visit us at ...tibco page 68 tradertools page 37 tradingscreen page 82 traiana page 44 tullett...

april 2008

visit us at www.e-forex.net

OFC Cover 18/3/08 15:25

IFC UBS Ad 18/3/08 15:26 Page 1

It's always difficult to predict whether you might be able tosuccessfully mimic or migrate a particular trading style,technique or strategy across different asset classes.

Although several of the articles in this edition have talkedabout how the equities market has been responsible for manyof the most recent developments in FX, many commentatorsstill believe the jury is out with regard to what form some ofthe most popular trading styles and techniques in equitiesmight ultimately take when translating across to the FX space.What seems clear is that we can't expect a direct replication oftechniques. It may be too early to say whether an exchange-style marketplace in FX will gain significant traction or ifdemand for anonymous trading will pick up in FX, butalgorithmic trading has certainly started to make an impact.

Unlike in an exchange-dominated market like equities, thereasons for using algorithms in the unregulated andfragmented FX marketplace are substantially different andmany popular equity algos may not make the transition. Forexample, widespread adoption of order working algos isunlikely in the FX market. However, there are still manypotential opportunities for deploying FX algos and a realneed for aggregation tools which will provide furtherstimulus for their development.

It will also be interesting to see whether the relationshipbetween algorithmic trading and dark pool trading inequities will be mirrored in FX. In equities, there is talk ofdouble digit growth in the use of dark pools and theproliferation of these pools has contributed to the growth ofalgo trading. We've tried to determine in this editionwhether there's any similar expectancy in FX for the use ofdark pool trading and what growth prospects it has. It isdifficult to find consensus on the subject so we will be re-visiting this interesting topic during the course of this year.

As usual we hope you enjoy the magazine and look forwardto seeing you next month at the annual ACI Congress whichthis year is taking place in Vienna, Austria.

Charles JagoEditor

e-FOREX

SPRING 2008

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001 Title Page 18/3/08 15:36 Page 1

Manfred WiebogenVoltaility returns

Peter D'AmarioE-Forex comes of age

Max SmithThe e-Forex Interview

John BatesComplex Event Processing

April 2008

Jim Leman and Ravi ManchiKey liquidity considerations in the new FX trading landscape

Tim O'SullivanTraderTalk

AAbn Amro page 137ABN Amro AssetManagement page 118ACI page 20ACM page 10Aegis Software page 127AITE Group page 67ANZ page 100Apama page 78

BBaxter Solutions page 55BIS page 89Bloomberg page 41Bloomberg Tradebook page 53BMO Capital Markets page 103Business Solution Grouppage 43

CCFETS page 98CFTC page 123Clientknowledge page 85CLS Bank International page 90CME Group page 120Cognotec page 95Commerzbank page 17Credit Suisse page 15Currenex page 79

DDanske Bank Inside

Back CoverDeutsche Bank page 6Digitec page 8Dukascopy Outside

Back Cover

EEBS Market Data page 66eSignal page 61 Eurobase page 143

FFFastFill page 126FIX Protocol page 121FlexTrade page 107Fortune Free Holding page 88FX Bridge page 19FXdirekt Bank page 146FX Solutions page 133

GGain Capital page 135GFI Group page 112GL Trade page 72Goldman Sachs page 52Greenwich Associates page 28

HHotspot FX page 6

IIBM page 158ICAP page 66ICE page 124Integral Development page 81Interactive Brokers page 9Interbank FX page 159IQPC page 54ISE page 121

JJCH Capital Management page 64JP Morgan page 11

KKalahari page 16

LLehman Brothers page 48Lind-Waldock page 124LogicScope page 84

MMatchbook FX page 52Marex Financial page 27MIG Investments page 129Morgan Stanley page 58

NNetScout page 68Newedge Group page 74Nordea page 7

OOption Computers page 63optionsXpress page 124Orc Software page 128

PPeople Bank of China page 94Philadelphia Stock Exchange page 123Portware page 39Progress Software page 77

QQuantHouse page 157

RReuters page 79

SSAFE page 88Saxo Bank pages 4 + 5SEC page 121Shanghai Futures Exchange page 98SmartTrade page 97 Societe Generale page 111Square Financial Services pages

144+145SS&C Technology page 105Standard Chartered Bank page 93

T360T page 118Tactical Asset Management page 52TeleTrader page 140TIBCO page 68TraderTools page 37TradingScreen page 82Traiana page 44Tullett Prebon page 119TwoFour page 133

UUBS InsideFront CoverUSFE page 124

VValhalla Partners page 52

WWall Street Systems page 12Westwater Corp. page 32World Trade Organisation page 90

Nick Dyne Post-trade STP for FX

20. Volatility returns to the FX marketsManfred Wiebogen looks at why thecurrent increase of volatility in the FXmarket is the result of uncertain andobscure economical developments.

22. Retail e-FX: the next big currencymarket revolution?Hjalmar Schröder and Hans-JörgSollberger discuss the opportunities thatretail FX margin trading platforms offerto both hedgers and speculators and itsfuture growth prospects.

28. E-Forex comes of ageUsing Greenwich Associates researchdata, Peter D'Amario illustrates how e-forex could be entering a phase of moremature development.

32. Detection and access: Tackling keyliquidity considerations in the new FXtrading landscapeJim Leman and Ravi Manchi examinethe factors making the detection of andaccess to liquidity complex in the FXtrading environment

46. Execution Algorithms - the nextstage in optimising your FX tradingperformanceNicholas Pratt talks with a variety ofindustry players to gauge what impactalgorithmic trading is having on the FXmarket and how the use of algorithmscan optimise trading performance.

56. Groping in the Dark: FX looks forhidden pools of liquidityNicholas Pratt sets out to discover moreabout the idea of dark trading andhidden pools of liquidity which is thelatest phenomenon to make the journeyfrom the equities market to its FXcounterpart.

2 | april 2008 e-FOREX

FOREWORD

LEADER

MARKETPLACE

FEATURES

contentsCompanies and organisations in this issue:

Hjalmar Schröder and Hans-Jörg SollbergerRetail e-FX: next big currency market revolution?

INDUSTRY REPORT

002-003 Contents 18/3/08 15:38 Page 1

Detection and accessKey liquidity considerations

Execution AlgorithmsOptimising FX trading performance

FX MythbustersPost-trade STP for FX

Site InspectionFXdirekt Bank

april 2008 e-FOREX | 3

66. Historical market data: a valuabletool for informing FX trading strategiesBy Jim O’Hagan

68. Real time performancemanagement & analysis for high speedFX networksEileen Haggerty outlines howidentifying and analysing FX tradingresponse-time performance can helpensure constant and reliable applicationavailability to end-users.

72. GL TRADE’s Aspen

74. With Max Smith, Global Head ofForeign Exchange at Newedge

78. Leveraging Complex EventProcessing for Algorithmic Trading in FXJohn Bates discusses the newtechnology of Complex EventProcessing (CEP) and how it can bedeployed successfully to address keybusiness drivers within the FX market.

84. Post-Trade STP for FXNick Dyne dispels some of the mythssurrounding STP for FX and otherOTC assets.

88. ChinaHeather McLean interviews majorbanks, technology vendors and buy-sideplayers in the country.

100. Single bank platforms: still anunrivalled value proposition?With Ian O'Flaherty, Peter Hagenauer,Eddie Wen, Klaus Hoffmann and LorneGavsie

112. Electronic Currency Derivatives:-prospects for the futureFrances Maguire asks if the FX industrywill ever successfully trade FX optionselectronically or if the hybrid model ishere to stay.

120. Technology: opening up exchangelisted FX products to new breeds oftraderFrances Maguire looks at whether theexchanges are succeeding in attractingboth retail investors and quant funds totrade FX on-exchange.

130. e-FX Options: Providing new profitand hedging opportunities for RetailInvestorsThe growth of electronically traded FXoptions by retail traders, both over thecounter and on-exchange, is taking off.Frances Maguire examines why FXoptions are being pitched as the fastestgrowing new revenue stream in FX.

140. Product ReviewThe TeleTrader Professional Workstation

146. Site InspectionLarry Levy looks at FXdirekt Bank,one of a small handful of German banksoffering a comprehensive range ofcontracts for the retail client.

152. With Tim O'Sullivan, Chief Dealerat GAIN Capital Group

157. Systematic Trading Technologies:changing the behaviour of the FXmarketStephane Leroy discusses how varioustypes of trading technology arefacilitating the evolution away fromdiscretionary trading.

VIEWPOINT

REGIONAL e-FX PERSPECTIVE

FOCUS

RETAIL E-FX CLIENT

TRADERTALK

UNDER THE MICROSCOPE

e-FOREX ROUNDTABLE

e-FOREX INTERVIEW

LOG OFF

THE e-FX MECHANIC

PRODUCT SPOTLIGHT

FX MYTHBUSTERS

002-003 Contents 18/3/08 15:38 Page 2

004-005 Saxo Bank Ad 18/3/08 15:29 Page 1

004-005 Saxo Bank Ad 18/3/08 15:29 Page 2

Hotspot FXi rolls out real-timeMarket Data Feed Hotspot FXi has introduced a real-time streaming marketdata feed to better support algorithmic and model traders.The real-time feed supplements Hotspot FXi's existingmarket data fees, which are provided at 50 and 250millisecond frequencies. All three available feeds provideprices and available quantities for all bids and offers on theECN. The introduction of the real-time market data feed

complements recent enhancements to the Hotspot FXimatching engine. Trading execution speeds on 90 per centof orders entered via Hotspot FXi's LiveLink API areexecuted in a range of 5 and 15 milliseconds.

UBS expands NDF currencypairs on e-FX platformUBS Emerging Markets Foreign Exchange and MoneyMarkets, has expanded the NDF currency pairs offeredon their electronic FX trading platform to includeUSDCLP (Chile) and USDCOP (Colombia). Quotesfor CLP and COP will be available during theirnormal market hours (COP 0800 -1300NY and CLP0700 -1130 NY). These two new currency pairsexpand the UBS existing offering that already includes:KRW, TWD, INR, RUB, and BRL. Selected crossesare available including EUR. CHF, and JPY.

Since 2007, UBS client's have been able to trade onprices for NDFs in the same manner as the wide rangeof deliverable emerging market currencies. Clients haveaccess to NDFs electronically from one week - oneyear (including BMF dates for USDBRL). Most sizetrades are automatically priced and executed deals canbe set to feed directly into clients risk systems.


NEWS

Deutsche Bank releasesFast Orders on autobahn FXDeutsche Bank has released Fast Orders onautobahnFX. Fast Orders allow clients to place GTCbids and offers as close to the market as they like.Orders are placed via the main trading screen andexecute against their streaming price. If a client’s orderreaches the target level and there is sufficient liquidityat that level, the client’s order will be filled. If thetarget level is achieved but the liquidity available doesnot match the order size, the client receives a partial filland the remaining balance remains live in the system.

If a client receives a completed execution but in partialfills, the system automatically aggregates the order andthe client receives one confirmation.

TD Securities licensesTraderTools’ STPlatform™

TraderTools recently announced that TD Securities(TDS) has licensed TraderTools’ straight-throughprocessing platform, STPlatform.

TDS intends to take advantage of STPlatform’scomprehensive FX order management features,including full STP, AutoFill™ (automatic orderexecution), an Order API with order importingcapabilities, as well as complete branch and customerfunctionality.

Order Pad of TraderTools’ STPlatform

006 NEWS 18/3/08 15:39 Page 1

007 Nordea Ad 18/3/08 15:30 Page 1

FX Bridge forms allianceFX Bridge Technologies and TeleTrader Software haveformed a strategic alliance bundling TeleTraderProfessional™ charting and analytical software withthe ProTrader Plus™ dealing platform.

ProTrader Plus is a second-generation dealing platformfor Forex, CFDs and options with a customizable tradestation, a front-to-back office reporting and managementsystem, and a pricing, risk management and analysissuite. The industry now has a feature-rich platform withworld-class charting and analysis capabilities.


NEWS

Digitec enhances D-3 Digitec has further enhanced its rate engine D-3. Inaddition to the RMDS® data feed the system now alsoincludes direct rates from several major banks andbrokers. The streaming updates from these APIs can beused for blending, comparisons and plausibility checks.Moreover, the integration of Bloomberg's B-Pipe feedis planned for the near future. A very user friendly

interface, a client server architecture with highperformance rating and a wide range of export interfacesare characteristics of the D-3 product. Increasingnumbers of global banks are testing and integrating theinnovative system to feed reliable rates to a growingnumber of e-trading applications. Traders in differentdealing rooms around the world are working withindividual configurations but share one central databaseand the responsibility for 24-hour price updates.

Bloomberg offersintegration to POMSBloomberg now offers seamless integration betweentheir FX Execution Manager and POMS, Bloomberg’sPortfolio Order Management System with theBLOOMBERG PROFESSIONAL® service. Now,POMS clients can send FX spot, outright, and swaporders directly from OX, the fixed income andcurrency staging blotter, to the FX Execution Manager.

Once an order is placed on the OX trading blotter andpasses all relevant compliance rules, it can be manuallyor automatically forwarded on to the FX ExecutionManager. On the Execution Manager, it can beworked like any other staged order in the BloombergFX electronic trading platform, including being filledvia RFQ, voice trade affirmation, or against anexecutable stream. Once traded, the fill flows back toOX and populates the Execution Details blotter. Thisintegration offers POMS users considerable flexibilityin managing their compliance-checked FX orders bothfor solicited and unsolicited fills.

AEGIS launchesAthenaTrader 4.0 for FXAegis Software has developed AthenaTrader™, a brokerneutral, multi-asset, execution management system(EMS). AthenaTrader maintains superior proprietaryfunctionality in connecting to exchanges, electroniccommunication networks (ECNs), and single-bankbrokers. It supports a wide variety of trading needs,including but not limited to: • Buy-side desks seeking best

execution, • Proprietary traders writing

algorithms and strategies, • Sell-side market makers and

agency brokers executingorders on behalf of clients.

"AthenaTrader is built fortraders who want to be incontrol of their trades usingeither algorithms or directmarket access to achievebetter, more effective execution" states SteveOppenheimer, Director of Marketing at AegisSoftware. "AthenaTrader is extensible through Javacode, so that new algorithms can be quickly writtenfor order execution" he says.

Steve Oppenheimer

008 NEWS 18/3/08 15:39 Page 1

009 Interactive Brokers Ad 18/3/08 15:31 Page 1

ACM launches theAdvanced Flash TraderSwiss online broker ACM- Advanced CurrencyMarkets - has just released a new enhanced version ofits Flash platform : the Advanced Flash Trader. Thisnew enhanced version is fully compatible with theother trading technologies supplied by ACM.

Developed with Flex technology, the Advanced FlashTrader is a “Rich Internet Application” offering a fullycustomizable user friendly interface. No download isrequired to install the platform and to benefit fromintegrated news and analysis as well as full chartingcapabilities. Moreover the Advanced Flash Trader doesnot require any specific open ports on firewalls,meaning that clients can log in from any computerwith Internet connexion without additional set up.

eSignal includes FX contentfrom sister companyeSignal’s quality data now includes GTIS from itssister company within the Interactive DataCorporation family, allowing a view of Forex marketdepth best bid / ask by contributor. eSignal also offersFX data from others, such as HotSpot FX Institutionaland Retail.

With 200 global bank andbroker contributors and spotrates for more than 100 currencies, as well as preciousmetals, cross and forward rates, eSignal’s data andcharting packages are ideal for Forex traders. eSignalprovides the professional, as well as the active trader,with streaming, real-time quotes and news, Forexmarket depth, plus powerful technical analysis andback testing. In addition, eSignal offers free Forexstrategies.


NEWS

TwoFour expands offeringsTwoFour, (www.TwoFour.com) a leading solutionsprovider to the financial services industry continues toexpand its offering and client base. A leadinginternational financial services firm has licensedTwoFour to manage its global foreign exchange andoptions orders. Two of TwoFour’s clients have recentlygone live on version 3.2 which includes fixed income,interest rate swaps, and internal arbitrage as well asenhanced treasury and cash management features. Tomeet the growing demand for its products andservices, TwoFour recently moved its New York Cityoffice to a larger space and opened an office inLondon. TwoFour is a flexible, workflow-based ordermanagement and trade processing solution designed toimprove user productivity, reduce related IT costs andincrease the percentage of STP transactions. The latestrelease of TwoFour supports foreign exchange, FXderivatives and enhanced treasury and cashmanagement, and includes fixed income, interest rateswaps and internal arbitrage.

Nordea live on 360TNordea has joined 360T's multidealer trading system,TEX. Nordea already has connectivity to FXall andRTFX and the inclusion of 360T will enable Nordea

to offer FX trading on the multi-portal platform wherethe majority of its customer base operates.

010 NEWS 18/3/08 15:40 Page 1

011 JPMorgan Ad 18/3/08 15:32 Page 1

Wall Street Systemsexpands e-Operations Wall Street Systems, has further enhanced its e-Operations solution, specifically in the area ofsettlement netting. Using the e-Operations suite oftools, banks have been able to offer seamless,integrated web-based services to their customers tosettle, authorize, confirm, split, and allocate trades.

Now, Wall Street Systems provides additional toolsallowing customers to net trades across asset classes,regardless of the origination of the trade.


NEWS

Eurobase wins eTradingproject with RMBRand Merchant Bank (RMB) has selected Eurobase toprovide a complete e-trading platform. RMB is theinvestment banking arm of First Rand, one of SouthAfrica’s largest financial services groups.

RMB will use Eurobase’s Siena, Siena Rate Managerand Siena eTrader for front office internal tradecapture, high performance pricing, marginmanagement and to enable its customers and branchesto trade directly via a single platform in, initially,Forex and Money Market products. Additional assetclasses such as Fixed Income, Interest Rate Derivativesand Options are planned for future phases.

Cognotec partners withSaxo BankCognotec and Saxo Bank, two of the leading providers ofweb-based institutional and retail foreign exchange tradingsolutions, have announced a partnership in which SaxoBank will provide streaming price liquidity to Cognotec’sRealStream Margin Trading platform. With one-clicktrading, prices will be fully executable, greatly enhancingthe straight through experience of the end client.

