFEIS(Advanced Foreign Exchange Information System) developed by Ares. The adoption Gaitame to strengthen its risk management operations, is expected to complete by the third quarter of optimize its cost structure, and increase its fl exibility this year. Cosmos Bank is facing the issue of the in the market. Gaitame will be able to deliver information system digit-change at the start of the improved service levels and execution performance. fi rst-century of the Republic Era (equaling the year Using Integral’s technology, Gaitame.com has control of its very sophisticated distributed FX liquidity aggregation system and is able to very quickly add new providers and adjust the current composition. Built upon FX Grid®, the FX aggregation system combines the liquidity from more than 10 banks and direct STP integration with prime brokers and trust banks. “We are very excited about partnering with Gaitame. com and helping them execute on Harpal Sandhu Customer Foreign Currency Account Statement their aggressive 2011 of the western era). Ares AFEIS is a new foreign expansion plans,” said Harpal Sandhu, CEO, Integral exchange computer integration system with complete Development Corp. “After a very short ramp up functions that cover foreign exchange businesses such period, Gaitame.com has achieved greater operational as retail banking, wholesale banking and dealing effi ciency and greater independence from their room. liquidity providers and prime brokers.” TraderTools releases new FX Trading Platform he latest release of TraderTools’ FX Trading • Full integration with other FX Trading Platform Platform features enhanced FX White- modules (FX Liquidity Aggregation, FX Pricing TLabelling functionality, including: Engine, FX Order Management), with online order • A web portal for global customers, allowing access credit checking available via the back offi ce with full to a bank’s FX services from any browser, with no STP client-side installations • Fully-customizable interface, similar to other feature-rich applications, providing high-quality widgets for a rich user experience in a bank-branded environment • Streaming of customer-tailored prices, with spread prices pushed to the customer’s browser from the TraderTools FX Pricing Engine • One-click dealing, and resting-order entry and management, using a grid of clickable dealing cells

10 | july 2010 e-FOREX

NEWS

Velocity Trade to widen execution DIGITEC announces capabilities back offi ce initiative elocity Trade (VT), the Canadian Forex broker, Vlocated in Toronto and London has announced aggressive plans to widen execution capabilities and overall client coverage. “Our Clients have global needs that will now be serviced under a single VT umbrella” said Simon Grayson, Principal Partner. The expansion includes the acquisition of a broker, based in Auckland, NZ and Sydney, Australia. “This acquisition will give VT a amburg-based technology connecting to new front offi ce signifi cant presence in the Asia vendor DIGITEC, systems as well as fi tness for high Pacifi c region. Hknown for the ‘D-3’ volumes. Innovative concepts for FX rate engine already used by a fl exible queue handling, control large number of global banks, has panels and intervention features started development of a brand with re-queuing and de-queuing new system for settlement of FX capabilities will be integrated. One and MM trades. Architecture of the highlights is very fl exible and process logics are based handling of the SSIs (Standard on cash fl ows rather than on Settlement Instructions) together instruments and transactions. with Association Rules that ensures This allows easy procedures mostly automatic handling and for adding new products and high STP rates. Fixnetix connects to Hotspot FX Simon Grayson ondon-based Fixnetix has announced that FX trading Greg Morgan, VT Principal Lconnections to Hotspot FX, Partner will relocate to the are now available with co-location region to run the growth services complete in Secaucus, New strategy. Additionally, Velocity Jersey. The Hotspot FX connection has entered in to a strategic via Fixnetix offers an added boost as marketing relationship with co-location supplies cross connect Computershare, offering foreign options to traders wishing to access exchange execution services multiple asset classes universally to Computershare’s Canadian on the 24 plus Fixnetix data centre client base and are exploring connections. “Fixnetix strives to provide the opportunities to cooperate Hugh Hughes further in other jurisdictions. most optimal trading solutions Computershare is the world’s for our customer base of banks, service offering is stronger than largest and leading provider of funds and prop shops worldwide,” ever with our recent alliance to investor services, operating in mentions Hugh Hughes, Chief NY-based Market Factory, an FX more than 20 countries. VT has Executive of Fixnetix. “We are feed handler allowing for buy side also announced plans to expand proud to provide low latency and sell side instant access, thereby offi ces to include; Vancouver, New connectivity to Hotspot and increasing counterparty diversity York and Charlotte, NC. multiple asset classes as our FX and liquidity.”

12 | july 2010 e-FOREX partner with the FX

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Currency derivatives: waiting for the next wave of regulation

n my earlier contribution to this column I highlighted the resilience of the FX market shown during the Icrisis, went through the regulatory initiatives mulled at the time and summarized the main risks / challenges being faced in Forex. As far as FX is concerned, my conclusions were that regulators should encourage more use of CLS Bank to reduce Settlement Risk rather than forced clearing and warned that fresh regulations may hinder the resilience of the marketplace and its own development.

Financial market participants, including ACI International have lobbied the European Commission to leave out the USD 49.2 trillion FX derivatives market from new regulation on the basis that they were not a contributing factor to the crisis. The exact details on how the new rules will affect this market remain unknown until the new rules are announced.

OTC Market Regulators concerns on derivatives are fully justifi ed. We all remember that in September 2008, American Manfred Wiebogen, International Group Inc, a President ACI The Financial major participant in the credit Markets Association derivatives market nearly collapsed and threatened to take the entire fi nancial down with it. Moreover, the growth in That lawmakers and fi nancial fi rms are at derivatives dealt Over the loggerheads over the forthcoming fi nancial Counter (OTC) over the regulations is well known. What may be past decade has been surprising is that upcoming regulations on OTC tremendous and almost derivatives will also cover currency derivatives. reached USD 615 trillion as at the end of 20091.

14 | july 2010 e-FOREX >>>

Commodities 2.9, 1% Unallocated 73.5, 12%

Forex 49.2, 8%

Credit Default Swaps 32.7, 5%

Equities 6.6, 1%

(Source and Figures in Interest Rate USD Trillion ) 449.8, 73%

Figure 1: OTC Derivatives By Risk Category

From this vast amount of outstanding notional Clearing houses amounts, derivatives in foreign exchange make up Clearing houses remain at the heart of regulators around 8%. This is namely made up of forwards and plan to reduce risk in the derivatives markets. This FX swaps with a maturity of less than twelve months. is meant to have a twofold pexiburpose: fi rstly to On the other hand, the bulk amount of the OTC increase fi nancial stability by reducing default risk and market is dominated by interest rate derivatives with secondly, to increase post trade transparency (PT). over 73%. Figure 1 above illustrates the remaining risk categories of derivatives. Default risk The main benefi t of a clearing house is that it The fi rst indications derived from the studies minimizes counterparty credit risk by asking Members published and comments given by regulators were to deposit substantial initial capital and maintain that FX Forwards and FX Swaps would eventually variation margins. However, clearing houses do not be exempted from new regulations on derivatives. eliminate all risks. For instance, market risk remains The news broke in May, when the EU Commission because market movements will still effect the risk announced that currency derivatives will be covered by position of a system relevant clearing member. draft European Union rules due in July. In fact, clearing houses themselves will become Regulators are wary that remaining loopholes would exposed to risks arising from variations in collateral be exploited by the industry, so they opted for a value. As the recent fi nancial crisis has shown, most blanket solution. For instance, market participants OTC transactions were collateralized but when all of a can purposely structure interest rate derivatives as sudden, the collateral became illiquid and fell in value, currency derivatives to achieve the same aims but avoid counterparties which assumed to be covered had to regulation. Therefore, the European Commission made scramble to fi nd the cash to meet their obligations. it clear that currency derivatives will not fall outside the scope of new regulations concerning derivatives. FX Post trade transparency derivatives are normally too customized or may not be Transparency is a hot issue as it can divulge sensitive liquid enough for central clearing. However, European pricing information, details on transactions and even regulators are expected to discriminate between type of exposures. According to regulators, lack of standardized derivatives that are cleared centrally and transparency has created diffi culties in accessing reliable those using bilateral clearing. This will be done by prices, assessing risks and checking best execution. widening the difference of the capital charges between centrally cleared and bilaterally cleared contracts Clearing houses could end up reducing transparency contained in the Capital Requirements Directive. regarding fair values and counterparty exposures

1 ‘Semiannual OTC derivatives statistics at end-December 2009’ BIS. http://www.bis.org/statistics/derstats.htm july 2010 e-FOREX | 15 FOREWORD

because each participant’s variation margin for executed and settled are certain. At this stage, the individual instruments exposures is not publicly market eagerly awaits the new wave of rules to be disclosed. Thus while clearing houses do effectively announced in July. The rest of 2010 will be dedicated decrease counterparty credit risk, they can to consultancy. Meanwhile, market participants and simultaneously decrease external insight into a fi nancial fi rms will attempt to lobby the commission fi rm’s overall exposure to both credit and market on a number of measures being proposed. risks. Another idea being fl oated that would bring transparency to the OTC market would be the Surely, there will be a push towards compulsory creation of a Trade Repository (TR) for all OTC clearing via regulated central clearing counterparties. derivatives. This will be in the form of a centralized Clearing through a clearing house will become registry that maintains an electronic database of every the norm and not the exception. When this is not OTC derivative. As highlighted in a consultative possible, a higher capital charge will be imposed to 2 report published recently by BIS , ‘’the primary benefi t make bilateral clearing unappealing. Moreover there of a TR stems from the improved market transparency can be incentives to standardize derivatives so they facilitated by its record keeping function, the integrity can be traded on exchanges. With so many changes of information it maintains and effective access to this in regulations, it is hard to envisage how the foreign information by relevant authorities and the public in exchange market will look like in a fi ve years time or line with their respective information needs’’. so. What is for sure is that as long as there is trade and a need for cross boarder cash transfers, there will be an Conclusion FX Market and in all probability, this will be stronger Radical changes in the way that derivatives are dealt, and even bigger than today.

2 Considerations for trade repositories in OTC derivatives markets. BIS, MAY 2010. http://www.bis.org/publ/cpss90.pdf?noframes=1

LEADER

The search for clarity: exploring new frontiers in FX TCA By John Galanek, COO, FX Transparency

Transaction Cost Analysis (TCA) is nothing new in oday, nascent demand for that same type the equities space. For more than two decades, of TCA is bubbling up in foreign-exchange most buy-side institutions spent considerable markets. In fact, that need for transparency time and resources to measure just how cost- T into FX costs is starting to spread to thousands of effectively they executed on their stock trades. FX trading fi rms, especially those that claim to offer The reasons why are clear: TCA provides world-class trade execution. unparalleled insight into the best execution framework and can identify opportunities for cost Of course, recent currency-trading litigation brought savings and performance improvement. against custodial banks has sparked investor demand for more data on FX dealing costs. However, even

18 | july 2010 e-FOREX >>>

with high-profi le lawsuits and the corresponding link Next, the disjointed nature of the FX market itself is, between the benefi ts of equities and FX TCA, there perhaps, its own worst enemy: There is no volume data are several barriers to widespread adoption of TCA in that represents the entire OTC market. FX liquidity is the highly fragmented FX market. fragmented across tens of OTC trading platforms and direct trades between counterparties (see Figures 1 and Barriers to FX TCA adoption 2 below). This makes a typical equity VWAP analysis a For starters, FX execution quality isn’t on top of many diffi cult starting point for FX TCA. investors’ list of considerations when weighing what will make their investment a success. Typically, their Additionally, every participant’s tradable volume in an concerns focus on whether they bought the right OTC market is a function of credit - who has extended stock, and did they buy it near its low price. (The you credit, and to whom you have extended credit. conventional wisdom is that if an investor Each market participant (both buy-side and sell-side) leaves 50 basis points on the table for has different liquidity available to them. Therefore, poor FX execution, it is not material even if each electronic platform were to publish because they are trying to make 50 volume data for trades ex-post (which most currently percent on the stock trade). do not), those volumes would not be representative of both Firm A’s and Firm B’s liquidity. This is different That fl ying-blind strategy on the from the exchange-traded equity world where credit investors’ part, however, has inconsistencies do not exist. In equities, all participants created one big benefi ciary: the face the exchange from a credit perspective, and all banks. Since the Offi ce of the have equal access to liquidity. Comptroller of the Currency (a division of the US Treasury) Lastly, accounting for the costs of the FX forward began tracking the data adjustment is arguably more important than debates 13 years ago, FX about VWAP proxies for the spot price, since it is trading has been much less transparent. Most buy-side FX trades are the most not executed exactly for the spot date, but for some lucrative part other value date. Painstaking efforts must be taken to of bank trading store accurate day counts and FX swap points for any revenue in the currencies that will be part of TCA (and using simple United States. In interest rate differentials does not account for the basis their role, the banks risk between the pairs and is hence a fundamentally act as principal to fl awed approach). OTC currency trades, not as an agent as they often do in equities; therefore, What’s driving FX TCA adoption? their economic incentive is to give investors the worst possible rate that they will accept, because the bank There are market forces and structural forces that has the other side of the trade (when the investor are leading increasing numbers of FX trading fi rms becomes long a currency, the bank becomes short the (on both the buy-side and sell-side) to analyze FX same currency). trading costs.

In other words, many banks are in no hurry to change On the buy-side, history tells us that large mark-ups on the FX status quo. custodial bank FX trades have been a vexing problem for investors for decades. What has put FX TCA on In addition, most buy-side fi rms do not have the radar screen of both the asset managers and plan timestamps that represent execution time on their sponsors has been recent litigation between the State of currency trades. Timestamps make it much easier to California pension funds and State Street Bank. utilize the existing equity TCA methodologies and evaluate the execution quality of a single trade. But Buy-side fi rms are also struggling to provide support even in the absence of timestamps, if investors are to their best execution practices in currency space, trading 5 basis points away from the mid-market rate where most have historically not performed TCA on a on most of their trades, there is no way to hide that regular basis largely because FX has been given a free fact with a good sample of trades. pass from hurdles defi ned by MiFID and Reg NMS.

july 2010 e-FOREX | 19 LEADER >>>

Figure 1

The regulatory environment for all OTC trading Buy-side fi rms today must ensure that they are is increasing globally, leaving less wiggle room for analyzing and addressing the needs of their various currency execution quality. customer constituencies, such as clients and key stakeholders. This base ranges from clients of hedge On the sell-side, the strategy is simple: Banks are funds and asset managers, to pensioners and state looking to FX TCA as a way to win market share by attorney general offi ces for public plan sponsors, to the demonstrating that board of directors and their market-making employees at a private capabilities and pension. electronic-trading platforms offer The overriding superior execution concern is that one of for the buy-side. these core stakeholder groups will address Risky business FX costs before their Mark Twain once investment manager famously said: does, which will make “What gets into the manager look like trouble is not what it hasn’t been doing we don’t know; it’s basic best-execution what we know for due diligence. That, sure that just ain’t in turn, can lead to so.” Mr. Twain’s losing a valued client, comment captures especially if the results the challenges Figure 2 are poor. facing investors that transact in the OTC FX market, many of whom have What are the benefi ts? believed the currency market is always liquid and Again, we can look to history to predict how best execution is a given, but have never bothered to transparency in the FX markets will benefi t clients actually measure it. and institutions, while at the same time providing a signifi cant and new competitive differentiator for both Those fi rms that choose to ignore FX TCA probably buy-side and sell-side fi rms. won’t suffer too much in the short term. But in the long term, investment managers run the risk of being A large, sweeping benefi t for all buy-side participants asleep at the wheel, if and when a client or stakeholder will be a reduction in overall FX trading costs as TCA of theirs investigates currency trading costs before becomes ubiquitous. This is, of course, exactly what their manager does. happened in the equity market 25 years ago when TCA went mainstream. There is no good reason to For sure, FX TCA is a larger concern for the buy-side think that the same outcome won’t repeat itself in the investors than it is for sell-side fi rms. FX market. For asset investors, measuring costs can

20 | july 2010 e-FOREX

LEADER

lead to a process to reduce them, which in turn leads banks. Hedge funds and sophisticated asset managers to better performance numbers. After all, how can don’t have this problem; but anyone who invests in you actually reduce trading costs if you don’t bother emerging market securities does. to measure them in the fi rst place? Extra levels of due diligence can also give asset managers an advantage The custodial banks have the FX data, of course, when competing for new business. but they don’t want the world to know how much they are making by acting as principal on forex Good enough for FX TCA trades. Therefore, investors won’t be able to ascertain Since the OTC currency market is so fragmented, the timestamps from the banks until one of the banks methodologies and tools for getting that critical look decides to truly partner with their clients. Then, the at transaction costs are still being perfected. But as other banks will have to follow along—or risk losing many others have put it before: Let us not allow the the faith and trust of their clients. quest for “perfection” be the enemy of “good enough.” The road ahead In this instance, it can be reasoned, some FX TCA is much better than no FX TCA at all. The lack There is no doubt that demand for FX TCA has of market-wide volume data can be overcome by started to increase. The lawsuit fi led by the State of assuming a constant order fl ow rate, for example. California pension funds will likely end up being a This is not a perfect situation, but this assumption catalyst for those investors who are seeking greater can provide very meaningful analysis. It is also transparency in currency trading costs. important to recognize that FX TCA is not an “apples to apples” comparison unless derivatives are compared Still some managers are reluctant to engage in FX to derivatives, swaps are compared to swaps, and TCA because they are concerned the outcome may spot trades are compared to spot trades. You get the not be fl attering. But as Abraham Lincoln once said, picture. “You cannot escape the responsibility of tomorrow by evading it today.” Some FX TCA providers now have enough data to offer a meaningful peer benchmark. For instance, it The fact that equity TCA has become so prevalent would be useful to know that your fi rm’s cost is 0.3 serves only to bolster that assertion. There are, basis points to trade spot and forward EURUSD; but however, a few more things that will help FX TCA to it’s even more empowering to know that the median become as widespread and robust. First, buy-side fi rms for other buy-side fi rms is 1.2 bps and, by comparison, need to modernize their order management systems your fi rm is better than 87 percent of the others in the to make them capable of tracking timestamps: Order TCA provider’s peer universe. creation time, arrival at the trading desk time, and Cautious optimism order completion time are common in equities and can make FX TCA more comprehensive. Just because there are nascent solutions entering the marketplace doesn’t mean that all participants are As better data with timestamps becomes the standard willing to accept them with open arms. input to FX TCA, this will support the development of pre-trade cost analysis models (both empirical First movers in the space include leading-edge market- makers who are embracing FX TCA to prove to their models and theoretical models). An estimate of clients just how good they are at what they do. Many trading costs ex-ante will be extremely valuable for FX platforms now provide FX TCA as part of their traders who need to decide between executing at 4 execution service. And leading banks that push the pm EST and taking on price risk by waiting for the volume model as opposed to the hard-markup model Singapore open. are anxious for third-party FX TCA providers to show just how good their pricing really is. Investors today do not have to stand for their custodians’ refusal to provide execution timestamps. However, the biggest hurdle to making FX TCA The investors are the clients, and they wield more as robust as equity TCA is a lack of transparency power than they think. This outdated practice has to– surrounding execution time on the part of custodial and will–change. It just makes too much sense not to.

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FEATURE

24 | july 2010 e-FOREX >>> Risk, Research and Red Tape: FX e-commerce caters for a changing demand-side

The FX-only platform handles streaming spot, forward, FX swaps, sophisticated, simple and algorithmic orders. BNP Paribas FX eTrader replaces an older system, which was mainly used inside the bank. Before rolling out externally, BNP Paribas FX eTrader was initially deployed internally to more than 1,000 users, in 58 different locations, as a test-run to prove that it worked globally on an industrial scale, 24 hours a day.

Cohen says: “We thought that it was a very good test-bed – to get every single one of our internal marketers to use it, as well as our traders, options traders, internal clients, and subsidiaries, before we actually went to our external clients. When we were completely happy with it we started to roll it out externally to clients.”

The decision to rebuild the platform came from a By Frances Maguire realisation that a large amount of client business is Increasing regulation and a renewed focus on today concentrated around single dealer platforms and the bank needed a sophisticated one to compete risk management, alongside a growing and effectively. Cohen says that BNP Paribas has big more demanding buy-side has meant that ambitions within the FX world and needed a very FX e-commerce providers are enhancing and strong single-dealer offering to realise these ambitions. revamping their platforms. Frances Maguire explores how some of the leading players are Streaming prices looking to grow their market share. The majority of streaming prices for the single dealer platform are delivered over the intranet to the GUI, arlier this year, BNP Paribas launched a although a direct connection is also available. BNP sophisticated new eFX platform, called Paribas also uses other distribution channels, such as a EBNP Paribas FX eTrader, which, according streaming API and multi bank platforms. to Andrew Cohen, head of e-commerce strategic initiatives at BNP Paribas, has been met with a very “BNP Paribas can connect to a client’s own aggregator positive reaction from clients. Volumes have already and stream prices via our API, or alternatively, we can increased sharply in the fi rst few months since launch. stream prices to a multi bank platform. BNP Paribas

july 2010 e-FOREX | 25 FEATURE >>>

has been streaming prices to multi bank platforms for many years and have had a consistently high ranking on them” Cohen says.

BNP Paribas FX eTrader, the bank’s single-dealer platform, offers an execution order management system, within the front end, that gives clients the ability to leave orders and to manage their orders within that system, as well the ability to amend or cancel them. For those users, with standalone order management systems, with different depths of order management, BNP Paribas could connect to them via its API. Cohen adds that some of the newer, less common features, such as trailing stops, are proving popular in its single dealer platform.

BNP Paribas FX eTrader has given BNP Paribas an opportunity to build and offer much greater post-trade support. It offers three types of STP, via the major STP Andy Cohen providers. Cohen says: “What we are hearing from “What we are hearing from clients is that they don’t want clients is that they don’t want to do bespoke work with to do bespoke work with each bank. The general trend is each bank. The general trend is that clients use one that clients use one or two of the third party providers so or two of the third party providers so we offer STP we offer STP solutions via these platforms and handle the solutions via these platforms and handle the integration integration work for the customer.” work for the customer.” Furthermore, FX e-Trader is being hooked up with BNP Paribas’s very well established cash management platform Connexis. Competition between top 10 Fokianos says the competition between the top 10 For Cohen, the biggest requirement users are banks is fi erce and it is driving a lot of innovation in demanding from providers is consistent pricing and the industry. “Remaining static, in terms of capabilities service from a robust and reliable platform, alongside and improvement to client service, is a recipe for losing the functionality to do everything they want to do, market share in this market. RBC wants to ensure we from streaming spot, to FX Swaps in all the currency remain competitive in this market by building on our pairs they need to trade, and fi nally, visibility on all success and enhancing our offering on a global basis.” the trades, reporting and STP. “This really isn’t any major shift in our philosophy or Stamos Fokianos, managing director and global head change in direction at RBC. We are simply going where of FX eTrading at RBC Capital Markets, says that our clients and their increasingly sophisticated needs are the bank is aggressively forging forward with some taking us. We are expanding our capabilities, adding top signifi cant enhancements to its FX e-commerce talent and focusing on ways to enhance our service,” offering and feels the time is right to invest further said Ed Monaghan, Global Head of FX at RBC. in its infrastructure, talent and overall client offering. “We are looking at every part of our business to fi nd Fokianos says RBC’s new platform will feature an places where we can improve our service, enhance our expansion of the products available and improved offering and build on the success we have had to- effi ciency in processing. Fokianos believes there are a date,” he says. sizeable number of clients who desire to connect to the bank directly, placing orders through their order Some of the areas Fokianos plans to explore include management or treasury management system. RBC enhanced pricing models, reducing some latency and is also working on upgrades to their FIX API to make improving risk management. processing more seamless throughout the lifecycle of the trade to reduce errors and missing confi rmations, Currently, RBC’s e-Commerce application, FX Direct, especially for those corporates not using Swift. includes an order book enabling customers to leave orders for execution by RBC and connect to portals, According to Fokianos, a number the enhancements such as FXall, Currenex and Bloomberg Spot. will benefi t real money managers with complex

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Price differentiation Fergal Walsh, Co-Head of FX eTrading at Citi says that when the bank was building the backbone for its Velocity platform and FIX distribution infra- structure, it reviewed the generation and distribution of streaming prices and, with an eye on the future, honed in on scale, liquidity and price differentiation in an effort to meet the diversifi ed needs of clients on Velocity and to differentiate its pricing to its clients on multi-bank distribution channels.

He says: “We’ve invested in a truly scalable and fl exible infrastructure – from price generation and distribution engines to matching, acceptance and risk management systems. We could be accused of over-engineering – a bit like building a fallout shelter in the latter half of the last century – you’re pretty sure or hoping you’ll never need it, but nice to know it’s there it if all goes Stamos Fokianos “Providing effi cient transaction processing, access to a pear shaped. In the nuclear markets of May 6th - this breadth of products and robust information capabilities are fl exibility and scale allowed us to stay in the game, of value, and interest to today’s sophisticated client.” meeting clients needs throughout the turmoil and market making right through the volatility spike.” Developing the complete array of order types that needs and corporate customers that want to instruct clients may choose to trade with on an e-commerce payments. “We feel the key to adding value is providing platform is complex and time consuming work, yet robust, client driven, analytical information.” vital to remaining competitive. From traditional FX orders that are routed to a trading engine or a He says: “In this competitive FX market, desktop desk, through to algorithmic orders running from space is at a premium. If you wish to be relevant to your clients your offering has to add a lot of value. Providing effi cient transaction processing, access to a breadth of products and robust information capabilities are of value, and interest to today’s sophisticated client.”

RBC will launch its new capabilities in a phased approach, providing it to key clients looking for specifi c functionality. “As we add functionality, we will roll the system out to a wider group of clients as it applies to their specifi c needs.”

While there is much uncertainty about the future regulatory treatment of OTC derivatives, and within that between FX swaps, forwards and options, Fokianos says that if every trade, that has a forward maturity, has to be reported to the regulators, a very big investment will be needed, in terms of management information systems. Fergal Walsh “We’ve invested in a truly scalable and “We are hoping that there will be some rational debate fl exible infrastructure – from price generation around this. While options can be seen as a speculative and distribution engines to matching, acceptance instrument but in my book, options are not there for and risk management systems.” leverage they are there for hedging,” he says.

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some of the most advanced models available, Citi is extending the distribution of these capabilities to as many destinations as a client may choose to execute from. Walsh says: “While streaming risk pricing is the core product of any market-making bank, the range of available order functionality is going to be a key point of differentiation in future. The FIX Standard continues to simplify the task of distributing these capabilities to a broad array of destinations.”

CitiFX has invested a signifi cant amount of effort into this aspect of its electronic product suite over recent years. For some organisations, having access to real-time risk metrics, alerts, effective exposure and cash fl ow reporting is as important as the provision of competitive liquidity. The CitiFX Click platform is our real-time reporting suite that covers these requirements and more. It is very customisable and gives clients the ability to review P&L, trades & James Dalton positions at group and portfolio level within a couple “Allowing our customers to analyse hedges held with other of swift ‘clicks’ on the interface. counterparties across multiple entities, enables them to make informed decisions based on their total FX and risk portfolio” Research and analytics James Dalton who runs the CitiFX Intelligent Orders team says that Citi’s approach to the distribution of order types is also crucial for those orders where stealth research material and advisory product is evolving and transparency are paramount, which is something rapidly; the relatively static portals of yesteryear Citi provides via the Intelligent Orders Suite. As the no longer cut it in an environment where media interpretation of best execution tends to vary between consumption patterns are evolving at breakneck clients, Dalton says Citi needs to be able to match up speed, alongside the technology available to browse product to their expectations accordingly. He adds it, and Citi is currently working on several initiatives, that Citi is closely tracking the alternative business designed to break down the traditional model. Says processes required to handle this kind of sweeping Dalton: “Allowing our customers to analyse hedges regulatory and compliance change in the market. He held with other counterparties across multiple entities, says: “Thankfully we’ve already made changes to our enables them to make informed decisions based on infra-structure and product suite that does not require their total FX and risk portfolio. When it comes to much more than fi ne tuning for us to cope with any daily trading and cash management, clients are able to incremental reporting or margining requirements.” perform automated consolidation of exposures across a global network, with hourly executions providing Since the Morgan Direct platform was launched 18 full STP automation. Citi’s global network also allows months ago by JP Morgan, it has supported real- clients to deal directly in onshore currencies from a time streaming executable prices 24 hours a day, head offi ce level, with the same seamless execution and 5 days a week, for up to US$100m notional value settlement as the rest of the CitiFX product suite.” for G7 currency pairs. JP Morgan also provides streaming pricing for NDF currency pairs. Eddie According to Dalton, breath of product is a key Wen, global head of e-commerce for FX and Rates at strength of the CitiFX e-commerce platform. Many JP Morgan, says: “Most of our transactions that occur asset managers that execute FX for passive businesses on electronic platforms today are done on streaming also manage active portfolios. Their post-trade prices. Users run an application, see the live two-way processes need to be robust and consistent across all prices and click on the price and the deal is done. Users can enter a notional amount, and the price fl ows. refl ects the liquidity available.” Benchmark execution has its place alongside According to Wen, streaming prices have now replaced aggressive risk pricing, depending on the nature of RFQ as the business norm in execution. For the more the underlying business. The provision of algorithmic

30 | july 2010 e-FOREX

FEATURE

complex instruments, in options, a combination of streaming prices and RFQ is still used. “For the fi xed tenors and rates, there are streaming rates that are constantly ticking and updating, and when they choose a deal it will automatically request for a dealable price for that very specifi c strike, auto-priced and execute, so it is a hybrid between streaming and RFQ.”

Order Management One of the areas of greatest focus at JP Morgan is order management. The bank is putting a lot of emphasis on giving clients the ability to work orders on an electronic platform. He says: “This includes the basic functionality, like being able to electronically accept and manage standard take-profi t and stop-loss orders over MorganDirect, as well as providing an API so that orders can fl ow directly from our clients’ trading systems into ours.”

JP Morgan is also enhancing the number of order types Eddie Wen supported on the platform. Besides standard take-profi t “We also have developed many post-trade and stop-loss orders, a product called AlgoX supports features so clients can roll their trades, a suite of algorithmic order types, such as TWAP+ and allocate splits, aggregate trades, and provide Sliceberg. These specialized order types are designed to settlement instructions” satisfy clients’ specifi c execution needs. “For example, a very large order can be worked over a long period of time, either hours or days, and have the risk dissipated Wen also believes that the greatest drivers towards gradually in smaller pieces,” he adds. electronic trading are price transparency, clear audit trail with time stamping, and timely provision of Wen says that liquidity is an issue in the current information. It is these benefi ts, and the ability to volatile markets and it is putting pressure on execution show best execution, he says, that will continue drive spreads for large orders. As a result JP Morgan is more electronic execution. encouraging customers to use orders as a means of execution as this reduces the amount of price impact “With what is coming out of many regulatory on the trade, improves spreads, as well as allowing users to disguise the order fl ow a lot better. discussions, it is clear that the regulators are looking for greater transparency in the marketplace and the Post trade initiatives electronic solutions are best suited to provide some of that transparency,” he says. On the post-trade side, JP Morgan has Morcom, a post-trade online portal that consolidates voice and UBS’s FXTrader Plus platform has one-click electronic trades across multiple assets into a single executable streams in all major currencies, precious portal. He adds: “Clients want a full back offi ce solution. We also have developed many post-trade metals and NDFs. Where market liquidity does not features so clients can roll their trades, allocate splits, normally support streaming (e.g. most NDFs or very aggregate trades, and provide settlement instructions. large ticket sizes) the application automatically offers Now that this is done directly with electronic tools it an RFQ. Simon Wilson-Taylor, managing director, eliminates much of the manual labour and errors in global head of FICC eCommerce, at UBS says: “Our post-trade services.” executable streams provide access to UBS’s core FX liquidity, as well as blended market liquidity and While much of the initial focus has been on online allows clients to place bids and offers into the system.” execution, Wen says the operational workfl ow of a transaction is very important to some clients, and While UBS does not offer an order management likely to become even more critical, especially in the solution, its e-commerce integration specialists work light of current regulatory discussions about post-trade closely with customers to advise and integrate to the repositories and reporting. right commercial and bespoke solutions for their needs.

32 | july 2010 e-FOREX Risk, Research and Red Tape: FX e-commerce caters for a changing demand-side >>>

Fully integrated STP Wilson-Taylor says that UBS has long set a very high standard for pre and post-trade services, and is really one of the only banks to offer fully integrated STP as part of its range of e-commerce services. The FXTrader Plus platform includes access to its industry leading FXWeb product for research and trading ideas, and to FXBuzz for current events and market colour, while its Keylink platform provides comprehensive cash management services, including trading and STP.

There are many ways in which UBS support clients requirements with customised e-FX solutions to cater for their auditing and best execution requirements, ranging from MiFID-compliant, multi-asset class, trading services in Europe, to time-stamped and benchmarked execution services, to comprehensive post-trade reporting and analysis. John Miesner John Miesner, managing director and global head of “We deliver our data in one of two ways. Either through sales, Hotspot FX says that as the fi rst institutional our FIX market data protocol, which provides 50 FX ECN, Hotspot FX has always delivered real-time millisecond updates of our market or, through our ITCH executable streaming prices. “We deliver our data market data protocol, which provides streaming updates in one of two ways. Either through our FIX market for every event that occurs in our market,” data protocol, which provides 50 millisecond updates of our market or, through our ITCH market data protocol, which provides streaming updates for every Hotspot offers a traditional GUI, as well as access via event that occurs in our market,” he says. Knight Direct, Knight’s multi-asset order management system to trade equities, options, futures and foreign exchange, via a single application. Knight Direct also provides users with access to a suite of algorithms and strategies in equities, options and FX. Additionally, users can access the platform through leading third party platform providers, or directly via Fix or Java APIs.

Three Tier Credit model Miesner says: “We continuously work with our prime broker banks, post trade providers, and software vendors to optimise STP, trade reporting and settlement solutions. In addition, we are always searching to improve our technology and product offering for post trade solutions. For example, we just introduced our ‘Three Tier Credit’ module, where secondary prime brokers can more effi ciently manage their client relationships within their prime brokerage structure. We are also upgrading our trade feeds with our prime broker banks, which will allow faster processing times as well as improving fl exibility Simon Wilson-Taylor “Our executable streams provide access to UBS’s core FX in trade data transmission.” He also adds that as an liquidity, as well as blended market liquidity and allows electronic execution platform, every transaction has clients to place bids and offers into the system.” a log fi le that can illustrate best execution, time of execution, time of entry into the market, number of

july 2010 e-FOREX | 33 FEATURE

matching counterparties. In short, any data that might be required by a regulatory body, is also available to the client on request.

FXall offers clients a choice of multiple execution methods depending on their trading requirements. These include collaborative dealing, request for stream, continuous streaming liquidity and an anonymous order book. Clients use one front-end to access over 500 currency pairs from more than 70 liquidity providers, and even the largest transactions can be executed in seconds with the tightest prices on offer from FXall’s providers.

Phil Weisberg, CEO of FXall, says: “Our active trading capabilities represent the best combinatioin of ultra-low latency from FXall’s Accelor platform and sophisticated order types from our recent purchase of LavaFX. Clients benefi t from a single platform that provides Phil Weisberg access to continuous, multiple rate streams with instant “By creating an accessible, low-cost messaging execution, deep liquidity and complete fl exibility network, we’re able to reduce operational risk and reduce around execution strategies. Many clients use our GUI the confi rmation cycle dramatically, from as long as front-end to leverage the power of their relationships, ten days down to seconds.” but some also use our API and market data.”

FXall’s advanced trading systems also leverage Settlement Center is a comprehensive offering comprehensive STP capabilities for control and with support for CLS trade management, custodial compliance to streamline foreign exchange workfl ows notifi cations, settlement instructions, split payments, for asset managers and corporations alike. Thoughtful netting and automation of prime brokerage give-ups. STP, netting and collaborative dealing with banks can reduce the effort required to execute an entire Reporting and Client Insight portfolio of trades across multiple allocations, Weisberg says that reporting capabilities that reinforce currencies and forward dates. advanced control and compliance processes are Post-Trade Solutions embedded in FXall’s platform, helping clients meet internal and external rules and fi duciary standards. Settlement Center is FXall’s automated post-trade Trade details are automatically captured and reported at service, which provides clients with a robust, secure every stage of the deal lifecycle, providing an unbroken and effi cient solution for confi rming and netting audit trail and providing a basis for comprehensive trades, in addition to managing complex settlement analysis and evaluation of trades. FXall offers instructions that can be implemented on a stand-alone comprehensive reporting that can be tailored to client basis or fully integrated into a complete end-to-end needs. Clients can gain insight around trading methods execution and settlement workfl ow solution. Clients through proprietary Execution Quality Analysis reports achieve a high degree of control over their operational that deliver insight about the best trading methods processes for all trades executed, whether on FXall’s platform or elsewhere. based on execution strategy. A partnership with ITG also offers sophisticated Transaction Cost Analysis According to Weisberg: “Our ongoing investment in reports to support fi duciary compliance, improved post-trade messaging assures clients that our platform performance and best execution. is capable of executing even the most highly structured settlement instructions and ensures that they will be “We continue to invest in our platform to provide prepared to handle any new regulatory requirements clients with the most effective and fl exible trading that may arise in the future. By creating an accessible, alternatives available, in addition to effi cient post-trade low-cost messaging network, we’re able to reduce processes and support for CLS. We believe the focus operational risk and reduce the confi rmation cycle on this transparency and market insight will become dramatically, from as long as ten days down to seconds.” increasingly critical in the future,” says Weisberg.

34 | july 2010 e-FOREX

FEATURE FX Liquidity Management: Should you be taking a more pro-active approach?

Defi nitions The defi nition and applications relating to Liquidity Management have prompted a considerable amount of debate. Various market participants have used it as a catchall term, with the meaning interpreted slightly differently depending on who one canvasses. However, whichever way you choose to defi ne it, having a sound FX Liquidity Management structure in place helps to ensure that trading opportunities can be more effectively grasped and risks more effi ciently managed. It also makes even more sense in terms of institutions when they are operating globally and managing FX rates and Liquidity internally and for their external clients.

With regard to key applications including Liquidity Aggregation, CEP and Smart Order Routing, By Roger Aitken one defi nition of The topic of Liquidity Management across the Liquidity Management capital markets and in the FX space in particular might be to regard has received a growing level of attention it as the “science of over recent years as innovation has allowed automatically managing technology to meet the complex Liquidity market and resting order fl ow with minimum human requirements of banks and fi nancial institutions, intervention”, according to Yaacov thus helping to deliver effi ciencies and mitigate Heidingsfeld, CEO and co-founder risk. Roger Aitken talks to some leading of TraderTools Inc., a New York- technology vendors to fi nd out more about the based provider of software and latest developments within this space. services to fi nancial institutions specifi cally trading FX.

36 | july 2010 e-FOREX >>>

He adds: “Liquidity Management from TraderTools’ perspective means: Am I looking at all my currency exposure from all the sources of my supply and demand simultaneously - in real time and electronically? With the volume of trades in the FX market and ballooning tickets it’s worth bearing in mind that this is a key requirement can no longer be performed manually.”

Harry Gozlan, CEO and founder of fi nancial trading systems specialist, smartTrade Technologies says: “Liquidity Management in my opinion relates to all that concerns the interface between the originating orders from a client or traders, right through until those orders are executed.” smartTrade is one of the industry leaders in cross-asset Liquidity Management solutions for banks, broker-dealers, asset managers, and large hedge funds. The fi rm recently introduced a new product called LiquidityDistributor for low latency customised distribution of OTC Liquidity (including FX). This solution is the fi fth modular component in its product suite - alongside the vendor’s LiquidityAggregator, LiquidityCrosser, LiquidityOrchestrator and LiquidityConnect solutions.

Adding value and reducing costs There are a number of reasons why banks and other fi nancial institutions that trade FX should be considering adopting more effective and automated FX Liquidity Management strategies. Ultimately it can add signifi cant value for fi rms who deploy such technology and can help tailor differing FX rates for certain client types or ‘buckets’ (e.g. institutional, corporate, retail).

Today, in order to compete, institutions also need to drive down their marginal costs and extract as much profi t as they can. And, for many sell-side institutions - who want to retain customers - this means considering putting in some kind of intelligent strategy.

Several years ago, after a raft of research reports from fi rms including Aite Group

july 2010 e-FOREX | 37 FEATURE >>>

architecture and the characteristics of the current and planned client fl ow.”

In the case of DealHub’s Business Activity Monitoring system, this can display real-time and historical reports of client fl ows and sales credit P/L, and is held up as “an ideal way” of making client fl ows visible to the naked eye by collating data in a single display - often making this “easily available for the fi rst time in some institutions.”

This type of overview can be used to see instantly the activity of an individual client, and the effect on revenues of changing the price spread, or moving the client from an ECN to the bank’s in-house e-Commerce platform.

“Once a critical point in terms of volume fl ow is reached, or even designated in planning, the key advantages of internalising these fl ows become apparent,” explains Kriskinans.

“To reach this point the bank must examine and defi ne the requirements for a robust intelligent price distribution system, Smart Order Routing, Liquidity Aggregation and algorithmic hedging.”

Peter Kriskinans In relation to other key services and solutions (e.g. “Reaction speed in terms of price delivery and auto- Liquidity Aggregation, Liquidity Distribution, hedging dictates an in-depth examination of the entire Intelligent Pricing, and Smart Order Routing) which Liquidity Management architecture and the characteristics of the current and planned client fl ow.” are being offered as part of a ‘comprehensive’ and integrated LMS architecture, Kriskinans asserts that there is “considerable crossover” between vendor solutions. and TABB Group were published - examining some of the early adopters of Liquidity Management solutions “Often banks will combine several offerings to - the benefi ts of LMS systems became pretty clear. create the hybrid solution that covers their exact For example, they have helped with increased price requirements and utilises the ‘best-of-breed’ solution transparency, which would lead to narrower bid/ from each particular vendor,” he adds. offer spreads, and in turn drove higher volumes. Also, in terms of electronic Straight-Through-Processing With DealHub, the vendor claims it has “solved (STP), having an automated Liquidity Management the problem encountered by banks seeking a single, solution could reduce the cost of processing trades unifi ed layer of proven technology across their entire that were considered unprofi table in earlier times. Add e-Commerce distribution platform.” to this global trading across time zones, which allows banks to capture greater spread. The DealHub Connectivity Manager Price Distribution solution distributes high performance FX rates to clients Examining LM architectures via the bank’s own Single-Dealer Platform (SDP), Peter Kriskinans, Managing Director at Option white label offerings, directly integrated API clients as Computers (DealHub), says as banks increase their well as multi-bank ECNs. This is claimed as having activity in e-Commerce: “Reaction speed in terms of “the fl exibility of being able to integrate with any CEP price delivery and auto-hedging dictates an in-depth vendor as well as the bank’s internal systems to give a examination of the entire Liquidity Management wide choice of price source and hedging capabilities.”

38 | july 2010 e-FOREX How strong is your backbone?

executing complex strategies across all asset classes requires a strong trading backbone. The smartTrade Liquidity Management system (LMs) is the market’s proven software solution to create deep execution patterns and matrices to face fragmentation head-on. The smartTrade LMs is the market’s only ‘state-aware’ software, giving organizations real-time order state information, trading instructions (rFQs, rFs, etc), venue status, and complete systems-state information for all smartTrade integrated systems. smartTrade. . . Liquidity Management with backbone. cross-asset, Modular and componentized, LMs is comprised of five essential pillars: LiquidityAggregatorTM — aggregation engine LiquidityDistributorTM — customized distribution strategies LiquidityCrosserTM — Matching engine LiquidityOrchestratorTM — smart order routing LiquidityConnectTM — Gateways to Liquidity Providers

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Option Computers also provides Liquidity decide which components and solutions they Aggregation with a comprehensive range of wish to select and compare the results in real time.” connectivity to ECNs and single bank APIs. And, And, in terms of ROI, Heidingsfeld says that this March the vendor successfully implemented its TraderTools has a “proven model that objectively DealHub/Connectivity Manager price distribution demonstrates increased revenue streams” for banks solution at a leading global bank. It provides their deploying its Liquidity Management solutions. customers with a strategic tool for low latency streaming of prices to multiple client-facing platforms. According to Heidingsfeld, one unnamed bank client has been able to save around $75 per $1m worth of TraderTools’ Liquidity Management Platform™ FX volume traded through just two aspects - FX is offered up as one of the only systems on the Liquidity Aggregation and FX Order Management. market today that integrates the “four disciplines” of “And when our FX Pricing Engine and FX White- electronic FX trading, namely: an FX Pricing Engine, Labelling modules are activated, that number could be FX Liquidity Aggregation, FX order Management and much higher,” he adds. FX White-Labelling. Distribution strategies “These are the four key elements of any system that Turning to steps that fi nancial institutions can take to any bank trading in FX requires,” states Heidingsfeld develop more effective distribution strategies for FX in New York. “But the fundamental question is really: As a bank are you buying all of those elements from a single vendor, or are you looking to use certain elements that you already have. Moreover, even if the system components are disparate, the overall Liquidity Management Strategy (LMS) should be unifi ed.”

More fl exible Aggregation solutions Looking at initiatives leading vendors have been taking of late to make FX Liquidity Aggregation solutions more fl exible in order to help in the optimisation of fl ows and to deliver more compelling competitive advantages, much has been happening.

At Option Computers they already have an extensive range of trading interfaces to multiple Liquidity venues. The fi rm’s Liquidity Aggregation GUI has a wide range of functionality including Order Management, which allows the user to construct their own order strategies that can be saved as preset order templates and used again.

Heidingsfeld at TraderTools, says: “As a technology vendor wholly-focused on FX, we deliver an open system, whereby if a potential customer has an existing LMS technology they wish to integrate, we can do that for them. As such, it does not have to be an ‘all or nothing approach’ where customers are held hostage to a particular offering.” Yaacov Heidingsfeld He adds: “Given that our licensing model is “To me, more effective distribution strategies in FX trading transaction-based, end-clients have all the technology all really revolve around more effective pricing.” [LMS solutions] available to them. They’re able to

40 | july 2010 e-FOREX Liquidity Management Platform

Leave the aggregation to us FEATURE >>>

Liquidity, banks will usually either have a white for FX spot, Forward, Swaps and NDFs to label e-Commerce platform or their own single multiple client facing eCommerce platforms. dealer platform. But commonly both, “as they DealHub’s Single Dealer Platform Gateway seek to reach a distributed audience of clients forms a common interface to the Bank’s Single- trading on their favoured platform,” notes Dealer Platform and direct client trading API Kriskinans. over the Bank’s messaging middleware of choice. It acts as the bank’s own ECN calling the He adds: “The most effective fi rst step any DealHub Connectivity Manager for pricing, bank can take is to future-proof its architecture maintaining stream assignments, handling to allow it to move fl exibly in any direction to session Management and user entitlements and reach end clients.” calls other systems to process blotter requests, pass orders and book deals as required. Heidingsfeld adds: “To me, more effective distribution strategies in FX trading all Another step really revolve around more effective pricing. Another “essential step” towards future-proofi ng Essentially, there really are no more than three Liquidity distribution strategies is to plan for the ways to distribute prices to a bank’s customers: volume and type of price requests and resulting (1) an FX White-Labelling solution, which most trades, which will grow exponentially as the institutions have adopted and are looking to business increases. DealHub’s Connectivity upgrade; (2) a Multi-Bank Portal; and, (3) a FIX Manager, for example, is designed to handle API to the customer. extremely high trade throughput and handle two-way communication of events between The method a bank chooses depends on it sophisticated algorithmic trading software. size and customer base.” However, he goes on, “Regardless of the channel, they have to ask Their Connectivity Manager incorporates highly whether they are making the best possible prices fl exible rules-based processing and provides and offering razor-sharp prices for different support for Request for Quotes (RFQ), Request customer profi les.” for Streaming (RFS) and executable streaming prices as well as Dealer Intervention. It manages At Option Computers they achieve more the negotiation and validation of the deal effective distribution strategies for FX Liquidity request lifetimes according to the protocol of for institutions with two key products. the individual ECN, performs credit checking DealHub’s Connectivity Manager is a price against internal systems, and validates outgoing distribution solution, which provides a strategic rates against a Market Data source and creates tool for low latency response to price requests STP to the Bank’s downstream systems.

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DealHub’s STP system is said to be capable of FX where brokers are dealing with a wide range of processing in excess of 2,000 trades per second, clients including retail, corporations, and institutions and offers “compliant archiving” and overview for who are all profi led differently for commissions and a comprehensive solution to integrate to the Bank’s credit limits. downstream systems and workfl ow processes. In relation to how more advanced Liquidity As a fundamental component in the implementation Distribution frameworks can help banks and brokers of a widescale single-dealer eTrading platform for better manage Liquidity pools and the margin/spread OTC products, smartTrade’s newly introduced adjustments they need to apply to various types of LiquidityDistributor hopes to solve many of these client (Corporate, Institutional and Retail), Kriskinans issues by enabling organisations to customize and says: “Banks that combine CEP vendors with create complex matrices for their distribution of DealHub’s Price Distribution system have tremendous market data and prices to various types of clients fl exibility on where and how they construct prices and including custom spreads and limits over any allocate credit during a price request.” messaging infrastructure.

Market data considerations LiquidityDistributor can manage the complex matrix of clients who can be grouped into different Liquidity Electronic FX trading desks are becoming very pools with different sales spreads, set multiple price burdened with the distribution and fan-out of market tierings for the clients, dynamically move clients data to clients. The problem is compounded within between pools and spreads, and apply credit checks before establishing a market data stream and the tradable stream.

Harry Gozlan explains: “LiquidityDistributor enables our customers to customize their order fl ow for Aggregation, Matching, and Smart Order Routing and now also to customize the distribution of that Liquidity. Clients will be able to create very complex patterns for their quotes, Liquidity stacks, spreads and limits to fan out to their clients over any messaging infrastructure for a higher level of client servicing at a very low level of latency.”

Furthermore, smartTrade customers will have the “ability to choose the combination of how they want their market data distributed including full market data, incremental, and confl ated snapshots.” As such the LiquidityDistributor is offered up as a “proven solution” for individual asset classes including FX, as well as fi xed income and equities. “It’s a natural solution for a cross-asset trading infrastructure,” Gozlan asserts.

Connectivity and Latency issues As regards connectivity, latency and legacy integration issues associated with revamping or upgrading an existing LMS, Kriskinans says: “Banks may choose to take a phased approach Harry Gozlan where their initial stance is to use some “LiquidityDistributor enables our customers to elements such as an existing price engine and customize their order fl ow for Aggregation, Matching, and Smart Order Routing and now also to cus- add the DealHub price distribution layer as a tomize the distribution of that Liquidity.” simple ‘framework’, which passes on pricing to existing client facing platforms.”

44 | july 2010 e-FOREX

FEATURE

vendors entering the connectivity space to compete with the traditional providers, improvements in connectivity speed are continuous.

Heidingsfeld says that latency and scalability are two areas that highlight both the challenge and promise of LMS systems. “The more the integration points and disparate technology, the greater the latency. Liquidity, as well as system optimization, should be measured across the entire FX platform. Because when the technology is closely integrated, the LMS solutions can really shine.” He adds: “the whole concept of Liquidity Management is still relatively new and has essentially grown up over the past 12-18 months. There aren’t many true LMS systems available on the market today.”

TraderTools is one vendor that starts conversations with banks about the individual modules that make up an overall LMS architecture – based on their immediate pain points.

“While some of these institutions already have Risk Management systems processing FX trades end-to- end, the issues really centre on whether they can process the information and fl ow required, fast enough to extract the value they need.”

Integration As to integration issues, Gozlan states: “Today there are not really so many issues if there is an existing LMS in place within an institution. However, what’s important is to have a common transport - a common technology - to transport data from the trade. Typically it is in place.”

With connectivity being in situ, he contends that it is not that diffi cult to basically cut out the existing component and replace it with one that is even more sophisticated. What can be sometimes be The fl exibility is then created to “problematic” is around a bank’s desire to redesign the migrate some currency pairings front end - facing out to clients. Gozlan notes that the off into an automated Liquidity other element that may require some work is when a Management and hedging solution, decision is made to extend out to other asset classes – whilst leaving existing pricing within FX and beyond. arrangements in place for less active pairings. And he says, when the bank is ready to expand coverage, the For example, if bank chooses to expand its FX spot “migration path is in place”. LMS system into FX plus options, the existing LMS system has to combine two different workfl ows. “For Latency is clearly a key issue to be solved. Banks often spot FX they may have streaming [prices] whilst FX ensure this is minimised by having three separate options could be RFQ-based. While we can undertake instances of their price distribution system - each one this as a vendor, it is not so much a legacy problem serving the clients in the global region. With new but more an organisational issue for the bank or

46 | july 2010 e-FOREX FX Liquidity Management: Should you be taking a more pro-active approach?

CASE STUDY fi nancial institution in question.” According Kriskinans, vendors are proving themselves “tremendously experienced” within their particular BayernLB deploys a realms of technical competence. As the market is driven towards automation, Liquidity Management vendors are offering their knowledge and expertise in handling new scenarios that arise. platform ayernLB is the leading Bavarian commercial bank “Typically each bank will want to for large and middle-market corporate customers in control and own the intellectual Germany and Europe. One unit within the bank that property it creates when it defi nes its B has consistently outperformed over the past few years is the hedging strategies, spreading matrix FX trading department, headed by Marc Burgheim. Although and smart order routing algorithms,” profi table, the unit is still largely based on manual trading. notes Kriskinans. “But [also] vendors are there to provide a workbench of core Automation is the Challenge functionality and support that facilitates Marc knew that FX trading was providing stable earnings this process.” for the bank. But he also knew that those earnings “could be increased with the right investment.” The right technology Build versus buy was the answer. If much of the FX trading could be A number of factors will infl uence automated, Bayern would be able to offer better prices, more whether FX trading fi rms should Liquidity and quicker response times than any other bank in consider developing their own its peer group. proprietary LMS infrastructures or outsource this function. “Time to Step 1 was Aggregation, in order to reduce spreads and market is also a key factor in deciding to increase profi tability. Step 2 was full STP, in order to be able outsource to vendors,” says Kriskinans. to increase trading in Options and Emerging Markets. On top of this, he adds that banks must consider the time and costs Marc checked out various Aggregation tools as well as ECNs involved in developing in-house and with Aggregation functionality. The problem was that each the skilled resources required to ensure one of these solutions would have to be integrated with integration to multiple systems - price additional tools in the future (i.e. to handle algorithmic trading or auto-hedging). engine, hedge, credit, etc. This may not necessarily be available at all banks. Integration is the Answer Kriskinans adds: “In the same way that After a relatively short, evaluation period the TraderTools’ it is unnecessary in 2010 for a bank to Liquidity Management Platform™ (LMP) was chosen and write its own STP feed handlers, when went live in the Bayern FX trading room. companies like DealHub can supply these type of solutions off-the-shelf, With manual trading, it is humanly possible to handle only 2 there are best uses of resources where or 3 Liquidity sources at a time. Now Bayern FX traders are the bank can create its own IP, and “more than happy” being able to stream 5 or more separate Liquidity sources at a time. logical outsourcing decisions where vendor solutions are tried and tested.” “What sold us on TraderTools was the fact that its LMP The modern Liquidity Management offered a lot more functionality than just Aggregation,” solution is therefore most likely to be a explained Marc. “We’re looking forward to activating collaboration between the bank’s in- algorithmic trading and auto-hedging functionality in the house expertise and the vendor’s ability near future.” to deliver the latest innovations in technology and process.

july 2010 e-FOREX | 47 FEATURE Technology and product innovation: opening up new opportunities with FX options

complaints of Retail FX customers is their only risk management tool is stop orders and even when they are right about the directional move of the market they frequently lose money because they keep getting stopped out. Retail FX customers are now demanding the same risk management tools and trading strategies they have for equities and futures: standardized put and call options. He goes on, “Retail traders already understand “exchange-style” vanilla options and they will know how to work with them immediately in FX.”

FX Bridge has just released the latest edition of its FX dealing platform ProTrader Plus™ (PTP 5.0), which features a completely By Frances Maguire new graphical user interface While increasing use of electronically traded (GUI) and other signifi cant user options is gradually redefi ning what is regarded enhancements. Among other new vanilla and exotic, the move towards the features, dealers get a customer development of an ECN for FX options, and alerting, communication, and the current regulatory debate around central monitoring subsystem which allows clearing all point to one conclusion: watch this them to track, communicate en mass, space. Where once, the more complex options’ and handle one-on-one contacts with structures seemed to be resigned to remain their entire trader base in any language. either RFQ or voice-based, this mindset is slowly PTP 5.0 also includes multi-dimensional cross-asset margining, commission and rebate being eroded as technology advances and the tracking, and managed group trading. PTP 5.0 ease of use of options’ systems increases. is FX Bridge’s fl agship product, which is licensed to banks and forex dealers, for trading spot, CFDs, and Retail FX option perspectives options. Joe Cunningham, chairman of FX Bridge Over the last 18 months, Cunningham says demand Technologies, provider of combined FX spot, CFDs, for electronic trading in options has grown dramatically and options trading software says “One of the big due to the increased volatility in the market, particularly

48 | july 2010 e-FOREX >>>

Joe Cunningham “Retail traders already understand “exchange-style” vanilla options and they will know how to work with them immediately in FX.”

due to demand coming from retail investors. “There is no ECN for options for retail traders. FX Bridge is probably one of the only options technology providers that works with the big banks, the largest options liquidity providers, and we have plans for an ECN for options, offering best bid, and smart routing, in the future.”

“We see that the fi duciary requirement for best execution will lead towards an ECN for options. Although options are already completely transparent, a single dealer system that can offer transparency and the best possible price is particularly important with options where volatility makes up a sizable portion of the premium.”

Cunningham does not believe that FX options, as they are provided today, will be part of the exchange model. He says they are more likely to remain bilaterally traded. However, apart from the very complex

july 2010 e-FOREX | 49 FEATURE >>>

extensive options pricing and analytical tools for both the dealers and the traders.

FX Bridge’s trading GUI has a feature that enables analytical tools, for margin calculation for any combination of long/short, put/call spot positions, for risk management, to evaluate overall positions and any combination of long/short puts and calls and also to stimulate trades individually and as a combined position across the portfolio.

ProTrader Plus™ Algorithmic options trading Just two years ago, Cunningham says that there products, Cunningham believes the days of trading was little real interest in algorithmic options trading FX options by voice are coming to an end but that the for FX but today it is a very different picture. FX more complex derivatives products will remain RFQ Bridge is working with several algorithmic trading for the foreseeable future. No matter how complex the developers, who are modifying equity algorithmic option is it is still based on a volatility curve and can programmes for FX that will include spot and options be expressed electronically. trading in one strategy. It is highly expected that FX algorithmic trading will follow the same growth FX Bridge recently introduced Strategy Optimizer on curve as equities, in fact, as Cunningham points out, its retail trading station. It enables traders to input creating algorithms for FX is perhaps less complicated an anticipated price move, a timeframe for that price than equities because there is not the added move to be achieved, and an amount they are willing complication of corporate events to take into account. to risk on the trade. From there, Strategy Optimizer analyses every permutation of long and short calls But most importantly of all, Cunningham predicts and puts over every strike price and expiration to fi nd that a huge growth surge in trading options is very the optimised combination of options that yields the likely, in about six months, pending expected changes highest return for the predetermined risk amount. in regulatory requirements. The Commodities Futures The trader can optimise for a specifi c strategy, say a Trading Commission (CFTC) and the National long call spread or a short put calendar spread, or for Futures Association (NFA) are considering changing any possible strategy. leverage rules for forex dealers in the United States. They have suggested reducing the leverage forex Cunningham adds that FX Bridge is the only dealers make available to their trading customer technology provider to offer cross-asset risk-based from 100:1 or 200:1 down to as little as 10:1. Most margining for spot and options. “FX Bridge’s industry observers anticipate that the rule will proprietary Volatility-based Margining™ system probably settle somewhere around 20:1, putting protects FX dealers from the ‘hundred-year fl ood’ worse spot trading on leverage parity with currency futures case market scenario, yet traders never tie-up a penny contracts in the US. He says: “If this happens, options more in margin than they are at risk for,” he says. will be the only instrument available for US based traders who want to utilise high-leverage strategies in FX Bridge provides an STP facility to provide pricing their FX trading.” and analytical tools, not only for high volume/low latency executions but also a variety of STP fi lters Richard Brunt, head of GFI FENICS says that the for executions going through forex dealers, as well as diversifi cation of risk away from traditional investor

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specifi c market risk, event or currency fl ow while in the other the options are traded primarily by buy- side market makers or speculators,” he says. FENICS Professional is an FX options middleware solution that delivers huge effi ciencies to its clients, allowing traders to deliver their proprietary prices to their sales teams around the globe, and even direct to their customer on internet using the FENICS Enterprise™ component. Full STP as standard to the banks back-end system ensures that trades fl ow seamlessly between FENICS Professional™ systems without the need markets is driving both institutional and retail for duplicate entry. investors to the FX options market. He says that increased volatility and number of players in the underlying spot FX market also leads to a natural progression of interest in FX options.