RealStream Margin is a complete solution for thosewishing to gain entry to the fast-growing ‘retail’ segmentof the FX market. An integrated platform, RealStreamMargin provides a web-distributed trading suite for endclients, while simultaneously providing fullcollateralisation or Margining Trading capabilities forstandalone control over Credit Risk associated withtrading in this market.

MIG focuses on growth andinvestment MIG Investments has put inplace a strong development planfor the future. As a Swiss PrivateBank, scheduled for 2009, thecompany is investing ininfrastructure, technology,research, people and processes,maintaining its Forex concentration whilst buildingout other product offerings within the financialservices industry. One of Switzerland’s fastest growingonline brokers, MIG currently offers some of theindustry’s lowest spreads and offers a powerful MT4platform as its FX gateway to clients – the MIGTrading Station. China’s largest finance website,Hexun, recently awarded the MIG Trading Station asthe 3rd most popular ranked trading platform byChinese investors in 2007, spotlighting MIG’sproficiency in that region.

012 NEWS 18/3/08 15:41 Page 1

013 ICAP Ad 18/3/08 15:33 Page 1

Dukascopy launches newManaged AccountDukascopy – SWFX Swiss FX Marketplace haslaunched a new managed account service for its clients.It represents a new opportunity for Dukascopy’s clientsto diversify their portfolio in a conservative automaticstrategy, that target’s 15% return per year with a sharpratio of 5. After the successful launch of the first strategywhich was fully funded in 1 month, Dukascopy madethe decision to create a second one. “We will accept upto 500 millions USDunder management forthis new program”,says CEO AlainBroyon. “and webelieve Dukascopy hasbeen particularlyinnovative inproviding this uniqueopportunity for ourclients.”


NEWS

New GFI FENICS Enterprise The second quarter of 2008 will see the release of GFIFENICS Enterprise, a suite of server components forthe complete life-cyle of foreign exchange derivativestransactions. It comes out of GFI's award-winningFENICS FX, pricing and risk management softwareused by many banks worldwide.

“FENICS Enterprise will give our clients the ability tochoose how their users view and receive FENICSPrices, either via FENICS desktop, or via a web frontend of their design, or using an out-of-the-boxapplication.” said Richard Brunt - GFI's global headof sales for FENICS sales. "It can be fully integratedwith the client's proprietary market data, mathmodels, and connected via the STP API to third partysystems. FENICS Enterprise will deliver scalability asour clients' business grows, allowing deploymentacross multi sites to internal and external users.”

GFI FENICS Reporting Service, one of the server components of GFI FENICS Enterprise

Alain Broyon and Dr Andre Duka

Interactive Brokers offerscustomised interfaceInteractive Brokers now offers professional traders acustomisable interface for optimum execution of Forextrades. Interbank quality spreads allow users to tradethe best bid and offer from more than ten liquidityproviders with spreads as low as a half pip and IB’ssmart router executes orders at the best available price.

Single-click order entry, drag-and-drop functionality,real-time price quotes, color-coded directionalindicators and real-time P&L are seamlesslyintegrated, along with a complete suite of tools for FXorder management. Quotes can be expressed in Spotterms or inverted to compare with Globex futures.More than 15 different order types are supported andfeatures include a “What If ” capability to verifymargin impact before trading.

IBFX provides access toMultiple Bank Liquidity Interbank FX (IBFX) has recently revealed its uniquemulti-bank order routing system, which provides itscustomers access to liquidity and automatically executestrades with five of the world’s 10 largest financialinstitutions.The advantages of trading with IBFX’s agency-based model include:• Tighter spreads (as low as two pips)• 100% automatic execution• No market manipulation • Competitive pricing• Anonymous order execution • Smart routing to leading banks“By obtaining competitive bids for order flow on ourproprietary multi-bank feed, IBFX customers achieveoptimal pricing and execution, faster processing times andincreased liquidity on every trade, with just one click ofthe mouse,” said company president and CEO ToddCrosland. IBFX’s multi-bank liquidity feed is availablenow for both live and demo accounts atwww.interbankfx.com.

014 NEWS 18/3/08 15:41 Page 1

015 Credit Suisse Ad 18/3/08 15:33 Page 1

NEWS

ICAP further enhancesEBS Spot FX platform ICAP has completed the most recent phase ofenhancements to its EBS Spot FX electronic tradingplatform which significantly improve functionality,increase the frequency of market view updates andspeed of data delivery, and provide greater order booktransparency for all EBS customers. ICAP has also

recently reduced the price distribution interval (timeslicing) on the EBS platform by 50 percent to 500milliseconds for all EBS customers.

Kalahari launches kACE2

Kalahari has announced the launch of kACE2, thesecond generation of the company’s flagship productkACE. kACE2 offers the front to mid-office functionsmore powerful pricing, publishing and performancethan its predecessor. kACE2 offers a powerful androbust analytics production environment wherebyusers in different roles can combine their expertiseand roll-out leading-edge modeling solutions rightacross the institution, all using one commonframework. Benefits include: scalable from smallworkgroups to large distributed networks; reducedoperational risk; consistency in analytics across theglobal organisation; reduced time-to-market; rapidmodel development; data sharing across tradedproducts; integration across functions (e.g. tradingdesk, sales desk, retail distribution).

016 NEWS 18/3/08 15:42 Page 1

017 Commerzbank Ad 18/3/08 15:34 Page 1

TeleTrader ProfessionalWorkstation 7.0 releasedTeleTrader has released a major upgrade of itsProfessional Workstation. Version 7.0 introduces thenext generation of Drawing Tools with revised userinterface and advanced functionalities. The fullyfeatured Pivot Points Tool and the improved FibonacciRetracements are state of the art and bring the alreadysuperior line tools to a new high. Additional benefits

of the new release include accelerated order procedureson the basis of integrated HTTP trading and extendedoptions for Continuous Contracts. TeleTrader has alsostrongly emphasized their ability to adapt to variousinterfaces which order platforms offer. Therebyenabling the display and adjustment of orders andpositions in charts and seamless remote control of theplatform’s order tickets.

Smart Trade releasesSmartConnectTM

Smart Trade Technologies has recently introducedSmartConnect™, a new trading-connectivity platformand Liquidity Orchestrator™, which combines smartorder routing (SOR), aggregation and matching.

SmartConnect, a highly configurable platform withcomprehensive connectors to various liquidity sourcesreceives and sends messages from multiple sourcesusing different formats and network protocols.smartTrade Liquidity Orchestrator enables users todefine their rules for SOR, aggregation and matchingso that an infinite combination of both executionstrategies and SOR possibilities can be achieved.

Commerzbank launchesnew FX trading platformCommerzbank’s new proprietary trading platformComforex Plus will deliver true streaming rates to itscustomer base on a 24 hour basis. ComforexPlus offers acomprehensive FX service and other highly attractivefeatures, such as streaming spot prices, forward and swapprices and a limit order management tool. The platformalso includes a module for Money Market placements.

In addition to these features, in the near futureComforexPlus will offer Precious Metals prices forphysical and non physical settlement. From the veryonset the platform will cover a broad range of currencypairs, including Emerging Markets currencies, byproviding tradeable prices on upto 135 currency pairs.


NEWS

Societe Generale addsnew serviceSociete Generale has added a new service to its current e-trading offerings on FX Spot. Clients connecting via aFIX protocol can now link to traders directly, havingaccess to real time executable prices in up to 35currencies. Societe Generale has a strong pricing

architecture, which provides competitive prices to clientsand is recognized as having one of the best response timein the market. Institutional clients such as Hedge Funds,Asset managers, Real managers or Brokers now have theflexibility to plug their internal trading engine to thebanks' source of liquidity. Societe Generale has chosen touse FIX Protocol v 4.2, which is renowned for its marketstandard and guarantees secure and consistenttransaction. The e-business team can be contacted formore information at: [email protected]

SmartTrade Market Depth

018 NEWS 18/3/08 15:43 Page 1

019 FX Bridge Ad 18/3/08 15:35 Page 1

Let me assume that volatilityis not what Central Banksare looking for. It will be

rather the opposite: Central Banks

have a strong interest in a smoothfunctioning of their economies.Just recently the EurogroupChairman Jean-Claude Junckercriticized the Euro’s sharp gain andstated clearly ‘we don’t like excessvolatility in the foreign exchangerate’. But to stay realistic: in acomplex and changing world inthe sense of no or only littleoverall volatility in the economythis may not be achievable. I alsowould like to stress and rememberthat monetary policy may havestrong implications for markets’volatility. Considering thesubstantial differences in thestructures of the various nationaleconomies and in the interests ofgovernments the exchange rate asand adjustment tool, amongstothers, is still of high efficiency.

Traders are providing the liquidityneeded to the markets afteranalyzing and reacting on political

or economical statements ordevelopments. The enormousdaily volume of OTC or e-TradedForeign Exchange products keepprices low. The spreads narrowedto a minimum and in particular e-Trading brought furthertransparency to the markets.Certainly volatility comes at cost,and from time to time, atransactions tax – the so calledTobin tax – is argued to reducevolatility by discouragingspeculative trading. I am seriouslyagainst such ideas as they areabsolutely misleading anddisregarding the real factorsinfluencing the financial markets.But such a tax will further raisetransaction costs for customers.

Again, traders, customers, hedgersetc. are following the given marketenvironment. January 4th 1999,the market implementation of theEUR, the opening market price in

FOREWORD

Volatility returnsto the FX markets


Friday, March 7th 2008, justwhen writing these lines theEuro hit a record high againstthe Dollar at 1,5459 after therelease of the U.S. non-farmpayrolls. The effective ratesurprised the marketconsensus and turned out tobe a drop for the secondstraight month. There is a lotof concern about how thehuge downturn in the U.S.economy is going to affectthe rest of the world. Politicsand economic outlooknurture the financial marketswith uncertainty whichresults in continuing highvolatility at the end.

Manfred Wiebogen, President ACI The Financial Markets Association

020-021 Foreword 18/3/08 15:44 Page 1


Sydney was at1,1747 Dollars. Themarket even movedto nearly 1,19 in thecoming monthsbefore it slipped toits low in October2000 at 0,8225. Itwas the uncertaintyof politics andeconomy whichcaused thedepreciation of theEUR of nearly 30%.There was theBalkan war, themarkets just passedthe East Asian crisis,the Russian crisis and the Brazilcrisis and the newly implementedEUR provided less fantasy and wasnot yet market proved. Well, itwas an easy game for the Dollar.The world again changed with theTech Stock worries in 2000 but inparticular with 9/11. Thefollowing years not only reducedthe interest rate environment butalso lead to historical lows in theforeign exchange volatility, whichwas seen between 4th quarter2006 and 2nd quarter 2007.

The low volatility in interest ratesbut also in stock markets in theyears after 9/11 encouraged otherinstitutional investors seeking analternative asset classes. ForeignExchange was then discovered bythem and turned out to providecomparable returns – due to goodintraday volatility of FX and manytradable currency pairs the returnswere quiet often better than thoseof bonds and equities. In one ofmy last columns I was interpretingthe last BIS survey which confirmsthis development of increasing FXvolume.

Carry traders themselves used thelow FX volatility environment fortheir positioning. Borrowing alow-yield currency and investingin a high-yielding one was thegame. Traders of course likevolatility. Usually the tradedvolumes increase by raisingvolatility and vice versa. Thephenomenon of carry tradinginvestments was that a lowprovided volatility environmentled to increased turnover in themarkets. Investors created extremepositions not only staying indeveloped currencies but alsomoving into emerging markets.

Now it seems, these days are gonefor the time being. The acuteeconomic uncertainty raisedvolatility in FX (and other marketstoo). Sub-Prime suddenly changedthe picture by mid last year. TheUS is probably going into arecession and as in the decadesbefore the current strength of theEUR, the JPY and in particular theCHF is recognized again as acurrency of save haven. Carrytrading is not decisive any more.

Huge portfolios were turned tooptimize the return but also toreduce the risk of currencymovements. The daily volatility incurrencies jumped and someemerging currencies see up to 5%or even higher of daily fluctuations.

The current situation mirrors thebalancing of our financial marketsby themselves. In years past we haveseen historical lows in FX volatilitiesbut also on interest rate levels. Thecurrent liquidity crisis may turn outto be bigger than assumed (latestsurveys are talking of USD 600billion) and is far away from atransparent situation. The currentincrease of volatility in the FXmarket is the result of uncertainand obscure economicaldevelopments.

The FX market does not need anyregulation but regulators areencouraged to provide a fair andtransparent playground and towatch very carefully the innovativedevelopments in other areas of thefinancial markets or in the bankingindustry.

020-021 Foreword 18/3/08 15:44 Page 2

Retail e-FX:the next big currencymarket revolution?The current average daily

volume on retail FXplatforms is estimated to

be in excess of $60 billion. At firstglance this seems just a fraction ofa global FX market, the estimatedvolume of which is around $3.2trillion a day1. More than half ofthat global figure is howeveraccounted for by FX Swaps andabout half of the remainder isinterbank trading. By this

reckoning, then, retail FXaccounts for more than 10% ofdaily buy-side FX volume ofaround $400-500 billion

Growth drivers

- Technology

Retail FX was enabled bytechnology in the first place, andits growth has been mainly drivenby developments in such areas as:

- automated margining andcredit facilities which enablehigher leverage

- real-time positioning, exposuremanagement and mark-to-market features

- capital management functionse.g. for trailing stops andalgorithmic trading

- tradable charting technology- simplified cash management using

Contracts For Difference (CFDs)

LEADER

Extensive media coverageof the retail FX market hasgenerated considerableinterest in currencies across a broad public.Heightened awareness ofthe opportunities that retail FX margin tradingplatforms offer to bothhedgers and speculators,and the growth of theircustomer base beyond realretail users, are supportingan estimated 30% annualgrowth ratein retail FX

volumes.


By Hjalmar Schröder, Managing Director, GlobalHead of FX Electronic Trading and RiskManagement and Hans-Jörg Sollberger, Director,FX e-Commerce at UBS Investment Bank

1 Triennial BIS Report 2007

Hjalmar Schröder Hans-Jörg Sollberger

022-026 Leader 18/3/08 15:45 Page 1

These facilities have struck a chordnot only with traditional retailcustomers but also with a growingnumber of individuals, corporates,financial intermediaries and hedgefunds – indeed anyone looking formaximum opportunity at minimalcost. This trend is particularlyvisible in Asia where retail margintrading platforms have becomeextremely popular.

- Carry Trades

Technology may be the means,but ‘carry’ is the concept that hasdrawn in increasing numbers offirst-time FX traders. Attracted inpart by widespread media coverageof carry trades over the past year,many new market participantshave set out to capitalize oninterest-rate differentials. Carrytrades now account for some two-thirds of total retail FX volume.

The graph above shows volumedevelopment in retail FX (bluebars), the percentage share of thatvolume represented by trades incarry pairs (red line) and thegeneric volume trend (black line).For this chart, a trade in a carrypair is assumed when the interestrate differential between two tradedcurrencies is larger than 5%, andthe percentages are an aggregate ofboth short and long trades.

- Structural Factors

Clients using these platforms canbe characterised as self-directed,highly self-sufficient and notprimarily looking for an advisedrelationship. The focus for theseclients is on:

- cost efficiency from wholesale-like, usually no-commissionpricing

- quality of execution- real-time risk management

capability- the convenience of 24x7 direct

market access with advancedtrading tools

- limited loss potential due toautomated margining and auto-closeout

- real-time add-on services, suchas news, research and enhancedcharting and analytics

From a supplier’s perspective,the trend for clients to usethese platforms hascertainadvantages:

- reduced client credit risk due toenhanced risk managementfacilities and auto-closeoutmechanisms

- reduced client advice, as most ofthese clients are self-directed

- outsourced execution- reduced settlement

costs usingCFDs

>>>


Source: UBS AG

022-026 Leader 18/3/08 15:45 Page 2

Both sets of factors are alsocontributing to the continuousgrowth of FX margin trading.

Trends and Opportunities

- Mobile Technology

While mobile technology has beenavailable for several years as amedium for viewing rates, placingor modifying orders or even tradinginteractively, the stability,accessibility, security and speed ofofferings has not yet fully met FXtraders’ needs. Given thecontinuous technologicaldevelopment in mobile devicesand communications, we willundoubtedly see these problemsdwindle in the near future. Expectmore providers to offer WAP or i-Mode applications that supportmobile trading, giving retail marketparticipants even greater flexibility.

- Algorithmic Trading

Algorithmic trading frameworkshave become part of every seriousretail FX platform. Sophisticatedclients want to define and back-test their own trading strategiesand build rules aroundfundamental or technical datascenarios. A set of easy-to-definerules for trade entry and exit –both stop-loss and profit-taking –can further boost interest in retailplatforms, as they allow traders toplay on signals and trends. A ruledefinition interface can consist ofa drag-and-drop rule set withdefinable parameters, with anoptional programming languagefor more tech-savvy users to setupmore complex rules. There are alsoofferings in which the platformprovider or invited third partiespredefine and own strategies,letting clients participate with apercentage of their assets. Theselast offer a cost-effective andtransparent alternative to managedFX funds.

- Convergence

From a number of perspectives,retail FX has moved beyond itsoriginal community andsignificant elements ofconvergence between wholesaleand retail FX have started toemerge. Wholesale FX providershave reached out for retail marketshare in three ways: firstly byproviding ‘white-label’ solutions;secondly by investing intoadvanced liquidity links with retailproviders enabling access to retailflow; and thirdly by purchasingstakes in retail platforms in orderto participate financially in thisfast-growing market. Conversely,retail aggregators have started toinclude elements of traditional FXbusiness by offering advice,increasingly advanced tools such asalgorithmic trading and APIs, andby offering FX services for cross-border securities trading (inducedFX), payments, managed accountfacilities.

So how ‘retail’ is retail FX still?The table overleaf summarizes thecase:

Challenges and Risks

Liquidity in FX markets has heldup rather well through the currentcredit market turmoil with pricegaps not exceeding 1% in maincurrencies, even during the mostvolatile period last August.Extreme gaps cannot however beruled out in the future and haveactually occurred in the moredistant past – for example duringthe sharp USDJPY selloff in 1998.Large market gaps challenge oneof the key pillars of the margintrading business model, namelythat real-time mark-to-market andautomated position close-out limita client’s credit exposure.