FENICS Professional™ a GFI FENICS platform for pricing, trading and risk management of FX options includes FENICS Trader™. FENICS Trader gives customers access to a multiple bank liquidity pool. FENICS Professional clients can use the FENICS Trader component to price options from the liquidity bank’s proprietary volatility surface.

Brunt says: “These prices can be fi rmed up via GFI FENICS RFQ technology and the user can trade directly from the FENICS Professional Application. The system is fully audited and captures all trade details via the GFI FX Blotter. This transparency clearly helps meet the need to show best execution.”

Brunt believes that RFQ, either through voice or electronically, is currently the only viable method for offering prices on what is effectively an infi nite number Richard Brunt of available OTC FX options. “There is of course the “FENICS Professional has fl ourished in the market segment through offering a platform that more structured strike and fi xed date approach that not only prices and risk manages the banks FX options, exchanges offer and this may be more appropriate for but also gives them the tools to generate fl ow through streaming live prices. The differences between the two integrated sales applications, and retail products approaches satisfy two very different customer bases. such as DCIs (Dual Currency Investments).” In one instance the option is created to hedge against a

52 | july 2010 e-FOREX

FEATURE

In Q3 2010, GFI FENICS will launch FENICS Professional version 12.1, which will include new functionality including: RFQ capabilities and auto dealing between sales and trading, chat, volatility spreading by counterparty and additional sales tools such as termsheets, supporting local languages.

According to Brunt there is some demand for algorithmic trading strategies in FX options, but without the aggregation of prices in the OTC market take up will always remain small compared to spot.

Brunt says that smaller banks are looking for integrated platforms that deliver more than the ability to price an option. These banks are inundated with ‘free’ pricing systems from proprietary e-commerce platforms and the traditional vendor boxes.

He says: “FENICS Professional has fl ourished in the market segment through offering a platform that not only prices and risk manages the banks FX options, but also gives them the tools to generate fl ow through integrated sales applications, and retail products such Alfred Schorno as DCIs (Dual Currency Investments).” “I guess that for the foreseeable future anything beyond second generation options will remain RFQ based,” Clearing of FX options

Brunt believes that the likelihood is that at some point options are increasingly perceived as vanilla structures clearing of FX options will be mandatory, although it nowadays. “Investments of the provider banks into could be some time before the different regions can their electronic pricing abilities are ongoing, but I guess put this into practice, given the truly global nature that for the foreseeable future anything beyond second of the FX options market. That said, clearinghouses are already saying that they will clear FX options and generation options will remain RFQ based,” he says. some clearinghouses are taking it on themselves to start the build process.

Alfred Schorno, managing director of 360T Group, says that options have always been a well-liked instrument for users with real underlying hedging exposure. “Based on the fact that market makers and portals offer streaming electronic pricing for standard options the interest from institutional traders has also increased,” he says.

Schorno says that FX options can already be traded on several single bank trading channels and also multi bank portals, like 360T, which offer features to execute different types and structures of options. He adds that while MiFID best price execution is still not a hot topic for FX and FX option business, nevertheless some of the market participants are already putting a big emphasis on this requirement, which will certainly come soon.

According to Schorno the defi nition of ‘vanilla’ is evolving quite a bit as fi rst and second generation

54 | july 2010 e-FOREX Technology and product innovation: opening up new opportunities with FX options >>>

360T Group has a strong belief in a best of breed approach and therefore concentrate on communication and execution. 360T offers request and execution features and of course, STP solutions to optimise the trading workfl ow while there exist very well established and specialised tools for analytics and pricing.

While Schorno believes it is still too early to judge the likely impact of the current regulatory debate over the future handling of OTC derivatives, as the specifi c regulatory requirements are still unclear. He says, however: “Interpreting the tendency that higher margin requirements and a limitation of leverage could be the outcome the effect will limit fi nancial institutions with high leverage. options, increase transparency and reduce the risk, Growing market due to the increasing likelihood that they will soon However, Eric Jawitz, senior market specialist, at be cleared through a Central Counterparty Clearing Calypso Technology, says that regulatory initiatives House (CCP). “Even without a regulatory mandate are expected to increase the size of the market for FX to clear FX options though a central clearing house, initiatives by fi rms such as the CME are underway to start clearing FX options, possibly as soon as year end,” he says.

For Jawitz, with the increase in international commerce, there is a growth in the volume of currency derivatives trading. Increases in volume will strain manual systems, so it is even more necessary to have a clean STP solution.

He says: “Currently, when you trade FX options, you have to accept the counterparty risk of trading with a bank. In the past, there wasn’t much of a deterrent. Recently people have lost the appetite for taking this risk. With CCP clearing, people wanting to trade FX options will no longer have to take the counterparty risk of any bank. Instead, with the CCP as their counterparty, their risk would be greatly reduced. This would allow banks with lower credit ratings to become market makers, increasing the size of the market and lowering the spread on the trades.”

Eric Jawitz ECNs “With CCP clearing, people wanting to trade FX options will no longer have to take the counterparty risk of any bank.” There are some attempts being made to build new trading models (such as portals, ECNs etc) for FX

july 2010 e-FOREX | 55 FEATURE

options and Jawitz believes that with CCP clearing, there will be much more interest in these sorts of venues. However, he adds, until there is suffi cient volume on these platforms, trading on the new ECNs will not be suffi cient to prove best execution.

Likewise, he believes that, if the platform is right, increasing use of real-time pricing for more complex options’ structures will become possible. He says: “FX options market makers use real-time pricing models to determine the prices they are willing to trade at. If the proper venue is created, we may see real-time bid/offer prices posted for more complicated, but common, FX option structures.”

Calypso has invested heavily in FX options’ functionality and released many new features this year. Says Jawitz: “With our FX options pricing sheet, you can easily create new multi-leg structures, defi ne formulas linking the fi elds together, and add the completely confi gured structure to the system for use by anyone in the fi rm. This makes it much easier to enter a trade and greatly reduces potential trade-entry errors.”

A powerful new solver can solve for strike, vol, notional and other fi elds including solving for zero cost structures (see picture for calculation of Strike for a Zero Cost Collar).

Multi-leg structures can be set up to generate one confi rmation. Modifi cations, expirations or triggering of barriers also generate messages on the structure level as well.

This makes life much easier for the back offi ce. Additionally, sophisticated option expiry and barrier triggering greatly reduce the complexity of one of the most error-prone FX option activities.

“As always, the integrated front-to-back multi-asset design of Calypso, along with a real-time feed of market rates, increases effi ciency and reduces costs for all asset classes,” he says. Traders from banks, hedge funds, asset management and corporations are looking for a change in the way FX options Technology and product innovation: opening up new opportunities with FX options

market has been the relationship between the bank and the customer. This is deeply embedded in the psyche of everyone in FX. It might have been true, at some point, in all asset classes, but a lot of other products have shifted away from this and I think FX will be a product that will follow this route.”

He believes this will happen as the FX market evolves and gets more different types of traders into the market, such as algorithmic traders, proprietary traders, hedge funds looking to make markets, this relationship will start to dissipate. This is why Rosenberg has been trying to fi nd a way to put this dealing capability on to a platform. This is available for spot FX, but most of the options trading models tend to be RFQ still.

Says Rosenberg: “At some point I think it would be interesting to be able to match up any two traders in options.”

Conclusion Glen Rosenberg In terms of the complexity of some options, “At some point I think it would be interesting to be Rosenberg says it is only time before more and more able to match up any two traders in options.” can be traded electronically. “A fair amount of options can be commoditised, and that includes exotic options as well. Once you can commoditise something, and are traded. Currently they need to make three to four put in a standardised input for matching, it can be phone calls to get prices, and if spot rates are moving done, but you always need the human touch to help they may have to make the phone calls again. Jawitz solve more complex problems,” he says. It has been a believes they would be happier using an ECN for slow process, but he thinks, traders are ready to make automated execution. In addition, this may help them the leap to electronic trading for options. further with more liquidity and better execution. “Another great benefi t of an ECN is a direct feed to There is a growing demand from smaller institutions the back offi ce. This reduces the demand on the back and retail institutions for the same benefi ts of offi ce,” he adds. electronic ECN and Calypso’s Jawitz believes it is only a matter of time until we see FX options trading Glenn Rosenberg, managing partner, of Bridgetrade on ECNs and clearing through CCPs. He says: “The strongly believes a better options’ trading platform is market will grow and spreads will decrease. The only needed and is developing an FX options’ ECN, that losers from this change may be the top-tier banks, includes a innovative clearing solution that ultimately which will no longer control the major trading. goes to central clearing but would have to be in stages, However, even these banks may profi t from the starting with bi-lateral trading. increase in volume.”

He says: “One of the things we had to do was come Regardless of whether clearing becomes mandatory up with a solution to trade complex over the counter for FX options – LCH-Clearnet has already begun products and engineer an intuitive front end GUI, building an FX options clearing system, which is which we have created and which I think will be very expected to go live early next year – the debate about attractive for this market place. Also, it will facilitate whether more complex structures can be traded the ability for people to trade directly with one electronically and whether an FX options ECN would another, because currently the central part of this gain traction will continue.

july 2010 e-FOREX | 57

FOREX TECHNOLOGY Beyond the Jargon The four key elements of technology

different procedures from treasury management system workfl ow to trade positioning and hedging by retail brokers. Other examples include “best execution” and “algorithmic trading,” both of which are black holes with infi nite applications that forbid any uniform application of the terms. And let’s not forget “internalization,” the jargon du jour used at our latest panel discussions and seminars. This term is often applied to suggest some novel patented technology; meanwhile, it really isn’t more than a newfangled label for fl ow optimization.

The prevalence of blanket terms can lead to some bad habits. Whether through expediency or assumption, one might exclude important context when accounting for requisites. In preparing to look for a vendor to optimize current operations By Chip Lowry or to launch a solution for the fi rst time, it’s worth ordering your most important needs into It seems as if every few months there prioritized lists, with expanded descriptions under is an article or panel discussion that each requirement. Before registering specialized appropriates a new catchphrase to sum needs, the list should fi rst index the four key up our industry’s current fi xation with the elements of technology: performance, scalability, latest technology. These colloquialisms risk management and extensibility. Whether form the vernacular to communicate starting or enhancing services for a hedge fund, complex issues. Vendors adopt the “insider corporate treasury center or brokering service, talk” to market and promote services these are the fi rst items that too often get to clients based on their technological checkmarks without a thorough audit of the underlying service. Again, these are more than acumen. For many of these clients, checkboxes to be ticked on a work order, for they however, the essential details underlying can defi ne the success or failure of the alliance their technical jargon may not be obvious itself. Here are the key points to consider: — or even available. Performance Ask the bidding vendor when their computer e use an endless list of jargon to orient servers were upgraded. While techies may say ourselves to the electronic FX business. the Intel Xeon 5680 is the best equipment, WAppraisal of our most common FX server connectivity, redundancy and attention terms shows how arbitrary they can be when used to maintenance are more important than brand without context. For instance, “straight-through hardware. Also, you need to fi nd out if their processing” is so important to the effi ciencies of servers use optical networks to provide access to electronic trading that it has its own acronym, their trading system as they are among the fastest

COMMENT “STP,” yet it encompasses any number of in the industry.

60 | july 2010 e-FOREX It is also important to know if the data feed is tick- It is important to ask for a written security policy, by-tick or provided in incremental snapshots. The key and when reviewing it, remember that cryptographic to a fast-matching engine is what industry insiders features, such as digital certifi cates and SSL session call “distributed matching engines,” in other words a keys, are a necessity wherever information is passed or framework that allows multiple-matching engines to stored. Also ask if they have third-party audit reports. function as a single unit to handle instrument load Since government regulations may require audit and provide fault tolerance. A fully distributed system trails, perhaps it is most important that the vendor allows for microsecond order matching. Vendors show fl exibility for customizing real-time reporting, who focus on performance technology should be able including orders executed, orders resting, client login, to demonstrate low-latency trading through fully margin and fi nancial statistics, and other important auditable trade tickets where average order matching lifecycle data, so fi nd out what their redundancy time is measured in milliseconds or faster. standards are. Finally, ask for server uptime documentation and what problems they’ve had. If Scalability they respond that their system uptime has been 100 percent, then you know it’s too good to be true. Don’t confuse performance for scalability. Where performance focuses on time measurements in response, Extensibility scalability is about concurrent access. At fi rst glance, “Reach” is of paramount importance. A proven it would seem the best vendors are those focused on track record utilizing market resources effectively the institutional class, where blackbox traders execute and effi ciently suggests a vendor is experienced stealth strategy in a high-frequency environment. Yes, with growing their clients’ businesses. FX execution a professional trading venue geared toward the most is only as good as the available liquidity. Ask if lucrative class of traders is paramount. On the other they have direct market access through established hand, the preeminent electronic communication relationships with banks, and if so, which ones. If networks (ECN) don’t connect to more than a few they have standing alliances with large fi nancial thousand participants at most, while a deployment institutions and other vendors, they’re likely to be geared toward the retail FX market, for instance, might plugged into the evolving nature of a fast-changing service tens of thousands of participants. And that’s for industry, where technology and liquidity progress one hub. Ask if the vendor services the entire spectrum from new and established places. The vendor must between retail and institutional traders. Experience have the willingness to build technology and liquidity with all segments means they’re more likely to have relationships on their own. Vendors demonstrating expertise extending a graduated infrastructure custom the fruits of these nurtured partnerships and acquired to individual market segments. technology should not have a problem identifying these established relationships. You may also want to fi nd out what data stream packet analyzers they use for continual performance Of course, these are merely starting points. Don’t measurement. Also called “sniffers,” these tools forget to check the vendor’s references as part of provide powerful network auditing and network the evaluation process; for example, the number of traffi c information for the purpose of calibrating load years in business, number of clients, and the size balancers and preventing outages. As users grow and and availability of their support teams. If you have trade volume increases, session services and multiple- a long list of requirements, you should submit it to matching engines should be added in succession. prospective vendors with enough lead-time so they can respond in time. The request for proposal (RFP) gives Risk Management vendors equal opportunity to respond with written proposals coupled with product demonstrations. Risk management starts with reliable administrative Terminology should never replace thinking, so ask software servicing the entire workfl ow. Ask the vendor questions whenever new phrases arise. While lingo is to disclose information about their client and liquidity convenient for starting the conversation, knowing the management tools. For brokers looking to create a implications for each market term will help predict the retail trading solution, it’s these management tools ultimate success of a business alliance. that allow them to automate safeguards and protect profi ts when aggregating liquidity from market makers Chip Lowry is the chief operating offi cer at Currenex, and segmenting clients into categories based on Inc., part of the State Street Global Markets division of trading patterns. State Street Corporation.

july 2010 e-FOREX | 61 FOREX TECHNOLOGY

Second Generation CEP: laying the foundation stones for enhanced FX Trading architectures

gauging CEP deployment specifi cally With Complex Event Processing (CEP) having within FX is hard, since it can form spread out across the asset classes - initially part of multi-asset deployments. within equities – there has now been a remarkably fast uptake within the FX space Early adoption of CEP was in fi nancial for CEP technology among both buy and sell- services. High volumes of data, sub- side fi rms. Roger Aitken quizzes leading CEP second latency requirements, high vendors and experts on the ‘second generation’ levels of control and fl exibility helped landscape and where the future lies. CEP spread across Wall Street and City of London fi rms. The rapid increase in fi rms seeking to gain a competitive edge in analysing omplex Event Processing (CEP) technology is increasingly becoming the foundation for Chigh-speed trading and a wide variety of low latency, transactionable infrastructures within the foreign exchange (FX) space and other asset classes. While the frenzy around CEP - essentially a sophisticated software tool - that took hold in early 2008 may well have mellowed somewhat during the fi nancial crisis and certain prominent bank collapses, this very fact has propelled risk management and real- time monitoring to the top of fi nancial fi rms’ agendas. The upshot is that prospects for CEP deployment across the capital markets - including the FX market - would appear pretty robust.

Spending growth Research from analysis fi rm IDC recently forecast that spending on CEP Middleware would rise by over 50% annually over the fi ve years from 2008-2009. And, Boston-based Aite Group, another fi rm which analyses CEP in the context of the FX market, has put skyrocketing volumes of customer data in FX - both spending globally on CEP software across the capital at the Institutional and Retail level - is fuelling the markets at US$303m in 2008 and growing. spreading adoption of CEP technology.

According to the recent Aite Group report, ‘The Data “CEP is a natural fi t for the high-speed trading space Utility Knife: CEP Cuts Into Enterprise Architecture’, because it provides agility via rapid development and while trading and trade-related projects like smart deployment of new applications, and it can deliver the order routing (SOR) accounted for 48% of existing low-latency performance required for this market,” use cases, risk management and market data areas were states Jeff Wootton, Sybase CEP Product Manager and making “double-digit headway”. That said, precisely Senior Director, based in Chicago.

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Sean O’Donnell, Director of Technology in London for the RealStream suite of products at First Derivatives (former Cognotec business), says: “The fact that FX is by its nature an OTC market - and not like a centralised exchange - means there are many more participants and far more multi-party relationships. That increases the complexity in terms of the number of transactions and events, which has a direct impact in relation to CEP, which is clearly geared to handling that level of messaging.”

Retail FX demand for CEP Within the FX market there are different kinds of trading profi les. There are high net worth individuals (HNWIs), all the way down to day traders and novice traders. Compared to the traditional Institutional FX space where there are perhaps low hundreds

or thousands of participants from the existing banks “It’s really the agility that is key,” he adds. “With the and brokers, the Retail space has tens of thousands of pace at which the FX market is evolving, fi rms that participants. trade in this market require tools that can evolve just as fast.” “All of that information has an impact on what a CEP engine can actually do in terms of profi ling these First generation CEP offered high performance kinds of clients, which would be vastly different to the correlation engines allowing users to build Institutional user base,” says O’Donnell. applications, while second generation CEP is more about realising the need for a complete - holistic - In terms of the fast growing demand for CEP within application development environment, that developers the Retail FX industry, this has essentially been fuelled have come to expect from mature systems. by the growth in electronic trading of FX as brokers

july 2010 e-FOREX | 63 FOREX TECHNOLOGY >>>

Average Daily Trade Volume in FX (In US$ Billions) Source: Aite Group seek to gain a competitive advantage and manage has been winning business from a number of Retail their risk in real time, coupled with the rise in global FX broking and spread betting fi rms, as well as in the investing. more Institutional (buy- and sell-side fi rms) traditional fl ow. “The opportunity in Retail FX is really around Evidence of the trend can be seen with electronic fi ne grain control of the customer relationship,” says trading having accounted for approximately 65% of Richard Tibbetts, chief technology offi cer at the fi rm. all FX trading at the end of 2009, but the expectation By way of example, he cites GAIN Capital, a client is for this fi gure to reach more than 70% by end of the company which has used the vendor’s CEP of 2012 according to Aite Group research (‘High technology to refi ne how they price and direct quotes Frequency Trading in FX’, April 2010). to their end customers. This helps them assign how they hedge and how they manage the fi rm’s position, And, despite the decline in overall FX trading volumes which Tibbetts claims is proving a “very profi table” between 2008 and 2009, the Retail FX market seems application. to have grown slightly in 2009 (see bar chart). While the Retail FX market still only accounts for a small Other Retail FX offerings fraction of the global FX market (averaging c. US$125 First Derivatives’ RealStream suite of products offers billion a day or around 3.5% of the global FX total of services to both Retail and Institutional clients. “As c.$3.7 trillion), most large FX banks are increasingly part of the Delta product suite, we have a CEP engine looking for ways to interact with the uninformed at its core. But additionally we have two platforms Retail fl ow. out there both for the Retail space in our RealStream margin products, and also out to our Institutional Sang Lee, author of this Aite report, stated: “For FX client space,” says O’Donnell. The product now, Deutsche Bank and Citi have taken the lead suite covers a range of key areas from mission critical among the large FX banks with their Retail offerings, trading and risk management systems and utilities for Deutsche Bank with dbFX and Citi with CitiFX Pro.” users, traders and developers.

StreamBase Systems, based in Boston, regards itself as The fi rm’s Delta CEP offering delivers unifi ed one of the largest “pure play” vendors in the space. It scalable real-time performance plus touts ease of

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FOREX TECHNOLOGY >>>

Wider integration issues Leading CEP providers have also been making strides in tackling issues associated with integrating CEP platforms with Retail and Institutional FX execution systems/platforms.

“We’ve seen that customers already have their own interfaces to the execution systems they use, so our CEP technology [Sybase] ends up being integrated with the customers’ internal systems,” notes Wootton. “They are using CEP as an additional real-time computation technology within their existing operations framework.”

Tibbetts says with regard to integrating CEP platforms with Retail and Institutional execution systems that it is a “big chunk” of the StreamBase framework for FX data aggregation.

One increasing trend that has been witnessed is trading fi rms that used only to deal (connect) with one or two FX execution venues like EBS and Reuters are now connecting to multiple venues, possibly several dozen or more. Indeed, StreamBase reveals it has two ongoing projects for sell-side institutions, where one fi rm’s FX system is connected to over 20 different venues. Jeff Wootton “CEP is a natural fi t for the high-speed trading space This vendor provides adaptors to the specifi c protocols because it provides agility via rapid development and deployment of new applications, and it can deliver the (the networking details, with some FIX-based) and low-latency performance required for this market.” its framework for FX aggregation takes each of those schemes turning them into a certain format. Then it pushes data up to the trading algorithms, the trades or integration with existing systems and a wide range pricing engine, and allows market participants to get a of technologies. The technology itself was honed in single view of the market. the high performance algorithmic trading units in investment banking, but is now in demand in a range First Derivatives’ O’Donnell notes that there have of other technology centric sectors. been “different approaches” in how CEP providers have tackled issues around integrating these platforms Delta CEP monitors all application activity during with Retail and Institutional FX execution systems. the day and publishes activity to a real-time database for historical archive/analysis. It can publish data to a He says: “You have tended to get traditional CEP wide variety of external messaging platforms for event- vendors where their ‘sweet spot’ has just really been based actions. focussed around the CEP engine and - from a vendor perspective - offering that out as an engine According to O’Donnell: “Delta utilises a series of with possibly some add ons. Then other third party CEP modules each designed to handle a specifi c providers are approached in terms of the actual business logic for one aspect of the event processing. downstream systems.” Effectively this would be a The unique message capabilities of the underlying distribution engine into the Institutional or Retail technology allows a modular build-up of events that FX segment, and then these are subsequently focus on an individual aspect of the event processing.” plugged together. And, typically this tends to be price

66 | july 2010 e-FOREX

FOREX TECHNOLOGY >>>

aggregation says O’Donnell, after which prices are Partnerships being pushed into those sort of platforms. Partnerships between market data providers and CEP vendors will ultimately streamline the process of data “From our perspective at First Derivatives, we are processing and delivery, and can thereby facilitate new in a unique position since we have a proven core solutions for real-time FX data analytics being offered CEP engine that is pretty much deployed in all the to end users. major investment banks as well as having a Retail and an Institutional e-FX platform.” According to “Pricing and reference data must be integrated, O’Donnell, the added advantage of this is that rather normalised and distributed in real-time and be of than having “disparate or loosely linked platforms quality to be fed into trading and risk models. This where latency could arise”, they can deeply integrate would also result in reducing the time devoted to them. cleansing and delivering this reference data,” says Sybase’s Wootton. “That enables us to have much more accessibility to the data, which obviously makes the CEP technology itself much more powerful. And, we have the He adds: “Technology tools such as CEP when opportunity to inject the power of that CEP engine aligned with market data vendors can help provide right into the core of both the Institutional and Retail a more holistic approach to trading as well as risk execution venues, rather than being a third party management.” where it is an add on.” Tibbetts points out here that: “One doesn’t want to be locked into a specifi c data vendor. As such we work with data vendors including Reuters, Interactive Data, Bloomberg, as well as small fi rms like ACTIV and others in the U.S. and Canada.”

With the StreamBase out-of-the-box CEP system, specifi c data (bid/offer prices, historical information, news events, etc) can be fed into the system and interrogated by quant analysts or software developers, either using off-the-shelf framework components or customised logic that has been developed.

Along with other leading vendors StreamBase is using an Eclipse-based development environment. Developed by IBM and used as an alternative to Java, it is an extensive platform for all sorts of software development, administration and management tasks.

“We have a deep integration with that platform (Eclipse), which provides us with a very rich developer experience,” notes Tibbetts.

More generally on partnerships, StreamBase has also developed the ‘StreamBase Component Exchange’ (SBX). The StreamBase Component Exchange allows customers, partners and other users of the StreamBase Richard Tibbetts platform to download and distribute reusable “The opportunity in Retail FX is really around fi ne components in an effort to build new event processing grain control of the customer relationship.” applications more quickly and improve upon existing applications.

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FOREX TECHNOLOGY

First Derivatives have many relationships with market points out, according to Sybase’s customer feedback data providers and O’Donnell says they “expect more” as compared to building the same applications from in the future. He says that the fi rm is “looking to scratch. expand” their Retail and Institutional platform - into other asset classes - beyond purely FX. That should CEP is fundamentally a “developer productivity bring scope for additional sources of market data tool”, and it also eliminates the need for specialist coming to the fi rm’s offerings. programming skills (e.g. network programming, multi-threaded programming, low-latency data Testing & debugging handling). “As such it allows users to focus on the The latest generation of CEP solutions are increasingly business logic and to go from prototyping directly into facilitating more rapid building, testing, debugging production without an extended development cycle.” and deploying of FX trading applications. adds Wootton.

“This is really the raison d’être of CEP,” says Wootton. Tibbetts explains that over the last few releases of “The value is in the agility gained by building new StreamBase’s platform debugging has been improved applications on a platform that reduces the time to to a point where it has both “break point and trace build and deploy by 80% - on average.” This is, he trade” debugging. “This allows [users] not only to stop an application as it is operating, but also to look back over the history of an application and understand why it made a lot of those decisions,” he says.

Using StreamBase CEP technology a developer can record the execution of an application (i.e. putting trades in the market) and explore why certain trades went wrong - even though the application largely works. By creating a trace of the application one can work backwards from the erroneous output to discover what caused the application to make the wrong decision. It can be used for algorithmic trading, order routing or market data analysis.

Backtesting, which is a slightly different process and separate from correctness testing, allows evaluation of large amounts of historical data from one day, a month, one year or even multiple years. In this area StreamBase partners with Reuters, Vertica, KX and others. StreamBase allows users to play back the data and put certain scenarios on it.

Established presence in FX CEP technology is already assisting FX fi rms with market-making, risk-management and surveillance operations.

Sean O’Donnell In the FX market many leading vendors like “You have tended to get traditional CEP vendors where their ‘sweet spot’ has just really been focussed around the Sybase have seen adoption of CEP for real- CEP engine and - from a vendor perspective - offering that time pricing, both in the spot and derivatives out as an engine with possibly some add ons.” markets. Sybase claim they are seeing “a signifi cant amount of interest” in CEP for

70 | july 2010 e-FOREX Second Generation CEP: laying the foundation stones for enhanced FX Trading architectures

real-time risk monitoring across asset classes, including high-frequency trading or prop desks and ideally for FX - but not limited to FX. the whole fi rm.”

“In fact, part of the appeal is the ability to aggregate Finding new applications positions, value the positions and exposures, in real- Turning to whether CEP in FX will move beyond time, across asset classes,” explains Wootton. “This popular applications such as FX aggregation and allows users see their total exposure - at all times - pricing, smart order routing, market data management along different dimensions.” and algorithmic trading, Wootton says his fi rm is witnessing a “constantly expanding” range of The ability to track both market applications. In addition to the above list, risk and credit risk in a single he fl ags up another area as being related system is also a “big draw” to limit management. says Wootton. “For pricing, the ease with which pricing “Beyond that,” he asserts. “The most algorithms can be refi ned notable is the growing adoption of and updated is a large part CEP beyond pre-trade applications and of the appeal. And, unlike into post-trade applications for real- ‘off-the-shelf’ trading time position keeping and exposure applications, with CEP monitoring, with continuous valuation the user has total using live market fl exibility and prices and control when it comes to the aggregation across algorithms used.” multiple asset classes and risk Tibbetts says: dimensions.” “Pre-trade risk checks are a Tibbetts adds: “We standard thing that are also witnessing gets developed in CEP’s move to StreamBase and it the middle offi ce. is a pretty common It’s just beginning, application.” Perhaps more but new offi ce controversially he suggests that organisations are the “simplest of simple” pre-trade risk realising that being management checks would have caught the kind up to the minute or of fat fi nger trading that some have speculated caused indeed the second is the recent near 1,000 point intra-day fall on the Dow benefi cial.” This is in terms of being able to process Jones Industrial Average. things much more swiftly and giving feedback to front-offi ce systems in order to keep clients updated Critically though, he says it is important to “structure on their positions and being able to understand (intra- your limits” on trading whereby a set list of risk limits day) when things start to go wrong. is enforced. These can be in terms of risk exposure to the whole market or specifi c securities or currencies. O’Donnell points out his fi rm sees further and deeper “integration” in their global business with platforms in “We even have some customers who have factor-based the FX space - both at Retail and Institutional level - risk exposure. And, when a particular trade would take and by leveraging their CEP technology. Furthermore, a trader or trading desk outside their ‘risk envelope’ he highlights greater integration around data analytics the technology can intervene to stop the trade.” Some and trading patterns, work around matching engines StreamBase clients also like to change risk rules during and “auxiliary services” that are going to be built the day to have intra-day visibility, “at least for the around the CEP engine.

july 2010 e-FOREX | 71 FOREX TECHNOLOGY

Optimising FX feeds: introducing low latency rate engine services

By Nicholas Pratt Rate feeds are an essential part of the FX trading process and like every other process it is something that is continually subject to re-engineering and investment in technology development. This development has increased manifold since the advent in electronic and algorithmic trading and it in turn has created a burgeoning vendor market for various software products and applications designed to help banks, brokers and traders make use of rate feeds that can blended, aggregated and optimised to produce an accurate, spike-free supply of prices that refl ects true market prices.

hese new feed services also need to be able to cater for new and increasingly complex TFX instruments in addition to the highly liquid FX spot market. They also need to ensure high availability in all market conditions and also provide improved risk and exposure management operations. But perhaps above all, in today’s market, FX rate feeds need to be very, very quick because the pursuit of low

72 | july 2010 e-FOREX >>>

Frederic Ponzo “The pricing engines that were built three to four years ago required low latency and tight integration with risk management systems but there were no credible systems out there so banks had to build everything in-house.” latency still seems to be the most pressing priority for market participants.

“All of the big FX dealers are using in-house systems,” says Frederic Ponzo, managing director of consulting fi rm Grey Spark Partners. “The pricing engines that were built three to four years ago required low latency and tight integration with risk management systems but there were no credible systems out there so banks had to build everything in-house.”

This is not to say that third party vendors do not have a space, says Ponzo, only that this space is more suited to the tier II and tier III banks and the various buy-side trading fi rms and corporate treasurers. But for the major banks dealing in the highly liquid markets of spot FX and outright forwards, third party vendors would not be considered. “The speed in streaming and updating prices is what makes the difference and that is through technology. And you don’t get that kind of stuff out of house. The average tier one bank is between $100 and $150m a year and those kinds of funds are not available to the average vendor.”

july 2010 e-FOREX | 73 FOREX TECHNOLOGY

The fi nancial engineering required in these FX The introduction of algo trading has brought into markets is very simple from a conceptual perspective, focus the importance of clean data. For example, says Ponzo. Nevertheless, the themes for all technology Owen relates the story of one client that angrily developers of FX rate feeds, whether in or out of accused his system of giving out bad prices and costing house, are the same, says Ponzo. “First of all it is the company millions. “When we went through it, it about latency, this is the most critical element. Then turned out that their own prices were being sent to it is about pre-trade risk, as long as it does not affect Reuters which was then sending them out again only latency, which is technically challenging. Essentially it to be reabsorbed by the trading fi rm. This created is a compromise, between latency and oversight. The an arbitrage opportunity for other traders banks will deny this but it is always a compromise.” and it was seized upon.”

Underlying data But with the right technology in place When it comes to FX rate feeds, says Gary Owen, sales these kind of things can be fl agged as and account manager at Swissrisk Financial Systems, an error and traders can then realign the belief has always been that the underlying data the system, says Owen. “These are is the most important element of providing rates to the kind of issues that algo trading clients and having cleansed data is an absolute must. can create if they “What we need to do is to ensure that the underlying are not carefully data is good, clean and accurate whether it is coming monitored. You from a single source, a multi-bank portal or a direct have to be quick feed from a single bank,” says Owen. but you also have to be solid “The ultimate goal would be to merge all of the pricing and you have data with no spikes to form a central core price for your to recognise own use. To do this you must have fl exibility so that certain you can either form a mathematical average price from trading several live feeds or take a weighted average price based patterns. on assumptions you have regarding the quality of each live feed and the prices they are providing. With this fl exibility dealers can come into their own by adding their own sentiment and valuing the feeds accordingly.”

Gary Owen “The ultimate goal would be to merge all of the pricing data with no spikes to form a central core price for your own use.”

74 | july 2010 e-FOREX >>>

If there is one trader making lots of small executions time and time again it is likely that they are trading against you because you pay a separate fee each time you execute, so you have to move to block that trader.”

Another operational risk issue that fi rms have to be aware of is when certain price providers may be less keen to quote prices, say when US economic fi gures or rate changes are announced, says Owen. “We have certain time slots where you can drop a certain bank out of an average price. So users can manually adjust the rate feeds and the adjustments to the average rate calculations will be made automatically.”

Latency Latency is of course an important issue in the FX market, particularly in terms of supplying FX rate feeds but there is a growing feeling that the pursuit has perhaps gone quite far enough for now. “Latency has got itself to the point where it has become almost insignifi cant in terms of rate feeds, says Owen. “For example, I have had traders tell me that if the latency is over half a millisecond then they do not want to know but that is still because the information is becoming too fast to be usable. Anything over half a second is of course unacceptable and responses have to be instant but at some point every fi rm has to make the trade off between removing latency and what is usable.”

A further trade-off exists in the use of feasibility checks and the latency that these operational risk measures introduce, further emphasising the balance between speed and control that is required by traders when employing algorithms. “We can do all of these checks but with each time you put one in, it will also add latency so you have to discuss this with clients and be open with them so that they can make adjustments and use their own judgement.”

Many of the vendors that have developed FX rate services and feeds accept Ponzo’s point that the higher echelons of the market’s participants will always look to develop their own technology but such is the size of the FX marketplace and the number of participants within it, that a third party vendor community can still fi nd enough business out there to thrive. “There will always be a very small group of leading banks that has enough development capacities to upgrade their in house solutions and react quickly to changes in the market or integrate the latest know-how,” says Andreas Kiesselbach, sales manager at Germany-based Digitec, a provider of pricing and trading solutions to the FX industry. “All other market participants have

july 2010 e-FOREX | 75 FOREX TECHNOLOGY >>>

says Kiesselbach. “So while speed is important in any market, sometimes it is also important to analyse the price and see if other sources differ and whether to adjust the spread accordingly. Or to run cross- calculations of a currency pair and compare that with a direct feed. It is about putting more intelligence into the system.”

Monitoring & Analysis Another feature more relevant to the FX spot market is the integration of monitoring and analysis tools with live feeds in order to assist with processes such as error or fraud detection and research. “The key term here is ‘hit reaction’,” says Kiesselbach. “The rate engines must be able to react with automatic skewing to multiple trades that are executed only on one side to reduce the period during which any losses may be incurred. It can be diffi cult to tell when a trader has Andreas Kiesselbach the wrong spot price but it is possible to limit the “There is a much greater range of prices in the forward effects of having a wrong price.” market so neither the engines sending the data or receiv- ing it, would be able to cope if all of this information was provided in a low latency basis,” Although the general focus for the FX spot market is on low latency, there are algorithms being developed that are more sophisticated than merely taking a price to decide if time to market and costs or independence and sending it out again, says Kiesselbach. “There is more critical for them. Vendors that have been are banks that are devising the spot price from an FX adding enhancements to their solutions over many future price. And there are banks developing quite years usually have more expertise than a typical IT complex algorithms that perform lots of calculations department of a bank. before sending out the price again.”

Kiesselbach also recognises that low latency is a key The list of additional features created through the use concern for traders across the market but he also of algorithms is growing all the time, says Kiesselbach, emphasises that there are several aspects to the pursuit and includes blending, automatic adjustments, of low latency. “One of them is: How long does it comparisons, automatic spreads that depend on take before the rate engine exports a new price. This volatility, different pricing models in different time takes usually just a few milliseconds. But the more zones and more. “This all implies that it’s not only important problem for many banks is that the chain of latency that counts and even if several banks are using downstream systems is too long. A rate request from the same quote machine from an external vendor, a multibank platform goes to an e-trading system. A they will still use it with individual pricing models margin system adds a spread and then the rate engine and strategies. Of course all of these calculations add generates a price that has to be routed back to the latency to the process but the benefi ts can often be multibank platform. This response time is usually greater than an approach purely focused on speed. much longer than the pure latency of just the pricing Ultimately it comes down to that balance between system. Only a closer link of rate engine and e-trading latency and accuracy.” platform can resolve this bottleneck.” Proprietary feed services The whole focus on latency is also more pertinent to FX spot pricing, rather than FX forward pricing where Leverate is an enterprise software services provider the market moves much slower and pricing feeds to online fi nancial brokers, and supplies FX rates to require much more focus on yield curves, checks and retail brokers and fi nancial institutions and with a comparisons. “There is a much greater range of prices background in aggressive algorithmic trading. It is this in the forward market so neither the engines sending background and the time spent taking advantage of the data or receiving it, would be able to cope if all of data feed weaknesses as part of an arbitrage strategy that this information was provided in a low latency basis,” inspired the company to develop its own feed services.

76 | july 2010 e-FOREX

FOREX TECHNOLOGY

“Whilst trading we did not know where the market was at all times, in order to know where it was we had to create our own feed”, says Lior Shmuely, vice president of Leverate Technological Trading Ltd. After intensive market research it became clear to Leverate that such a solution did not exist in the market so the company developed its own data feed for internal use and which it now offers to brokers – particularly those based online and focused on the retail market.

The use of algorithms within this data feed service is an integral part, says Shmuely. “Forex trading is by nature a high-risk and volatile business. Market makers and retail brokers in particular, are vulnerable to arbitrage hunters, scalpers and other types of fraud, due to their commitment to minimizing order rejection. It has been reported that the average market maker loses between $30,000 - $50,000 on every $1billion in trading volume to arbitrage hunters Lior Shmuely trading on off-market prices. “Not only do deviations, spikes or delays in rates expose brokers to substantial losses, they also can damage repu- “Not only do deviations, spikes or delays in rates tations and create confl icts with honest traders.” expose brokers to substantial losses, they can also damage reputations and create confl icts with honest traders. For example, misquotes due to a spike may client addresses us with questions regarding the feed activate stop-loss or take-profi t limits, resulting in benefi ts, we actually present that potential client with unpleasant situations that lead to distrust between the discrepancies on their own feed. This is done by brokers and traders. We make sure that the feed integrating Leverate’s systems into the client’s trading supplied to the broker is accurate under all market platform and storing all client per-symbol ticks in our conditions by backtesting them against our data tick database. We then use a feed comparison distributed supply to prove their accuracy,” says Shmuely. system to check for the accuracy and reliability of the client’s feed and to produce a report which is sent to Need for verifi cation the potential client in order to show how Leverate’s feed In today’s markets, banks and brokers should be could resolve that client’s feed problems.” seeking assurances that speed and integrity of their rates are verifi ed and maintained, says Shmuely. Conclusion “Banks and brokers should fi rst of all ensure that “Banks and brokers are looking to minimize risk and the quality of the feed is suffi cient to allow online maximize the bottom line,” says Shmuely. “Today it is instantaneous trading. The supplier should offer not enough to offer superior real time feeds – brokers solutions and support to the services provided and and traders alike are demanding superior liquidity the bank/broker need to request a list of monitoring behind the feeds as well as demanding superior service procedures as well as technological support to support and risk management capability.” When selecting a the claims made by the supplier. Today, many forex vendor to supply rate feed services, FX traders must brokers receive ‘fi re and forget’ rate feeds from banks consider the following criteria, says Shmuely. “First or other major brokers that do not monitor or analyze and foremost they must consider the quality of the their rates against the ‘true’ market price. Other feed offered – speed as well as accuracy and precision. sources including recognized and established feed Then they must look at the supplier’s history and how suppliers provide indicative rate feeds which are not long it has been in operation as legitimate, fi nancial suffi ciently fast or precise to meet commercial brokers’ feed supplier and how good its reputation is.” Other business needs.” factors such as service level and expertise, client base and recommendations must also be taken into account This data quality issue has also become a key part of as well as the extent of features available through Leverate’s marketing drive and its efforts to recruit the products on offer – from anti-fraud services to new customers, says Shmuely. “When a new potential business continuity.

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Financial Extranets: providing seamless and dedicated connectivity for FX

X trading fi rms today are seeking connectivity to multiple FX trading Fvenues and counterparties to ensure that they have the widest range of data points and opportunities. To take advantage of arbitrage and other trading opportunities such fi rms are looking at connectivity paths on a monthly basis ensuring that their routes are the fastest, as well as ensuring operational reliability that comes with a 24/7 market. Increasingly they are seeking dedicated connectivity - without contention - through fi nancial Extranet providers to a variety of FX trading venues and counterparties due to

By Roger Aitken Roger Aitken explores why FX trading fi rms are increasingly seeking dedicated connectivity to their FX trading venues and counterparties and what are the benefi ts of using global Financial Extranets to achieve this.

80 | july 2010 e-FOREX >>>

ongoing market/trading venue (Points of Presence) in cities like New York, the vendor fragmentation. Contention in a can bring in diverse carriers, diverse POPs, as well as trading/communications context diverse hardware onto their network. At that point refers to competition by users of a system for use a client would then go (connect up) to their trading of the same facility at the same time. The term partner/counterparties in the same fashion. contention ratio applies specifi cally to the number of people or fi rms who share a set amount of “Our backbone is a fully meshed network, so it has bandwidth. multiple blades in/out and there is no single point of failure,” Schwartz adds. “We don’t put anything in the Private Internet middle and we provide encrypted packets.” Alan Schwartz, President of Transaction Network Services’ (TNS) Financial Services, based in New By contrast to secure and dedicated fi nancial Extranets York, explains: “The way we defi ne our fi nancial for users, the public Internet is not only exposed to Extranet is in terms of providing clients with security issues but access speeds fall during periods of access to more or less a private Internet, with peak use. all the benefi ts of IP technology. We then bring clients into the ecosystem - Extranet - that is a Avoiding contention closed and protected environment.” Dave Brown, Senior Vice President, Global Network Operations for IPC, says in relation to FX trading Private is key. A private Internet alleviates all the fi rms: “It is imperative to ensure that there is no bad things about the public Internet, but enables contention between pricing to and from trading all the good things in respect of fl exibility TNS venues and between counterparties. In addition, when wants to offer its clients. For instance, with TNS streaming prices to customers, reliability, consistency, having multiple POPs and scalability are key factors.”

TNS’s Schwartz agrees saying: “Given the fact that the FX trading is by its nature very different from the equities world, with no centralized market and individual feeds coming from various broker dealers, FX market participants have a greater bandwidth requirement. As such they do not want to take a chance in having contention or to share [as much].”

TNS is one vendor providing clients trading FX and equities with the option of sharing all their bandwidth with all their trading partners. Customers can buy a “Tier-1 worth” of bandwidth in order to run all of their trading connectivity over it, or a fi rm can decide that this is not the way they want to run it.

july 2010 e-FOREX | 81 FOREX TECHNOLOGY >>>

Schwartz adds: “In the FX space that is not how FX trading communities, IPC’s Brown says: “The participants want to deal with matters. What they vital benefi ts are enabling access to communicate want to do is say ‘For each client I want ‘X’ amount of immediately with trading counterparties, key clients, bandwidth allocated to them’. And, part of the reason leading venues and remaining fl exible and scalable for is down to higher bandwidth requirements.” the next cross-asset trading requirement.”

There are a number of reasons for this. One centres TNS’ Schwartz says that the benefi ts of using global around the concept of fl ooding the counterparty fi nancial Extranets include speed to get ‘on net’, cost with high levels of trades or information, and having reduction and improved latency. “If customers are on to compete with another party who sends less TNS today and there is another institution they wish information down the pipe and being in potential to do business with - it’s almost instantaneous. So, the confl ict (i.e. contention). Also, there is a desire to have speed with which you can achieve connectivity is really “equal or better latency”, Schwartz says. By effectively fast,” he says. “carving it out” through a fi nancial Extranet service ensures that this problem should never arise. Cost reduction can also be achieved over putting in physical private lines, which was traditionally how Benefi ts of Extranets things were undertaken at high-end level. “One can In terms of the benefi ts of using global fi nancial claim that it’s better latency, because vendors such as Extranets and what low latency electronic connectivity TNS continually provide statistics on the network - all services are being delivered to buy and sell-side day long.”

He adds: “We provide clients with a portal so that they’re able to look at latency rates. There is a natural benefi t in providing that type of service [yourself] over a private line. And, the odds are that there is virtually no way one can build the same disaster relief connectivity that a provider like TNS could build.”

The value proposition of fi nancial Extranets versus the latest high speed Internet networks, rests in the fact the Internet does not offer the same level of reliability, scalability, security, consistency or provide ‘end-to- end’ Service Level Agreements (SLAs), critical to the demanding requirements of FX trading fi rms.

“There is no visibility on the connectivity,” notes Brown. “Therefore one has no way of determining if the fastest and most direct route that has been taken. And, the unpredictable nature of the Internet makes it subject to frequent disruptions that can impact availability, speed and quality of service.”

According to Brown, a provider like IPC is able to provide direct support with a single phone call, which “in many cases automatically and instantly re-routes traffi c via our resilient, self-healing core optical network infrastructure.”

Security, reliability and speed Alan Schwartz “The way we defi ne our fi nancial Extranet is in terms of Jerry Brunton, Marketing Director, BT Global Banking providing clients with access to more or less a private and Financial Markets, who is responsible for marketing Internet, with all the benefi ts of IP technology.” BT Radianz services around the world, comments: “While we still have customers who may be using

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trading applications over a secure VPN on the Internet, “As a result of this extensive footprint, chances are that the really serious FX trading fi rms want security, if someone needs a connection to a new service, it’s reliability and speed. You still cannot guarantee those likely that we will be able to utilise the BT Radianz key characteristics through the Internet.” connection they already have in place,” says Brunton. He adds: “For a new site that needs to be set up, we’ll New York-based Brunton adds: “The public Internet design a fully redundant connectivity solution which is not ready to support cloud computing for the means that we order fi bre from diverse carriers, install institutional trading environment. There may be some redundant routers at the customer site, and route the last mile access to the public Internet, but what I’ve connections back to separate, redundant data centres.” seen is that people are still getting used to the idea of cloud computing and deciding whether they’re Part of the design involves ensuring that the redundant comfortable relinquishing control.” fi bre takes separate paths into a building. For example, He adds: “To be honest, our biggest competitors are BT may have one fi bre path going along 40th Street the ‘DIY shops’ because they want to manage vendor and another along 41st Street into the same building contracts and buy their own capital equipment. Most in case something happens that cuts the line on one importantly, they want to be able to manage their of those streets. The fi rm also ensures that these two own people, on site. The BT Radianz service is not paths go up in different risers in the building. all hardware. Rather, it’s a fully-managed service that offers a 100% guarantee of availability, so that our And, if there is an explosion or an electrical fault customers can step away from managing connectivity at one of the carrier’s facilities, BT have another in order to focus on their core competence and carrier that can provide back up. Indeed, such a fault generating revenue.” occurred with a customer just this May in New York when an electrical line overheated. Despite losing one Deployment of their lines, their Extranet service was unaffected. Turning to what issues are associated with joining a Financial Community Extranet and the deployment timeframes involved, when fi rms have existing ‘on-net’ connectivity with IPC’s network, the vendor claims that the service can be “turned up” in a matter of a few hours – thus facilitating almost immediate trading and access to liquidity.

In fact, most sell-side institutions are already using IPC’s network services and a number of their clients are already on-net, which Brown says demonstrates what he claims as the “longevity” of IPC’s market presence.

For Schwartz, while for most of TNS’ clients they would normally install about a week after the telco leased lines are installed, some territories may not be as fast in terms of pulling fi bre. “That said, even if we go into city where TNS does not provide connectivity directly, we usually fi nd a relatively cost effective way to bring someone into the closest location.”

The fact that the BT Radianz Shared Market Dave Brown “The vital benefi ts are enabling access to communicate Infrastructure has around 14,000 locations/end points immediately with trading counterparties, key clients, lead- globally today that are already set up and connected ing venues and remaining fl exible and scalable for the next means that most customers do not require new cross-asset trading requirement.” hardware or a new telecoms service to be brought in.

84 | july 2010 e-FOREX FX markets move fast. Can your network keep up?

The foreign exchange market is the largest, most liquid financial market in the world, trading around the clock and around the globe. The BT Radianz Shared Market Infrastructure is the world’s largest financial services connectivity platform, with 24x7 customer service and access to the widest range of multi-bank and single-bank FX liquidity sources and market data services. It’s the ideal connectivity platform for global foreign exchange trading.

More than 60 firms use the BT Radianz Shared Market Infrastructure to provide their clients with access to their FX services including market data, pre-trade analytics, single-bank trading, multi-bank portals, prime brokerage, risk, and customer management tools.

With our optional low-latency services – BT Radianz Proximity Solution and BT Radianz Ultra Access – our customers have the fastest, most flexible and efficient connectivity solution, backed by a 100% service level agreement.

The BT Radianz Shared Market Infrastructure brings together a community of 14,000+ customer locations globally. Through a single connection, the BT Radianz platform enables customers to access hundreds of applications and services covering all asset classes across the entire trade cycle.

BT. Bringing it all together bt.com / GBFM FOREX TECHNOLOGY >>>

Schwartz adds: “Service, quality and reputation are defi nitely key factors in the choice of provider. In terms of costs, I would say that the perceived costs of a fi nancial Extranet service are relatively low since we’re not providing the software.”

Financial viability of the provider is also worth noting. “People defi nitely look at fi nancial viability of the provider in question. Over the years one has seen companies claiming to be in the Extranet space that are not really in it. Effectively some have just been ‘quasi’ providers, offering other services and using their Extranet activity as a loss leader in certain instances.”

TNS offers global support to its customer base, running three helpdesks operating 24/7 (in U.S in Europe and Asia). They can all back each other up, but handle regional interests too.

Delivering competitive advantages Looking at ways by which Extranets offering high capacity network infrastructures can provide competitive advantage to FX trading fi rms, this should be viewed in the context of the fi nancial market place Jerry Brunton “The public Internet is not ready to support cloud moving at an extremely fast pace and being faced with computing for the institutional trading environment.” varying requirements. “Currently shrouded in a number of regulatory initiatives, trade warehouse initiatives and multi- Choice of Extranet provider asset trading initiatives, it’s imperative to work with a In terms of the factors that may infl uence a fi rm’s network provider that has a global footprint and that choice of Extranet service provider, there are clearly can provide the most scalable and fl exible solution as a number of key factors. They include latency, possible,” states Brown. He adds that this is “truly the reliability, scalability in terms of adding connectivity only way to remain competitive” as time to market or bandwidth to additional participants quickly and adaptability are key competitive advantages. and easily, as well as the choice of venues and counterparties. There is also accessing existing market Vendors like TNS offer a Managed Extranet solution participants and the existing community. and also provide TCO (Total Cost of Ownership) savings - with several benefi ts over self-service The ability to get dedicated and secure bandwidth that solutions. These include improving time to market, is not subject to the volatility of market conditions increased resiliency, minimized risk of technological found with a shared network infrastructure (such as obsolescence, employee overhead reduction, and risk MPLS) is key too, Brown points out. management amongst other benefi ts.

“To have a provider that is focused on the fi nancial Reducing latency services market and understands the critical service and support response that is required is fundamental,” Turning to steps that leading Extranet providers stresses BT’s Jerry Brunton. “Global reach is absolutely have taken to reduce latency to facilitate algorithmic critical and few fi rms can provide the support and trading and DMA for FX trading fi rms, IPC’s Brown network infrastructure to support the requirements of claims that the vendor has positioned itself “very today’s fragmented global marketplace.” differently” from other fi nancial network providers.

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“By the mere fact that we are solely focused as a fi nancial solutions company, our contention is that we provide best-of-breed solutions that are engineered specifi cally for a client’s application,” he asserts.

Vendors such as IPC can offer connectivity solutions for Direct Market Access (DMA) and can work Sell-side fi rms must be very strategic in with the client to select the best carriers, routes and the way they build and deploy their pricing datacentre position for multi-region, multi-city access engines. “They must avoid creating latency in the to trading venues regardless of asset class. Additionally, price - before it leaves the fi rm - and is available IPC is able to “custom design” solutions that minimize to the market,” says Brown. “This requires careful latency, offer routing agility, diversity and full consideration in planning and managing their own resiliency to best facilitate effective algorithmic and enterprise networks.” electronic trading strategies. Buy-side fi rms, most of which will have access to Brunton comments on the steps being taken to reduce services from many sell-side institutions, tend to latency: “We approach latency reduction from two remain fl exible in their relationships with prime angles: ‘Make it Closer’ and ‘Make it Faster’. On the former (make it closer) we have our BT Radianz brokers, sell side and trading venues. “Therefore, using Proximity Solution service which takes an FX portal’s recognised network solutions providers permits them trading engine and deploys it in our hosting centre(s) to remain fl exible,” he adds. where we also offer hosting space to trading fi rms.” This reduces the distance between liquidity source and Brunton commenting here says: “Sophisticated trading trader thus reducing latency. fi rms looking for liquidity in FX must have the widest, most direct access to that liquidity and not be fi ltered Making it faster is the BT Radianz Ultra Access service, through just one fi rm. They need to be able to hit all a dedicated technology solution utilising specialised the multi-bank portals, single bank portals, and FX hardware and DWDM technology. “It’s a highly ECNs to have a complete view.” managed point-to-point connection using both the lowest latency fi bre path and equipment available, and SLA’s with the least number of network hops - just one.” So, what Service Level Agreements (SLAs) should FX fi rms be looking to arrange and put in place? Here Meeting other challenges fi rms should bear in mind that service levels should be In relation to how fi rms can leverage Extranets in specifi c around those markets and venues that people order to better meet the challenges of delivering and wish to access. And, be specifi c around latency. accessing liquidity and execution data, buy and sell- IPC, for example, works with clients to develop side trading fraternities have different demands. custom solutions that address a specifi c application.

88 | july 2010 e-FOREX Financial Extranets: providing seamless and dedicated connectivity for FX

“SLAs can be completely customised to maximize performance, only made possible by our agnostic approach strategically partnering with best-of-breed carriers and data centre providers and locations,” contends Brown.

BT’s Jerry Brunton adds: “I cannot imagine that any market participant trading FX products or any other asset class would accept anything less than 100% availability. This is what our SLA provides. Downtime is potentially lost millions.”

TNS’ Schwartz notes that in terms of SLAs and what FX fi rms and others should look for rather “depends” on what they are willing to pay for. “One certainly cannot expect the same SLA over an Internet connection or single-route T1 installation as a fully redundant system.”

He also cites what he refers to as the ‘commitment to change’ theme. “What we found in the FX world is that the window for network maintenance and changes to the clients’ confi guration is very small. So, Emmanuel Carjat if a client wants to work with another trading fi rm, “As connectivity to the foreign exchange they’ll want us to permission that.” This requires TNS market becomes more complex, FX targeting fi rms are to undertake certain work, but it has to fi t with a very looking for scalable connectivity solutions that can grow limited client time frame. both geographically and in terms of increased bandwidth as trading volumes rise.” The TNS executive fl ags up the need for FX fi rms to choose an SLA from a provider that is also fl exible in its approach, that adapt to future changes on the client Emmanuel Carjat, CEO of specialist connectivity side and “diagnose issues with them in a very proactive fi rm Atrium Network, picks up on that point way.” This, he says, is very much a focus of what TNS commenting: “As connectivity to the foreign exchange does in “working through issues, even when they are market becomes more complex, FX targeting fi rms not our issues.” are looking for scalable connectivity solutions that can grow both geographically and in terms of increased Future evolution bandwidth as trading volumes rise.” In respect of what new products and services leading providers will be are tailoring for fast moving markets Atrium Networks is starting to make its presence felt like FX, Brown points to the next stage of “evolution” in the FX space and has a number of partners in the being around post-trade services. “The ability to shape of ISVs, exchanges and market data providers, as support all aspects of the clients’ trade lifecycle is a core well the likes of HotSpotFX and Currenex. In respect goal of IPC network services,” he says. of their Ultra low latency connectivity, the fi rm uses a number of ‘dark fi bre’ providers to take the shortest Looking at how future demand for fi nancial Extranets path between the venue and the client site. Through within the global FX marketplace will develop, given Metro Ethernet they use a variety of carriers in each current proposed changes between the OTC and location to offer diversity to each client location. exchange traded/exchange venues, Brown believes that market participants will need “as much fl exibility to Carjat offers some fi nal words: “The capacity to access multiple venues in multiple locations”. They connect to a simple infrastructure to trade multiple must also be able to potentially move their offi ces to and cross-asset classes and a connectivity solution that other more forgiving jurisdictions and “governmental can handle and process associated FX market data will environments”, if so required. Consequently, “fl exibility, ensure that fi nancial Extranets have a great future in scalability and global reach will be key,” he adds. the global FX marketplace.”

july 2010 e-FOREX | 89 VIEWPOINT

Why regional banks are positioned for growth

egional banks who survived the credit crisis By Igor Gitsevich, Director, Solutions at SunGard Sierra with strong fi nancials are now poised to R take advantage of the changing landscape The recent credit crisis has resulted in a and use this opportunity to grow their business as dynamic shift to the banking industry by the economy recovers. Banks are experiencing rapid opening new opportunities for regional banks. expansion through acquisitions and in some instances While traditionally focused on serving the seeing exponential balance sheet growth in a relatively domestic needs of local customers, regional short span of time. In addition, these same banks are banks today are targeting and supplying a also now able to attract newly available talent due to broader array of services. massive job attrition from the larger banks. These new hires are able to help build upon traditional services

90 | july 2010 e-FOREX while also bringing expertise in expanding out new Increasing Customer Satisfaction & Information lines of business. Also, the personalized service these Transparency banks can offer further differentiates them from larger Today’s regional bank customer is more demanding, banks, giving them greater traction in their ability to acquire and retain customers. requires quicker access to information, and is comfortable using technology. Customers want to Expanding Services see intraday activity in order to better operate their businesses in terms of cash fl ow and risk. Not too long ago, regional banks did little for their customers on an international basis, such as cross- The larger banks have been addressing this need border payments and FX trading. This was usually done as an accommodation, subsequently executed through the creation of secured customer Internet and processed through one of the larger banks that portals, which provide customers with a way to view supported global transactions. Not having the ability their entire holistic bank activity. Regional banks to natively handle these transactions, it was never seen need to acquire the capability to provide this same as lost revenue. Aside from “giving away” the business functionality, because it is an essential value added to the bigger banks, it also opened a potential threat service that is necessary to compete against other from the larger banks to slowly encroach upon other banks and ensure customer retention. services that the regional banks traditionally operated. Controlling Costs & Optimizing Resources Today, regional banks are recognizing these lost Solutions that are effectively provided in an ASP or opportunities and are taking steps to bring these hosted environment can provide regional banks with business lines in-house and service both the domestic and international need their customers require. The needed cost effi ciencies. A treasury platform should business has always been there, but the sophistication provide an IT infrastructure that alleviates the need of the regional banks is fi nally catching up to their for the bank to incur unnecessary technology cost, and customers. These banks are now acting as full-service enable them to focus on their core business. shops while also maintaining their reputations as the personalized, trusted local banker. Providers of hosted or ASP solutions achieve greater economies of scale, and ultimately, deliver those cost Improving Processing Effi ciency savings to the bank. Hosted solutions also offer rapid Along with increased lines of business, naturally implementation, time to market, and scheduled come the issue of increased transaction volumes and updates aligned with new functionality, regulatory and the need to properly process them. Unfortunately, compliance rulings and accounting updates. Some volume growth does not always translate into hosted solutions also offer the benefi t of disaster increased operational staff. All institutions today, recovery and daily back-ups. large and small, have limited budgets, resources, and time to market constraints. To help cope, regional It is also important that the platform be banks need scalable treasury solutions that are easy to comprehensive, yet component based. This enables deploy, offer high levels of automation and straight- a bank to subscribe to and use only the capabilities through processing, while allowing a certain level of that is required for their immediate business, with the customization. ability to add functionality as the business changes and grows. This type of scalability is crucial to The treasury solution should support a wide accommodate changing business needs and faster time range of asset classes allowing regional banks to to market. compete effectively in today’s environment. Other essential attributes of a treasury solution include: In Summary consolidated views across all customer activity, real- time connectivity to trade execution engines, market Regional banks have taken a signifi cant step forward data feeds, payment systems, compatibility with in their desire to offer more sophisticated services to core banking platforms, and integration with OFAC their customers. The potential is real, and it is up to checking services. the banks to fully realize the opportunity.

july 2010 e-FOREX | 91 FX ON EXCHANGES

A better way to manage risk?