LEADER

022-026 Leader 18/3/08 15:45 Page 3

- Regulatory Changes pushConsolidation

Some of the more established FXbrokers may have been pleased latelast year when a proposal from theNational Futures Association (NFA)was approved by the USCommodities Futures TradingCommission (CFTC). The proposalincreased the minimum net capitalrequirement for US Forex DealerMembers (FDM) from $1m to$5m. The new requirements wereimplemented end of December lastyear, and it seemed clear that manyretail FX providers would struggle tocomply with them in the short timegiven. What will worry many moremarket participants is the NFApresident’s challenge to Congress toraise the net capital requirementsubstantially further, to $20m.

The Swiss Federal BankingCommission (EBK) has adjustedits regulatory requirements forretail FX providers who operate inthe Swiss market and now makes abanking licence a prerequisite. Both the US and Swiss regulatorymeasures and potential similaractions in other legislations willvery likely lead to a dramaticconsolidation and structuralcleanup in the sector. This trendshould benefit clients – who willbe served by a better-regulatedindustry offering better depositprotection – and will also furtherstrengthen the position of well-established retail aggregators thatalready comply with thesestandards.

Non-bank retail aggregators thatalready comply with the newregulations or stand a good chanceto meet their requirements will tryto remain independent as long astheir business models still work.The less-prepared retail players willlook for a suitable licensed bankpartner to merge with; merge withanother aggregator to strengthen

their capital base before applyingfor a bank licence; go offshore; oroperate only until regulations canno longer be avoided.

- The Need for Stable andEfficient Systems

Why are stable and efficientsystems essential?

First, the sheer transaction volumein the retail FX space itself leaveslittle room for error as a singleprice misprint can cause tens ofthousands of spurious executionsand close-outs. Second, APIprogram-based traders willautomatically capitalise onimperfect pricing performance.Third, retail clients tend to becompletely dependent on thestability of their chosen platform –as opposed to traditional FXclients who can fall back todealing over the phone, or withanother bank – so that outageswill have a very severe impact ontheir risk management.

These strains, coupled withcontinued spread erosion, leave


>>>Retail e-FX: the next big currency market revolution?

“From a number ofperspectives, retail FX hasmoved beyond its originalcommunity and significant

elements of convergencebetween wholesale and retailFX have started to emerge.”

022-026 Leader 18/3/08 15:45 Page 4

little room for error in retail FXsystems’ design. Retail volumesthemselves impose simplicity andstandardisation in order execution,client spreading and marginmanagement and automatedcloseout mechanisms. As thesevolumes grow, front-to-backprocess re-engineering will likelybecome inevitable for manyplayers, becoming a decisive factorover time.

- Client Suitability and Support

Diligent client suitabilityand appropriateness

processes canensure that

retail aggregators are onboardingthe ‘right’ clients. This is asimportant as having a capablesupport and operationsorganisation to run the business.Finally, enriching this offeringwith advice service levels can helpmitigate reputational risk whilemaintaining cost efficiency.

Taking these trends intoconsideration, a comparison ofcurrent versus future FX servicescould look like the illustrationabove.

Conclusions

Boundaries between retail andinstitutional FX are becomingincreasingly blurred. Growth in‘retail’ FX is already being driven

less by this specific client segmentthan it is by a change in

behaviour across alltraditional client

segments,including

professional individuals in theretail, core affluent, and high networth client segments, and eveninstitutional clients.

Governments have begun toregulate retail FX providers muchmore closely. This will benefit notonly retail customers, but alsobanks and well-established non-bank retail aggregators.The valueproposition to banks entering theretail market, especially as regardstheir credit rating and risk-takingcapacities, risk managementexperience, cross-asset capabilityand brand value, will add furthermomentum to retail FX growth.

A significant consolidation in theretail sector lies ahead, and only alimited number of retail aggregatorswill survive over the longer term.The majority will likely struggle tokeep up with the tighteningregulatory regime, and in particularits increased capital requirements.

Institutions will need to integratethe innovative technology providedby retail aggregators with thetraditional strengths of major FXbanks, such as security of funds(credit rating), depth of balancesheet and command of liquidity.Institutions will need to mitigateany potential reputational risk bydiligently checking clientsuitability and appropriatenesswhen on-boarding, and by offeringa cost-efficient, risk-based clientadvisory model. Such institutionswill remain or develop into keyplayers in the retail FX market.

Retail FX is impacting andchanging wholesale FX markets andmodels – and vice versa. Together,these two trends are transformingthe overall FX landscape.


LEADER

022-026 Leader 18/3/08 15:45 Page 5

027 Marex Ad 18/3/08 15:47 Page 1

E-forex trading volumesincreased some 20% from2006 to 2007. But because

overall FX trading volumesjumped 36% year-over-year, thetotal share of foreign exchangetrading executed electronicallyactually shrunk to 43% last yearfrom 50% in 2006. (Note:Greenwich Associates tracks foreignexchange trading volume amongend-use customers; volume figuresreported in this report exclude inter-bank transactions and volumegenerated by other sources.)

Research from our firm,Greenwich Associates, shows that— prior to last year — electronictrading systems were gaining newusers and new business from FXmarket participants around theworld at a relatively consistentpace. E-trading systems captured20% of global volume in 2003and 30% in 2005 before hittingthe 50% mark last year.

However, the results of our mostrecent e-forex study suggest thattrading practices have begun todiverge among different types ofFX users in different regions. Thisfinding supports the notion thateFX is leaving behind its initialstage of dramatic across-the-boardgrowth and entering a moremature period in which marketparticipants begin to self-sort intoactive or infrequent users ofelectronic trading systems basedupon their unique needs andstrategies.

Growth andSegmentation

Worldwide eFXvolumes increasedto $43.0 trillionin 2006-2007from $35.5trillion the prioryear. One reasonfor which thisgrowth laggedthat of totalglobal foreign

exchange trading volume —which soared to nearly $100trillion last year — was that muchof the growth in the overall FXtrading business was driven byincreases in the trading of optionsand emerging market currencies— two products not particularlyconducive to electronic trading.But the story of why e-tradingdeclined as a share of the FXwhole last year is much morecomplicated than that. Forstarters, the share of FX marketparticipants using electronictrading systems for at least aportion of their business actuallyincreased to 55% in 2007 from53% in 2006 — a statisticallysignificant increase in the contextof the more than 1,700 companiesand institutions participating inour research last year.

So even as the share of total FXtrading volume executed through

e-FX INDUSTRY REPORT

e-Forexcomes of age


Growth in electronic foreignexchange trading volumesfailed to keep pace with thesurge in global FX marketslast year — a sign that e-forex could be entering aphase of more maturedevelopment.

Peter D'Amario is a consultant with Greenwich Associates

028-031 Industry Report 18/3/08 15:48 Page 1

electronic channels declines, e-trading providers continue toattract new users. The customerbases of the leading e-tradingsystems have been growing steadilyfor the past several years: Asrecently as 2004, only 44% of FXmarket participants tradedelectronically. Just as importantly,the percentage of FX users tellingGreenwich Associates that theyhave no plans to start trading

electronically — a group we’vedubbed the “hardcore eFXholdouts” — continues to shrink.In 2006, 36% of FX users saidthey have no use for electronictrading; that share fell to just athird in 2007.

But the research results reveal anincreasing divergence in usagepatterns between large, activetraders — generally financialinstitutions — and accounts thatgenerate relatively small amountsof annual FX trading volume.More than 80% of the world’smost active FX traders (those thattrade more than $50 billion inforeign exchange every year) use e-forex systems, up from 77% lastyear. Usage rates decline withoverall trading activity: Abouttwo-thirds of traders generating

between $10 billion and $50billion in annual volume tradeelectronically, as do 46% of thosewith annual trading volumes of$1-10 billion and about a third ofusers with smaller annual totals.(A growing group of computer-driven FX traders executes 100%of foreign exchange tradingvolume electronically—typicallyvia the futures market—but thesemarket participants fall outside the

parameters ofGreenwichAssociates’customer focusedresearch.)

For the timebeing at least, thee-forex client baseappearsincreasinglydivided betweenactively tradingfinancials thathave taken up e-forex in large

numbers, and corporates thatoften prefer to stick withtraditional execution methods.Although theshare of globalcorporates sayingthey useelectronic tradingsystems increasedto 43% in 2007from 40% in2006, usageremains far lowerthan that amongbanks (90%),hedge funds(65%) and fundmanagers/pensionfunds. This finalgroup could represent animportant source of e-forexgrowth in coming months. Theshare of fund managers and

pension funds trading FXelectronically increased to 55% in2007 from 48% in 2006 — animpressive adoption rate thatcould be maintained as theseinstitutions seek out effectivemethods for meeting regulators’requirements for documentingbest execution.

On a regional basis, eFX usagepatterns seem less influenced bydifferences in trading strategiesand more driven by culturalpreferences and the state ofdevelopment of e-trading systemsin terms of technology andliquidity. E-trading providers haveachieved the highest level ofmarket penetration in the UnitedStates, where more than two-thirds of FX market participantstrade electronically — upmeaningfully from 61% in 2006.Europe is not far behind at 63%after an increase from 60% in2006. In sharp contrast, e-forexuse fell to 46% of Asian FXmarket participants in 2007 from52% the prior year. Although theshare of FX users trading

electronically in Japan did increaseyear-over-year, the countrycontinues to lag the rest of theworld when it comes to e-trading,

>>>



with only 36% of foreignexchange market participantstrading electronically.

E-Forex Market Share

The relatively high levels of marketpenetration already achieved by e-forex providers within the mostactive part of the FX customer base— financials and the world’s mostprolific traders — suggest that theindustry’s ability to sustain growthrates will depend on its success inwinning more business fromexisting clients.

From 2006 to 2007 the share oftotal foreign exchange volumedirected to e-forex systems byexisting eFX users was essentially flatat 63-64%. It must be noted,however, that simply maintainingthis share amidst the rapidexpansion of the global foreignexchange market required asignificant increase in absolute dollarterms. The biggest bump came fromexisting hedge fund users, whichessentially doubled the total amountof FX volume they directed to e-

trading systems from 2006 to 2007.Thanks to this sharp increase, theshare of total FX trading volumeexecuted electronically by existinghedge fund users jumped to 62%from just 47%.

Also helping e-trading systemsmaintain their share of thebusiness within their existing clientbase was a significant increase inelectronic trading volume amonge-forex users in the UnitedKingdom. In absolute terms, U.K.customers increased total e-tradingvolume by more than a third from2006 to 2007 — a jump thatincreased the share of their overallforeign exchange volume executedelectronically to 66% from 55%.

These relatively big gains helpedoffset declines in ContinentalEurope and non-Japan Asia, wheremodest increases in total electronictrading volume resulted in adecline in e-trading systems’ shareof the overall FX trading business.E-trading also lost share amongexisting corporate eFX usersaround the world. Althoughcorporate e-forex trading volumewas up some 23% in absoluteterms, the share of users’ overalltrading volumes captured byelectronic systems dropped to51% in 2007 from 59% in 2006.

The Decline of theSingle-BankSystem

While the e-forexmarket as a wholecontinues toattract new clientsat a relativelyconsistent rate,single-banksystems are failingto keep pace withthe growth ofmulti-dealerplatforms. Theshare of FX market

participants reporting to GreenwichAssociates that they trade foreignexchange on single-bank orproprietary electronic systemsdeclined to 47% in 2007 from55% in 2006. Use of third-party or

multi-dealer platforms waseffectively flat during the period.Meanwhile, the share of FX userssaying they trade on both single-bank and multi-bank systems fell to20% from 28%.

A defection by banks drove thedecline in use of dealer-sponsoredsystems: In 2006, 83% of banksthroughout the world said theyused single-bank platforms; in2007 that share fell to just 70%.Our research results also reveal asignificant move by fund managersand pension funds away fromsingle-bank systems. Usage by theseclients fell to 27% from 38% year-over-year — a shift at least partiallyattributable to fund managers’ability to use multiple prices postedon third-party platforms todocument best execution.

Bank-sponsored trading platformslost considerable ground inContinental Europe, where theshare of FX market participantsusing these systems dropped to 46%in 2007 from 59% in 2006, and inthe United States, where usage fellto 35% from 40%. Only in Asia(ex-Japan) did FX traders move inthe opposite direction, with usage ofmulti-dealer platforms declining to59% in 2007 from 67% in 2006and use of single-bank systemsincreasing to 73% from 70%. Onefactor that could be contributing tothe strength of dealer-sponsoredplatforms in Asia is the significantshare of FX trading volume in theregion involving emerging marketcurrencies, which to date have notbeen the forté of the major multi-dealer systems.

For Small FX Users, a Push toElectronic Execution

The results of this year’sGreenwich Associates study revealone additional finding that couldbe of critical importance to


e-FX INDUSTRY REPORT


companies and financialinstitutions that use global FXmarkets on a less-than-frequentbasis. Among foreign exchangemarket participants generating lessthan $1 billion in annual tradingvolume, the use of dealer-sponsoredtrading systems increased to 64%in 2007 from 52% in 2006 and theshare saying they use both multi-dealer and single-bank systems roseto 15% from 9%.

This increase in the use of single-bank systems comes amid a broaderpick-up in eFX activity amongthese small accounts. The share ofmarket participants trading lessthan $1 billion per year thatdescribe themselves as current usersof e-forex systems increased to 34%in 2007 from 28% in 2006. Overthe same period, existing eFX

customers within this segmentdramatically increased the share oftheir total foreign exchangebusiness directed to electronicsystems — to 56% from 52%.

Some portion of this growth canbe attributed to naturalprogression: Infrequent FX traderscontinue to adopt electronictrading at a relatively slow rate,and as they do, they graduallyincrease the amount of businessdirected to the electronic systems. However, the sharp spike in e-

forex usage amongFX marketparticipants withrelatively smallannual tradingvolumes —combined with anotherwise puzzlingshift to single-bank systems —suggests thatanother factor iscoming into play.

For the past severalyears, our firm has been advisingsmaller and relatively infrequentusers of foreign exchange marketsto be cognizant that “human” salescoverage is an expensive resourcefor their FX dealers to provide, andas a result, less-profitable accountsare likely to see a reduction in the

amount of “facetime” they receivefrom their dealers’sales reps. Thesignificant increasein the number ofthese smallaccounts tradingFX electronicallyon dealer-sponsored systemssuggests that, in atleast some cases,the move awayfrom traditional“high-touch”

trading may be less than voluntary.

This group of relatively smallforeign exchange users that areadopting electronic trading simplyas a means of accessing marketliquidity is emblematic of thesplintering e-forex customer base.To this point, the strong growth ofthe eFX industry has been analmost natural function of a newand effective technologypermeating a dynamic market.Because the product offers such

obvious benefits, it was almostinevitable that large numbers ofmarket participants would give it atry and, finding it advantageous,begin directing growing amountsof their business to electronicplatforms. At some point in thenot-so-distant future, however, e-forex will leave the easy growth ofits infancy behind.

Conclusion

Although e-forex might wellmaintain its double-digit growthrates for some years to come, thesegmentation of the eFX client baseis a clear sign that this maturationprocess is already underway. Today,we are seeing infrequent FX tradersexecuting relatively tiny volumesthrough electronic systems becausethey might not be able to getcoverage from dealers otherwiseand we are seeing banks and hedgefunds that are nearly constantly inthe market using e-forex systemsfor two-thirds or more of their totaltrading volume. Meanwhile, agrowing number of fund managersand pension funds are usingelectronic trading systems as asimple and cheap way to documentbest execution. This is the future ofthe e-forex business, and with eachpassing year, growth will becomemore dependent on providers’ability to satisfy the diverging needsof these unique customer segments.


e-Forex comes of age


Long known as one of thedeepest and most activelytraded products in the

world, foreign currencies have,over the last several years, attainedunanticipated attention for avariety of reasons. While thereality of substantial increases intrade finance have grown as theglobal nature of import and exportactivities have mushroomedworldwide, the emphasis on morerefined cash and treasurymanagement has pressed forgreater use of electronic methodsto meet growing transactionneeds. Similar in some ways to theequity markets in how the use oftechnology evolved in the methodsof how trading was accomplished,the foreign exchange markets sawthe emergence of the “click anddeal” form of technology as thefirst and prominent way oftechnology presenting itself.

The growth of investments ininternational fixed income andequity markets has fueled greatlyincreased transaction levels in theforeign exchange markets. Thisreality, combined with the

growing desire on the institutionalbuy side to retain the spreads thatbrokers had previously reapedwhile trading for clients in theforeign exchange markets, ledthem to retrieve their prerogativefrom their custodial banks tocontrol the disposition of foreignexchange activities. They therebyreaped the benefits of morecompetitive rates and netting ofoffsetting transactions in the largerinstitutions. Hedge funds for theirpart also began to refine theirtechniques of working with theirprime brokers to leverage theircurrency positions and tradingstrategies as part of their overallfinancing creativity.

As the interest in foreign exchangegrew as an asset class to the longonly buy side and then the hedgefund community, the number andvariety of single entity currencytrading portals grew withstreaming executable quotesreplacing other earlier quotationmethods. While foreign exchangefor some asset managers remaineda secondary event associated withtrades in other asset classtransactions, there was a distinct

Detectionand access:


Jim Leman and Ravi Manchi,co-Principals of WestwaterCorp. examine the factorsmaking the detection of andaccess to liquidity complex inthe FX trading environment

MARKETPLACE

Jim Leman

Ravi Manchi

Tackling key liquidity considerationsin the new FX trading landscape

032-034 036 038 040 042 Market Place 18/3/08 15:50 Page 1

>>>



MARKETPLACE


group of asset managers and hedgefunds who adopted morequantitatively oriented tools andtrading strategies that began tocount much more on frequenttrading and greater speed of orderdelivery. The growth of a diversegroup of listed derivativeinstruments also offered a moreconsistent and prolific stream ofpricing information that could beused in context with other pricinginformation that enabled morequantitatively based strategies tobe set in motion at a pace that thebuy side found acceptable.

In today’s markets the buy sideplayer has a wide variety ofliquidity points to choose from inexecuting his or her trades. A largeand growing group of singleprovider solutions are availablewith new and improved versionsbeing introduced on a regularbasis. While these have existed forsome time, they were joined bymulti broker or bank portals anumber of years ago as an attemptwas made to consolidate thenumber of places a buy side playerwould need to look for quotes.Thereafter, ECNs began to presentthemselves to provide a newwrinkle to the institutional andthen retail investor populationsthat promised more transparentpricing and a way for differentsized transactions to be executed.While equity players weremotivated to embrace ECNmechanisms to detect liquidity nototherwise easily accessible, inforeign markets where substantialsize has generally been the normfinding hidden liquidity in sizewould not prove to be the primarymotivator. Greater transparency ofquotes, the ability to spread orders

to a variety of execution pointsquickly and greater focus onminimizing market impact beganto factor more significantly intothe style of trading. In that respectthe experience of asset managersand broker/dealers who transactwith them paralleled equityexperience.