FX on By Frances Maguire Exchanges

92 | july 2010 e-FOREX >>>

“This illustrates the strength and the growth in our FX futures market. We manage the health of business The fi nancial crisis brought with it unprecedented by making sure we focus on the breadth of customer volatility and credit concerns that are still having participation, providing products that are interesting their effects on all global markets, including to hedgers, investors and liquidity providers across all FX – namely in the form of the widespread geographies,” he says. fi nancial reforms that are now underway. Aside from the recent fl ight to quality that exchanges May 2010 average daily volume in CME’s FX experienced throughout the crisis as credit products was US$160 billion, representing growth of lines and liquidity suddenly dried up, the clear 141 per cent year on year, with futures growing 133 message from the G10 is that, by 2012, a very per cent and options growing 344 per cent versus different landscape will emerge, where as much May 2009. “When you talk about risk management, vanilla business as possible will be transacted on investing or hedging, for a large part you are also regulated exchanges, or at least cleared through talking about extended use of options. Options are a central counterparty. Furthermore, increased a tremendously fl exible risk management tool,” says collateralisation requirements will be laid out Sammann. by the regulators for those instruments that continue to be traded over-the-counter (OTC). The healthy growth of both FX futures and options is critical, says Sammann, as they complement each other. A very deep and liquid underlying futures ith this level of change facing the industry, market is needed because customers are trading futures many are already reviewing structures against options – the two are very tightly linked. Wand trading decisions in order to comply with incoming liquidity risk requirements, as well as gearing up for the likelihood that FX options at least, and possibly swaps and forwards will need to be “When you introduce centrally cleared in the future. a central counterparty mechanism you Derek Sammann, managing director of Interest Rates are mitigating the and FX Products at CME Group, says that one of bilateral counterparty the key value propositions of using exchange-traded risk that exists between futures is the credit mitigation facility of a central any two sides of an counterparty. over-the-counter He says: “When you introduce a central counterparty (OTC) transaction.” mechanism you are mitigating the bilateral counterparty risk that exists between any two sides of an over-the-counter (OTC) transaction. Because of this, we, as a Clearinghouse and as an exchange, are able to bring together the broadest possible and most diversifi ed set of market participants to trade with one another. A large part of our business is coming from hedgers and investors who have positions outstanding, not just speculators.”

Open interest One of the most important metrics used to show the split between speculative day traders and buy and hold participants is open interest, the total number of transactions that remain on the books at the end of the day. According to Sammann, CME’s open interest grew by 87 per cent, to a total of $220 billion (1.8 Derek Sammann million contracts) between Q2 2009 and Q2 2010.

july 2010 e-FOREX | 93 FX ON EXCHANGES >>>

A large part of this growth is that currency by its to take a view on a basket of currencies, as opposed to very nature is deeply tied to the capital markets, both the individual currencies. equities and debt, and as capital fl ows move around the world there is a natural currency risk. Sammann says: “We have skills and expertise in building liquidity, in bringing customers and Bilateral credit risk delivering technology. The Dow Jones Index Services Ever since the Lehman, AIG and Bear Stearns events, business brings a track record of building index there has been a much more heightened awareness of products based on customer needs, so we think there bilateral credit risk and this has been a key driver of are some exciting opportunities in extending the index our exchange traded FX products growth, according to services business outside the equities space and across Sammann. “With an exchange, or central clearing, this asset classes.” counterparty risk is mitigated and neutralised which is a very attractive proposition to market participants. In Additionally, with the rise in options trading, CME addition, the transparency of exchange-traded market is also examining ways to deliver a new product to adds to the safety offered by a regulated marketplace, customers that look at volatility as a tradeable asset, in which is hugely important for global participants. And terms of a volatility index that allows investors to trade fi nally, an important driver for growth is liquidity. and take a position on volatility in foreign exchange. CME is one of the biggest FX platforms in the world, and the largest in listed FX products. There is a CME is also planning to extend its OTC clearing reassurance that comes from that kind of liquidity services to the FX market later this year. Clearing from a customer’s point of view because they know services will be available for spot, forwards, options their entry and exit costs are very small due to the and NDFs in a bid to extend the benefi ts of the deep liquidity.” central counterparty out to the OTC market, across asset classes. Regardless of the fi nal regulatory decision, CME also offers the full range of asset classes under CME will comply and remain fl exible. a single umbrella: energy, metals, FX, equities, agriculturals, and interest rates alongside alternative “There is clear distinction between this and migrating investments, such as weather. “This is a huge draw for products to a central order book where you both participants in addition to operational execution, execute and clear. What the market is telling us connectivity, relationship of the Clearinghouse and is that they would like to see a convergence of understanding how their business can be done in a the bilateral model and the exchange model single venue.” with central counterparty services provided at the post-execution level to the OTC CME expanding product portfolio market. This means that customers will still be able to trade on a bilateral basis on an In terms of products, the bulk of the OTC execution venue, but their trade can product portfolio is futures and be sent for clearing into a clearinghouse,” options on individual currency Sammann says. pairs, but CME is currently planning to expand its global Sammann says that the deep liquidity of index services. Earlier this year, CME’s products and the transparency of the CME purchased a 90 per cent mark to market are very important to users stake in the Dow Jones Index with hedging needs. The ability to know, at any Services Business. To complement many of its point, what the price is and what the settlement individual products, CME is looking at ways price enables the investor to constantly monitor to leverage this relationship and ownership both the underlying exposure and the hedge in stake to look at index products and basket order to manage risk. products in currencies to enable investors

94 | july 2010 e-FOREX FX COMMODITIES \ INTEREST RATES \ EQUITIES \ ENERGY \ METALS \ WEATHER

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CME Group is a trademark of CME Group Inc. The Globe logo, CME, Chicago Mercantile Exchange and Globex are trademarks of Chicago Mercantile Exchange Inc. CBOT and Chicago Board of Trade are trademarks of the Board of Trade of the City of Chicago. NYMEX, New York Mercantile Exchange and ClearPort are trademarks of New York Mercantile Exchange Inc. COMEX is a trademark of Commodity Exchange Inc. These contracts are listed with, and subject to, the rules and regulations of CME. Copyright © 2010 CME Group. All rights reserved. FX ON EXCHANGES >>>

On exchange growth elsewhere trades were taking place off exchange with limited Arshad Khan, Managing Director, at the Bahrain risk management opportunities. By routing all trades Financial Exchange says that the increased volatility through central clearing, participants can eliminate in forex markets was driving increased business on credit risk through margining, and the risk of loss due to the exchange as market forces generate currency to counterparty default.” fl uctuations, which make exposure in the OTC market more prone to risk. To manage currency exposure, market participants are using both currency futures and options. Currency He says: “There are also Euro zone issues, which have futures allow the forex investor to hedge against generated a lower GDP to debt ratio, resulting in the foreign exchange risk. With this type of product, the need to divert exposure from the OTC markets to the investor is able to close out of their position, and exit exchange-traded futures markets, where hedging and from the obligation to buy or sell the currency prior to risk management tools are more accessible. Finally, the the contract’s delivery date. credit crisis has been one of the major contributors in driving participants to use exchange-traded currency An option is a contract that gives the purchaser, the futures. Where prior to this, a large proportion of right, but not the obligation, to buy (call option) or sell (put option) the underlying reference asset at a specifi ed price level known as a strike price, at any “There are also Euro zone issues, which have time until an agreed expiry date, or only on the expiry generated a lower GDP to debt ratio, resulting in the date. In order to lower the risk of currency exposure, need to divert exposure from the OTC markets to the either a plain call or put option is used, or else exchange-traded futures markets, where hedging and exchange participants are using different combinations risk management tools are more accessible.” of these two options. Managing risk Khan says that real-time tracking of margins, mark- to-market loss limits, circuit fi lters or daily price range, exposure limits based on deposits in the form of cash and cash equivalents, ensure that exchange participants using exchange traded instruments are able to effi ciently, and effectively manage their risk. “Institutional investors have exposure in various markets across the globe, and thus are more exposed to FX risk. They enter a market to bet on say a particular sector like equities or commodities and can hedge the FX risk using FX futures,” he says.

All currency contracts that are traded on an exchange usually include futures contracts and plain vanilla options. These contracts are standardised in terms of quantity and quality of the particular underlying currency. Khan says: “Hedging in currency futures enables investors to improve their return profi le against the risk of depreciation or appreciation. It can be a possibility that due to depreciation, an investor’s pay-off is lower or even in negative, when compared with a hedged position.”

The major advantage for investors and risk managers taking exposure in options is that only the option Arshad Khan premium is being paid for purchasing option

96 | july 2010 e-FOREX

FX ON EXCHANGES >>>

contracts, while the possibility to profi t from favorable manage their currency risk, and the drive to reduce price movements still exists. When buying FX counterparty credit risk. option contracts, the right, but not the obligation, to buy or sell a futures contract at a given price is He says: “Geographic distribution of revenue obtained. “Therefore when price movements are not continues to expand as businesses become more favorable, this right will be exercised by the buyer or global. Even the liabilities of individual investors holder of the option, and therefore the purchase of are expanding beyond their normal territory. For options provides protection against unfavorable price example, an investor may own real estate in another movements, while permitting to profi t from favorable country where the loan is denominated in a currency ones, and this strategy limits the exposure to volatile that needs to be hedged. That investor can easily conditions in global markets,” he adds. hedge that risk using the same brokerage account that allows him to invest in stocks, ETFs, and options on Khan says that since the emergence of the credit crisis those underlying instruments. Specifi cally in the US, there has been a marked movement of trading from FX options are tradable through virtually every online the off exchange or OTC market to the exchange and full service broker that provides access to the traded environment. “The key attraction of this form options markets.” of trading is the removal of unregulated bi-lateral trading where counterparty risk is common. Although There are a variety of there are many participants who will continue to use instruments available to this, the natural attraction to the on exchange fully investors at ISE: cash- cleared environment will prevail,” he says. settled FX Options, currency grantor trusts New currency contracts (which are ETF-like Khan says that the launch of new currency contracts especially in the emerging market segment will be on BFX’s radar, since there has been increasing transactions between banks and non-fi nancial customers in emerging markets, resulting from higher economic growth and trade. Reports indicate that the share of currency trade between non-resident counterparties has increased. Also, the G10 currencies will also be on the launch list due to the growing signifi cance of a global platform “All exchange and the associated price volatility listed and traded embedded in global trading. instruments are cleared through a “Last but not the least, the G10 clearinghouse. The currencies are considered to be the reduction of risk 10 most liquid currencies in the allows capital to be world, therefore one can expect active used more effectively, participation, if launched on the eventually lowering exchange,” he adds. the overall costs of a risk management Kris Monaco, director of New Product Development at International program.” Securities Exchange (ISE), says there are two signifi cant factors that will continue to push this growth trend: the increasing number of institutions and even individuals that need to effi ciently Kris Monaco

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FX ON EXCHANGES

products), options on grantor trusts, and futures. On ISE, investors can execute these multi-legged FX options are available through a wide network of strategies in a single trade while avoiding legging risk. brokers because the products are exchange-listed. ISE is planning signifi cant enhancements to its FX That increased distribution results in competition options product suite over the coming year, including among brokers, further resulting in lower commissions additional pairs, new product structures, and new FX and innovation in trading functionality (e.g., order benchmarks. types, execution capabilities, analytics, etc.). FX products set to grow Monaco says that effi ciency also comes from Monaco believes the demand for new and innovative centralising and mitigating counterparty credit risk. FX products will only increase and that the number “All exchange listed and traded instruments are cleared of new instrument types already in use illustrates through a clearinghouse. The reduction of risk allows this. However, he adds, the growth in exchange listed capital to be used more effectively, eventually lowering product usage so far has not cannibalised OTC trading the overall costs of a risk management program.” as much as it has introduced new participants to the Options are so fl exible FX market. “In the end, we will see a healthy mix of OTC vs. exchange-listed trading because the lines will According to Monaco, options are one of the most become blurred between the two areas. Exchanges powerful yet fl exible derivative instruments, regardless will seek to do more to accommodate, and perhaps of the underlying asset class. Global exposure can facilitate, certain trades that are complex or unique be managed with options by employing simple enough to require an off-exchange solution.” directional trades, or by using multi-legged strategies that can hedge volatility risk.

“Consider an investor that expects to have exposure to a certain currency over a fi xed period. The cost of hedging that exposure depends on the level of protection that the investor seeks and the length of time that the protection is needed. In this case, an options position can be considered synonymous with other types of insurance, such as home or car insurance.

When hedging with options, an investor needs to know the value of the asset at risk, has an understanding of the probability of certain events occurring, and ultimately determines the most suitable strike and expiration. That level of customisation allows an investor to tailor its risk management programs to suit its specifi c needs,” he says.

Although many hedging strategies are simply one- directional, options provide risk managers with more sophisticated capabilities. For example, spread strategies enable risk managers and investors to protect themselves from or gain exposure to volatility in currency prices. These positions can be entered into easily because they are exchange-traded products.

100 | july 2010 e-FOREX

ALGORITHMIC FX TRADING

Customising FX algorithms: fi ne tuning your order execution strategies By Nicholas Pratt

The FX world has now fully adapted and attuned itself to the world of algorithmic trading and these tools are now being widely employed across the industry as opposed to being restricted to the elite word of high frequency trading populated by technology-driven hedge funds and prop shops. But now that mainstream adoption has begun, it is clear that the demands from traders are becoming more specifi c when it comes to their algorithms and the services needed to support them.

he one- size-fi ts-all Tapproach has become largely redundant and traders are now looking to fi ne- tune their execution set-up to fi t certain trading strategies, functions, time frames, visibility themselves preferences and investment objectives. as distinct from their rivals, The benefi ts of moving away from a are there any risks associated ‘black box’ approach are becoming more with this tailoring? Will it obvious. But what steps should traders become harder to backtest and take when looking to develop more benchmark such unique and customisation? Is it possible to customise untried trading techniques? an off-the-self trading system? Can the Perhaps lessons can be learned customisation be done in tandem with from other asset classes that are the vendors or can it be done in-house? further along the evolutionary scale in terms of algorithms. Or perhaps And while the benefi ts of customisation it is too precarious a step to blindly may be attractive to fi rms looking to translate the properties of one asset form a competitive edge and mark class to another.

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So what order types are proving to be most popular with FX fi rms? “With FX we have seen a slightly different approach than we have seen in equities and the order types do not always translate easily from one asset class to another,” says David Hastings, global head of sales FX at trading software developer FlexTrade. “In FX we are seeing trading in the normal OCO orders, take-profi t orders and moving take- profi t orders. Time-slice orders are proving particularly popular with FX fi rms due to the fact that they are able to send the liquidity back into the market without affecting the market’s fl ow.”

It may have taken a while but the FX world is becoming more accustomed to algorithmic trading, says Hastings. “Traders are realising that whatever they used to do verbally can now be done algorithmically. So when it comes to customising algorithms, it means listening to the client and understanding exactly what it is they want to do and then designing the algorithms accordingly – whether it be maximising alpha or minimising slippage. But it also involves some buy-in from the traders and they have to take a leap of faith to an extent.”

Evolutionary process

Does this leap of faith extend David Hastings to moving away from the “Time-slice orders are proving particularly popular with FX traditional black- fi rms due to the fact that they are able to send the liquidity box approach of back into the market without affecting the market’s fl ow.” the past? “It is an evolutionary process. When the algorithms and it has become much easier to transpose black boxes fi rst trading ideas into an algorithmic context. And we can came out, not many provide them with the tools they need to create their traders understood how own algos and backtest them. However, I maintain they worked but they that the easiest way to customise the algorithms is for have gradually got more traders to work in partnership with the vendor and acquainted with them and the explain what they are trying to achieve.” signals they send are now they are being continually back-tested and fi ne-tuned. If you overlay execution The proprietary instincts of most traders has led many algorithms on top of the black boxes you create a very of them to try to keep the mechanics of their trading well-rounded execution tool.” and what they put into their buy and sell signals secret from even their vendors, says Hastings. And these The extent to which algorithms can be customised instincts also lead many traders to customise their own is very dependant on the capabilities of the trading algorithms. In terms of the risks associated with this fi rm, says Hastings. “Off-the-shelf algorithms can do-it-yourself approach, the only real concern that be customised or slightly fi ne-tuned by the traders Hastings highlights is backtesting and benchmarking. themselves to fi t their needs without requiring too “With an experienced vendor, they would have much knowledge of the programming language and run these tests several times whereas traders may be code that it was originally written in. The technology running them for the fi rst time. You have to be very has helped by making it much easier to write sure that you have ticked every box. It is really about

july 2010 e-FOREX | 103 ALGORITHMIC FX TRADING >>>

data assimilation and getting hold of the liquidity nature of the technology. Legacy systems have long been providers’ price feeds so that you can create an frowned upon in the fi nancial technology sector even environment in which you can test how effective your though they sit at the heart of many banks and fi nancial execution algorithms would have been. There are still institutions and have done so for years. However, like challenges involved around the provision of the data any bank employee that has been there for decades, but it is certainly easier than it was.” they tend to be infl exible, diffi cult to integrate and largely impenetrable when it comes to working out In terms of benchmarking there is an obvious trade-off what is going on inside. For relatively new technology involved between the ability to compare algorithms like algorithmic black boxes, this impenetrability and the desire to have algorithms that are wholly is of particular concern, says Giles Nelson, Deputy unique compared to everything else out in the market. CTO, Progress Software, a provider of complex event And in the main, it is a trade-off that most traders processing technology. are prepared to make, says Hastings. “I don’t think anyone changes the bog-standard algorithms without “We had a customer come to us that had been using a knowing the risks that are involved and the desire to black-box that was put together by a couple of in- differentiate is still a big driver.” house developers. It worked very well but after a while they wanted to make some changes only to fi nd that Legacy technology the developers had left and no-one else knew how Another reason why traders are looking to move on it worked. They could not change it so they had to from the black-box approach of the past is the legacy throw it away. But now it is possible to buy software and create tools that can be used by business analysts to test and deploy an algorithmic trading strategy that can evolve as fi rms get used to algorithmic trading, market changes and employees leaving.”

As is common among the vendor community, Nelson also feels the proprietary instincts among FX traders are still strong and have an infl uence on their decisions regarding the customisation of algorithms and the relationship with third party software vendors. “Typically we don’t know a great deal about what our clients are doing with the software and they can be very secretive. This might be because they are not regular users of third party software and are keener to develop their technology in-house but I think that is the wrong approach. Why not use a tool that can make you more productive even if it has been developed by a third party? Of course it depends on the institution involved but sometimes these decisions are based more on the protection of jobs in the IT department rather than increasing productivity.”

The interest in customising algorithms is being seen across the market, including agency broker Bloomberg Tradebook. “Bloomberg Tradebook is a broker and a technology company. We pride ourselves in our transparency, analytics, trading algorithms and staff of execution consultants,” says Gary Stone,director Giles Nelson of development and trading research & strategy. “A “Typically we don’t know a great deal about what our clients are doing with the software and few years ago FX trading technology was all about they can be very secretive.” transparency - helping traders fi nd and extract liquidity so providing them with a deep liquid marketplace

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As the algorithmic trading market continues to develop and become more accepted in the mainstream, are we likely to see even the most vanilla of FX traders using their own customised algorithms rather than the commoditised products available off the shelf? “The mainstream FX traders may not have the time, funding, expertise or effort to develop algorithms. Even at the high end where high frequency traders are looking to develop their own algos and typically use brokers as a pipe, they are looking for an easy-to-use incubator for proving ideas before engaging in full blown development.” Stone continues, “This is what we saw in the equities market where it started with a ‘their algo-our pipe’ approach. In time, however, the traders recognised that we brokers are more adept at understanding the idiosyncracies and microstructure of the market. We have tactical trading algorithms, smart order handlers that are specifi cally tailored to fi nding and extracting liquidity and a set of execution consultants that can advise of which ones to leverage to seek a better execution. So in the future FX market, brokers will add more value than just a dumb pipe. It will be more a case of their idea and intelligence, our consultants working with for appropriate algo Gary Stone “ in the future FX market, brokers will add more value than just a dumb pipe.” and a market depth screen was the big game. Clients have moved very quickly and now they need much more than that – algorithms, STP and different order types. So our focus for the next year is on continuing to develop algorithms and build fl exibility that enables traders to combine algos together to implement their strategy and trade their idea..”

Self-service approach This focus has led to an initiative that Tradebook calls its ‘black box within a box’. “Where some clients are going to third party, off-the-shelf FIX engines or contracting with developers to customise their algorithms, that only serves the top end of the market. We are attempting to do that directly on our front-end and through an order API. Customers will be able to mix and match different order types, data triggers and tactical trading algorithms such as trailing stops, laddering/scaling and average price algorithms together or build their own algorithms. It is a fl exible approach that enables a trader to get from idea to Jeff Grossman implementation rapidly before the market conditions “The diffi culty with backtesting is avoiding back-fi tting.” change and negate the strategy.”

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ALGORITHMIC FX TRADING >>>

Simulating performance There are also several steps that must be taken to simulate the performance expected from a customised algorithm. “The key steps are debugging and optimizing by simply running the algo in production type environment. The greatest challenge is actually the replication of production conditions. The diffi culty with backtesting is avoiding back-fi tting.” Benchmarking also becomes more challenging once algorithms are customised, says Grossman, meaning that the greatest risk from customising your algorithms is that you waste resources on marginal improvements or improvements that you cannot measure.

Jan-Folkert Kunst, Managing Director of TradeSense, a Holland-based trading software vendor and algo integrator identifi es a number of steps that should be followed in the backtesting and simulation of a customised algorithm. The fi rst of these involves defi ning the various factors to be tested through written descriptions, case studies and fl ow charts. “Then you have to look at the coding, and the actual testing and the test environment to be used. The tests in production should be done with small amounts and be monitored at all times. The key principle is the documentation and the biggest challenge is fi nding the Jan-Folkert Kunst right test environment,” says Kunst. “..as this market matures quickly, we will see specifi c demand arising in less commoditised products, like emerging market currencies and Despite the challenges involved in the testing and more new order types will be needed.” the risk that customised algorithms may become too specifi c, cannot be adapted for any other use or be compared or benchmarked, Kunst believes selection and our pipes. The client still uses their that a bespoke approach has a number of different intellectual property in terms of what to trade and ways in which it can help fi rms differentiate their what price but they use our raw materials to interact trading strategy. “The most important aspect is the more effi ciently in the market and let us make the fl exibility needed for changing market behaviour. decision on how best to engage the marketplace.” Especially now, the greater trading fi rms are able to adapt their strategies in this way because of According to Jeff Grossman, head of sales at Ireland- customised algorithms. Furthermore, as this market based Baxter FX, customising the algorithms is the matures quickly, we will see specifi c demand arising only way to keep pace with the general fragmentation in less commoditised products, like emerging market in the market and the mutation of liquidity. But there currencies and more new order types will be needed.” are several factors that FX trading fi rms must consider Added sophistication when deciding whether to customise their algorithms on an in-house basis or leave it to the provider. “They The trend for added sophistication in FX algorithms is must consider the importance of any proprietary something that is being observed across the industry. information and also refl ect on what the true cost of “What I am seeing is more complex algorithms built developing in-house will be. In terms of considering on top of pre-existing simple ones; this is a natural the involvement of a provider they must look at the progression as the market matures and traders seek benefi t of support and the ease at which it might be to develop advanced customisations on top of proven given as well as the reduction in time to market.” logic,” says Joey Horowitz, chief technology offi cer

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of the Athena Transactions Platform at Thomson Reuters. “The basic trading algorithms are also becoming a much more routine and natural part of the system.”

Another notable trend that Horowitz has seen is a change in the type of tools that traders are using when building their algorithms. “Many are starting with complex event processing (CEP) tools but then move on to 3GL tools. So while CEP is a great technology for algo development, as the traders become more skilled and the algorithms more sophisticated and time sensitive they will often code directly into the execution management system’s API’s.” These trends are generally indicative of a growing familiarity with their algorithmic tools and a realisation that if they invest in better systems they will achieve better results, says Horowitz. “Time to market and faster prototyping has advantages but traders are realising that rather than taking short cuts when investing in their algorithms, in the end result they can make more money by coding them directly.”

While there is still a signifi cant demand for the standard, off-the-shelf algorithms from manual traders looking to bring more automation into their executions, the decision to customise algorithms has been made easier by the fact that it is no longer Joey Horowitz such a complex undertaking. “You no longer have to “What I am seeing is more complex algorithms built on top get the code from the vendor and extend that logic. of pre-existing simple ones; this is a natural progression The algos are simply an innate part of the system and as the market matures and traders seek to develop have become the default mechanism,” says Horowitz. advanced customisations on top of proven logic,”

Furthermore, the algorithms are much more user- friendly and accessible to the traders themselves operating correctly. We provide tools that take into rather than their more technically minded colleagues account algorithmic actions within the simulated or the supplying vendor. “The vendors have come up market so that you can create a testing environment to speed and recognize which algorithms are naturally which can monitor any subtle changes that have been used in particular trading circumstances so that made to the algorithm.” when the trader undergoes a particular action, they will automatically be launching an algo rather than Despite the importance of the benchmarking and requesting one.” backtesting process, it is still not as widely practiced as it perhaps should be due to its complex nature and Challenges of testing a lack of recognition within the market that there are In terms of the testing process for algorithms, there are tools out there to help them, says Horowitz. “It is a growing number of tools now available that refl ect hard and there is a lot of skill and technique involved. the customisation of algorithms and the challenges It is also important that the testing tools be directly involved, says Horowitz. “Functional testing is connected to the algorithmic trading system itself. complicated and you have to be in control of all of Ultimately correct testing procedures streamlines your market data and order executions to create a the whole customisation and development process deterministic and predictable testing environment because it helps traders understand how their algos so that you can be assured that your algorithm is will perform.”

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112 | july 2010 e-FOREX >>> Special FX building a new breed of trade execution platform By Nicholas Pratt

and high speed. The successful adoption of Technology within the fi nancial messaging protocols such as FIX has helped in terms of connectivity but is there still markets does not stand still for very long and, despite the advances made work to be done in this space? Similarly is there still a call for low latency or have most in electronic trading and execution traders reached a point where execution can in the FX market, the next stage of be performed no faster without signifi cant development and the building of a new and perhaps pointless investment? breed of trade execution platforms are well under way. Nicholas Pratt And fi nally what of the technology itself? explores some of the ways that these Can the FX market make use of general developments are taking place and trends such as the increasing maturity of the what expectations banks and brokers cloud computing or software as a service have of their platform providers. (SaaS) operating models? And does the whole are of Web 2.0 technologies such as HTML 5 and rich internet applications ore and more traders are (RIA) have any place in the FX market? Are migrating away from the single these web-based technologies of enough asset class strategies of the past maturity to form the foundation for mission M critical trading platforms and services? And towards either multiple or cross-asset class strategies – a trend which must surely have are FX traders fully aware of the potential implications for the execution platforms benefi ts on offer and really ready to fully they use. Similarly new and more commit to these areas of technology complex instrument types within FX development? are becoming increasingly popular which means that trading systems Need for fl exibility will have to be able to adapt “As markets, regulation and the entire and exhibit enough fl exibility fi nancial world are changing so fast in to incorporate these new recent times, all parties including software instruments. development companies need to react faster and be more fl exible,” says Denis Alongside these new trends Borisovsky, chief executive of Ukraine- there are still the enduring based trading software developer PFSoft. themes that have remained “It is very important to use repayable and important over the last advanced technologies like J2EE in order few years – the increasing to build a scalable application with reusable need for straight-through- code and inexpensive maintenance costs.” processing and greater connectivity and, more The importance of technology like J2EE is controversially, the being driven by the growing demand among demand for low latency traders for more performance-driven

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Order Entry, Basket, FX Board, Options Chain Visual Chart, which are based on top of the platform core. All these mean that the requirements for preferences of different trader groups and markets can be met.”