Key liquidity access anddetection challenges

As with most universes ofcustomers they come in all shapesand sizes or more precisely with allmanner of investment strategies,trading strategies, trading tools,algorithms, and needs which guidethe way they approach the market.

For classic clients with business ortrade related needs in the foreignexchange space the method ofinteraction has increasinglyembraced technology andinnovation but much more fromthe perspective of gainingefficiencies to cope with businessrelated growth or the appetite forverifiable competitiveness in rateswhile maintaining traditional orhistorical relationships with brokerand bank providers.

Clients who are pursuing foreignexchange as an asset class play donot have the same historicalcontext with their counterparties.Moreover, they are, in many cases,seeking to adopt methods of

interaction and dealing that putthem more clearly on a footingthey enjoy with broker or banks inother asset classes. Compoundingthis trend is the reality that thevariety of strategies being exploredand implemented has grownsignificantly as the availability ofquantitative tools provided byvendors proliferates. Again as withequities the availability of moredata and application of technologyis consistent with the equityexperience. Additionally, theemergence of retail oriented daytrading operations and the growthof individual interest in tradingcurrencies has changed tradingpatterns and attracted theattention of various providers ofservice in the marketplace.

As the returns in other asset classesbecome more difficult to realize,the pursuit of improved returns byuse of currency overlays, outrighttrading of derivative instrumentsand the trading of currencies astheir own asset class are findingfavor across a wide variety of assetmanagers and hedge funds. Withthe overall growth of the globaleconomy and the individualcountry economies and theattendant growth in assetmanagement trading activity, thebuy side has more trades to becarried out and an appetite toexecute them more quickly.Moreover the concept of quality ofexecution was also growing andwas borrowed from other assetsbeing managed. These realitiesthen give rise to selecting tools tobe used in adopting strategies,determination of destinations fororder flow and what services canbe expected in terms of pricecompetitiveness, speed of

>>>


035 NewEdge Ad 18/3/08 15:52 Page 1

execution and transparency oftransactions when gauged againstprior experience with other assetclasses.

Brokers for their part grapple withthe varying needs of their clientbases and the costs that exist forthem to attract and maintain thedifferent segments of their clientuniverse. Brokers need to refinethe information they gather on thetrading needs of their clients andhow those clients profitabilitymeasures up against new andemerging clients who demand adifferent level of service. Brokers,who previously enabled clients to“click and trade” through theirproprietarily provided front end orphone messaging now needs toconsider how many differentportals or multi broker/bank sitesthey want to deliver quotes tothroughout the day. Now enablingstreaming actionable quotes viaone of the ECNs available fromthird parties or individual entitiesraises issues for how quickly thebroker or bank needs to be to stay

competitive as the universe ofusers grow. With the advent of theFix protocol we now have brokersand banks enabling API access byselected clients. In this world theentry of trades is not gated by thekeyboard of the user but insteadby the computer model the clientis using and the speed of theassociated trading engine poweredby millisecond tick data. Brokersnow have clients no longer gatedby their keyboards. This in turnforces broker/dealers tocompensate with faster auto quoteand auto execution software thatmust be in place along with realtime risk management.

Crossing of block sized trades as apractice in equities arose from thebuy side clients’ desire to executelarge blocks without experiencinginformation leakage. The desire tominimize leakage continues today.Now through the wonders oftechnology, the existence of reserveorders, which show part of anorder to the market but keep aportion out of sight, and the

development of dark pools, whichallow orders to rest out of sightwithout a displayed quote, permitclients large and small as well asbroker/dealers to discretely accessliquidity without creatingnoticeable market impact whilestill receiving a representativeexecution price based on publicmarket trading. As pricing oftrading fosters more transparencyeither by business imperative orregulatory fiat the need or desirenot to show entire order quantitieswill increase. Currently largeforeign exchange trades occurregularly however new anddifferent strategies are becomingmore common and as dark poolshave helped equities cross blocksand harness offsetting trades Ibelieve we will see somemechanisms created specifically inthe foreign exchange market totest similar principles. We canexpect that technology will play arole so that executionopportunities are not missed.

The equities world saw this armsrace occur once and it appears wehave begun to see it manifest itselfagain in foreign currencies as moreclients using an ever growingnumber of tools are trading moreand more actively attempting toextract the variances presented byactions in the market. After the1987 equity market crash, the roleof being a registered market makercarried a burden that required amarket maker to participate in amandatory execution processwhere those who were slow tochange their quotes were lockedinto trades launched bysophisticated clients. The lessonwas now clear. Speed was anessential component and human


MARKETPLACE >>>


037 TraderTools Ad 18/3/08 19:23 Page 1

MARKETPLACE


keyboard reaction was no longerenough if you were makingmarkets. That may be clear nowfor many in the foreign exchangemarket it may well be amandatory element of all players’sets of tools in the future in orderto achieve representative executionperformance in a market wherevarious algorithmic trading toolsand blinding order delivery speedis prevalent. Algorithmic executionstrategies are the primary reality ofthis trend where the number oftransactions taking place mayincrease but the value of thecurrencies involved remainssubstantially at the same levels.

Liquidity guidance solution?

The perspective of the players inthe market is guided by the waythey use the market largely dictatethe adequacy of the mechanismsin place that allow them to achievewhat they need to do to carry outtheir duties and keep their clientssatisfied. For certain classes ofclients that trade infrequently andhave relationships with brokers orbanks that meet their needs, themechanisms available to them maybe entirely adequate. For clients ina role of managing other people’smoney or serving clients who havethat role, the need for continuouspursuit of the very best rate at thefastest pace possible can fuel anappetite where speed of execution,speed of price change informationand a wide variety of liquiditypoints is an absolute necessity.Anonymity and pursuing theabsolutely best price at any pointin time would call for demandingcriteria to gain business. Strategiesthat base profitability on very thinmargins on very large positionscreate a challenging environment

for brokers or banks choosing tocourt such business. Maintainingcompetitive dealer capabilities anddealing with such demandingclients require those brokers to beequally adept at managing theirquotes and positions as well asmaintaining a variety of liquidityoptions that will enable them tomanage their risk at a speedneeded to match their fastestclients and competitors.

Acting in a dealing capacity forclients whose appetites andstrategies are global in nature callfor commitments to trade theirbooks on an around the clockbasis especially where these clientswish to continuously coordinateeither linked underlying equity orfixed income trades to theircurrency components or thosewhose currency trading hinges on

a globally managed book ofbusiness and who fields his or herown team of personnel.

For the most demanding clientswhose strategies are predicated onmodel following quantitativetechniques, one can expect thatuse of API capable solutions are anecessity. Moreover that class ofuser will want multiple liquiditypoint access that will grant the fullrange of order types available andconsistent speed of execution thatwill enable an order generated bythe strategy to aggregate the quotedata from these sources and use asmart routing capability that canslice or segment an overall order ina variety of fashions needed tocarry out the strategy rapidly withno single counterparty able toform a complete picture of whathas just occurred in the market.

The new FX trading landscape

>>>


039 Portware Ad 18/3/08 19:24 Page 1

MARKETPLACE


As a result, clients will expectbrokers and dealers to be able toprovide software that can absorbmultiple provider quotes,understand the various order typesavailable and enable clients toaccess this capability via thebroker’s trading personnel. As hadoccurred in the equity market,direct market access (DMA) byclients evolved from singleexchange decisions to multipledestination capable software wherethe human trader still selected thedestination. Given the growth inactivity levels the speed of tradingpresent and the need to managescarce resources, the developmentof smart routers will be the nexteventuality.

Broker quality of execution will beclosely monitored and the flow oftrades committed to thosedemonstrating competitive quotes,adequate depth, speedy executionand the ability to take on highvolume activity levels. Brokers fortheir part will definitely need thesame tools in terms of routingdecisions and speed of trading tobe comfortable making quotes inan increasingly active anddemanding market.

As more asset managers embracecurrencies as an asset class orpension plans commit resources tocurrency positions, the creation ofnew and varied strategies will becreated to win the right to tradethese new waves of assets.Technology trading improvementsand quantitatively orientedsolutions, many times created bybrokers or vendors, will aboundcreating a crowded field wherecompetition will translate into

more competitive execution costsand other measures ofcompetitiveness. Access to darkflow or more properly captive flowwill most probably prove attractiveto those who value anonymityhighly. Additionally, smart routerexperience will become amarketing element of a broker ordealer’s capabilities andperformance tracking will beessential to obtaining and keepingbusiness.

Again, trying to assess how theforeign exchange model maymimic equities could prove lessthan a direct replication. UsingECNs, algorithmic execution

strategies and crossing venuesmost likely do not hold the samepromise in foreign exchange thatthey did in equities. Theproliferation of algorithmictrading strategies, the number ofECN providers and dark pool or“alternative liquidity providers”may not grow in the same way. Infact, with regulation guiding muchof the equity game, the absence ofregulatory intervention leads oneto believe market pressures fromthe buy side and the adequacy ofhow their needs are met by thedealer community seems muchmore the force to be reckonedwith in foreign exchangetransactions.

The future?

All in all, as the markets move intoa more completely electronic modethe tone of the markets willchange. With the expected growthin assets dedicated to this classalong with the growth ininternational trade the number ofplayers in the game and thecomplexity of the strategies beingundertaken will be accompanied bymore quantitative models. Thatphenomenon call for more quotesand data points providedinstantaneously as they areproduced. Crunching this data andacting in sub second response timewill be a compelling necessity alongwith access to the widest variety oforder destinations available withdocumented experience the judgeof who continues to see flow.

As the various client segments areoutfitted with more sophisticatedtrading tools and broker dealersoffer Fix connections, the varietyof options the buy side has tomove around trading activity willmake it disarmingly easy to moveflow if a client is disappointed inany way by a broker/dealer. Afterbasic connectivity is established,the need for aggregation softwarewill be evident as the machines,following transaction events orquote changes, will be able toredirect or shift flow instantly.

Over time brokers and dealers willseek to demonstrate thecapabilities of the technology andnetworks they have assembled toserve their clients. This situationcan occur where their appetites fortaking the other side of thesetransactions becomes taxed theyhave the ability to access liquidityat extremely competitive prices.

>>>


041 Bloomberg Ad 18/3/08 19:25 Page 1

They will seek to satisfy their clients need forsegregation of execution activity so clients canmask their activities. Hedge funds may beparticularly interested in this dimension of thebusiness. Eventually pricing at less than a pip maybecome a demanded feature the largest clients’request of their primary group of counter partiesas a prerequisite of continuing to do business atthe size and frequency they enjoy. This eventualitymay be brought forward by competitive pressuresby new entrants. It may be the way priceimprovement as experienced by the equity marketpresents itself to foreign exchange and it mayhappen in an internal crossing mechanismadministered by certain players who operate on ascale few can match. Nevertheless, the level ofbusiness the foreign exchange markets continue toattract will occasion intervention by new players,new strategies from existing players and greatercapabilities to personalize and customize solutionsfor the buy and sell side users.

Buy and sell side interests including retail tradeflow will be explored as a way to reduce marketimpact, create price improvement results and evento reduce transaction costs to some degree. Theability of existing or new players on both the buyand sell side to ratchet up their game through theaccelerating use of technology will createcompensating pressures to offset either purebalance sheet brawn or involvement in historicalsegments of others in the foreign exchangebusiness. The continuing expansion of assetmanagers and hedge funds into foreign exchangeand into international markets will make tradingforeign currencies a much more complex andchallenging business. Growing pools of dedicatedassets to established and emerging marketcurrencies, pricing pressures on transaction costs,unendingly higher volume levels compounded bythe need for greater velocity of trading will driveboth the buy and the sell side to explore andexperiment with new techniques and tradingtools. Where it will end or how long it will taketo get there is not clear. However, we can counton technology, quantitative techniques, highertrading volume, faster execution delivery andlower rates to remain constants in that newerglobally oriented world.

MARKETPLACE


043 BSG Ad 18/3/08 19:29 Page 1


SPON

SORE

DST

ATEM

ENT

A quiet revolution in client connectivityThe new FX battle ground for dealer banks wanting to add value for their clients

We expect the rightprice at the righttime. That’s the

vanilla offering and we expectour bank to deliver above that. Iwant to hear what they can dofor me.”

The comments of one corporatetreasury manager speaking at aLondon lunch are becomingmore common as the bankscompete to put clear blue waterbetween themselves and theirrivals in terms of client service.

Now as daily FX tradingvolumes increase, post tradeservices are becoming a new wayfor banks to add value to theirclients, and to differentiate fromtheir competitors.FX dealersmanage a bewildering series ofprocesses tracking their clienttrades, from trade date activitybeginning with the receipt oforders, to trade allocations andconfirmation, then proceeding to

settlement date with processessuch as trade and paymentnetting, client reporting andposition and settlementreconciliation.Typically each ofthese activities has a separateinternal process, which leads togrossly inflated costs, and inmany cases, a level of duplicationwhich would have many CIOsgritting their teeth.

Traiana

Post trade service specialistsTraiana are evolving into themarket leader for FX post tradeservices, and many banks arenow taking all of their clientconnectivity and post tradeservices and outsourcing them toTraiana. Traiana’s Harmonyplatform is already the marketleader in terms of post tradeservices in the FX primebrokerage space. Now the ICAP-owned business has chosen totake the whole concept of posttrade processing to a new levelwith a renewed focus on itssingle client connectivitysolution - in effect, a ‘universaladapter,’ linking a bank to itsclients, with a single hub thatcentralises all post-trade clientinteractions.

Built around the philosophy thatthe client connection should besingular wherever possible, sothat adding a new service isquick and efficient, Traiana’sclient connectivity provides

unparalleled service withminimal IT footprint. WhileSTP is important to the client,they are resistant to the idea ofgoing through months ofplumbing each time they ask fora new asset class or service froma single dealer. Traiana deliversthe holy grail of client tradeprocessing, without imposingtechnical protocols and standardson the client. The client sendsinformation in their preferredformat using their preferreddelivery mechanism includingspreadsheets, PDF reports andfaxes.

Pre-trade

Pre-trade, Traiana works togathering orders from clients -bulking when necessary - priorto fill. Client requests forbreakdown and preference fortrade consolidation are all storedwith the order enabling tradeprocessing to happen as theorder is filled.

In addition, FX orders arederived from cross-bordertransactions in other asset classessuch as equity and fixed income,creating contingent FX marketorders. Restricted market activity(such as Korean or Brazil) canalso be bulked up across theenterprise, making oneconsolidated order for the localagent, which in turn can beallocated back to the customer’saccounts upon fulfillment.

“

Jesse Drennan is a director of Product Marketing at Traiana

044-45 Traiana 18/3/08 19:31 Page 1

Post trade

At the post trade stage, Traiana’sclient connectivity solutionprovides an automated anddirect feed of deal tickets, marketdata and position summaries canbe sent, analysed and processedas and when, required by clients,in the format they require.

Beyond managing trade flow andprocessing, Traiana offers a singlescreen for managing clientaccount setup. These screensenable operations to link disparateaccount definitions across internalsystems to the client as well as toapply client-specific namingconventions to reports generatedon behalf of the client. This end-to-end solution reduces errors andbreaks in the system whiledelivering better processing timewith fewer systems and interfacesto maintain, both for the bankand the client. It also makes it fareasier to reconcile across multiplesystems by consolidating themthrough a single processing hub.

In one example, a major bankhad more than 25 steps andsystems across its pre and posttrade infrastructure. Theyteamed up with Traiana to bringthese processes down to ahandful, so booking, allocationand confirmation have all beenexternalised to a single hub.

Advantages

The advantages of this clientconnectivity solution is mostapparent in the bank-to-clientspace where a client can beconnected to their bank througha single service consolidatingallocation and confirmations,give-ups, and netting on flowsfor a range of currency productsincluding cash, options andNDFs.

Traiana also provides bank tobank connectivity, both multi-dealer platform to bank, andsingle dealer platform to bank,providing solutions for both buyand sell side.

Traiana’s first major foray intopost trade servicing in FX camewith the EBS-tested NetLinkservice. Recognized as a majorsuccess story, NetLink isdelivering up to 95% reductionin FX tickets being processed byoperations on dealer to clientflow which is particularlybeneficial given the largenumber of tickets algorithmicand retail aggregation clients canproduce.

At the trade confirmation stage,Traiana offers both connectivityand tracking as well as directconfirmations for clients,consolidating the status from allconfirmation venues into asingle report.

For the final stage of theprocess, settlement, Traianaprovides both trade-by-tradeportfolio checkout as well asposition reconciliation matchingon net or gross position andmarks to within presettolerances.

Traiana’s goal is to providecustomers with connectivityacross the whole lifecycle of thetrade – pre trade, post trade andsettlement. Ultimately, moreefficient processing acts both asa catalyst to market expansion aswell as a facilitator for theadoption of electronic trading,increasing liquidity to thebenefit of all.


About TraianaTraiana provides global banks,broker/dealers, buy-side firms and e-trading platforms with solutionsto automate post trade processingof financial transactions. ItsHarmony network is used by over50 of the world's leading banksand has become the marketstandard for post-trade processing of FX transactions.

Traiana’s technology is used toprocess tens of thousands of deal tickets every day and contributesto the orderly growth of the global financial markets.

Traiana’s business model is drivenby the growth in the number of trades as each trade triggersmultiple post trade events andTraiana charges for each event.Traiana has been very successful inoperating as a neutral platform inthe foreign exchange market andenjoys a great partnership with all the market participants.

It is estimated that there are 500million transactions annually in the OTC markets (ie excludingfutures), which cost USD 5 billionto process. Improving theefficiency of the whole processallows volumes to increase whilst removing risk and reducingcosts to all market participants.

ICAP is the world's premier voiceand electronic interdealer brokerand the source of global marketinformation and commentary forprofessionals in the internationalfinancial markets. The Group isactive in the wholesale markets ininterest rates, credit, energy,foreign exchange and equityderivatives. ICAP has an averagedaily transaction volume in excessof $1.5 trillion, more than 50% ofwhich is electronic.

044-45 Traiana 18/3/08 19:31 Page 2

FEATURES

ExecutionAlgorithms - the next stage in optimising your FX trading performance

46| april 2008 e-FOREX

For example, some people inthe market draw a cleardistinction between

algorithmic trading andalgorithmic execution – the formerreferring to the algorithms used todetermine the decision to trade,whereas the latter relates purely to

the execution process that takesplace once the trading decision hasbeen made.

There are further distinctions to bemade in the types of algorithmsthat are offered and used in the FXmarket and who is offering them.

Many people feel that the term‘algorithmic trading’ is muchoverused in today’s FX market.Overused it may be but whatexacerbates the frustration withthis whole topic is that everytime the algorithm term is used,there tends to be a differentdefinition attached to it.

By Nicholas Pratt

046-052 054 FX Algos Feature 18/3/08 19:32 Page 1

>>>


There is also a range of potentialcustomers from hedge fundsbuilding their own proprietarytrading systems, banks buildingtheir own internal proprietarytrading shop and also those banksthat are looking to offer advancedexecution algorithms to their FXclients in the same way that theyhave offered advanced executionalgorithms in the equities market.

The vendors

Among the vendors there are anumber of different motivesdriving the demand for FX-relatedalgorithms. For John Bates,general manager for the Apamadivision of vendor ProgressSoftware, the fragmentation ofliquidity in the FX markets withso many new venues emergingmeans that clients are looking touse algorithms to find where thebest trading opportunities lie. “Soliquidity seeking and marketaggregation is one of the firstthings that traders want to achievewith FX algorithms, if you wouldcall that functionality an‘algorithm’.”

Once they have this handle onand visibility of the market, thereare then a range of activities thattraders may engage in, says Bates.“For example, a bank may want tosupplement its very expensive spottraders with execution algorithmsso that you are automating themore vanilla trades and leaving thespot traders to concentrate on thehigher value or more complextrades. Or a bank may want toautomate the whole FX tradingprocess and use algorithms to notonly hold positions but alsoprovide automatic risk hedgingwith algorithms that will monitorpositions and look for whencertain risk thresholds may bebroken and then auto-hedge thosepositions to attain a riskneutrality.”

At Aegis Software, another vendorproviding algorithms for FXtrading, there is an acceptance thatsophisticated algorithms are still ina nascent stage, according to vicepresident Norman Friedman.However, many clients are usingalgorithms in their effort toaggregate the liquidity of thefragmented FX market. Friedmancalls these “semi-automatedstrategies.”

“Traders need algorithms to helpthem deal with a fragmentedmarket,” says Friedman. “Theycan’t look everywhere, they can'tclick everywhere. Semi-automatedalgorithms help traders deal withthe complexities, such as gettingin and out of the market easily. Anexample of such an algorithmwould be to sweep three bids andthen put an offer out, all in oneoperation. We have customerswho’ve implemented dozens ofsuch strategies.” Other customers,he notes, are looking to use

algorithms in the same fashion asin the early stages of theirappearance in the equities market,namely to move large positionswith little market impact.

“There are a few Aegis customersengaged in arbitrage and trajectorytrading, techniques more readilyapplied to other markets,” he says.Friedman believes that thesestrategies are not likely to bewidely used yet for two reasons:FX lacks low-latency pricing dataand the deceptive quality of theliquidity displayed. In variousvenues, banks will post the sameprices on a number of ECNs,creating the impression of greaterliquidity than there actually is. “Inother markets, such as equities orenergy, it's all about co-locationand minimizing latency,” saysFriedman. “But in the FX market,traders just want to know that theprice they see is real. Until thepricing gets down to themillisecond level, it may be diceyto use algorithms for ‘real-time’arbitrage.” Ultimately, saysFriedman, the FX market willbecome more efficient, prices willget sharper and the use of

John Bates “So liquidity seeking and market

aggregation is one of the first things that traders want to achieve with

FX algorithms”

Norman Friedman "Until the pricing gets down to the

millisecond level, it may be dicey to usealgorithms for ‘real-time’ arbitrage”



FEATURES

algorithms will become moreadvanced. However, FX will neverbecome a regulated, exchange-dominated market like equitiesand, therefore, differences willremain. “But,” he adds, “in termsof the analytics, the FX marketneed not remain so far behind thecurve just because of thesedifferences. Going forward, Ithink FX algos will start to trackthe way equity algos evolved. Forexample, a quant working inequities should be able to work inFX because, mathematics-wise, thetwo will look very similar.”

Pursuit of execution quality

According to Vijay Kedia, presidentof US-based vendor FlexTrade, thekey driver for FX algorithm use hasbeen the pursuit of executionquality and price improvement.He also believes the tradingindependence buy-side firmsexperience with algorithms is amajor benefit over the traditionalrisk transfer means of execution.This independence, however, doescreate an added risk to buy-sidefirms in that they are taking onmore responsibility for their tradesrather than giving their orders to a

broker for an agreed risk price. Butas far as Kedia is concerned, thebenefits far outweigh this risk, andto date, there is much lesserpenetration of broker algos in theFX market.

"In equities, most buy-side firmsrely heavily on broker-providedalgorithms," said Kedia. "With FXit's a different situation. Sincemost principals on the sell-side area market maker on the trade, thereis a much greater need for locallyrun algos. You see, each brokeracts like a dark pool of liquidity inthat they are not disclosing theirbids and offers to the wholemarket. Since there are so many ofthese undisclosed liquidity pools inFX, the best way for buy-side firmsto overcome this disadvantage is torun their own algos. In this waythey can pick which broker toaccess at the point of their ownchoosing."

Lastly, Kedia maintains there is noreason why FX algos cannot growto the same extent that they have inthe equities market. "If anythingthere is a greater need for algos inFX because there is much lesspricing transparency on theexchanges, as well as a real need foraggregation tools that can bring allthe fragmented liquidity closertogether."

The banks

Despite Kedia's assertion thatbroker-based algorithms have notmade much penetration in the FXmarket, there are still a number ofsell-side offerings available for FXtraders. Investment bank LehmanBrothers has two algorithmicofferings – the main one being asuite of algorithmic execution

tools which clients can use toexecute trades with Lehmans overan extended period. “They areequity-style order workingalgorithms but the key point isthat they are all principal-basedrather than agency-based so wetake risk on all of thesealgorithms,” says Martin Zinkin,managing director of FX e-tradingat Lehmans.

There are several reasons forLehmans taking this approach,says Zinkin. “FX has always beena principal market and, comparedto the equities market, the riskappetite of major dealers is a verysignificant source of liquidity inthe market. If you exclude thatfrom client execution through anagency approach, then you aremissing out on a large portion ofliquidity. We also believe that

traders can minimise their marketimpact beyond what wouldhappen if they used agency-stylealgorithms because we are able toabsorb a lot of the flow internally.”It is an example of the way inwhich the differences between the

Vijay Kedia “a greater need for algos in FX

because there is much less pricingtransparency on the exchanges”

Martin Zinkin “The key point with our principal-based

algo is that you are getting betterexecution in the sense of cheaper tradingcosts because you are not transferring all

of the risk in one shot and will not becharged a full premium by the dealer.”



>>>Execution Algorithms - the next stage in optimising your FX trading performance

equities and FX markets haveinfluenced the development of analgorithmic trading service, asopposed to the approach of takingwhat has worked in equities andthen simply transferring the sameproduct to the FX market.

“The motivation for usingalgorithms is very different in FXthan in equities,” says Zinkin.Whereas in equities it may becommonplace for a single order toaccount for 10% of the dailyvolume of that stock, the same cannever be said of a Eurodollartransaction, such is the depth of themarket. Secondly, equities hasalways been an agency business andbuy-side firms do not have theoption of executing a large order ona risk price at an excess spread ofone or two basis points , unlike theFX market. “Because of the depth ofthe market and the small cost of risktransfers, the case for widespreadadoption of order workingalgorithms is less compelling in theFX market,” says Zinkin

However, this is not to say thatthere is not a niche for algorithmsin FX and that there are not thosewho will benefit, says Zinkin buthe is also clear that Lehmans isnot targeting the FX dealers thatbase their strategy on their abilityto time the market and arelooking to use algos that willexecute orders at specified times.

Instead Lehman’s offering isprimarily aimed at quantitative-based fund managers that arebasing their trading decisions on along-term view of the market ornon-FX specialists that will belooking to an algorithm for areduction in their trading costsrather than a specifically timedexecution. “The key point with

our principal-based algo is thatyou are getting better execution inthe sense of cheaper trading costsbecause you are not transferring allof the risk in one shot and will notbe charged a full premium by thedealer.”

This is a relatively new approach inFX even though there are principaltrading algos offered in equitieswhere the dealer simply assumesthe tracking error risk relative to abenchmark for an increased fee.“This is where we differ in ourmodel because we are choosing totake the risk onto our books andnot simply passing executions intothe market,” says Zinkin.

Market impact

There are significant risks involvedin the use of algorithms for both

buy and sell-side, particularly if theliquidity in the market is not there,says Zinkin, meaning that therewill either be large market impactor a failure to complete the order,leaving the trader worse off than ifthey had adopted a traditional risktransfer in the first place.

The risk of algorithm use isexacerbated by the relatively vagueunderstanding that many FXtraders have of market impact, saysZinkin. They are not used todealing with market impactbecause all of their trading costs arenormally represented by the riskprice that the dealer gives them andit is then up to the dealer toassume any market impact.Consequently there are someunsophisticated views on marketimpact among fund managers.

Impact - It's all about timing & execution


“For example, many of them maythink that simply slicing an orderinto small chunks will save themtrading costs. If it is done rightthis may be the case but it is notnecessarily the case. It will usuallyresult in a smaller average spreadcost but this may well be morethan outweighed by greater marketimpact and information leakage"

As the misconceptions aroundmarket impact suggest,engendering a widespreadadoption of algorithms in the FXmarket will first involve changingthe mindset of many of thetraditional FX professionals, notleast those that believe theirmarket edge comes through theirtiming and execution, says Zinkin.“We don’t see a great deal ofevidence that this is true but thisis a significant shift for clients -you are telling them that what

they think is their edge is notreally an edge.”

Ultimately, says Zinkin it is up toindividual clients to take aquantitative look at their FXexecution desk and decide whichindividuals or execution strategiesare adding value and which onesare not. “Where clients really dofeel that they are adding value, weare happy to provide risk pricingfor them, so in essence we areagnostic as to their executionmethods,” says Zinkin.

“There are a lot of misconceptionsand offerings that probably don'tadd much real value in themarket,” says Zinkin even if theywill appeal to a small section ofthe market. Similarly, Zinkin isnot getting carried away with howwidespread the adoption ofalgorithms may become. “Algos

will grow but I think orderworking algorithms will remain arelatively small percentage of themarket compared to equities.”

“We shouldn’t forget that this is anevolution,” adds Robert Fleschler,managing director for FX e-distribution at Lehman Brothers.He argues that the central issue inthe development of algorithmswill be the control that tradershave over their orders as theprocess and the decision makingbecome more automated. “One ofthe reasons that algorithms cameinto existence is that they allowedthe executors of the orders to tradein a different way yet still remainin control of the trade. Asalgorithms evolve, however, theywill have to decide if they arewilling to cede this control overtheir orders.”

Achieving Best Execution

For Eddie Wen, managing directorof global FX e-commerce at JPMorgan, there is an onus on bankoffering algorithms in the FXmarket to demonstrate that

FEATURES


Robert Fleschler “One of the reasons that algorithms

came into existence is that they allowed the executors of the orders totrade in a different way yet still remain

in control of the trade”


>>>

they are achieving best execution.“How do you measure the cost ofexecution? There is no de factostandard. It would be interestingto see whether these algos areactually executing at the ‘bestprice’.”

There have been some initiativesto address this but, unlike theequities market where theexchanges play a supervisory andgoverning role in the market, thereare no equivalents in the FXmarket, meaning that any attemptto establish execution standardswill take that bit longer.

The other aspect that may affectthe take-up of algorithmic tradingwould be the actual service itselfand how it is being given to thecustomer, says Wen. “Currentlythere is no standard way in whichthese services are offered so it isdifficult to compare services.”

Does this lack of standardisedcomparisons between differentalgo services mean that buy-sidefirms will simply go with theirpreferred bank rather than themost suitable algo? “Buy-sidefirms will ultimately go with whatthey feel most comfortable.Historically they used risktransfer-based execution wherethey would have known exactlythe worst possible price they couldobtain and they also maintainedthe sales relationship with thebank. Switching from that modeto algorithmic execution is a bigchange – players would essentiallybe giving away some certainty ofexecution rate in favour of a moreefficient execution. The certaintythat comes with traditional risk

transfer may still be desirable formany market participants.”Consequently Wen believes theFX market could be split intothose advocates of algo tradingand those that prefer to stick withthe traditional risk transferapproach rather than be subjectedto the market risk that comes withalgorithms. “For example therewill be players who are lessconcerned about the cost of theirFX transactions and are moreinterested in the executed priceand knowing it promptly,” saysWen. “For them, the use of analgorithm for execution may belimited.”

On the other hand, use ofalgorithms for some buy-side firmsmay be beneficial. “It depends onthe strategy. Some buy-side firmsthat traditionally employedexecution traders may find the useof algorithms more efficient thandiscretionary traders’ judgment.Furthermore, for a leveraged fundthat needs to make trades on verylarge positions, algos can be aneffective way to parcel out risk insmaller pieces to reduce market

impact and disguise order flow.For firms that have multiplestrategies running with opposingviews, parcelling of risk mayinduce greater chance ofinternalisation.”

Risks

In terms of the risk faced by thebuy-side users of sell-side suppliedalgorithms, Wen says that some ofit will come down to trusting thesell-side to protect theconfidentiality of the order flowsand to a sufficient amount ofobfuscation to avoid reverseengineering. The other impliedrisk lies in the volatility andinconsistency of execution as itwill not be guaranteed at a specificprice.

There are buy-side firms that maynot want to rely on algos providedby banks and choose to developtheir own in-house algorithms orbuy them directly from vendors,such as FlexTrade, but there is atrade-off involved, says Wen.“They get added security throughthe confidentiality but they missout on the benefit of better ‘fills’ –where clients’ orders are left on thedealer’s platform to be filled ratherthan sat waiting on a proprietaryplatform where there is far lessvisibility.”

For the sell-side, the risks lie in theflow information that they willlose as more clients use algorithmsto hide their flow. There is also theadditional investment needed tonot only develop their algorithmsbut also in funding the effort toprove or demonstrate that thesealgos are the optimal tools theypurport to be. It is a costly


Execution Algorithms - the next stage in optimising your FX trading performance

Eddie Wen "How do you measure the

cost of execution? There is no de facto standard. "



business for these banks and onefull of difficult choices. Forexample, how much investmentshould a bank put into developingand marketing complexalgorithms? Algorithms that aretoo complex may be difficult toprove its value, but algorithmsthat are too simple are easilyreplicated and commoditised.

Nevertheless, despite thesedifficult choices, Wen anticipates acontinued uptake of algos in theFX market but does not see itbecoming a dominant means ofexecution. “The FXmarket will alwaysremain fragmentedbecause of theheterogeneity of themarket participants. Iexpect algorithmic toencounter the favour ofsome FX marketparticipants as it bringsan element ofinnovation but it willnot be for everyone.”

The buy-side firm

US-based Tactical AssetManagement and its relatedcompanies have been runningpure-play, in-house designedalgorithms since late 2003, saysmanaging director Josh Levy. “Ourentire trade life-cycle is 100%automated. We connect via FIXAPIs to our providers who streamexecutable streaming prices whichwe analyse and synthesize togenerate trade signals. When asignal is generated, a trade messageis automatically sent out. After theconfirmation returns, our positionsare electronically managed.”

Before setting up Tactical, Levywas an FX trader for GoldmanSachs as well as Valhalla Partners,a buy-side proprietary FX tradingoperation which he joined forceswith to found MatchbookFX, theseminal FX ECN which is widelyconsidered the pre-cursor toHotspot FX. Because of hisexperiences as a trader, Levy hascome to appreciate the advantagesof automated trading. “It is hardto deny the disadvantages oftrading on a discretionary basis.When there is humaninvolvement, the trading process isalways vulnerable to unavoidable

errors. The impact of humannature and emotion - the enemyof reason - on the trading regimencannot be overlooked.”

Algorithmic trading may havearrived in the FX market via theequities market but accordingtoLevy, not all the traits of equities-based algos enjoy the samerelevance in the FX market –particularly the liquidity-seeking orsmart order-routing features.“Unless you are an exceptionallylarge pension or real-money fund, Idon’t think liquidity seekingexecution-strategies are as relevant

to FX as they are in equities sinceFX is already a pretty liquid marketand in most cases, participants canhave executable prices streamed tothem in their full amounts. Wedon’t do anything overlycomplicated in our executionapproach because often the morecomplicated your executionstrategy, the more FIX connectionsyou require and therefore moreproblems you encounter. When ourprices are streamed to us with anacceptably tight bid/ask spread andsize, we simply execute on them.”

Levy says that his team will re-examine and revise thealgorithms as needed,however he stresses thatthe key to success whentrading with algorithms ispatience. “If you have amodel that you feel hasproven itself over the longrun you need theconfidence to stick with itduring draw-downs toadhere to the strategy. Ofcourse, the true challengeis knowing when to sit-

tight and let the mathematics playitself out and when it isappropriate to step in and makechanges, however minor orfundamental”

This is not to say that Algo FXtrading is any panacea. There arecertainly a whole host of otherpotential risks in using algorithms.“Technology risks, softwareglitches, hardware failures,application-latency, dropped-serverconnections, internet latency aswell as loss management risksabound. When you move fromdiscretionary trading toalgorithmic trading, life does not

>>>FEATURES


053 Bloomberg Ad 18/3/08 19:33 Page 1

magically become problem-free –you simply exchange one set ofproblems for another.”