End of the silo These developments underline the theory that individual product and silo-based trading is fi nally coming to an end as trading fi rms increasingly migrate towards multi-asset class solutions. “This is a basic evolutionary rule. Once people see something better they will use it, and it’s only a question of time. Multi-asset solutions prove themselves in many ways: they are easier to learn and use for both brokers and traders; they are much more reliable than some integrated multiple solutions; they allow consolidated risk management, hedging and user management. Finally, multi-asset platforms refl ect human nature. It is all about trading, and each asset class is just a little different instrument, but its core its always same – and very simple - buy, sell and make a profi t.” Denis Borisovsky “Multi-asset solutions prove themselves in At the same time as traders are embracing multi-asset many ways: they are easier to learn and use for both trading platforms, they are also moving away from brokers and traders; they are much more reliable than multi-dealer platforms that only address single-asset some integrated multiple solutions...” classes, says Paul Caplin, company founder and chief executive of Caplin Systems, a UK-based software architectures delivering scalable and ultra-low latency developer that specialises in the client delivery aspect functionality, says Borisovsky. “There are many factors of the FX trading process. Caplin says that the at work when it comes to explaining this demand. multibank platforms that dominated the FX market Markets are becoming much more liquid in recent in the early part of the millennium, such as FXAll and years. Trading algorithms are becoming much more Currenex, are now facing greater competition from sophisticated and automating trading mechanisms the single-dealer platforms they once replaced among have become popular. The network of integrated buy-side FX traders. parties has increased since the universal STP protocol (FIX) has become widely-used. “In those early days the multi-dealer platforms would argue that all clients wanted to see multiple quotes for All these factors mean a challenge for old fashioned trading for both best execution requirements and for platforms, most of which are going out of business. the ease of use and removing the need for multiple New platforms have been specifi cally designed to screens and feeds. But this has turned out not be the cope with new market demands. They are based case,” says Caplin. “It turns out a lot of traders are on new technologies and on specifi c architecture happy to trade with a single bank much of the time, approaches for much better performance, scalability if the offering is good enough. Having realised this, and fl exibility.” Similarly the move towards cross- banks saw the need to offer something better in asset trading platforms requires a much more accurate terms of client delivery and this became an important approach to architecture design, says Borisovsky. component in their FX offerings and not just an add- “These platforms should allow different interfaces and on.” models that are specifi c to each market on top of the underlying platform. For example, our product has At the same time banks began to apply the same logic around six different types of margin models, which to other asset classes such as fi xed income and FX allow all main asset classes within a single platform. options and there was a rapid realisation that rather We also offer at least eight different ways of creating than having lots of single dealer platforms in separate an order within the system: Matrix, Market Depth, asset classes, it would be better to combine them into

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one multi-asset class, single dealer platform – a layer of software that spans silos within the bank that delivers a high quality, integrated trading screen directly to clients’ desktops. “The technology is quite advanced in this area but adding equities and derivatives to this is still at a relatively early stage,” says Caplin.

Does this mean that FX is an asset class that presents fewer challenges when included as part of a multi-asset class system? “For each asset class you have to connect to the appropriate systems. Some of the FX systems are quite old and they can be quite idiosyncratic. For example, rates trading requires more complex analytics because there are so many more instruments and yield curves and so on. But on the other hand, FX requires faster updates because the price changes so often. And because you are almost always supporting one-click trading of streaming executable prices, you have to ensure that prices are always displayed with very low latency, even when the user is receiving 100 updates per second. Those two factors – the high rate of price changes and the popularity of one-click trading – Paul Caplin mean that the need for prices on the user screen to “Those two factors – the high rate of price changes and be constantly updated is more extreme in the FX the popularity of one-click trading – mean that the need market.” for prices on the user screen to be constantly updated is more extreme in the FX market.”

RIA technology The other big factor in the building of trading delivery platforms and applications is the rapid change in the technology that is being used, says Caplin. The Java applets that were so successful in previous years are now much less frequently used – in part because of the demise of Sun Microsystems. In their place has emerged rich internet application (RIA) technology, a sub-section within the much vaunted Web 2.0 branch of technology. “In previous years this was mostly done via installed applications but this is increasingly rare because of the cost of installing them. Now, if you are building a trading delivery platform, you have to go one of two ways – the fi rst is to opt for a heavy client- installed app using either Java or .NET. A small number of banks engaged in high frequency trading are still installing Java-based applications because they feel they will gain an advantage on performance. The rest of the world, though, is using RIA technology,” says Caplin.

Rich internet application technology is still a new area for many banks and it is complicated by the fact that currently there are three competing offerings in this space – Flex from Adobe, Silverlight from Microsoft or native web technology – so banks have to make

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a decision about which technology to adopt and to to deliver trading over the web, so it is somewhat train their development staff in while vendors have entrenched in the older way of doing things. But to cater for all three. “We currently support all three many banks are proving that RIA technology works technologies. In the long run, native web technology is very well so that caution is evaporating. I think it the most certain to succeed, though Silverlight is clearly is particularly suitable because of scale. When you very strong. There is a huge user community behind are voice trading there is only so many people you it and the support of large companies like Google can speak to on the phone in a day. But once you go and Apple so there is little doubt that it will go from electronic, you can reach an unlimited number of strength to strength. But in the short term, technologies people. But you need a technology that can be easily like Flex and Silverlight are able to offer an easier rolled out to all of those people.” development environment. One question that banks need to ask themselves is what their time frame is. If Better user experience they have a short-term outlook, almost all web browsers support Adobe’s Flex so they would be able to get an The demand for a better user experience in electronic application up and running very quickly but in the FX trading is inevitable, according to Christopher long-term, it is a technology that will be squeezed out Kallmeyer, Director of Product Development at by web technology, particularly as HTML5 comes in trading technology vendor Financial Software and adds more power to web technology. We’ve tried to Systems. “Users see new services in certain products resolve this dilemma by providing a web framework – and then demand the same level of services on other Caplin Trader - which takes all the pain out of building products.” This is particularly true of web-based a native web application.” technology and the whole Web 2.0 area which has been so pervasive at the general consumer level and Caplin believes that RIA technology will develop helped retailers as well as banks to enrich the online very rapidly over the next few years as the initial experience of their customers and now it is being conservatism from FX traders fades and the explored within the FX trading market. “While speed technology matures. “FX was the fi rst asset class of execution is often a focus, post-trade capabilities are equally important to create the best overall user experience. We are seeing banks, broker-dealers, and prime brokers looking to offer their clients increasingly robust data in real-time to help with decision support and risk management.”

Kallmeyer continues, “Cross asset support is another critical area of improved user experience. Single-bank portals have begun to regain market share from multi- bank portals because of their ability to provide access across an array of asset classes. Some of the banks have opted to build this on their own while others have turned to vendors to provide a speed-to-market advantage. This is an area where we are beginning to see more uptake.” He goes on, “In addition to robust data publishing and cross asset support, the banks are also looking for pre-trade margin and limit checking, real-time alerts delivered to the desk and the client, and full multi-lingual support in the web portal, statements, and other client correspondence. These are all areas we’ve been able to differentiate.”

Scalability without latency Christopher Kallmeyer “We are seeing banks, broker-dealers, and prime brokers According to Peter Jörgne, partner and chief executive looking to offer their clients increasingly robust data in real- at Sweden-based trading software developer Aphelion, time to help with decision support and risk management.” the requirements for latency or scalability differ depending on the trading fi rm. “The technology

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aggregation of liquidity and risk mitigation with powerful autohedge functionality.”

Latency less important For others there is a general sentiment that low latency is becoming less important, at least in terms of this relentless race towards an end point of zero milliseconds. “There has been a big push in this area over the last two to three years and now I think you have either got low latency or you are not in the game and we are now into the realm of diminishing returns,” says Carl Martin, chief technology offi cer at Eurobase, a UK-based developer of FX trading software. “At the moment, for the 98% percentile, the performance time for rate generation is 6 milliseconds for the most complex of processes which includes algo processing, credit checking and constructing margins. If this was to be halved to 3 milliseconds, the tangible benefi t would be so slight as to be irrelevant. Most vendors have approached that sub-10 millisecond band and there is very little motivation for them to go any further than that.” Peter Jorgne “I believe we will see more initiatives to offer complete Martin does see far more interest in the demand for suites of integrated end-to-end functionality within FX multi-asset trading platforms as vendors look to get trading and cross asset bundling but it will be driven by more out of their customers and these customers look the banks reacting to customer demand.” to rationalise the number of systems that they employ. However, as simple as the concept sounds, there initiatives will differ quite a lot if you speak to a tier are some technical challenges involved for vendors 1 bank who has been auto trading for a decade or – particularly when considering cross-asset trading, if you speak to a tier 2 who is just starting they will where multiple asset classes may be involved in the defi nitely have different plans for the future. From same trading process or transaction. the vendor side however I believe we will see more initiatives to offer complete suites of integrated end- “Platforms are essentially two types – business-centric to-end functionality within FX trading and cross asset platforms that have technology bolted on to deliver bundling but it will be driven by the banks reacting to specifi c technical features or technology-based platforms customer demand. The new generation will be based that understand a bit of business,” says Martin. “The on auto-trading with broad connectivity to multi-bank latter group struggle to adapt to other asset classes portals and liquidity pools, with strong auto hedging because of the different business processes that have and algorithmic execution, all performing trades with to be understood. So we have tried to keep the two ultra low latency.” He goes on, “Most banks who have elements separate – the business engine from the been in the FX business for a while are experiencing technical delivery side. In a perfect world, traders would volume increases to a level that the systems can’t have a fully featured front-offi ce sitting behind a fl exible handle, they need scalability without adding latency. delivery tool. For example, if you have a platform that At the same time many banks and hedge funds are does spot FX and you want to bolt on a CFD, it is a big coming in to the market on more modern platforms job. But if you have a platform that supports the A-Z of with integrated components where low-latency has products and is delivered via a web page, to then deliver been part of the architecture and design from the that via an XML feed is straight-forward.” start. Performance is a key requirement for success as the competition, trade volumes and volatility that the Web technology FX market experience requires timely and accurate Technology development has also been made easier processing of transactions. Quasar eFX is proving to be by the advancements in web-based technology and its the quickest to respond to market quotes with capacity take-up by users, says Martin. “It has made it possible to handle the high volumes of trades with superior to create a much better user experience that was not

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possible fi ve years ago, particularly on the retail side where you can create very advanced front- ends with more widgets. We are also seeing a wider use of apps on other devices such as phones and this trend is now being transferred to trading and banking. So the user experience is becoming key. And if you look at the profi le of FX traders, they may all use technology in different ways but they are all concerned about the look and feel of their technology and their tools – just look at their Rolex watches. These are not supermarket employees so there is a lot more pandering to them in terms of the technology they use.

“There has been a massive shift forward in terms of web technology. When we entered the gateway space six years ago, the connectivity options were very varied but now the whole world has centred on FIX. Similarly, when it comes to the technology for frameworks and front-ends, it is becoming a lot more commoditised. For the fi rst time ever, we are seeing mainstream web technology being used in the banking and FX space. The mainstream vendors in this space now all have an FX service or an equities service where they are showcasing their technology for a banking audience. For the fi rst time, banking requirements are driving the technology.”

While Martin states that this development has made it easier for vendors such as Streambase by creating another tool in their armoury, he is also cautious about the rate at which new technology is developed in this area and, as Caplin stated, the need for vendors to ensure that they do not leave themselves committed to a technology that later proves to be out of favour and fashion. Vendors therefore have to approach this new technology with an attitude of openness and fl exibility. “In software there is a general principle of inversion of control – rather than hardwiring any technology, you make it ‘plug-inable’. The pace of change is so fast you can easily fi nd yourself with a Betamax and not a VHS so it has become important that you don’t hardwire the technology into the heart of the mainframe.”

Martin also agrees with Caplin’s earlier assertion that the single-dealer platforms have become more popular at the expense of the multi-dealer platforms. “It has been interesting how it has panned out. Four or fi ve years ago, it became clear that this was going to be the way the market

122 | july 2010 e-FOREX Special FX - building a new breed of trade execution platform

Carl Martin “Platforms are essentially two types – business-centric platforms that have technology bolted on to deliver specifi c technical features or technology-based platforms that understand a bit of business,”

developed. Multi-dealer platforms had become popular but for the vendors, do they really want to go to market with 30 other users, competing on nothing other than price? As a vendor developing single dealer platforms it is much easier to differentiate or to be fl exible enough to provide specifi c services at a high margin.”

Conclusion Ultimately, says Martin, the trend for multi-bank platforms will extend to the point where asset class- specifi c systems will be a thing of the past. “We talk about FX platforms and equities platforms and fi xed income platforms as though they are all different systems but in the future, even in two years time, I think we will just be talking about trading platforms. We are already seeing cross-fertilisation among traders – the head of eFX may not have come from an FX background. The underlying prices may still be serviced by the banks but the clients of that bank may be trading in many different asset classes and they want one point of contact at their banks. So the banks are thinking about the electronic trading platforms in a much more holistic way, combining FX with fi xed income, equities, CFDs and even spread betting.”

july 2010 e-FOREX | 123 RETAIL e-FX PROVIDER

Better Bridge - better broker?

making, an item of great interest at higher levels in Excellence in quotes aggregation, latency a typical FX broker operation! Since MT4 has some detection with advanced risk control on the diffi culty handling certain order types, the the bridge back and front ends, as well as near perfect helps additionally with this functionality. real time reconciliation/synchronicity between the MT4 platform and back offi ce systems are Obviously low latency information on which the all becoming critical to broker performance, client account trades is a crucial initial area. Once the and profi tability in an increasingly competitive client or their chosen MT4 “Expert” formula issues a FX marketplace. e-Forex talks to some of the buy or sell order the bridge helps to handle and fulfi ll leading MT4 Bridge providers to discover more this. Since MetaTrader4 in particular has certain ways about how different bridging technologies are of handling partial fi lls, for example, the bridge is able characterised and what are the key trends in to assist with this functionality. this relatively new, and specialized fi eld. The order also requires routing to one or a variety of liquidity providers and or banks. Most bridges allow the broker to split clients up into groups, giving him What does a Bridge bridge? the option of taking varying levels of risk against client Most MT4 Bridges provide some kind of incoming accounts. These features are dealt with in more detail quote handling for price information fl ow into MT4, later in the article. often referred to as a rate or price feed. The bridge handles various price “mark ups” as well as order “The bridging process is quite simple,” says Francisco execution to liquidity providers, post trade interfacing Martinez, Managing Director of Rous Technology to back offi ce systems and reconciliation. Many LLC, a long established MT4 Bridge company based in bridges also calculate how much money the broker is San Diego. “It is installed on the same server that the

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MT server is hosted on and connects the Metatrader to any counter party with a FIX API. A broker just assigns a group to the Rous Dealer and then any trades from an account from that group will be automatically routed to the counter party of the broker.”

Demand and competition Eighteen months ago there were very few MT4 Bridges available. Now liquidity providers like Currenex have begun to provide their own bridge solutions. While some brokers have successfully developed their own MetaTrader Bridges many have failed and have now outsourced their bridging solutions. Having a bridge helps lower risk and protect the company from runaway position possibilities that in some cases can threaten a brokers existence and client funds.

“We are constantly seeing new platforms that clients want to connect their Metatrader to. We feel that listening to our customers needs and acting quickly to their demands allows us to stay ahead of the curve,” states Martinez.

One Tier One US bank recently indicated that they had Stephen Leahy a team evaluating no fewer than seven MT4 Bridges. “A stricter regulatory environment has also been an One may imagine that this “team” may be little the additional spur on the demand for bridges, forcing many wiser at the end of their assessment since they have not brokers to STP all of their risk in order to meet capital actually yet tested these bridges live. Some of the more adequacy requirements,” established bridge companies appear to have had more than their fair share of operating problems, causing brokers to re-evaluate their choice of MT4 Bridge. “The arrival of high frequency high volume professional traders and even institutional players in the MetaTrader space has changed the requirements for risk control and effi cient execution in this market,” remarks Clive Diethelm, CEO of PrimeXM GmbH, a Swiss MT4 Bridging solution company out of Zurich.

july 2010 e-FOREX | 125 RETAIL e-FX PROVIDER

“A stricter regulatory environment has also been an additional spur on the demand for bridges, forcing Tom Higgins, CEO of Gold-i, United Kingdom: many brokers to STP all of their risk in order to meet 1. Low Latency capital adequacy requirements,” comments Steven 2. High Reliability. Leahy, CEO of Capital Markets Access Partners, 3. High Performance. marketing partner to oneZero Financial.

Broker priorities Clive Diethelm, CEO of PrimeXM GmbH, What are the three most important things a broker Switzerland: looks for in a MetaTrader Bridge? We asked several bridge providers this question. They replies are, not 1. Position consistency between the broker surprisingly, similar though there are some differences: and its liquidity providers. 2. Stability 3. Throughput

Francisco Martinez, Managing Director of Rous Technology LLC, United States.

1. Stability 2. Flexibility 3. 24 hour support

Andrew Ralich, Co-Founder & Principal, oneZero Financial Systems, United States.

1. Stability 2. Confi gurability 3. Performance

A larger European based broker we spoke to (a client of one of the above companies) highlighted the following features as most important when looking for a bridge:

1. Performance and speed 2. Ability to Confi gure 3. Risk Management and profi t locking.

Markup Control A “Price Feed” or a “Rate Feed” is crucial to the effi cient running of any broker operation. Some brokers will use different liquidity providers for different currencies, according to Francisco Martinez Tom Higgins of Rous Technology, with certain currencies better “When a bunch of EAs trigger at the same time, dealt with by different liquidity providers or banks. your bridge needs to be able to cope with 100’s of orders per second,” If for example the EURUSD trades at an average spread of say, typically, 0.7 pips throughout the European

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day, the broker can decide to mark prices up either to a constant level of, say 1 pip, making an average of 0.3 pips per trade or the broker makes a variable spread with the mark up changing every time the spread changes at the underlying liquidity source. The broker may want to make a “minimum” mark up, thus taking advantage of the brief times in the day when the spread is exceptionally low, especially on an aggregated feed. For example, even though the broker may allow the rate feed to show as low as 0.6 pips, the market may give the broker a 0.1 or 0.2 or even no spread at times, so allowing the broker to profi t from the difference.

“Such low spreads would generally only take place on an aggregated feed,” suggests Clive Diethelm of PrimeXM. ECN Model Clients in general dislike the idea that every time they trade the broker is making a constant markup, especially when, at very brief times the spread at certain ECN’s like TDFX is below zero i.e. a temporary negative spread. ECN “solutions” for MT4 have sprung up from brokers such as MB Trading, FXDD, Deltastock and FX Open. In certain case the broker in many cases provides the “raw bank feed” to the client, only charging commission.

The commission, however, is then effectively the markup, with say $18 per million the equivalent of 0.36 pips per trade. Some Bridges now support the ECN Model.

Quotes Aggregation Some larger brokers will aggregate prices from a number of liquidity providers and banks. Banks prefer to discourage this practice as they like to have all the fl ow from a particular symbol, which allows for possible netting opportunities.

Certain bridge solutions, however concentrate on aggregation capability more than others. “PrimeXM is particularily strong in the area of quotes aggregation and order routing, both of which have been integrated into the PrimeXM Bridge, giving the broker the opportunity to Clive Diethelm “In today’s volatile markets, positions which take full advantage of a range of liquidity are out of balance can be disastrous to a broker. providers and banks as well as multi A bridge which does not ensure this balance is banded liquidity for superior execution,” worthless as a risk management tool,” comments PrimeXM’s Diethelm.

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“Advanced quote aggregation can give brokers the edge and make a huge difference to profi tability - both in terms of better pricing for the broker and their end clients. The PrimeXM based broker can essentially decide whether he wants to hit multiple banks and liquidity providers simultaneously in order to quickly execute at a low spread or take a less aggressive approach and respect more fully the various liquidity bands. In this case, the engine can essentially pick the bank or liquidity provider(s) that supports the best overall price for the size of the trade,” asserts Diethelm. oneZero Financial Web Reporting System Tom Higgins of Gold-i tells e-Forex that quotes (i.e. transactions per second) in an effi cient and timely and best price multi contributor aggregation will be manner? available in the new Advanced Bridge from Gold-i, due in Q3, 2010. Can a bridge, for example, placing several hundred EA transactions per second fulfi ll orders in the same Apart from pure aggregation, the ability to stream number of milliseconds as another bridge? This is a multiple rate feeds for different size clients is also very sensitive issue between the different bridges, so its important - intelligently quoting for different liquidity best to test. And test some more. At what point will bands and then executing according to variable logic. the bridge start missing orders, or simply crash? Will For example, a GBPUSD spread for 3 million will clients start to get a “busy” signal, which no doubt be different for 50 million or 500 million in size, at does not help client retention levels? any moment in time. Contrary to popular belief in the retail market, spreads are higher for bigger size Tom Higgins of Gold-i claims that current testing orders. Andrew Ralich of oneZero fi nancial has told allows his bridge to process well above a hundred us that this is a common requirement at enterprise trades a second. Bridges have lost brokers clients level brokerages, where different rate streams are more through ineffi ciency at this basic operating level. All common for larger MetaTrader clients. the bridges interviewed for this article claim to have addressed this issue successfully. We have little doubt Choosing a bridge some better than others. Some bridges issue the broker client with EA’s so the broker can self test throughput. Before deciding which Bridge solution is best suited We suggest the broker conduct their own testing in to a brokers particular needs there are a few areas this crucial area using not only the bridge providers that require examining in more detail. These revolve criteria but more especially their own. around Execution, Order management, API’s, and Client profi ling: 2. Partial Fills and Limit Orders Some older and more primitive bridges are essentially 1. Execution unable to address this issue and all orders are only Once the customer or their “Expert” formula makes capable of being fi lled at market. This poses a problem a buy or sell decision, the bridges must carry and as certain customers will naturally place large limit fulfi ll that order. There are several issues here. One is orders - to be fi lled at that price or better. How the traffi c. Can the bridge cope with heavy throughput bridge works with MT4 to report these “partial fi lls”

128 | july 2010 e-FOREX Better Bridge - better broker? >>>

is clearly crucial, as MT4 is not optimally set up to cope with this order type. The companies interviewed in this article all support partial fi lls, but in different ways. Its is therefore best to assess this - once again - via extensive questioning to broker requirement and testing.

3. Server or Manager API? Gold-i have chosen to use the server API rather than the Manager API. The Manager API connects in remotely. “Its a small subset of the Server API,” says. Tom Higgins. “Whilst you can do a lot of things in it you cannot take pretty much complete control of MetaTrader as you can with the Server API. Because its remote its much slower because it has to go across the network in and out of the server. With the Server API your programme actually becomes part of the server, so when something goes on in the server (like an order request) you get notifi ed of that immediately rather than having to go via a message.

This allows you to stop MetaTrader doing the things you don’t want it to do and make it do the things you do want it to do. And you Francisco Martinez can make it much much “We are constantly seeing new platforms that clients faster. We are talking three or want to connect their Metatrader to.” four milliseconds compared

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to hundreds of milliseconds,” he says.

Andrew Ralich of oneZero Financial comments that, “We’ve found that there are specifi c advantages to both the Manager API and Server API. We use both in our Bridges. The Manager API is useful for decoupling the processing of trades from the MT4 Server, while the Server API gives more precise control of the internals of oneZero Financial Bridge GUI

MT4. Depending on the needs of our clients, we can utilize both APIs simultaneously to achieve the best results in terms of control and processing power.” The advantages of both solutions are further illustrated by the fact that Rous Technology uses the Manager API, while PrimeXM uses the Server API.

4. Client Profi ling In some brokerages larger “A” stream clients’ orders are STP’d and smaller clients’ orders can in certain cases be placed in the “B” stream, with the smaller orders fi lled at market prices by the broker on his own books. Most bridges reviewed here are able to separate these two streams as specifi ed by the broker.

The ability to separate clients into “A” (STP) streams and “B” streams (broker takes position risk) is a feature supported by most advanced bridges now. The grouping can become more advanced, with some bridges allowing clients to be separated by symbol, size or even time of day.

Andrew Ralich Client profi ling is a hot issue. “The product doesn’t offset risk unless it’s doing it 100% of Too much interference in the time and it’s not a tool you can rely on unless you know separating client orders its up and running at all times,” or taking positions against clients can be

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RETAIL e-FX PROVIDER

g broker clients, our bridge maintains real MT4 Client MT4 Admin time statistical profi les Bridge Rules & Setup on each customer providing a fair and level playing fi eld across Feeder - the board.” Price MetaTrader 4 Interface Server Conclusion

Gold-i FIX API Plug-In Ultimately, all the Logs Generates FIX messages (no bridges discussed FIX session) Persistance Files in this article offer advantages in their own Orders / Execution Reports way. Different brokers (FIX4.4 messages) Rates require in many cases similar but different custom solutions. The Gold-i Gate Bridge Logs FIX Engine (QuickFIX). variety of choice and 64 bit Windows Service Persistance Files the clear dedication of the above teams is readily apparent, and should provide brokers with a variety of willing options and Trading Sessions & Back Office Session alternatives. If one Quote Sessions (FIX messages) (FIX messages) word summarizes the assessment process in this area, that word BackOffice FIX LP FIX would have to be to ask Gateway Gateway all the questions from all angles and then do extensive testing.

PrimeXM claims that one enterprise level US Client Back-Office Systems LP Execution Systems broker testing one of the above bridges recently had over a dozen people working in a simulation environment just Gold-i Gate Bridge Schematic trying to “break” their bridge (unsuccessfully), counter productive, as the broker moves from a pure showing just how seriously some brokers are netting functionality to actually taking a view on the taking their bridge testing. Ralich claims that the market and betting against individual client positions. oneZero Bridge has “never” crashed to date in a live With several years of experience in low latency environment. While this article was being written, arbitrage, Diethelm has built latency protection into Gold-i was conducting extensive simulation testing PrimeXM’s execution algorithm. He comments: “We on its bridges performance claiming the ability to have extensive experience seeing clients trying to hit push through over 100 trades a second via Hotspot’s off-market prices. In order to properly protect our simulation engine. The competition is on.

132 | july 2010 e-FOREX LET ROUS TECHNOLOGY SUPPORT YOUR FX RISK MANAGEMENT!

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www.roustech.com +1 619-595-3177 [email protected] RETAIL e-FX PROVIDER myForex On-Site

FinaTek (http://www.fi natek.com) is the provider of the myForex Trading Platform. Since 1996 the founders of the company, Alexander Ryvin, Anatoly Tkach and Andrew Sinitsyn have been engaged in the design, development and supervision of proprietary trading platforms for leading Retail FX industry players like MGFG, FXCM, FX Solutions, and others. In 2002 they got together to create the next generation Andrew, why was there a need for myForex On-Site? enterprise grade Retail FX trading platform. When it comes to online FX trading, “Retail” doesn’t mean “small” anymore - especially now, when the In February 2003 the fi rst release of the population of individual FX traders, both professionals myForex platform was successfully launched and amateurs, has grown exponentially. Increasing for CMS in US. Currently myForex is being numbers of larger players are entering the Retail FX used by Retail FX market participants all over trading space and others are evaluating this attractive market. Their software choices are to either acquire the world, thus demonstrating that FinaTek’s a Retail FX company with existing trading platform, fl exible and scalable technology solution to license a white label platform from the Retail FX is ready to be adopted by the leading FX market maker, or to build software from ground up. market players. Each of the above strategies has its own drawbacks and limitations:

• acquisition is expensive and most likely will The fi rm has recently introduced myForex On-Site a come with proprietary or limited scope software new solution designed to satisfy the demand from not compliant with business and technical larger market players for a Retail FX trading soft- requirement of large company ware platform. Online Retail FX trading has enjoyed • dependency on the white label provider limits business profi ts and fl exibility of customizations, exponential growth since its inception and attracted plus it can be a serious security concern attention from a multitude of banks and brokers. • adapting the existing institutional style trading myForex On-Site is the fi rst market proven, enter- platform is not a trivial matter due to the huge prise grade, turn-key software solution suitable for design differences between interbank and Retail well established companies with high technology trading models • developing a fully featured and scalable Retail standards and strict security policies. Today we in- FX platform could take years and signifi cant terview Andrew Sinitsyn - the lead system architect investment.

PRODUCT REVIEW for myForex On-Site, and FinaTek CTO:

134 | july 2010 e-FOREX We believe that the best and the most cost effective approach is to acquire a trading platform site license from a reputable vendor who understands a clients’ specifi c market needs, adheres to technology standards and policies, and is fl exible to adapt to rapidly changing market requirements. myForex On-Site is a perfect fi t for that purpose. It’s creation was based around 15 years of experience covering multiple FX broker-dealers and their diverse business requirements. What led you to offer myForex On-Site? Historically we were oriented towards an application service provider model, or a so called SaaS (Software-as-a-Service) type of service. With the SaaS allowing them to stand against the service model, myForex Platform is delivered from competition. This model relieves the customer and supported in our data centers. We fi rst received from the trading platform development and support a request for trading platform migration and in- burden thus allowing them to concentrate on house installation when IG Markets was in process of business development and to save time and money by acquiring our customer - FXOnline Japan. The whole outsourcing technology needs to professionals. process required quite a few system-wide changes along with the necessity to comply with strict internal policies However not all Retail FX market participants, and procedures – all in a tight schedule. Finatek also especially those with established IT departments, are passed technical audit by PriceWaterhouseCoopers. willing to outsource their technology needs primarily After successful completion of the deployment and data due to operational and data security concerns. They are migration to IG Markets data centers, and helping to looking to have the trading platform deployed in their run the platform in-house for over a year, we are now own data centers with complete control over technology. completely confi dent in our ability to offer the same At the same time, they cannot afford to invest years type of On-Site installation to all interested companies. building it from scratch. The On-Site licensing model is designed specifi cally for that purpose: a one time fl at What makes myForex On-Site attractive for licensing fee, knowledge transfer to the in-house IT prospective clients and how it compares to your team, optional annual support and upgrade fee, full current SaaS service model? access to the Platform source code and documentation. From its very beginning, the myForex core architecture was built on leading enterprise technologies to deliver Are you going to continue to offer the SaaS service a reliable, scalable, and fault tolerant FX trading model? platform solution. Its cluster based implementation We are very well aware of how diffi cult it is to build supports tens of thousands of concurrent users and and support data centers with full data redundancy and millions of transactions per month. myForex provides failover. That’s why not all customers are technically virtually unlimited integration possibilities with external capable of running the trading platform internally, or products and services. The myForex Platform is based could afford to pay for the platform license upfront. on the standard set of technologies and infrastructure Our hosting offering is one of the most reliable and cost typically used by most fi nancial companies. Its support effective in the FX industry, so the SaaS model is not and expansion wouldn’t require any unique skills and going away. At the same time, with the introduction of can be done with existing IT resources. myForex On-Site our customers can start with the SaaS model and switch to an On-Site license later when they Both SaaS and On-Site solutions share the same expand their business and acquire expertise necessary to reliable and proven architecture, as well as the trading support the platform internally. functionality. The major difference for myForex On- Site is its licensing and support approach. For further information about The SaaS licensing model is based on transaction fees. myForex On-Site please contact: This pay-as-you-go approach eliminates signifi cant info@fi natek.com initial investments for small FX broker-dealers thus

july 2010 e-FOREX | 135 RETAIL e-FX CLIENT Bridging the gap Retail meets Institutional FX

has no relevancy in today’s forex market place,” he states.

John Moran, COO at Advanced Markets, states that never before have retail traders and investors been exposed to such a high level of technology, liquidity and brokerage options in foreign exchange. He notes: “The retail space has become a highly sought after segment for banks and brokers alike.

MAREX Financial has been drawn it to the retail client world now because of demand. Previously, it was in the business of servicing and facilitating the needs of prop traders, notes Farooq Muzammal, Head of Foreign Exchange and Bullion at MAREX Financial. He says that until recently, this was done only for Financial Futures traders, while the foreign exchange division of MAREX traditionally catered solely to institutional customers such as banks, hedge Heather McLean funds and other fi nancial institutions.

The retail forex trader segment is now a client On MAREX’s retail client base, Muzammal remarks: base as highly sought after as the institutional “For these customers we have developed a private market. Banks and brokers are bending over client group of seasoned professionals who know the backwards to make these smaller players feel retail client world very well. It is their remit to offer like part of the forex family, providing them with these customers the same high quality service that we the tools of the trade more commonly associated offer our institutional customers. We are not looking with institutional traders and investors. Heather for short term, small deposit and highly leveraged McLean takes a look at how retail providers are customers, but are offering whatever services are bridging the gap between institutional and retail. needed to maximise the longevity of our customers. We are looking for long term relationships; this is why we look to protect clients’ interest by not offering margin levels that are unrealistic for long term Different breeds? success.” Ross Ditlove, CEO of MB Trading, says his company sees little difference between professional and semi- Within the retail space, Muzammal notes there are professional, also known as very active retail traders, two distinct types of customers. “There are those other than committed capital. As a result, MB that we consider true ‘retail’, with small deposit sizes, Trading’s professional grade technology platform usually looking for leverage greater than 100:1, who services both retail and professional FX traders alike. are consequently high risk and have a high propensity “It was a long standing industry belief that larger to lose their deposits. Then there are which we at accounts should receive tighter spreads. Our fi rm MAREX term ‘professional’ private clients; they considers this a preposterous notion and one which will have a higher deposit, may ask for 100:1 / 50:1

136 | july 2010 e-FOREX >>>

leverage, but will very rarely use it and have a disciplined approach to trading. MAREX’s typical customer is the latter.”

Muzammal notes that retail clients rarely have the same access to charting, news and back offi ces that an institutional trader will have, so for that reason, retail platforms have to offer these functions built in. “We have seen from our own customers that the more sophisticated ones will in the end get their own, more complex, charting packages, and use our professional stand alone back offi ce system. For these customers the cost of execution is key, so we offer MAREX FX Black, a multi- bank, multi-liquidity source platform that make sure that our retail customers are not the poor cousins of their institutional counterparts.”

Moran adds a word of warning in light of traditional institutional services being fi ltered down to the smaller end of the trader market, however: “Increased levels of transparency and technology provide the tools to make every retail investor feel as though they can be successful and beat the street,” says Moran. “That being said, there is a cost, or barrier to entry. Whether it is educational seminars, signal software or developing an API or FIX connection to a slick home-based trader, professionally built operating and hardware systems are becoming the norm. But the cost can be high; in the tens of thousands to trade FX liquidity.”

Tools of the trade On how retail FX brokers are providing innovative institutional FX pricing and leverage structures to give retail traders more precision and trading power, Moran states that retail clients are only now grasping the positive impact of direct market access (DMA) and what that can mean to their liquidity and execution. He says they are migrating away from a ‘broker trading against’ model of the dealing desk, because they know that their broker is on the other side of every trade they execute.

july 2010 e-FOREX | 137 RETAIL e-FX CLIENT >>>

OMS were originally developed to handle post trade activity, but over the last 10 years OMS has increased effi ciency and returns as a front end tool, to capture trade fl ow from one piece of technology to a broker or settlement engine. Moran remarks that retail brokers have had to develop interfaces to accept trade activity from the more highly sophisticated technology drivers, but also be able to handle a simple fl at fi le download.

“This has given retail clients the ability to create a more cohesive, low-touch trade entry option that dovetails well with DMA technology. While this option has its obvious advantages for the retail space, it can be a daunting task for the less sophisticated trader to manage the intraday trade and settlement activity,” says Moran. “In an effort to effectively manage trade fl ow, access to a front end application, trade blotter or GUI, is still a necessity. Retail brokers now offer many connectivity options including multiple front and middle offi ce applications. We feel this will continue to morph as retail clients’ increase their reach into DMA liquidity.”

Reducing latency Retail FX brokers are also pioneering advanced and low latency trade execution for retail forex, Moran continues: “The entire DMA model was built to level the playing fi eld for retail traders. It brings a completely different product to the market; I equate it to using dial up internet access versus internet access through a t-1 line. There is no comparison. Retail brokers have looked at gaining the edge with the Farooq Muzammal “We are looking for long term relationships; this is why retail segment by offering value added services, such we look to protect clients’ interest by not offering margin as research and news services. While those value-add levels that are unrealistic for long term success.” services are a nice to have, there is nothing that beats tight spreads and instant execution. The DMA model offers the best of both worlds; a value-add service, Moran notes: “The DMA model has afforded the but with direct access to a multi-bank, unobstructed retail investor complete transparency direct to the liquidity portal.” interbank market, and in some special cases to bank- only liquidity portals, such as Advanced Markets. The Prior to the advent of DMA in the world of FX, retail bank participants in these portals embrace the fl ow traders had very limited, if any, access to the interbank because it is a natural liquidity source that they have market. DMA has created an E-Harmony, match- not had access to previously through their normal making style environment, where it matches approved distribution. This mutually benefi cial environment broker clients to approved bank liquidity. This is allows the banks to price the bank-only DMA pool only accomplished through a strong communication very aggressively, commit to very limited slippage, and conduit between the retail clients, anonymously complete all fi lls. The backend order management vetted, with a strong interbank partner, says Moran. system (OMS) plumbing benefi ts derived from the This type of transparency ensures that clients are years of capital and time that the banks have invested, not deliberately trying to harm the liquidity pool, makes the routing of trades untouched, straight while at the same time giving them an environment through the settlement process.” that is anonymous, provides deep liquidity and uber

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tight spreads, all afforded by participating banks and the notion that full transparency to the marketplace is managed by the broker. the only way to interact fairly. MB Trading aggregates liquidity from multiple sources, which includes: There are several factors that have played a role in banks, automated trading systems, and dark pools of reducing latency to the end retail clients that Moran liquidity. The best bid or ask price at any moment separates in two parts: what measures have the brokers can come from any combination of these sources, says used to reduce latency for retail clients; and what Ditlove. steps the retail clients have taken to reduce latency to their brokers. He explains: “The brokers have used In the 1990s, MB Trading was part of the movement proximity to bank servers, wider bandwidth and more from exchanges to ECNs in Equities, to put the power sophisticated technology in the API, but perhaps the of execution in the hands of the traders. Its forex most critical factor is and has always been how long system was designed to be a non-deal desk (NDD) the broker holds on to the trade. system from the start. MBT then aggregated STP executions with its bank partners and added ECN “Retail clients that use a GUI have also increased their components into the mix by showing the customer the bandwidth to speed their internet connectivity, and full Limit order book. By maintaining a centralised additionally invested heavily in bypassing the GUI order book, including stop and trailing stop orders, completely. They have developed FIX connectivity and keeping Limit orders on the ECN directly, the direct to the broker systems. This bypass not only business lowers the latency of trading considerably. gives them better access to liquidity and execution, Further, says Ditlove, MB Trading offers software but allows them to use more sophisticated signal or development tools, API’s and FIX 4.4 integration. He algorithmic technology, previously available only to says this allows more technologically advanced clients the most sophisticated investors.” to write their own trading software and to interact with the company’s systems in a fully electronic Control with an ECN manner. The MB Trading model is designed to give Forex traders were previously limited to three basic the client the most order types when working with a deal desk: Market; control possible, Limit; and Stop. In addition, many deal desks says Ditlove. This brokers would not allow a trader to place a Limit design is based on or Stop order if it was too close to the current market price. This is done to allow the brokers

John Moran “The DMA model offers the best of both worlds; a value-add service, but with direct access to a multi-bank, unobstructed liquidity portal.”

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effi cient execution is a matter of fi lling against these price levels in a systematic fashion.”

Auto and algo dealing desk to see On devising new tools and the orders on their solutions for retail FX traders to books well in advance of undertake more advanced automated moving their prices. and algorithmic trade execution, Muzammal comments: “We wanted This still happens today, but many brokers algorithmic trading to be available to a wide have become a bit trickier, remarks Ditlove. He says: subset of clients, some of whom do not have “Some now call themselves ECN’s when they are not. the experience to build their own algorithms. We have a very simple test that we employ and use Marex Black was designed with these traders to help clients understand how a true FX ECN like in mind. The low latency infrastructure, built in MB Trading’s operates. Find any currency pair on any algorithmic capabilities, and FIX connectivity is ideal broker’s system. For simplicity, use a pair with a three for these clients. FIX access and hosting options allow or more pip spread. Let’s say the Bid is 100 and the even more fl exibility for clients demanding more.” Offer is 103. Now enter an order to Buy at 101. If you and everyone else on your broker’s system do not Moran states that the bar on automated and immediately see your new Bid at 101, thus making the algorithmic trading continues to be raised for retail market now 101 by 103, then you are not on a true investors, but not always with the desired result. He ECN. It’s that simple.” explains: “Their desire for added sophistication is insatiable. Every new piece of technology that comes Ditlove adds there is no delay or manual intervention to market is slightly different, in some cases better and between when a Limit order or bank quote arrives, some cases worse. An added layer of sophistication and when it appears on MB Trading’s quote depth is now being derived by very intelligent and for others to see. “Our proprietary routing system, sophisticated developers globally. which has won awards in the equity arena for years, is able to route a customer order to whichever source “Rocket and nuclear scientists, from obscure of liquidity is the best price and most readily available technology havens such as the Ukraine or Kazakhstan, at the time. Our quote system integrates the various have become more mainstream,” continues Moran. sources of liquidity and displays a full montage with “Their products are being designed specifi cally for size at each level of price for all to see. The most retail investors. Their products and sophistication are

142 | july 2010 e-FOREX Your FX bridge should be integrated with your CRM system.

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making some retail traders much better at what they do, but in some cases, it is like putting a nuclear reactor in the hand of a third grade science teacher - no disrespect intended for elementary school teachers! My wife is a wonderful kindergarten teacher, but given a nuclear reactor...one can only wonder.”

New trading relationships To develop new trading relationships that more closely align the interests of both trader and service provider, MB Trading has recently launched MBT World, its new online community. Here, traders can talk and chat with support representatives and with each other, can request new features they would like to see MBT develop, and vote on other people’s suggestions. One of MB Trading’s new platforms, MBT Lightwave, allows traders to create strategies. “We want to hear from our clients, and obviously, we use our technology to give them the tools that they need to accomplish this. MB Trading continues to support clients in their endeavours. We understand our success is completely based on our clients’ success,” comments Ditlove.

MB Trading has created a central hub that acts very much like a stock exchange does today. It has successfully centralized a great deal of retail liquidity. The more clients MBT has, the more level and effi cient the playing fi eld is for all, claims Ditlove. As MB Trading continues to grow, its spreads get tighter and its cost to transact falls, Ditlove continues; last year MBT passed on a 40% reduction in commissions to its clients. “Many incorrectly believe that such a model prevents the smaller retail trader from fairly participating; nothing could be further from the truth,” he continues. “Mini-sized orders, routing to all banks, sub-pip increments, and fairness in quotes were all once believed to be something reserved for the large trader. We have shown this to be a fallacy and thus available to all our clients.”

144 | july 2010 e-FOREX Bridging the gap - Retail meets Institutional FX

Muzammal adds: “As clients get more advanced, they expect more from their broker. We see this as a good thing. Our key strategy is to build long term relationships with all our clients. We therefore provide a range of tools to meet their ongoing requirements. We have a platform available with built in algorithms allowing them to trade based on their view of the market. We also allow clients to connect using systems with expert advisors, allowing them to easily plug in their own trading strategies. For more advanced clients we are able to provide API access to enable them to plug their own trading application directly into the MAREX Black liquidity hub.”

On how brokers are devising new tools and solutions for retail FX traders to undertake more advanced automated and algorithmic trade execution, Ditlove comments: “All three of our platforms (MBT Desktop Pro, MBT Lightwave, and MetaTrader 4) have different versions of scripting languages. Obviously, in a liquid, 24 hour market like forex, the ability to write scripts that behave appropriately is critical to everyone, from the small retail trader to the big funds and systems traders.

“We also feel that it is important that we make it easy for traders to connect to our execution and account systems in whatever manner suits them best. We offer an SDK kit, Quote API, and FIX 4.4 connectivity to developers so that they can concentrate on what Ross Ditlove matters most to them, which is taking their own vision “We want to hear from our clients, and obviously, of a trading system or frontend GUI and connecting we use our technology to give them the tools it to the marketplace. The underlying foundation is that they need to accomplish this.” that clients trust that MB Trading is facilitating real time market executions without intervention,” sums up Ditlove. have call centres, 1-800 numbers, or email; they want instant messaging or Skype. Raising the communications bar Looking after the client is the key to brokers raising “When you have a trade that is about to reach a the bar in retail FX service provision, observes resistance level and you are having trouble with your Moran. “In many cases it does not matter how platform, you do not want to have to wait in a call much investment you make in trading technology, queue or send an email; you want to hop on Skype it comes down to how you service the client. While and tell the representative ‘get me out’ of a trade. automation has changed the way we communicate, it Traders want to feel like they have a direct, real time has not changed the fact that people want and need connection with someone sitting at a desk that can get to communicate. Brokers today do not just need to them out of the trade if necessary,” concludes Moran.

july 2010 e-FOREX | 145 RETAIL e-FX CLIENT Automated FX Systems: winning space on crowded desktops

Over the last few years we have witnessed explosive growth in automated forex trading, for the obvious advantages it offers over manual trading, including overriding emotional factors and trading strategy consistency. Heather McLean talks to some of the leading providers of these automated FX solutions to see what’s on offer and how traders can avoid some of the pitfalls.

Rise of automated trading Auto trading has gained in favour over the last few years for many reasons, not all of which are obvious, James Green, managing director and chief compliance offi cer at FXDD, notes. Having the ability to manage one’s account, rather than having to trade one’s account, provides psychological support to those whose time or interest prevents them from learning how to read the structure of a market on their own, he notes.

“Thus the availability of Expert Advisors and other assorted algorithms has provided a boom to third parties and made market participation more readily available,” comments Green. “Whether the algorithms or Expert Advisors provide the hoped for profi t is another question. Some of the more interesting innovations with automated software include sophisticated programmes that permit traders to assess

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signals on a more detailed basis, similar to the multiple data point criteria that a manager would use in determining which trader should be allocated funds.

“These programmes provide deeper statistical insight than a simple historical listing of wins and losses, like baseball box scores. Even more interesting than statistical analysis, however, are the programs that are self-healing. These programs can adjust on the fl y to changing market conditions so that resting orders can be cancelled and replaced or cancelled altogether. In addition, these programs can repopulate executed orders, set them to scale in and put them in stealth mode under predetermined market conditions,” Green notes.

Auto trading is increasingly popular on the broader retail level because it offers a less demanding entry into the market, accompanied by the underlying desire to rely on the work of others, claims Green. The economics of auto trading programmes has lowered the barrier to entry for many who would otherwise not have either the confi dence about forex trading, you’d get a lot of blank looks. or the skills to trade on their own, he states. The notion of automating forex trading would be even more remote and preposterous. Now, almost all “As these programs gain in sophistication, however, people who fancy themselves as traders or investors are they will spawn changes in dealer’s risk management familiar with forex, and are comfortable with the idea operations and in underlying business models,” Green of automating their forex trading. continues. “In order to accommodate the growth in auto trading, many fi rms have developed specifi c “And that’s where the evil twin enters the scene,” skill sets for supporting customer service. The ability observes Klein. “Now that the world is comfortable to work directly with customers who have more with automated forex, the scammers and crooks sophisticated needs in programming and strategy have showed up. That’s why we traders are deluged development has also greatly increased customer with junk emails promising ‘2% per day’ forex EAs, interest in and participation in the markets.” guaranteed income, holy grail systems, and more. These are things that any real trader knows in his Rise of the con men heart are impossible; there is no such thing as risk free Yet the rise of automated trading has also led to a rise trading or guaranteed profi ts, let alone 2% per day.” in “con artists”, warns Matthew Klein, president of Collective2.com, a fi rm that provides objective, third- Klein continues: “It’s an old story, of course. The con party reviews of trading strategies . “They are like a set men only bother to arrive at a party when the other of twins from an old 1950’s horror movie, the mirror guests have shown up and are ready to be exploited. images of each other, one good and one evil. On And what these con men are exploiting now is the the ‘good’ side, there has been a massive penetration universal human desire for making money without of forex trading at the retail trading level, and a work and without risk. Twenty years ago, they touted simultaneous acceptance of the idea of automated ‘work at home addressing envelopes’ plans. Now they trading. Ten years ago, if you polled the readers of a sell forex EAs. So, while the technology has changed, general circulation fi nancial magazine and asked them human nature has not.”

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What traders want no real capacity to understand the true risk of an As to what key features and functionality traders are automated forex product. And because of this, their looking for from Expert Advisors and robotic trading actual purchase criteria (the real reasons why they systems, Klein says what people claim they are looking decide to trade one method over another method) for and what they actually choose are often two very have very little relation to their stated objectives (low different things. risk).”

First the obvious answer, Klein states: “People claim While Green says: “Many customers want their auto they are looking for an automated system that is ‘low trading platforms to function as forward thinking risk’ and can be traded with a minimum of capital. predictors or as nimble (read: automatic) means to Simple enough, and perfectly reasonable. The problem adjust trade structure to changing market conditions. is that human beings are very poor judges of what As orders become more complex, this generation of is actually low risk. I’m not talking only about retail retail traders will demand greater fl exibility and a far traders, by the way; this weakness extends to the so- wider range of functions than are currently available. called sophisticated money managers, too. If you have “Other traders are looking for more direct access to any doubt about this, look at what happened in the the markets with a greater ability to place large orders, past two years to the mortgage-backed securities that and know they will be fi lled at or about their price. sophisticated investors had rated as ‘triple-A’, that is, Having the ability to automatically select from a essentially risk free. catalogue of strategies with the click of a mouse will give traders more fl exibility in adapting to market “So we in the automated forex business face a bit of a changes. One feature that all traders want is an auto- problem, and it’s not something we like to talk about,” kill feature that detects when a programme is not notes Klein. “The problem is that our customers have functioning as it should, and automatically kills all orders and alerts the trader remotely that there is a problem,” continues Green.

Spreading the risk For both novice and experienced traders alike, the requirement to spread the risk is essential as it provides traders with a smoother equity curve, observes Greg Hay, vice president for business development and co-founder at Tradency, a leading automated Forex software provider. He adds that portfolio balancing using the same currency pair, but on a different timeframe, is also becoming very popular. “Traders feel by using system that offer intra-day trading, combined with mid term and long term trading, creates a blend of uniqueness therefore they are not exposed to the views of one strategy alone.

“In the past, traders tended to use one signal provider or expert advisor. With thousands of systems on offer on current mirror trading platforms, the ability to diversify has become so much simpler. Additionally, within the portfolio, traders can add James Green “Many customers want their auto trading platforms to or remove new strategies at the push function as forward thinking predictors or as nimble of a button. Automated trading has (read: automatic) means to adjust trade structure to never been so easy and traders have changing market conditions.” so many tools and resources at their fi ngertips,” says Hay.

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these systems tend to all exhibit the same performance profi le; they work quite well for some period of time, making small consistent profi ts, then they blow up, losing whatever winnings were initially made, plus much of the starting capital.

On what key features and functionality traders are looking for from Expert Advisors and robotic trading systems, Hay notes that systems that have demonstrated profi table past performance in various market conditions, and systems that can adapt immediately to changes in volatility, trends and liquidity, are sought after. “A truly mechanical system such as an Expert Advisor or algorithmic system needs to be self-adaptive and show market robustness,” he comments. “Traders who develop their own trading system can fi ne tune the system to meet their trading requirements. Also, traders can use various models for different market conditions.”

Auto versus algo Hay points to a division between systems that can Mathew Klein be categorised as either algorithmic (such as Expert “The dirty little secret of our industry is that most Advisor or Tradestation code) or automated. He customers like action. That is, Las Vegas-style action.” remarks that although the two systems sound very similar, the differences are substantial. “The fi rst category is using an algorithmic system to take buy-sell signals on the trader’s account based on Yet gambling and girls are what this sector is really programmed metrics inside the code. The second after, Klein observes: “The dirty little secret of our category uses technology that delivers signals from one industry is that most customers like action. That is, trader to another and is auto-executed on the clients’ Las Vegas-style action. You see, the problem with account. The signals that are being executed on the automated trading is that if the product actually client’s account may be manually created signals from works, there’s not much for a human being to do. the system provider. So while case one is signals from That’s the fantasy, right? Turn it on, let it run, an algorithm, in case two, the client has automated collect profi ts. Lather, rinse, repeat. But while we execution of signals from a manual signal provider or humans think we like that idea, we actually don’t. automated provider.” It’s boring. At a minimum, we want something to watch. We want to be entertained. And so the trading Yet Hay states traders have realised that even with methodologies that people choose tend to be those mechanical algorithmic systems, their trading does where there’s always some action. In other words, not meet expectations. “This has driven them to use trading systems that trade a lot. strategy sharing techniques, whereby they copy trades from another successful trader,” he explains. “And hey, guess what? The forex brokers, their introducing agents, and even the guys selling the Customisation EAs and ‘systems’, are all compensated on a per-trade execution basis. And so they tend to love, and to Customisation of automated systems is now possible prodigiously market, the ‘systems’ that trade a lot, by more experienced traders with programming too.” capabilities. Hay comments that high level traders with experience in programming have the ability to Klein says this makes everyone involved happy, at fi rst. modify certain aspects of the code to personalise the But ultimately the game comes to an end, because system.

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Hay says: “In order to design and test an automated pricing can be expressed and priced in any currency, system, traders will need to deploy the use of a strategy whose ratios can be reduced to the granular level for development platform; the likes of Ninja Trader or maximum trade exposure, and that can function in TradeStation would suffi ce. These platforms require either a market making or stealth mode so as to avoid high level programming skills to write code from detection, are just some of the customised programs scratch. Even to modify an already written code would now available, he notes. require an experienced programmer. Within retail forex, this only accounts for a small percentage of Green adds: “Everyone boasts high frequency and low traders and most prefer to use automated solutions latency. These characteristics will soon be expected from the programmers themselves. The consensus rather than demanded. Most of the innovations in from the vast majority of retail forex traders is they algorithms and trade logic will occur in prop shops do not have the time or the inclination to develop and the rest of the world will know little about them. and test their own strategies. In addition to this, due One of capitalism’s characteristics is to sell to the to the high number of profi table strategies available masses. Proprietary traders do not share that view. In for trading, they have many to choose from already at the retail world, as soon as an algorithm or Expert their disposal.” Advisor has any type of reasonable track record, it hits the internet because the developer wants to share Yet the range of customised trading is infi nite, it with the world. The development in this arena is states Green. Manufacturing synthetic contracts, much more predictable because retail traders do not such as outrights and multi-legged spreads, whose write directly to banks or other portals. Thus the development in proprietary shops is retained in house and is virtually unlimited.”

Third party execution The modern functionality of current automated trading software allows for the instant delivery of trading signals to a third party execution platform, states Hay. This fl exibility and technology allows third party system developers to push signals for automatic execution across a wide range of clients in various brokerages.

“Integration is a one step process and straightforward. This allows strategy developers to showcase their system across a large trading audience instantly. This solution also allows clients of the strategy developer to choose whichever broker they prefer to trade with. In turn this allows forex traders to mirror the trades on their account from an algorithmic programmer. So the client can sit back and relax whilst trades are being automatically executed on their account,” Hay remarks.

Klein agrees that nowadays, people are much more willing to use a trading system that was created by a third party developer. Yet people who discover automated forex trading for the fi rst time always Greg Hay follow the same, doomed to ultimate failure, “The consensus from the vast majority of retail forex trajectory, he notes. First, there is an initial rush of traders is they do not have the time or the inclination to enthusiasm for do-it-yourself automation. People learn develop and test their own strategies.” that there are these wonderful tools out there which let them develop their own systems, so they do. They

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develop, they backtest, and they optimise, spending while we report real results, warts and all, and while many, many hours creating their own system. that may sometimes work to a system developers’ disadvantage, ultimately it benefi ts them, because “But their efforts typically end in frustration,” Klein when they fi nally have a good system that really warns. “You see, it takes a long time to develop your performs well, customers will be able to trust the own system, and then you run it for a while, and it results.” may even work for quite some time, but then it stops working as the market regime changes. So you’re back On benchmarking systems, Hay says there can be at square one. When traders reach that point, after no substitute for real time trading results over a long they’ve spent all that time developing their own system period. Traditionally, back-testing of trading systems that has a very limited window of effectiveness, if any, provided the initial results that enabled a trader to they suddenly become very open to using systems start a system on live trading, but back-testing of created by third party providers.” systems can only be considered a rough guide to a system’s actual performance, not a substitute for real Benchmarking the best time performance tracking, he says. As people become more willing to use third party systems, there is growing need to fi gure out how to Due to sheer volume of trading systems available, compare and rate those systems in some objective system providers need to demonstrate exceptional fashion, adds Klein. Collective2.com is just one performance to achieve a high ranking. In the past, solution out of many to rate systems, he states. “Our novice traders would measure a systems performance business model is to integrate technology very closely by the profi t or pips achieved by a particular system. with various brokers, so that we are able to report Yet as technology improved, scoring mechanisms for the actual trade executions received by real traders systems has improved in parallel. using the real systems. We need to work diligently to convince system developers that it is in their best Hay notes: “When selecting trading systems, there interest to appear on the Collective2 platform, because are many metrics for a client to assess before opting

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for a system that is right for them. The list is endless, optimisation, black boxes, and the rest, to their captive mind-boggling and ultimately confusing to the customer base. These will be interesting times,” sums average trader. In order to address this, at Tradency up Klein. we have developed a unique scoring mechanism that combines the critical elements of metric performance Hay adds: “Retail traders started to investigate the use to provide a single ‘T-score’. This score allows clients of automated systems a few years back and the growth at a glance to identify the best currently performing was exponential due to code sharing. As the market is system, ensures system developers are utilising good maturing, there has been a fl ood of poor algorithms risk-reward trading styles to achieve a high ranking that are being marketed very aggressively. A saturation status, and moving forward, that system developers are point will be reached and code developers will keep designing systems that are trading in a responsible and good strategies to themselves as code piracy increases.” well behaved fashion.” While the evolution of retail FX automated trading Future evolution solutions will continue to grow wider, but not On how we can expect to necessarily deeper, says Green. This is a see retail FX automated comment on the end user rather than trading solutions evolve, a limitation on the designer, he Klein comments: “On adds. “The retail market the technical level, is driven by the same you’re going to see a characteristics move toward radical that drive all simplifi cation. The retail trading market of people markets; fear and willing to install greed. That isn’t EAs, and keep a to say that retail piece of software traders don’t want running on information, they their home PC, do. However, is a market the ability to that has been use the data in pretty much a productive completely mined. There manner has the ain’t much opportunity potential to be left there; only a small overwhelming portion of the population because of the sheer of investors has the gumption volume. to deal with the hassle of setting up and running automated trading under “Automated trading, with particular reference to third that paradigm. So instead, you’ll start to see more sites party systems, will continue to gain popularity because like Collective2.com, where trading is managed on a algorithms can manipulate data into trade logic, website, from a browser, where there’s no software to perform calculations for trade selection, are easy to install and run; you just point and click. use, eliminate fear of making the wrong decision and thrive on the enticement of greed. “On the business side, you’re going to see brokers and liquidity providers try to move into the adjacent The next generation of auto trading platforms will strategic space of providing systems and money take on characteristics of sophisticated portfolio management services to clients, because the brokerage management where traders can pick and choose business is a “dog”. It’s commoditised and margins are models, test them, rate them, compare them to other being competed away down to zero. So it wouldn’t models and ultimately click a mouse to select the be surprising to see most brokers morph into pseudo combination of trade logic that fi ts their individual money management fi rms, or at least to provide those appetite for risk or particular comfort zone for trade services, like automated trading platforms, system timing,” summarises Green.