One area that Levy feels has garnereda little too much attention, at theexpense of more substantive issues, isthat of execution speed. “Only forarbitrageurs – or perhaps those thattrade very aggressively oropportunistically when detecting anoff-market price - is message latencymission-critical. We do not tradethat way. Our models are purelypredictive and not dependant oninstantaneous execution. Of course,with execution and message transfersthe quicker the better, but it is notcore-critical to us. We just need areasonably acceptable return time.”The issue of latency and fastexecution has been so overdone

that Levy feels many may now beoverlooking the point ofalgorithmic trading: pursuit ofprofits. Finding the quickestspeed with which to execute issecondary. “If we are notprofitable when we trade, it willnot matter how fast the execution.Conversely, if we consistently buyat 10 and sell at 90, it won’tmatter if we executed in 20milliseconds or 95 milliseconds.”

Evolution of Algorithmic FX

In terms of how algorithmictrading will evolve, Levy shrugs hisshoulders. “Who knows? All Iknow is that lately, everyone andtheir cousin now wants-in onalgorithmic trading so I thinkthere may be a misconception that

you have to be trading‘algorithmically’ if you want to besuccessful. Many may not trulyunderstand what algorithmictrading really is.” NeverthelessLevy anticipates growth as moreplayers enter the algorithmictrading market in differentcapacities and with differentstrategies. “Some may well bemarket-making algorithms whileothers will be arbitrage-driven.There will be long term, short-term, trend-following momentumand counter-trending, but I seethe market evolving just as it hasin the past – through commonsense. If there is efficiency to begained from algorithms or processautomation then there will bedevelopment in this area.”

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055 Baxter Ad 18/3/08 19:34 Page 1

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Groping in the Dark:FX looks for hidden pools of liquidity


Yet again, there is nouniform definition of darkpools in the FX and the

question ‘what characterises ‘darkpool’ trading strategies in FX?’ canevoke several different answersdepending on who you ask.According to Sang Lee, consultantwith US-based Aite Group,believes the term ‘dark pools’ refersmore to bank’s efforts to internalisetheir incoming flow.

For Kim Bang, chief executive forBloomberg Tradebook, dark poolsrelate to the more general task ofaggregating liquidity from a rangeof venues including traditionaldealers, exchanges, ECNs andalternative liquidity venues. “Someof these venues feature hiddenliquidity,” he says before addingthat Bloomberg Tradebook nowemploys a ‘liquidity hunter’

function designed specifically toextract this hidden liquidity toimprove fill ratios and averageprice.

Keith Lite, Director, BusinessDevelopment, Hotspot FX, Inc.believes people use dark pools, ormay some day use dark pools, asone venue type within their broaderquest to source liquidity efficientlyand with minimal market impact.

These are the same reasons theycurrently use ECNs, dealers etc.“Clients tell us that currently FXdark pools are not sufficiently liquidto be a meaningful part of theirexecution portfolio. These marketparticipants alternatively are activeusers of reserve or iceberg orders onour platform, where they accessliquidity in an opaque fashion.” says Lite

Evolution of Dark pools in FX

In the equities market there hasbeen talk of double digit growth inthe use of dark pools but is thereany similar expectancy in the FXmarket and will the evolution of

The equities market has beenresponsible for a lot of thenewest developments in the FXmarket. As electronic tradingstarts to gain traction among FXtraders, providers andparticipants have begun towonder what else may be ableto successfully translate fromthe land of stocks and shares tothe world of euros and dollars. Insome areas, such as electronic

trading, the transposition is bothobvious and straight-forward butin other areas the applicabilityseems to be more speculative.Algorithmic trading is beginningto make an impact in FX,although it is still not clear whatform the most popularalgorithms will take and eventhen, it is thought thatalgorithmic trading will onlyaccount for a minority share of

the market in this lifetime.Elsewhere, on issues such as thedemand for anonymous tradingand an exchange-stylemarketplace, the jury is mostdefinitely out. The latest suchphenomenon to make thejourney from the equities marketto its FX counterpart is the ideaof dark trading and hidden poolsof liquidity.

By Nicholas Pratt

Keith Lite“Clients tell us that currently FX dark

pools are not sufficiently liquid to be ameaningful part of their execution

portfolio.”

056-060 062 064-065 Dark Pools Feature 18/3/08 19:36 Page 1

>>>



dark pools in FX have to followthe same path as equities darkpools if they are to reach the samelevel of growth? “Clearly the levelof liquidity in equities is driven inpart by the thousands of stocksthat are actively traded,” says Lite.“In contrast, FX trading volumesare largely concentrated in five orso currency pairs and the universeextends to a few dozen.Additionally a centralised pricingmechanism facilitates a moretransparent marketplace in equitiesand having a reliable market priceis very useful to traders who areexecuting in dark pools.”

Although some similar themesmay emerge in the FX market, itis unlikely that it will followexactly the same course asequities,” says Lite citing thepreviously mentioned differencesin the two markets as potentialchallenges to any further adoptionof dark pools in FX.

These differences can be seen inthe relationship betweenalgorithmic trading and dark poolsand whether an increase in theformer can encourage greater useof the latter. For example, inequities, while algorithmic tradingdid not begin with the rise of thedark pools, the proliferation ofthese pools certainly contributedto the growth of algo trading, saysLite. “However, in the FX space,the development of liquid,anonymous ECNs was the key toenabling algorithmic trading.”

In the future, as FX dark poolspotentially become more active,Lite does not rule out thepossibility of more specific FX

dark pool algorithms and strategiesdeveloped or adapted from equitiestrading. He also says that it ispossible the next two years may seethe appearance of at least one ormore liquid FX dark pools as wellas a number of fund managers andbanks using the same types ofvenue-neutral algorithms that areavailable in the equity marketplacetoday as part of some market-widehunt for liquidity.

“Generally the goal of marketparticipants is to optimally accessliquidity across a fragmentedliquidity landscape whilesupporting strategy-relatedconsiderations, such as minimalmarket impact,” says Lite. “It isnot about trading in a dark poolor other market structure per se,which is a means to an end, notan end in itself.”

For Sang Lee of Aite Group, if anytype of dark pool is going to besuccessful, there will have to be alarge FX bank involved somewherebut even with this involvement hedoes not expect there to be hugechanges over the next two years.“Within two years I still don’tbelieve that there will be muchtrading going on in the dark poolsside of the market.” Unless, that is,someone is somehow able toattract a certain amount of flow fornon-liquid currency pairs. “If thishappens then I would imagine alot of interest could be generated,”says Lee.

The banks:

Whereas the previously stateddescriptions of dark pools maydiffer, others are more specific in

their definition of what a darkpool should be. “For me, darkliquidity refers to a place whereyou can input an order that youwould like to have filled but haveno idea if there is another party onthe other side of that transaction,”says Jeremy Smart, global head ofFX e-sales at Morgan Stanley.“You cannot see what the liquidityis in that market or what bids andoffers there may be.”

Is there a misconception amongsome in the FX market of whatdark trading is? Are some confusingfragmented liquidity with darkliquidity? Are some mistakenlyreferring to anonymous ECNs asdark liquidity trading systems?

“That wouldn’t surprise me,” saysSmart. “FlexTrade’s MilanFX is agenuine dark liquidity tradingsystem for FX but if anyone thinksthe same of Hotspot, Currenex orLava, they are very much mistaken.The key difference with the ECNsis that you know whether or notthere is some liquidity there, even ifyou do not know the source oridentity of that liquidity.”


FEATURES

Sang Lee “Not much trading in dark pools...

unless someone is somehow able toattract a certain amount of flow for non-

liquid currency pairs.”



Is there a need for Dark Poolsin FX?

Having established the variousdifferent perceptions of what darkpools are, the next question iswhether anyone feels there is anyneed for dark pools in the FXmarket?

“In theory, dark pools are a sourceof efficiency in the market. Peopleworry about showing their hand –liquidity in the FX market can besensitive to any declaration ofinterest and it can be easy to makemoney from this knowledge butbeing able to use a dark poolwould help hide this information.”

But is market impact less of anissue in the FX market than theequity market? “Market impactcan be more of an issue in FXthan other markets because it canbe quite easy to call the marketonce you know someone’sposition,” says Smart. “Some ofthis market impact can be reducedthrough the use of an anonymousECN however, for those firmslooking for profit opportunities; itis not the identity of the positionholder that interests them mostbut the fact that someone has thatposition in that size.”

Despite a theoretical need for darkpools and the efficiency they maybring, Smart feels that in practicethere are likely to be few adoptersof such a service. “The problemwith dark pools is that theefficiency comes from having largepositions which traders need toclear. But in reality the volume oforders in that size is small andtraders would be unlikely tobother to put smaller orders intodark pools. Instead they will justlook to execute their trades aslightly, quickly and efficiently aspossible across a range of venues.”

Obstacles to growth

Users of electronic trading are oneof the more likely target marketsfor dark pools, however the risk‘books’ that run the positionsgenerated by the trading systemsdo not generally cater for thelarger orders that would be used in

>>>Groping in the Dark: FX looks for hidden pools of liquidity

Jeremy Smart “For me, dark liquidity refers to a placewhere you can input an order that you

would like to have filled but have no ideaif there is another party on the other side

of that transaction,”

The danger of playing around with Dark Pools!



dark pools, says Smart. “Theupper limits on these risk booksare more likely to be €50, not€100 and upwards.”

Similarly, those FX traders that dohave large orders to place aregenerally the voice traders. “Thesetraders are typically veryexperienced and tend to stick totheir core markets – such asReuters and EBS. They alsotypically have a shortage ofdesktop space and are unlikely towant another range of screens tocater for dark pools which theyuse infrequently,” says Smart.

A further practical obstacle to thegrowth of dark pools is the viciouscircle that tends to come with anynew project in the FX market.Participants tend to shy away formanything that does have not largelevels of liquidity but unless theycan attract a large number ofinitial users, these dark pools willstruggle to gain any such liquidity.

This is not to say that dark poolshave no future in the FX market,says Smart, but it may well be in adifferent and much smaller sizethan some are anticipating. Therewill also have to be some changeson the banks’ side, says Smart.“The banks’ electronic risk bookswill have to be able to take farlarger orders so that they canefficiently place orders onto darkpools. Once that starts to happenthere will be more natural liquidityon the dark pools which shouldcreate more interest for the rest ofthe market. That is what reallyneeds to happen because I justcannot see manual or voice tradersplacing orders in dark pools.”

Another way this situation may beexpedited, says Smart, is if traders

start to use tools on their desktopthat aggregate the whole marketfor them – rather than havingseparate screens for each liquidityvenue, they have one screen whichshows them the depth of liquidityacross all of these venues. “Whatthis might mean is that theelectronic risk book would besimilarly aggregated and able tolook across all of these venues.When this happens we may seetraders using dark pools in somekind of meaningful size.Effectively the voice traders willthen use their electronic risk booksto clear risk using all availableliquidity, including dark pools.”

For now, the talk of dark pools islargely exaggeration says Smart.“The discussion of dark pools inFX is another example of peopleseeing what has happened in othermarkets, such as equities, andassuming that the same willhappen in FX when it may notreally be appropriate to do so.”

Offering a Dark Pool capability

One bank that is confidentlypredicting that what happened inthe equities market may yet alsohappen in the FX market and isoffering a dark pool capabilitywithin the execution services itoffers to its FX trading buy-sideclients is Credit Suisse through itsAdvanced Execution Services(AES) suite of algorithmic tradingtools. The AES brand began life inthe equities market and has sincebeen introduced to other assetclasses, including FX.

Credit Suisse is predicting thatwhat happened in the equitiesmarket may yet also happen in theFX market and is offering a darkpool capability within the

execution services it offers to itsFX trading buy-side clients isCredit Suisse through itsAdvanced Execution Services(AES) suite of algorithmic tradingtools. The AES brand began life inthe equities market and has sincebeen introduced to other assetclasses, including FX.

“We are very excited about thisproduct because we feel that weare revolutionising the FXmarket,” says Paul Buckley, theman heading up the Americassales arm of AES FX. “We aredemocratising the market for buy-side firms and giving them directaccess to the interbank marketwith the ability to capture spreads.We are essentially changing themarket from an adversarialprincipal-based approach to anagency-style of trading.

In terms of the way the product isput together, Buckley says that heinfrastructure and topology of theAES FX service is identical to thatused in AES Equities. “There is analgorithmic trading layer thatexecutes on the aggregatedliquidity and that liquidity is

>>>FEATURES

Paul Buckley “We are democratising the market forbuy-side firms and giving them direct

access to the interbank market with theability to capture spreads.”


061 eSignal Ad 18/3/08 19:37 Page 1

sourced by a smart order router.At the moment the router goesthrough a number of ECNs but inthe future we intend to bringbanks into this mix as well as non-traditional market makers andsynthetic sources of liquidity fromother places.”

The dark pool aspect comes fromthe crossing engine that is beingdevised, an internal marketplace orcentral order book where clientscan post bids or offers or takeliquidity if they want to cross thespread. “It is a dark pool in thesame sense of equities in that ifthey post a bid or offer they willnot be able to see if there isanything on the other side of thatpost,” says Buckley.

Buckley believes that the AES FXservice is offering something

different to the other dark pools inthe FX market in that it is notwholly geared to large orders ofmore than 50 million euro offers.“Large orders will probably be agood portion of the transactionsdriving the fills but they will besplit up into much smaller slices.And we also hope to appeal tothose smaller firms placing muchsmaller orders.”

Although Buckley says that theservice could be used by any FXmarket participant, the bank istargeting four main marketsegments – the hedge funds, thetraditional asset managers, theregional banks and corporates.

“The theory behind it is to changethe way the market is viewing FX,away from a principal-basedapproach with adversarial pricingto more of an agency-basedapproach. So we are looking tocharge a flat rate or have acommission structure for theservice rather than making ourliving from being a market-maker,” says Buckley.

Certain parts of the service havealready made the transition from theequities space to FX, says Buckley,such as using the algorithms to tradeon the ECNs, which “is just a caseof getting the distribution out theclients”. However, the dark poolelement may take more time to fullydevelop in FX.

Trading for a fee

One thing that Credit Suisse willhave to achieve with its newproduct is changing the mindsetof FX participants that havepreviously traded in the traditionalprincipal-based way rather thanpaying a commission for theirtrading. Yet Buckley says that theearly response of buy-side firmshas been very positive. “They areall happy to pay the commissionfee because they recognise thevalue of going directly to theinterbank market rather thanhaving to cross the spread and paysingle platform prices.”

There is also the fact that there aresome aspects of the service that aremore readily associated with theequities market. For example,smart order routing has been ofgreat benefit in the equities worldwhere liquidity in certain stocks isoften scarce but this is rarely thecase in FX where liquidity isgenerally high. Nevertheless CreditSuisse is confident that the servicewill have just as much value in theFX market and will be aiming toattract a number of new anddivergent sources of FX liquidityin its search for better prices.

Consequently Credit Suisse islooking to attract some of the newliquidity providers, in particularthe hedge funds that are essentiallybecoming market makers, miniECNS or venues in and ofthemselves because of theirwillingness to take the other sideof positions. “At the moment theyare trying to access the marketthrough the ECNs like Currenex,HotSpot and so on but I believetheir business models arepredicated on reaching as wide anaudience as possible so as a bank


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063 DEAL Hub Ad 18/3/08 19:38 Page 1

we are willing to provide themwith that access to liquidity,something that other banks havenot done so far.”

The benefit to the clients, saysBuckley, is direct access toliquidity without the potentiallatency or cost of more indirectaccess and the creation of a marketplace that is sponsored by an agentrather than principals, such asprime brokers. Buckley alsobelieves that Credit Suisse’sstrategy of adopting a vendorneutral approach rather than beingreliant on a single bank platformwill help the platform to attractthe initial liquidity that is soimportant to any new venture inthe FX market. “We are looking atgetting the product distributedand getting it into the front-endof as many different vendors aspossible. We are looking to get theclients on-board and the market-makers on board so that we canincrease or volumes and make itattractive to everybody.”

Long terms prospects for DarkPools

The short-term task facing CreditSuisse is, therefore, clear enough.But what of the long termprospects for both Credit Suisse’sown offering and the successfulrunning of dark pools? On theissue of the dark pool, Buckley iskeen to emphasise that it is merelya tool and a means to an endrather than the central part of adeliberate strategy and that thethree core aspect of the service –the algorithms, the smart orderrouter and the dark pools – are allequally valuable.

However, if banks are to sponsortheir own dark pools, such asCredit Suisse has done, then it will

be crucial that the trends that haveemerged in the equities marketalso crop up in the FX market,something which Buckley fullyexpects to happen. “I think the FXmarket will go through the samemetamorphosis as the Nasdaqmarket did in equities 10 yearsago, only the changes in the FXmarket will happen muchquicker.”

The buy-side:

In terms of buy-side FX firmswilling to talk at length about theircurrent or intended future use ofdark pools, there are precious few.One hedge fund manager thatpreferred not to be named,presumably not as a show ofsupport for the idea of anonymityand darkness in FX, did agree thatdark pools can bring someefficiency to the market. “Certainlythey can reduce the market impactof large block trades, which maybe essential in allowing largerliquidity providers to trade riskeffectively.”

What is more in doubt is just howlarge this potential interest maybe, he says. “The trend over thelast few years has generally beentoward smaller ticket sizes so I

would say that the group ofmarket participants that will mostbenefit from dark pools isprobably fairly small.”

Therefore, as an essentially large-ticket tool, the future growth ofdark pools will be somewhatreliant on the possibility of moreparticipants becoming liquidityproviders and the moreopportunities that exist for theseparticipants to passively interactwith the market, the moredemand there may be for movinglarge blocks with minimal impact.

Market efficiency

Riccardo Capelvenere, chiefexecutive and co-founder ofLondon-based hedge fund JCHCapital Management, is yet to dipboth toes into any dark pools aspart of the firm’s trading strategy,although he does not rule out thepossibility. “In addition to ourinterbank flow we also trade onanonymous order driven ECN’swhich gives our overall tradinginfrastructure more flexibility,” he says.

“This can be regarded as the firststep towards using dark pools. Wehave not yet traded on anonymouscrossing networks in the currencymarkets that do not have an impacton the ‘publicly’ traded price.However, we are always on the lookout for new and interestingliquidity sources which ultimatelycould reduce our overalltransactions costs in an efficientmanner.” Like others before him,Capelvenere does feel that there issome market efficiency that can begained from the use of darkpools,although he also feels thatthey would be more naturallyconducive to relatively illiquid


FEATURES


currencies or relatively large blocktrades where traders would want tominimize their market impact in ananonymous and discreet manner.

He also feels there are a number ofpractical barriers to the growth ofdark pools in the FX market, themost obvious one being the lackof liquidity. “Obviously if theuptake of users is poor then darkpools may take a while to becomemainstream in their usage. Inaddition relative to equities forexample, currency markets,certainly in the majors is relativelyliquid so their usefulness isnegated to a certain extent. “Secondly the currency marketsare different to the majority ofequity markets in that there is nocentralised exchange to reflect the

publicly traded price which youmay use as a benchmark forcrossing. Thirdly theydisintermediate banks, unless theyare the owners of the network, soyou may find reluctance to theirusage from bank trading desks.The implications of MiFID mustalso be considered.”

Despite this somewhat guardedoutlook on the growth prospectsfor dark pools in FX, Capelveneredoes believe there are somepotential catalysts out there. “Themain catalyst is the ability toreduce your transaction costs,” hesays. “In addition you cancalculate market impact moreaccurately if you are self directingyour order flow while anonymityand the ability to not influence

the publicly traded price per tradewould be factors which would alsohelp to reduce your transactioncosts.”

Above all it is clear that we are inthe very earliest stages of darkpools in FX and consequently it isunwise to make too bold aprediction in terms of howpopular they may become.Nonetheless, Capelvenere doesbelieve there is a role for them toplay in the FX market of thefuture, however limited it may be.“Dark pools will contribute interms of complementing theincumbent structure of currencytrading. They would probablysettle at a natural overall marketshare once they have matured asan offering.”

Groping in the Dark: FX looks for hidden pools of liquidity


What’s more important– building the fastestsports car or sourcing

the fuel to run it? The two are ofcourse symbiotic - one will notwork without the other, unless youget out and push of course!

The same can be said for trading inthe financial markets, in particularFX, where building the smartestblack box model imaginableamounts to little if it’s notvigorously tested with accuratehistorical data, then fueled with fast,accurate data in a live environmentto trigger buy/sell decisions.

Algorithmic trading techniqueshave gained firm foothold inelectronic spot FX trading, astraders continually strive tooptimise performance and add tothe bottom line. To ensure ordersare filled quickly enough to benefitfully from the speed of theircomputer-driven models, black boxtraders need a highly liquid andelectronic market such as EBSSpot. Comprehensive, transactionalhistorical FX market data isabsolutely critical to thedevelopment of efficient tradingmodels, which must be extensivelyback-tested before being deployedin live trading conditions.

In fact, many trading strategydevelopment and testing procedures

require a robust combination ofdepth of book and volume data.Strategy and analyst teams canexamine terabytes of historical datato determine market trends andperform both granular andcorrelation examination andliquidity profiling. Trends are thenevaluated and applied to anticipatedfuture trading performance. Suchanalyses are important as theyminimise the guesswork involved indetermining the best times formarket entry and exit.

To offer maximum value, it’sessential that this data be clean,consistent and cover a broad timespan. It is also imperative for thedata to represent truly transactionalinformation, drawn from a primarymarket. Only data of this qualityprovides a true view of marketactivity.

The EBS perspective on the globalspot FX market goes back to thebeginning of electronic trading andprovides more granulartransactional information than anyother source.

VIEWPOINT

Historicalmarket data:an indispensible tool forinforming FX trading strategies


by Jim O’Hagan

Interdealer-broker ICAP’sJim O’Hagan, Global ProductManager for EBS MarketData, discusses the crucialrole historical market dataplays in developing morereliable FX trading modelsand strategies.

066-067 Viewpoint 18/3/08 19:39 Page 1

Today, more than 2,500 diverseprofessional FX and metalstraders in 50 countries trade onEBS Spot, a global market ofnatural interest. EBS tradingvolumes grew strongly in 2007with average daily transactionsup 28 percent year-on-year toUSD 182 billion. On-going EBSSpot trading activity thus feeds acontinually expanding source oftransactional historical data.

Algorithmic trading across theforeign exchange market isexpected to increase to 25% by2010, according to research bythe AITE group, while ITspending on black box tradingoverall will exceed USD 300million by the end of 2008.

In line with these findings, atICAP, algorithmic trades nowaccount for a growing portion ofaverage daily volumes on theEBS platform. EBS is thereforeuniquely well-positioned tosupport professional marketparticipants – both strategistsand traders alike – with asignificant competitiveadvantage as they formulateinformed FX trading strategiesfor the future.

In addition to its relevance to algostrategy development and trading,historical market data can be usedto support a host of other keybusiness processes – fromverification of security, inventoryand portfolio evaluations, tocompliance with regulatory andfiduciary requirements formultiple price sources.

The EBS historical data offeringprovides unique and certifieddata of all currencies and metalstraded on the EBS platformfrom January 1997. Access tohigh quality and reliable data iscrucial for traders looking tovalidate, back test and refinetheir models.

A question which we are oftenasked and which frequentlyconfronts FX tradingorganisations is whether itmakes more sense in terms ofresources to design and buildtheir market data architecturein-house, or to outsource it tothird-party vendors.

Certainly, an agile dataarchitecture is absolutely criticalto meet the demands of today’sFX market for the short,medium and long term. While anumber of banks and non-banksbuild systems in-house as part ofa wider strategy to internalise asmuch technology as possible,outsourcing – which allowsfirms to focus on their corecompetencies – is still widelypopular.

Proponents of building in-houseclaim cost-effectiveness, whilethose who favour outsourcingargue that it allows them toprovide both clients andemployees with effective toolswithout incurring internalresource costs (in both humanand financial terms).

Our suggestion is common-sense: use the best to get the

best. If your organisation has acapable and sufficientlyresourced in-house team, it mayvery well be to your competitiveadvantage to build on your own.But don’t underestimate the skilland efficiency available fromindependent software vendors orother third-party specialists.

To help our customers assesswhich approach could be mostappropriate for their specificrequirements, ICAP created theICAP Vendor Partner Program.The Vendor Partner Programwas created to connectcustomers with qualified vendorsoffering a range of servicecategories including modeltrading, STP and market datadistribution.

So, to return to our sports caranalogy. Not only would yourbeautiful new toy be of littlepractical use without fuel, butfilling it up with the wrong stuffcould have undesiredconsequences for its short- andlong-term performance. Thesame is true of trading in the FXmarkets – if you’re going tobuild a superior trading model,then make sure you only use thebest data to validate it.

More information on EBSHistorical Market Data andother ICAP Market Datasolutions is available onwww.icap.com/market data.Jim O’Hagan may be reachedon [email protected]

1Source: AITE Group, 2007april 2008 e-FOREX | 67

VIEW

POIN

T

066-067 Viewpoint 18/3/08 19:39 Page 2

The ability to identify andmonitor microbursts,latency and packet loss for

critical market data andtrade/exchange applications andthe protocols associated withthem, such as FIX, Multicast,TIBCO and others, is essential tothe day-to-day operation offoreign exchange trading houses,hedge funds, investment banksand other global financialinstitutions and market exchangeswith trading desks.

Additionally, the reliance onalgorithmic trading is drivingfirms to re-architect their tradingsystems and networks for lowlatency and optimal performance.Firms are automating tradeprocesses and adding throughputand processing power to theirmarket data and trading systems.Data centers are being relocatedcloser to trading centers to reducethe distance trading applicationsmust travel with the expectationthat performance will improve,ever so slightly. Market datadelayed by tens of millisecondsmay no longer be usable fortrading purposes, so designing thenetwork to minimize latency isalso essential.

As importantly, customers, brokersand traders depend on thesenetworks 24 x 7 to check accountbalances, current stock prices,validate orders have been executed,view investment and tradinghistory, research investmentalternatives and talk via IP phones.This increased dependency on thenetwork has brought many ITdepartments additionalresponsibilities and formidablechallenges in managing,maintaining, and optimizing theperformance of their valuable,global networks.

What’s needed

What network engineers in FXorganizations need is a bestpractices approach to detect,diagnose and resolve network andapplication problems in order toreduce overall networktroubleshooting time. Metricsthat reveal details of the health ofFX trading services can be bestquantified by leveraging deeppacket inspection technology.Packet flow based analysis deliverscomplete visibility into real-timeoperational intelligence spanninghigh-level KPIs (Key PerformanceIndicators) and early warning,flow based analysis of all the

THE e-FX MECHANIC

Real time performancemanagement & analysis forhigh speed FX networksIdentifying and analyzing response-timeperformance to ensure application availability to end-users


In the highly competitiveforeign exchange tradingindustry, volatility, surprises,and unpredictability are thenorm. Natural disasters inone corner of the world,political upheaval in adeveloping country, anannouncement from the U.S.Federal Reserve Chairmancan each dramatically impactthe foreign exchange market.And yet, the need to maintainoptimal, predictable, highquality network performanceis one constant demand. Infact, according to leadinginformation technologyjournal Information Week, “amillisecond advantage intrading applications can beworth $100 million a year to amajor brokerage firm.”1

Eileen Haggerty, Director, ProductMarketing, NetScout Systems.

1 “Wall Street's Quest to Process Data at the Speed of Light,” Information Week, April 23, 2007.

068-071 eFX Mechanic 18/3/08 19:40 Page 1

applications throughout thenetwork, with drill-downs to theactual packets for deep forensicstroubleshooting. Thiscombination enables ITorganizations to reduce mean timeto restore (MTTR).

KPIs for Early Warning

Those responsible for the healthand well being of trading networksneed to begin looking to KPImetrics to provide the necessary“high definition” analysis andvisibility essential for earlydetection of emerging network orapplication problems. KPI metricsin the FX and investment tradingnetwork environment analyze thehealth of the FX trade lifecycle byanswering the most challengingquestions, including:

• “How fast is each FX tradingapplication running?”

• “Is that response time withinacceptable parameters?”

• “Are there any errors for thatapplication or network area?”

• “What is the success rate?”

Some important KPIs toincorporate in an overall solution

may focus on measuring aspects ofthe user experience, such aserrors,jitter, and response times forkey applications. These are mostcritical to FX investmentorganizations because they provideearly detection of performanceissues, potentially enabling them toavert a problem that degradesperformance of tradingapplications, or worse, brings thesystem down.

An important component inderiving KPIs is using statisticalbehavior modeling to detectabnormal changes in network andapplication behavior in order todeliver early warning ofperformance issues. Performanceanalytics systems automaticallylearn the network’s behaviorpatterns and identify performanceanomalies without the manualconfiguration and guesswork ofsetting thresholds. By using varioustime frames, the analytics system isable to detect different classes ofproblems, including short-termspikes, sustained shifts, and subtle,long-term performance drifts thatare virtually impossible to catchmanually.

Some specific KPIs essential toperformance management of FXnetwork environments include:

• Alerting and KPIs derivedfrom threshold alarms ontraffic utilization, applicationvolume, or deviations fromacceptable response times forFIX or HTTP traffic.

• Real-time microburstalarming

• Identification of inter-packetdelay or latency on aparticular application streamand alarming if the gapexceeds a pre-defined limit

• Robust error detection, suchas monitoring out-of-sequence packets /retransmissions in real time,and the ability to generate analarm when the gap exceeds apre-defined value

Problem diagnosis with Flow-Based analysis

Once a potential problem isidentified using established KPIs,effective use of application andpacket flow-based analysiscollected by monitoring key datacenter, trading floor, and internetaccess segments to help answerquestions such as:

• “Which network andapplication resources arebeing utilized?”

• “How much bandwidth iseach applicationconsuming?”

• “Are the applicationsoperating in the proper QoSclass?”

• “Who is using theapplication?”

• “How are multipleapplications traversing thenetwork affecting oneanother?”

>>>



Flow-based analysis helps to answerthe question “How are ourresources being used?” The needsof market trading companiesdemand real-time and historicalpacket flow information to keepthe network running at peakperformance with the lowestpossible latency. Part of thechallenge of fully realizing this levelof flow analysis is being able toidentify all applications in thenetwork including well-knownapplications such as e-mail, HTTPand VoIP; web based applications(by URL); complex applicationslike Citrix and SAP; and specializedfinancial trading applications.

Any solution selected shouldincorporate measuring, analyzing,and alarming in key areas of theFX network to troubleshoot andevaluate performance metrics withthe following functionality:

• Real-time monitoring andhistorical reporting analysis,including utilization,response time, hosts andconversations, of markettrading applications, such asFIX, OPRA, MDP, PGM,etc.

• Evaluate FIX protocolapplication utilization andwhen possible, break downand analyze activity byspecific transactions type,e.g. administrative messagesand FIX Order Single andexecution messages.

• Examine traffic activity andapplication response timemetrics and notify ofdegradations and identifiedfailures in FIX trades, e. g.when a specific FIX OrderSingle does not have acorresponding executionmessage.

• Ability to identify IPMulticast groups as uniquebusiness applications as wellas view the interactionbetween publishers andgroups

• Ability to view TIBCOstatistics, including errortraffic and retransmissions

• Alerting and KPIs derivedfrom threshold alarms ontraffic utilization, applicationvolume, or deviations fromacceptable response times forFIX or HTTP traffic.

Focused troubleshooting withDeep Packet Analysis

For many situations, traditionalmonitoring approaches provideexcellent analysis of networks,applications, conversations,response times and trending.However, at times, packet-leveldetails are necessary totroubleshoot and identify themore gnarly problems withcomplex, latency –sensitive FXtrading services transported acrossglobal networks. Continuousrecording of the actual packets inthe network provides an insurancepolicy of sorts to leverage in caseswhen post-event forensics andretrospective analysis is necessary.

Other "slow-downs" that effect the traffic


THE e-FX MECHANIC


The addition of 24x7 continuouspacket capture helps answerquestions like:

• “What exactly was theconversation exchange for aspecific application?”

• “How can we reconstruct asession from the recent pastto see what happened?”

• “Is there a poorly designedapplication causing thedegradation?”

Your solution needs to retaincontinuously recorded packetflows from target interfaces in thecore, distribution, and accesslayers of the network. Thisprovides a complete set of tracefiles with both header and payloadinformation for in-depth, post-event forensic data mining withmicrosecond granularity. Indiagnosing the most challengingpacket-level problems, IT staff inFX networks should look toengage sophisticated, integratedfilters to analyze monitoredapplications, such as OPRA ormulticast TIBCO, and to launchbounce charts with built-in,contextual drill-downs to the tracefile packet for quick viewing of thesession details.

Problems resolved

• A brokerage firm based inthe United States providesinstitutional clients withaccess to financial andcommodity markets aroundthe world and maintainsmemberships on the majorworldwide futures andequity options markets.They offer a suite ofproducts including futures &options, equities, foreignexchange, fixed income,

financials, energies, metals,agriculturals & softs andsecurity futures, as well asservices such as tradeexecution, global clearing, andelectronic brokerage usingreal-time trading systems.They had recently introduceda new FIX protocol-based, on-line foreign exchange tradingplatform which featured theability for traders to customizecurrency pairs and settings, setticket size limits, and providestreaming spot prices in allmajor currencies via a “one-click” browser-based systemfor fast market access.

Using packet flow basedanalysis, the firm instituted a real-time performancemonitoring solution toexamine traffic activity andapplication response timemetrics in order to identifyand notify the networkengineers of degradationsand failures in FIX trades, e. g. when a specific FIXOrder Single does not have a corresponding executionmessage.

• One particular financialinstitution was experiencingintermittent delay problemswith one of its market dataapplications and users werestarting to complain. Using apacket-flow based networkand application performancemanagement solution theyinvestigated the applicationresponse time and discoveredthat the delay was attributableto one specific, overwhelmedserver, not the network. Oncenetwork operations identifiedthe problem, the supportteam was able to redirect theclients to alternate servers forproduction data.

• A major retail brokerage firmmanaged dramatic trafficvariation following a USinterest rate change in orderto maintain optimal tradingapplication performance.

The Ultimate Payoff

Time is money! For most, this is acute saying, but in foreignexchange investment services itcouldn’t be more accurate. Theevolution of real-time performanceand transaction monitoring,analysis, and trouble-shootingcapabilities have provideddemonstrable reduction in meantime to restore services to theirnecessary business levels in manyfinancial and foreign exchangetrading organizations. A March2007 Ashton, Metzler andAssociates sponsored survey of 138enterprise network engineeringprofessionals revealed thatengaging a real-time networkmonitoring and managementsolution had reduced their time todiagnose performance problems byapproximately 69%. Usersreported that problem diagnosistook an average of 9.1 hours withother tools and approaches, andan average of 2.8 hours once theydeployed more holistic solutionsincorporating KPI-to-Flow-to-Packet technologies.

For global FX tradingorganizations, such dramatic ITproductivity improvements arecertainly worthwhile results fordeploying these real-timeperformance managementsolutions. However, when moneyflows through the network, theultimate payoff for rapid problemresolution is going to berecognized in customer service,retention, and financial rewards –your business.


Real time performance management & analysis for high speed FX networks


In recent years, there’s been anexplosion in FX tradingvolumes, largely driven by the

significant expansion of buy sideinvestors. The industry’s massiveinvestment in technology is payingoff, with greater price transparencyand a wider range of executionchoices available now than everbefore, even to the smallestparticipants. Ironically, this newtechnology landscape has madelife more difficult in a way: eventhe smaller trading operations arenow often forced to monitor andmanage cross-platform, cross-asset,high-volume trading!

As the new paradigm of electronicFX trading emerges, marketparticipants are finding theirtechnology needs falling into fourbroad categories: connectivity,cross-asset consolidation, security,and reporting. Implementing all ofthese is a daunting task for largetrading operations, let alone

smaller players. Hosted post-tradeconsolidation solutions, like GLTRADE’s Aspen product, canmake it much easier for tradingoperations of any size to meetthese technology needs.

Connectivity: The large entranceof buy-side players has led to asharp increase in the number ofelectronic trading venues available,and most participants subscribe toseveral of these. Each platformrequires its own real-timeconnection, and there are otherconnections required as well:Market data providers, primebrokers, account custodians, andsome end users want connectionsto their own internal systems.Many of these systems havedisparateconnectivityrequirements,some of themquite complex.For example, thelarger market dataproviders mayrequire hard lineconnections fromtheir servers, andthis can beprohibitivelyexpensive.