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Rory Kennedy

Forex Financial Services: bringing a more personal approach to FX brokerage

Forex FS is a holder of an Australian Financial e-Forex talks with Rory Kennedy, Director of Services License. How rigorous is the licensing Forex Financial Services (Forex FS), a leading process in Australia and how important is it to Australian based fi nancial services company obtain an AFS license? which was established in 2008 by a group of former investment bankers, IT specialists and Australia has one of the most rigorous and regulated currency dealers. fi nancial systems in the world. The carrying on of a fi nancial services business without an Australian Financial Services License (AFSL) is a criminal offence. Rory, how would you describe the core business An AFSL holder has extensive obligations in relation to activities of Forex FS? disclosure when operating a fi nancial services business. The core business of Forex FS is to provide broking There are ongoing requirements once the license and advisory services to clients in Forex and precious is obtained which include; fi nancial requirements metals. Our clients can take full comfort in knowing comprising of net tangible assets and cash fl ows and that Forex FS acts as a pure broker between its clients maintaining risk management systems and policy. In and its banks and does not hold any proprietary addition the licence holder must implement a code positions. Forex FS offset all its trades back-back of conduct, fraud policy, training policy, human directly with the top tier FX banks (in the world), resources policies, investment policy and procedures, securing its clients extremely tight spreads and due diligence procedures and complaints policy and superior execution. The vision of the fi rm is to provide procedures. The licence holder is also subject to an the highest level of service to our clients, keeping in annual compliance & accounting audit. mind that every client is unique with differing needs, requirements and expectations. Our decisions and What steps has Forex FS taken to achieve the high recommendations are always made with the client’s level of personal customer service you are able to best interest in mind. offer to clients?

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MetaTrader 4

Forex FS prides itself on its customer service. Every account balance of $100,000 and spreads start at 1.8 client is assigned their own personal account manager. pips on major currencies. Our premium and professional accounts have access to our top level industry specialists. Our industry For less experienced traders, we are allied with specialists have no less than 10 years experience Lifestyle Investor Services who provides training on and derive from institutional banking and broking how to invest and trade. Lifestyle Investor Services are fi rms. These individuals are seasoned professionals leaders in their fi eld with a goal to support and teach that understand the markets and the needs and our clients the correct principals for trading. requirements of professional traders. For our professional traders we provide them with access to our top level industry specialists. They also What types of trading account does Forex FS offer and what conditions have you applied with regard to account sizes? Forex FS offer trading accounts for all level of traders: We start at micro accounts which require a minimum initial deposit of $500 with minimum lot size of 0.01. Standard accounts require an initial deposit of $2,000 with minimum lot size of 0.1.

For more experienced traders, we recommend our professional and premium accounts. The initial deposit for professional accounts is $10,000 with minimum lot size of 0.1. Spreads start from 2 pips for major currencies. Our premium account holders must maintain a minimum Auto Pilot

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of the fastest, reliable and most stable online currency- trading platforms available. The Avalon FX Pro system features are designed to maximize the traders’ online Forex trading experience and give them more control and fl exibility so that they can focus more on trading and less on stress management.

Why do you think the MT4 platform continues to remain so popular with both brokers and traders alike and are you considering adopting the Avalon FX new MT5 platform? receive free access to real time newswires powered by MT4 is very popular with traders due to the Expert Dow Jones. Dow Jones is a leading provider of global Advisor functionality. The charting package on business news and information services worldwide. MT4 is also very popular due to the expansive list of indicators and tools available. MT4 has traditionally What trading platforms are available with Forex FS? been used by dealing desk brokers. Trading directly with a dealing desk poses a confl ict of interest because Forex FS offers its clients the choice of three trading the broker can profi t from trader losses if the trades are platforms. MT4 is our primary platform. As of today, not offset. Forex FS chose to integrate MT4 into No MetaTrader 4 is one of the most innovative and Dealing Desk execution so client orders are executed powerful trading platforms. It outperforms and stands back to back with a global bank. This also means you out from competition. MetaTrader 4 combines an can use any self-trading or expert advisor strategy, even accessible, user-friendly interface with a wide range scalping. Forex FS will wait acquire the MT5 platform of powerful functions, making it a highly fl exible should there be the demand from our client base. platform. These advantages have made MetaTrader 4 the most popular trading platform in the world. What functions does your client terminal have to assist traders to test and deploy their own systems Forex FS partnered with Tradency to be the fi rst and strategies? Australian broker to launch Tradency’s mirror trading platform under the name Autopilot Forex FS offers its clients extensive resources to back test and forward test their automated strategies. Tradency’s Mirror Trading Platform is a revolutionary trading tool, designed to provide a service for Retail Back testing: This method requires you run a built Forex clients that has previously only been available - in feature within MetaTrader called Strategy Tester for institutional clients. Tradency’s platform is the which enables you to test your strategy against the fi rst of its kind, Mirror trading platform. The mirror already saved history data. Back testing is less accurate trading platform allows traders to use the knowledge than forward testing but takes minutes for you to of experienced traders for their own trading. Mirror determine if it’s a good or bad strategy. Trading presents Forex traders with an opportunity to quickly and conveniently select one or more Forex Forward testing: In this method you test your traders’ strategies and mirror their trades in real time. strategy in a demo account day by day for a suffi cient period of time before you decide if it is a successful Forex FS also offer an alternative for those looking for strategy or not. This is a much more accurate method some different features. Focused on eliminating trading than the back testing but it may take months for you system pitfalls, Avalon developers have produced one to get assured results.

156 | july 2010 e-FOREX Forex Financial Services: bringing a more personal approach to FX brokerage

Forex FS recommends forward testing and we Most of our clients are located in the Asia-Pacifi c implement the following protocol to assist clients on region, with the majority in Australia and New our demo/test environments: Zealand. There are no immediate plans to attract more clients from overseas but Forex FS is seeing an increase • We apply the same data feed to our demo/test in interest from overseas. This is mainly due to our environment as to our live environment. unique offering of direct interbank liquidity and • Account options are exactly the same as on the live policy of not trading against clients. The possibility environment. of changes in the regulatory environment offshore, • Even the swap points on our demo/test server are combined with Australia’s rigorous regulatory system updated regularly. and strong economic position, have also contributed to international awareness. In this way, we mirror the live environment on our demo accounts to allow clients to receive the most accurate and precise results when testing their strategies. Looking further ahead, why do you think increasing numbers of clients are Automated Trading continues to attract more going to be trading with Forex FS? followers within the Retail FX space. How is Forex FS positioned within this space? As clients become more informed and sophisticated they will realise that there is more to Forex FS is aware that Autotrading is the fastest growing a brokerage service than tight spreads. Forex FS market within the retail Forex industry. Leading the continues to increase its client numbers for the Autotrading revolution is “Expert Advisors” which following reasons: allows full automation of the analytical and trading processes on the MetaTrader4 platform. The other 1. No competition with our clients growth area in Autotrading is mirror trading. The Forex FS is a riskless principal broker. Clients mirror concept involves trade duplication of experienced can take full comfort in Forex FS, which traders. We already have the market leading platform for does not hold any proprietary positions and automated trading in MetaTrader4 but, having identifi ed is therefore purely acting as a prime broker the continuing shift in our own client base towards between its clients and its banks. automated trading, we partnered with Tradency to be 2. Our Clients Trade DMA the fi rst Australian broker to launch Tradency’s mirror Forex FS is among a small group of brokers trading platform under the name Autopilot. Forex FS offering true Direct Market Access (DMA) continues to look for opportunities to further secure its services for the Foreign Exchange and Precious position as a leader in products for automated trading. Metal trading products. The benefi ts of a DMA broker are transparency and effi cient Does Forex FS currently offer any White Label or execution. DMA brokers operate under the Introducing Broker partnership opportunities? premise that the interests of both the client Forex FS offers outstanding partnership opportunities. and the broker are aligned. Our partnership programs support brokers (“IBs”), 3. Protection of Client Funds traders and industry participants in creating or For additional security, all clients’ funds enhancing a lucrative Forex business. Many companies are kept on the Segregated “Clients Trust and individuals have built lucrative IB, and money Account” with National Australia Bank. management businesses with Forex FS, enjoying the Accordingly, in the unlikely event of default, benefi ts of monthly revenue payments while letting client funds are protected\ and cannot be used Forex FS manage the expense and maintenance of back to the benefi t of creditors. offi ce systems and trading software. We equip IBs, agents and money managers with all the necessary tools 4. Industry Specialists to run their business. These tools include BackOffi ce Forex FS targets the best from the industry and access for IBs and agents and MultiTerminal for money has assembled a fi rst-rate team, which includes managers and those handling several accounts. experts in all areas of the business. These individuals that make up our team are seasoned In what regions are most of your existing clients professionals that understand the markets and located and does the fi rm have plans to attract a the needs and requirements of our clients. wider client base from overseas?

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Forex education and training: should you be joining an FX Masterclass? By Sion Smith of Fx Training Zone he day to day trading and investment skills of Retail Foreign Exchange Trading has been on Retail FX traders can be improved by the ever the rise for the past fi ve years and remained Tincreasing range of online education services. fully operational during the fi nancial crisis, One of the most effective and popular methods is outperforming most other asset classes. As improving trading strategies through watching online a result of this, the Forex Educational market videos and analysing professional trade reviews. Professional FX training companies publish video has developed and is now set to take centre tutorials about understanding the markets and how stage in the next growth phase. One of the traders can profi t from using a number of different fundamental reasons for the increase in strategies. Online videos tend to be free of charge and popularity of FX training is that it is available readily available on a number of sites such as ‘You to a wider scope of trader, from the beginner Tube’. Furthermore, the viewer has the freedom to to the seasoned professional, and can be pause, rewind or repeat anything that they have seen, undertaken in a variety of methods and fl exible times, something that has enhanced its popularity among both retail and professional institutional FX traders.

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which in turn allows them to fully absorb and learn basics to complex market theories. Users of Automated the content. These videos provide a cross-section and system-based trading can benefi t from various types give examples of success stories of automated trading of trading advice. The main obstacle to Retail FX systems (Expert Advisors). Traders in using an automated trading machine, due to the vast choice available and the fact that each system Community trading caters for and takes advantage of a certain market The world of Retail FX Traders is becoming united environments, is which to select. FX Training Zone due to the growing popularity of community subscribers benefi t from the advice that the best way trading, which offers a group approach to trading. to get a true refl ection of the system is by analysing Traders are actively sharing knowledge through past performance and statistics. All system providers such networks as trading positions are published, should publish unbiased statistics via recognised third which enables the trader to further their knowledge party statistic providers such as MT4Stats. Users through the expertise of others. A number of Forums should also be made aware of the maximum possible and discussion boards are now being used to share draw down period which that particular system can information about commercial trading strategies endure. this further helps organisations share knowledge and understanding. Through such sources traders Tailored training are able to receive advice and guidance from more The Forex industry has experienced rapid expansion experienced traders. E-Learning enables both retail in the past 2 years with education providers now and professional institutional Forex traders to learn providing tailored products to suit all levels of FX at their own pace and gain an insight into certain trader. To ensure the trader gets the most out of areas of interest. A sense of independent learning and confi dence is achieved through E-Learning which is provided through a series of articles ranging from

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their selected training programme it is vital that their knowledge and market experience is assessed. 3) Continued Support: Many providers will Specifi cally tailored questionnaires are now being simply sell you a trading course or Ebook, used to accurately gauge the level of market exposure, which will contain irrelevant material and offer trading strengths and weaknesses that the trader you nothing in the way of on-going support. possesses – and the results of these questionnaires are By choosing a specialist FX education provider used enabling the education provider to tailor the you will receive succinct, relevant material training given for each individual trader. FX Training and an online support website which offers Zone is leading the way in offering a number of continued learning and development. training programmes which cater for these differing 4) Education Material: The provider should levels of experience and base their training on teaching publish the course content so the trader is traders to understand how and why the market has aware of what they can expect to learn during moved in a certain direction. It is also now possible to the training programme before purchasing. book one-to-one tuition programmes which enables the trader themselves to drive the direction of the 5) Online Presence: All professional providers education and receive a personalised service. should have a website which regularly publishes material on popular content sharing Good providers should always put great emphasis websites such as ‘YouTube’. Spend some time on their teaching methods, not enforcing a limited going through some of their content and assessing how helpful other traders have found number of trading strategies which will no doubt it? Also it is worth checking if the providers are fail to work in 6 months’ time. It is important that using social networking websites as this can be the trader understands how new technical indicators useful to receive regular updates of the services work so that they can apply them to their desired they provide. trading style in confi dence. Many people tell us that they simply do not have the time to sit in front of 6) Trading Psychology: Trading success is the charts all day long looking for that elusive entry, dependent on your psychological state of mind. it must therefore be up to the education provider If you’re a trader just starting out, where do you to understand this basic requirement and provide a fi nd the initial confi dence to pull the trigger? sustainable solution based around their desired trading FX training providers have now turned to NLP (Neuro-linguistic programming) as a tool for life style. We have also been approached by a number developing the perfect mindset of tomorrow’s of fi nancial directors of multinational blue chip professional traders. companies to help educate them about the possibility of using FX options to minimise the companies’ risk exposure to currency fl uctuation. Benchmarking services When choosing an FX education provider there are The specialist FX training providers have now started some key things you need to consider: to help traders in selecting the correct programme by benchmarking their services against other available products. This is being done to bring transparency 1) Provider’s Exposure: Traders should be aware back into the industry after it was fl ooded with of the provider’s company profi le, who will a number of scams offering automatic Expert be teaching them, the extent of their Forex Advisors which had a limited shelf life. By providing experience and how long they have been professional training the industry is hoping to clean teaching. Note: Good traders do not always up its reputation and draw back traders who have been make good teachers. put off by false promises. Before selecting any provider you should ask to see course critique questionnaires 2) Research Provider: Be aware that certain and reviews which have been submitted by past providers target traders’ naivety by offering attendees. These will give you a vital insight into what extremely profi table strategies. Such strategies other traders in a similar situation as yourself thought are almost always too good to be true, if they about the content and more crucially how effective worked 100% of the time then everyone they found the teaching methods of the trainer. would be using them – they are simply unsustainable in the FX markets. If you are looking for solely online based services forexpeacearmy.com is a great place to start, here

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you will fi nd reviews and comments posted by current and past customers which allows you to build a comprehensive profi le around the material you will receive. In my mind, any programme undertaken should offer continued online support in which the provider can assess the trader’s performance therefore helping to drive future material requirements.

With the increasing rise in popularity and quality of interactive online video conferencing websites, FX training providers now have the ability to deliver live training over the internet to thousands of people at once. These conferences also known as webinars, allow traders to interact with the trainer in a live market environment without the need to install any specialist software onto their computer. Joining a live webinar communicate directly with websites like Currensee.com. is extremely benefi cial and easy, enabling the trader This means that it is no longer just the trader verses the to view a live video feed of the trainer’s screen, hear market, but a ‘trading community’ working together audio explanations and even record certain sections of that are able to view the live positions of similar traders the lesson. The trader has the ability to ask questions to themselves. Furthermore, traders have the ability to and receive live feedback on market theories as well as follow trader leaders who are certifi ed professionals, improving their ability to create specifi c trading plans. allowing them to effectively mirror each trade. The education provider then rewards these leaders through Being involved in such an interactive webinar programs similar to Introducing Broker contracts (IBs). dramatically improves the experience for a trader developing their trading skills as they can relate to Support services other attendees who have a similar skill set to their Once a trader has selected what they believe to be their own. Specialist FX training companies are also using best personalised training approach there are a number the power of popular video sharing websites to publish of additional value added support services that the a series of video lessons / presentations allowing training provider should offer. As an FX trader you traders to build their knowledge base at their own want access to up to date relevant information about pace. Next time you log onto your preferred social the markets you’ll be trading, the provider should either media platform, do a search for FX Training; you will supply you with a detailed resource list of where you can fi nd a number of providers publishing live news and obtain such information or give you access to an online even trade recommendations. support website. This support should offer continued guidance in understanding the current market profi le, With the increasing popularity of mobile trading, and both regular professional technical and educational FX Training providers are now developing products articles. Look for such services when selecting your and services which take advantage of the increasing FX Training provider as this can really help you in the complexity that the platform can offer. Leading transition from demo to live trading. Attending a live providers have incorporated their news, technical webinar can help you gain the vital confi dence you and educational based articles actually inside the require to succeed in the live markets. Something else trading platform itself, thus enabling the trader to worth noting is how accessible the trainer(s) or EA digest the latest economic data together with market creator is via email or instant chat, if such a service is analysis in one program. This in turn allows them to offered be sure to check for any hidden costs. make informed trades far quicker and easier. Social based trading has also leapt in popularity due to the FX training programmes dramatically range in development of easy to install Expert Advisors, which price. There are two main categories: 1) Self learning

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market. Other ventures, which are anticipated to result in, a continued income for the affi liate includes ‘online signup referral’, in which the affi liate is rewarded with a monthly percentagep for every successful subscription. Another option, is to resell automatic trading robots known as Expert Advisors – these can simply be installed on a traders platform and pre-programmed to run at designated times. The appeal of this is heightenedh for the reseller as they are only responsible for the actual sale, not the success or maintenance of such an EA. Conclusion TheT best FX training providers consist of a set of experienced traders whow are able to educate others using their own wealth of experience and pastp exposure of the Forex markets. A good trader, does not necessarily make a good teacher. Having teachers whow have made the same mistakes as the trader somewhere in their career products, range from £100 - £300 and can include puts them in a far better situation to explain how E-books, automatic trading robots (Expert Advisors) complex market analysis actually plays out in a live and typically video tutorials published on DVD; 2) environment. It vitally important that the FX Training Professional classroom based training programmes provider teaches the trader to understand the markets, range from £400 - £2000 or more depending on rather than enforcing a systematic approach of a the level of training given. To put this in context, a certain trading strategy. Every trader is different, each good quality beginner FX training programme would will have their own trading strengths and weaknesses, which need to be indentifi ed and addressed by the cost around £500, whereas an expert one would be trainer. upwards of £1500. Before selecting any FX training material ensure you understand the positives and I was once asked to explain what the forex market negatives of each approach and make your selection looks like; the best description would be that of a based on your learning style. Once you have made the rainforest made up of thousands of different living selection, stick to it! organisms each relying on one another in an ever changing environment. To go about harvesting the The increase in demand for quality FX training has power of such an entity you must fi rst understand the opened the door for professional providers to start basics of how the environment can change – Babypips. offering affi liate and reseller programs. These kinds com is a great place to start giving traders a free insight of programs are proving to be very popular as both into what and how something can affect the market. parties benefi t greatly, with the training provided To fi nd the most suited organism to your trading style receiving greater exposure of their material and the I would also recommend forexfactory.com that has affi liate being able to offer a more comprehensive thousands of proven FX trading strategies & EA’s, service to their existing customer base. FX Training which you can research, and test with yourselves. To Zone is currently in deep discussions with a number gain the confi dence and understanding of knowing of larger brokers throughout Europe, India and the when your chosen organism will thrive companies US to provide them with a white label education like FxTrainingZone.com will provide you with the service that they can offer to existing customers in an understanding and guidance you need in a live trading effort to separate their platform from a very saturated environment

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Gearing up to meet the challenges of High Frequency FX trading By Erik Lehtis

As fi nancial markets move into a phase of aving been in the FX market in one role heightened regulatory attention in the securities or another since around 1980, I’ve seen industry, high frequency traders are eager to Hthe market expand (California-based bank explore new areas of opportunity. For many, trading desks and investment bank participation in the foreign exchange is the New World. Offering interbank market in the 80’s, non-bank participation the deepest liquidity of any market, along with via prime brokerage in the 90’s) and contract (closing tremendous volatility and fascinating currency-by- those Calif.-based branches in the late 80’s, bank currency characteristics that make each trading merger mania, Y2K and Euro fear in the late 90’s), pair unique, FX is a fantastic world to explore volatility highs (during the 80’s) and lows (the mid-late at any frequency. However, be forewarned that 90’s), cycles of coordinated central bank intervention unlike the New World of old, this one is already to knock the dollar down (the Plaza Accord in 1985) well-populated with savvy, well-funded and well- and to prop it back up (the Louvre Accord of 1987), established participants, undisturbed stretches and the impact of technology on how business is done, of golden opportunity are rare, and success is starting with Reuters Dealing (1981), EBS and Reuters far from assured. Some of the challenges are matching in the early 90’s,. However, nothing in my common to HFT, but others are unique to FX. So opinion has had the transformative impact on the FX let’s explore some of these, to better prepare marketplace the way that high frequency trading has, you for your exciting journey into HFT in FX. and in particular HFT participation by non-bank proprietary trading fi rms.

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Liquidity transfer It truly was the growth of the non-bank high frequency community that gave the FX market a much-needed shot-in-the-arm starting around 2003. Volatility in the market had become moribund beginning in the late 90’s, as fear of Y2K systems failures, the advent of the Euro, and the massive bank consolidations all worked to shrink opportunity for traders. The old risk:reward equation no longer seemed to hold sway, as the market lost any ability to follow through directionally, and slippage due to poor HFT and FX trading venues surface liquidity became hazardous to the bank traders who had to make a living making markets on large A few notes about the various trading venues and the transactions. The high frequency community arrived market segments they serve: EBS and Reuters are at and brought the ability to transfer liquidity from areas the top of the heap from a volume standpoint. They of over-supply to those areas of under-supply. The form the backbone of the interbank liquidity pool, market came to life, dynamically transformed. having supplanted the voice broking network and the direct-interbank dealing conventions that dominated Beginning around 2000 with the launch of the liquidity until the mid-90’s. Due to their long Currenex, FXall and Hotspot platforms and the presence in the market, they offer less functionality ensuing exposure by EBS of their platform to API for screen-based traders, which are almost exclusively access in 2003 and Reuters Matching in 2005, bank traders, and they have the most restrictions on automated trading in FX has changed the way access for API traders. liquidity is provided and by whom. Prime brokerage has been an essential element all along, due to the They nevertheless are the most important pools of bilateral counterparty settlement model that underlies multi-participant liquidity, and they serve as the de the very foundation of the interbank FX market. facto primary sources of price discovery. The manner All the aforementioned ECNs operate within that in which liquidity is divided between them is also context—there is no central clearing counterparty- unique: EBS has the market cornered for liquidity in oriented platform in spot FX. Without banks serving the non-Commonwealth majors (EUR/USD, USD/ as prime brokers and giving clients access to their JPY, USD/CHF, EUR/JPY, and EUR/CHF), while balance sheets and the ability to trade in their names, Reuters remains the primary liquidity for GBP/USD, non-bank participants would not be able to have EUR/GBP, AUD/USD, USD/CAD, and NZD/USD, direct access to the FX marketplace, and would instead as well as the other Asian pairs, USD/MXN and the have to get their liquidity from a salesperson on a other Latin American pairs, and the Eastern European bank FX desk. and Scandinavian pairs. Most of these situations owe

Erik Lehtis is the President of DynamicFX Consulting (http://dfxconsulting.com), a practice that draws on his expertise to assist banks and exchanges operating in the high frequency space in foreign exchange. july 2010 e-FOREX | 165 LOG OFF

themselves to long-standing convention and the unspoken determination of the interbank market to preserve both platforms, so that neither can develop a monopoly.

The other major platforms, including Currenex, Hotspot, FXall, Integral, 360T, FXCMpro, and Bloomberg Tradebook, are to one degree or another geared toward the needs of the buy-side community, which includes corporate treasury, hedge funds, fund managers, and retail aggregators. (FXCMpro is a white-labeling of the Currenex platform). Many HFT fi rms will want to extend the reach of their market- making operations to these platforms, interacting with a wider spectrum of buy- side customers. But beware: HFT, both bank-side and non-bank, can often run into each other on these platforms, and FX Venues Competitive Landscape (As of end of 2009) Source: ECNs, Aite Group therein lies a commonality between FX and other asset classes--trades between two HFT fi rms usually end up with one of them being unhappy. Your algorithms will take into account these facts, and will also take note of the FX trading landscape: each Lessons from other asset classes venue is unique in how it formats rates, its minimum trade sizes and trade size increments. Each exchange In fact, many of the challenges faced by a fi rm seeking also has its own message policy: they vary widely and to enter the high frequency FX arena are familiar to can be unexpectedly restrictive to the newcomer from those with a HFT background in other asset classes. equities. Failure to take heed of the exchange-imposed Setting aside any assumptions about this familiarity, here are the specifi c challenges that will need to be throttles on your behavior will result in undesirable met in order to participate effectively in this very trading consequences and in some cases steep fi nes. competitive marketplace. Most exchanges provide FIX connectivity for order management, but each implementation has its unique First and foremost, there needs to be a substantial characteristics. Request For Stream, order ladders, holding of intellectual capital. This is essential— two-sided quotes, and other complex order types without a clear and pertinent idea about how you are all implemented to one degree or another by the intend to trade profi tably in FX, you simply will not. various exchanges. Algorithms that have demonstrated a track record of consistent success in other asset classes are not Market data necessarily suffi cient in this regard—they must be Each exchange has its own unique distribution of cognizant of and attuned to the unique characteristics market data as well. They vary from exchange to of spot and forward FX, and currency futures. exchange but all have one thing in common: to the equity trader, they are paltry. They range in cost from Therefore, you must have a solid working knowledge of: free to exorbitantly expensive, and will test the patience • the settlement process of the experienced quant with their sporadic nature • the prime brokerage model and limited scope (not one exchange publishes every • the Net Open Position calculation used by trade, even in aggregate). Modeling the liquidity of the PBs and the ability to perform that calculation market by building a consolidated order book is not in real time diffi cult, as the inter-exchange discrepancies in price • how daily currency cash fl ows are calculated publishing formats are easily normalized, but the fact and managed that most prices are pulsed at regular intervals, rather than streamed, makes for some uncertainty as market among other FX-specifi c fi nancial details. snapshots age—the fact you haven’t received an update

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High Frequency Trading in FX Source: ECNs, Interviews with bank and high frequency trading fi rms, Aite Group does not mean the true state of the order book hasn’t activity across the global deployment. Real-time changed, and actual trades tend to be published (if at positions, P&L, and other risk metrics should prove all) by the exchange well in arrears of the order book their accuracy now. If your strategies are latency- snapshot refl ecting the aftermath of those trades. There dependent, you will want to have advanced network is some data cleansing that needs to take place as well, monitors tracking network performance in real-time, because much of what is published can be redundant. with particular focus on the connections between your feed handlers and gateways, and the relevant On top of all that, there are the single-bank exchanges. e-platforms. You can trade directly via a GUI interface with over a dozen banks, and many will now also The software development environment is of course permit connectivity via FIX API. These banks are one of the most critical aspects of the enterprise, and becoming more interested in, and technologically in almost every case will constitute more of the fi rm’s capable of, handling the fl ows from high frequency intellectual capital than any other single aspect. Without traders. One must be careful, though, in that this is attempting a full-blown discussion of the various a relationship business, and no one likes his or her characteristics of that environment, it may be worth liquidity being aggregated. A HFT fi rm that attempts noting here a couple of things that are common to all to exploit bank liquidity will soon fi nd that it has lost successful HFT fi rms, particularly in the FX space. First, access to that liquidity. each fi rm will have a tightly integrated feedback loop between the technical and business portions of the Development environments trading team. Full and free communication between these functions in an atmosphere of mutual respect In order to properly and confi dently develop to this is sometimes taken for granted but cannot be over- unique distributed execution environment, the HFT emphasized for the success of this particular endeavor. fi rm’s algorithms will need to demonstrate they can interoperate correctly. This means establishing a A dysfunctional development process will produce a simulated environment that mimics the production nonfunctional trading system. The stress of developing environment soon to come. Among other things, a a high-performing trading system in an ultra- realistic Sim environment will account for expected competitive environment should not be overlooked, inter-locational latencies as well as the specifi c trading and when the participants are individuals who characteristics and requirements of each exchange. may have spent their careers developing their non- interpersonal skills, it is normal for diffi culties to arise. Trading engine logic and performance are not the Failure to manage these confl icts can be fatal to an only elements of the trading system that need to incipient trading operation. pass certain benchmark tests at this stage: the fi rm’s risk management framework should at this stage Second, the fi rm needs to establish a rigorous, formal also demonstrate its ability to keep up with trading process for software development. It has been said

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that trading fi rms are really Therefore, high-speed technology fi rms, and there are no circuits connecting all of these successful technology fi rms that don’t have a centers for the purpose of transporting market data well-defi ned and subscribed-to production culture. and order traffi c is essential (and costly). Your developers must adhere to professional software production standards of some kind if work is to be Having secured rack space, powered up and cooled performed with any degree of consistency in quality or down their servers, leased all the appropriate circuitry, timeliness. and tested all the connections, the fi rm can now begin the task of testing interoperability. This is Deployment issues where the trading engine logic is harmonized to the Providing the entrant has achieved a solid deployment framework, and things are demonstrated understanding of the unique post-trade settlement, to work in their production locations as expected back offi ce, and exchange-specifi c characteristics based on outcomes in the Sim environment. Once of the FX market and has baked all this into some trading engines, feed handlers and gateways have all kind of multi-layered trading system cake, physical been installed at the various sites, a comprehensive deployment issues can be addressed. The question suite of unit tests should be conducted. This suite of co-location is not an “if” but a “where”. Most will encompass simple functionality, stress testing of the exchanges you will want to connect to have and various forms of imaginable extreme market matching engines located in the greater NY-NJ area, conditions, and a range of test trades that should and offer proximity location connectivity at Equinix deliver the full spectrum of expected trading in Secaucus, so that is a very logical and widely opportunities. chosen option. CME’s Globex platform is in Chicago, naturally, and Reuters has their matching engine in Once the tests all pass with green lights, the system is London. Additionally, EBS has matching engines go. From that point forward, it is all about analyzing in London and Tokyo, and for the ambitious global actual trades, fi guring out what went wrong, as well as player, co-location at the Equinix sites in those centers what went right, and isolating issues that need to be as well will be mandatory, due to the advantages focused on. Then it’s just a matter of scaling up and accrued executing as close to the matching engine as out. You are now well on your way to discovering the possible. world of high frequency trading in foreign exchange.

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