A hosted systemlike Aspen makese-FX connectivity

easy, since it has existingconnections with dozens ofliquidity providers, ECNs,aggregators, market data providers,prime brokers, and accountcustodians. These connectionsspan many different technologies,data protocols, APIs, messageformats, and encryption methods.Although the industry as a wholecontinues to slowly convergetoward the FIX protocol for post-trade notification, there are dozensof other protocols still in use, andthey won’t be going away anytimesoon.

Many FX trading operations arefinding that they can save millionsof dollars in softwaredevelopment, data center

PRODUCT SPOTLIGHT

Product Spotlight: GL TRADE’s AspenManaging Cross-Platform Trading ThroughCentralized Connectivity


As e-FX technology continuesto grow by leaps and bounds,buy-side players are lookingfor consolidated solutions tomanage increasingly complexconnectivity, position and riskmanagement, security andreporting requirements.

Connectivity to electronic partners

by Roger Bright, Chief Technology Officer for Aspen

072-073 Product Spotlight 18/3/08 19:42 Page 1

management, and interfacemonitoring costs by using a hostedsolution like Aspen, which does allof this for them. In a realm wherealgorithmic trading is drivingvolumes ever higher, this type ofconsolidated connectivity is not aluxury but a necessity.

Cross-asset consolidation: Everyyear, more and more hedge funds,broker/dealers, and proprietarytrading operations add FXproducts to their customerofferings or trading strategies. Evenwithin the e-FX realm, manyplayers are starting to trade NDFs,swaps, and forwards. Customersare starting to demand technologyto manage diverse positions acrossasset classes within a singlesoftware suite, since many FXtrading operations now also tradeequities, commodities, and fixedincome. Aspen’s Position and P&LBlotter fills this need by showingtraders and managers consolidatedviews of total position across allasset classes—and these views areupdated in real-time as newlyexecuted trades flow inelectronically.

The story doesn’t end with positionand P&L management. Riskmanagers need to view theirtraders’ positions and riskthroughout the day. Broker/dealersneed to monitor their customers’margin usage and collateral. Evenhedge funds are beginning to needmore complex back officeprocesses, such as automatic tradesplitting into fund allocations, andend-of-day position rolling.Solutions like Aspen not onlyperform these tasks, but also notifydownstream prime brokers,custodians, and risk analysis toolswith appropriate messages and datafeeds once these tasks are complete.

Security: It is no surprise that asexecution and post-trade

technology becomes increasinglysophisticated and more readilyavailable, information managersare shifting more of their focustoward security considerations.Connections with tradingplatforms, prime brokers, marketdata providers and end users allneed to be secure, but eachplatform seems to have a differentmethod of implementing security:Some platforms require VPNs,while others require SSH tunnels,SFTP, HTTPS, PGP (or its variantGPG), or even hard lineconnections. Providers such as GLTRADE free users from theseconcerns by implementing thenecessary security protocols athosted data centers.

Reporting: Inevitably, the rapidgrowth in e-FX trading hasbrought with it increasedregulatory scrutiny and reportingrequirements. All levels of tradingoperations are beginning to realizethat they need to be able toproduce full audit trails whenrequired. Additionally, manycompanies need to send end-of-day (or even hourly) reports oftrading activity to their primebrokers and account custodians.Players in the broker/dealer spacehave to send daily and monthlystatements to their customers.Furthermore, many are findingthat their more sophisticated

customers wantreal-timeconnectivity totheir owntrading systems!A system likeAspen cangenerate all ofthese reportseither in real-time or throughconfigurable,scheduled batchprocesses.

As electronic FX trading continuesto evolve, all levels of marketparticipants will find that theyneed sophisticated trading,connectivity, and reporting tools tostay competitive. Hosted solutionssuch as Aspen can replace much ofthe drudgery of systemdevelopment, allowing users todeploy sophisticated solutions in amatter of weeks rather than years.This allows firms to save valuabletime and concentrate on their coretrading strengths.

Related Product: GLWin

GL TRADE’s front officetrading solution, GLWin,displays tradable bid/offer andmarket depth prices frommultiple FX venues includingBaxter, Hotspot, FXCM Proand FX Marketspace in aflexible grid-based layout.Multiple tabbed panels enable1-click trading between sets ofcurrency pairs within the samewindow, whilst multiplewindows enable completecontrol over desktop real-estate.Key features include Bid/offertile display showing executablebest bid/offer prices andassociated quantities acrosssingle or multiple FX markets.


Position and P&L Blotter - a consolidated view of all positions across asset classes.

072-073 Product Spotlight 18/3/08 19:42 Page 2

The e-Forex Interview


e-FOREX : INTERVIEW

With Max SmithGlobal Head of Foreign Exchange, Newedge Group

Max, what was the rationalebehind the formation of Newedge?

The market has been in aconsolidation move over the lastfive or six years, with mergersamong many of our competitorsas well as exchanges -- ABN wasbought by UBS, CME acquiredCBOT, NYSE merging withEuronext and now buying theAmerican Stock Exchange – so ourshareholders began to look at how,instead of being marginalized, theycould capitalize upon this trend tostrengthen their investment andparticipation in the brokeragearena, along with their offering tocustomers.

Both Fimat and Calyon Financialhad very similar business profiles:both owned by major global banksheadquartered in France (SociétéGénérale and Calyon respectively),both focused on similar businesslines, and both with very limitedproprietary trading activity in orderto avoid conflicts of interest withour customers. In a lot of ways, itwas a natural fit and joining forces

created a far greater new force thansimply the sum of our parts.

The result is Newedge, a globalmulti-asset brokerage business,with a strong presence in 17countries with 25 offices, andmore than 3,000 people workingfor us. We have access to morethan 70 exchanges around theworld and our combined revenueswere around ?1.1 billion last year.Newedge executes on a daily basismore than 5 million contracts andclears more than 6.2 millioncontracts. Globally speaking, themerger created a fairly balancedbusiness. The US represents about45% of revenues, Europe 42%and Asia the remainder.

The merger created an extremelystrong competitor that stands outwith its advantages in terms of astrong capital structure, acomprehensive product base and,most especially, as a single focusedcompany. We are able to put all ofour resources, technology and otherresources to deliver 100% to the

execution and settlement/clearing ofinstitutional customer transactions.

Our core business is the listedderivatives business where we ranknumber three in terms of USsegregated funds, and we have adominant share of the business onmost of the major exchanges aroundthe world. Another key businesswhere we have made a priority ofexpanding even further is our primebrokerage offering. Our FXoperation is a major component ofwhat we have to offer in this arena.

What main goals has Newedge setfor itself over the next few years?

We are very optimistic about Asiaand other emerging market areas.Asian financial markets have grownsignificantly over the past few years,and Calyon Financial brought withit to the merger a joint venturerecently concluded in China withCITIC Group, one of the majorplayers in the Chinese market.

We have set ourselves some veryaggressive goals at the corporate

074-076 Interview 18/3/08 19:43 Page 1

level including a partial IPOwithin 18 to 24 months, with thetwo shareholders, Société Généraleand Calyon, retaining more than50% of the interests. This willcreate our own currency for futureacquisitions, which we willcertainly continue to explore bothbefore and after the IPO.

We have set ourselves the goals ofbecoming the top player in theFCM business, a major force ininter-dealer brokerage,recognizable as one of the bestprime brokers and, mostimportantly, doubling our currentresults within three years.

What vision do you have for growingthe FX component of your business?

We are in a growth mode whereour FX business is concerned.This is one of our most importantbusiness lines, with a full range ofFX products – spot, forward,NDF, EFP and options --managed through a single bookfrom trading desks in New York,London and Sydney on a 24-hourbasis, 5.5 days a week, as well as asales and options desk out ofChicago and sales personnel inDubai and Hong Kong.

FX currently represents 5% of therevenue for our combined companyand we believe there is tremendousroom for growth, particularly giventhe expertise and clients we alreadyhave. We expect this line tobecome a more and moresignificant part of our business.Wesee the options business as atremendous area of potentialgrowth We recently hiredanother very experienced seniortrader for the Sydney office andplan to expand our staffingelsewhere in the region,particularly Hong Kong, where wehave a strong corporate presence,creating significant opportunityfor cross-selling.

Overall, we have a very largegroup for this space and we planto expand even further.Capitalizing upon the strong FXpresence that Fimat had inChicago and that CalyonFinancial had in New York enablesus to cross-market to clients of allthe other business lines thatoperate out of our two largestglobal offices.

Can you tell us a little about howthe Newedge FX division isstructured?

I’m the Global Head of FX, basedin New York, with Mike Bailey asthe Head of FX Europe andDeputy Global Head. Both reportinto Marc Schultz, who is notonly CEO of Newedge Americas,but is also the global executivecommittee member responsible forseveral of the key business lines.Mike also reports locally toAmaury de Villemandy, Londonhead of sales.Combined staff includes: nine inChicago, both upstairs and on thefloor; 11 in New York, four inSydney, one in Hong Kong, and13 in London and Dubai.As experts in the field of primebrokerage, the Newedge FXGroup offers full service PrimeBrokerage, drawing upon themany years of clearing experiencethat both Fimat and CalyonFinancial had in catering to clientsthat range from traditionalinvestment managers and CTAs tohedge funds to overlay managersto banks and other FCMs andbroker/dealers.

What do you see as the mainadvantages that Newedge offersFX customers?

There are a number of fronts onwhich we are uniquely positioned:

• Unparalleled Market Liquidity -- Our FX trading team

combines primary liquidity fromEBS and Reuters along withindirect liquidity from our nearly60 banking relationships aroundthe world. With a greater pool ofliquidity than single banks, weare able to price and executelarge transactions quickly andefficiently for our clients.Newedge clients trading via ourFX Edge electronic tradingplatform also benefit from thesebanking relationships.

• Neutral, Fast Agency Pricing --The deep liquidity of ourupdated agency model allows forimmediate neutral pricing versusthe “pass through pricing” of atraditional agency desk. We donot take proprietary positions,so all pricing is always unbiased.

• Benefits of Scale -- Newedgeexecutes tremendous volumeeach day on behalf of clients inall time zones. Our team is theprimary business relationship ofmany global banks. Clients ofall sizes benefit from theleverage that this volume createswith proprietary institutions.Execution for various tradingstyles, from global macro tosystematic, is enhanced by thissame leverage.

• Anonymous Market Access -- Asa non-proprietary agency desk,we are seen as a partner to ourclients. We provide completecustomer anonymity whenexecuting transactions. Fueled bylarge trading volumes, it is easyto mask our clients’ interests andpositions when entering orexiting trades. The market seesonly the Newedge name.

• 24-Hour Support -- Tradingclients have round-the-clock access to our experienced team ofprofessionals for aggressivepricing, limit and market orders,and market commentary. Wemanage all FX relationships viaone desk, ensuring consistentservice to our institutionalclients. Newedge also offers

>>>


074-076 Interview 18/3/08 19:43 Page 2

electronic tradingsolutions across manymarkets. Likewise,Newedge’s E-Brokeragecustomer support team isstaffed around the clockand is ready to handleany technical questionsfor our trading clients.The electronic supportteam is constantlymonitoring connectivityand working to ensurethat FX Edge meetscustomers’ liquidity needsduring all marketconditions.

• Client Services -- AllNewedge clients have asingle point of contact toa dedicated ClientServices Representative(CSR). With our global networkof offices and CSR teams,Newedge can offer our clientsseamless global coverage on a24-hour basis.

• Electronic Reporting -- With RealTime Access (RTA), Newedge’sproprietary web-based reportingsystem, clients can securely accesspre- and post-processed accountinformation in real-time forreview or downloading. The RTAdatabase updates in 15-minuteintervals with pricing updatedevery two minutes.

Can you highlight some of the keyfeatures of your FX Edge electronictrading platform?

FX Edge will continue to provideclients with a neutral platformthat offers deep liquidity and tightspreads. The platform offers clientanonymity, real-time access and allthe afore-mentioned reportingcapabilities.

Other characteristics of the FXEdge platform include:

• Aggregated spot prices frommultiple liquidity providers.Newedge has long standing

credit relationships with nearly60 of the world's leading FXbanks and has selected only topquality partners to ensure ourclients receive high quality,available liquidity. This resultsin tight spreads and continuityof pricing that only multiplesources can provide.

• System accessibility to streamingmarket data provided in twoformats: Screen Trading or viaFIX API.

• Customizable trading platformfor those users with ScreenTrading access. Control alldefault trading quantities, one-or two-click trade execution, setcurrency and order size limits,configure trade blotter, selectmultiple currency pairs andgenerate customized,downloadable reports.

• Proven FIX API connectivityapproach. Newedge providesfull support throughout theintegration of the FIX API.Integration is streamlined thanks to our proprietary FIXRules of Engagement protocoland the expertise of our FIXsupport team assisting clients insetting up appropriate network

connectivity, including testing,sample code in C++ and Java,and a final structuredcertification.

• Cost savings through utilizationof one source for execution andclearing. By acting as principalto all client transactions and tothe covering deals, we eliminatethe need for an FX primebroker which reduces executioncosts for clients clearing with us.

• The ability to process data viamultiple file formats includingCSV, PDF, XML, FIXML,TXT, and Excel-compatiblefiles.

What plans do you have toenhance and develop your tradingtechnology?

We are already addingtechnological support staff toenhance our product support aswe achieve greater critical mass.We plan to leverage therelationships with externalsoftware houses held by bothFimat and Calyon Financial sothat we offer our clients the fullelectronic suite and completelysupport whatever the clients want.

e-FOREX : INTERVIEW


FX Edge

074-076 Interview 18/3/08 19:43 Page 3

077 Progress Apama Ad 18/3/08 19:44 Page 1


Leveraging ComplexEvent Processing forAlgorithmic Trading in FX


Dr John BatesFounder and General Manager,

Apama Division, Progress Software

Over the last year, a strongbusiness case for automatingforeign exchange trading hascontinued to drive the adoptionof advanced trading technology.The FX market is characterizedby fragmented liquidity - causedby an ever-growing set ofliquidity pools and ever-increasing volatility. Within thisenvironment, a growing numberof firms are interested inlowering the cost and enhancingthe profitability of FX trading,using techniques such asalgorithmic trading. This interestcan range from augmenting spotdesks with automated tradingsystems that execute trades and

manage positions, to highfrequency algorithms that seekout and act instantly on tradingopportunities in the fragmentedliquidity environment. In the highfrequency world, traders realizethat algorithms must act onopportunities before anincreasing number ofcompetitors who are aiming toget there first. This growinginterest in trading automationcomes at the same time asmanaging trading risk is verymuch at the fore-front ofthinking, given the marketclimate and some high profilenew stories. Automating andstreamlining the processes ofbacktesting, tracking riskexposure in real-time andautomatically hedging to managerisk, are all techniques thatinstitutions now need toincorporate into their algorithmictrading plans. This articlediscusses a new technology thathas been deployed successfullyto address these business driverswithin the FX market. Thetechnology is Complex EventProcessing (CEP).

Complex Event Processing

CEP is about monitoring,analyzing and acting instantly onpatterns that indicateopportunities or threats to thebusiness. In FX, this can bemonitoring market data from FXvenues, detecting patterns thatindicate trading opportunities andautomatically placing andmanaging orders to take advantageof these opportunities. CEP in FXcan also involve monitoring risklevels as trades are placed andpositions change and, if riskthresholds are exceeded, hedgingpositions automatically.An “event” in CEP represents anyupdate – such as a new quote froma trading venue or a news articlearriving on a newsfeed. Theseevents are fed into a CEP engine,via an integration adapter layerthat can connect to a wide varietyof heterogeneous services. TheCEP engine is the brain of themonitor-analyze-act functionality.

The patterns for which the CEPengine will monitor, analyze andact are described as event-basedrules, as illustrated in Figure 1.Rules can contain arbitrarilycomplex temporal and logical

078-080 082 Apama 18/3/08 19:45 Page 1

sequences, along with actions totake if the sequence is detected.In some CEP systems, such rulesmight be described either in aCEP language or a graphicalmodeling tool that is accessible tonon-developers. Recently there hasbeen considerable focus on theevidence that CEP adoption isbeing driven as much by thebusiness as by technologists.Graphical tools that targetbusiness users, such as traders, andenable them to create andcustomize trading strategieswithout the need to program is akey contributor to thisphenomenon.

Event-based rules respond whenthe data values in received eventsare relevant to the parameters of arule. For example, a new eventmay cause the recalculation of acomplex analytic or may be part ofthe detection of a pattern thatindicates a statistical arbitrageopportunity has been identified.

Figure 1 is a simplified example ofa CEP rule that monitors theEUR/GBP cross - looking for a

trading opportunity. This patternrequires the continuous re-calculation of analytics, such as themoving average of EUR/GBP andthe EUR/GBP velocity (i.e. if it isheading up, down or leveling).When an opportunity is detected,orders are placed – but if thesituation reverts mid-trade, theseorders are automatically cancelled.

Connecting to Multiple FX Venues

The FX market is characterized byliquidity that is spread across arange of different trading venues.These trading venues includebank-provided liquidity pools, aswell as aggregators and ECNS,such as EBS, Reuters, Currenex,Hotspot and FXAll’s Accelor. Thegrowth in the number of tradingvenues has led to increasingliquidity fragmentation. This hasdriven a number of newrequirements in tradinginfrastructure and CEP has beenshown to be an ideal technologyto meet these requirements.

The first requirement is the strongdemand from trading groups to be

able to connect to not just onepool – but to multiple, if not allpools – to get a broader picture ofwhat is happening in the marketand to seek out best price andliquidity. Trading groups do notwant to use different tradingsystems simply because of theirconnectivity to different pools;they want to use the same tradingsystem and connect to multiplevenues concurrently. Since a CEPengine treats all market updates as“events”, events from multiplevenues can easily be combinedwithin the same platform.

To enable open connectivity, FXliquidity pools now provideelectronic applicationprogramming interfaces (APIs) toenable trading systems to connectto them, receive market data andplace orders. However, one FXcomplexity is that, unlike equitieswhere the FIX protocol is rapidlynormalizing the means ofconnecting to trading venues, allFX APIs do not yet adhere to astandard. This requires anelectronic trading platform toimplement connectionsindividually rather than rely on aunifying protocol. Strong CEPplatforms will mask thecomplexity of different APIs andprotocols by providing anintegration layer that enablesconnections to multiple tradingvenues. Within this layer adaptersconvert the incoming market datainto events that the CEP platformcan consume. Similarly, eventsthat are generated by the CEPplatform, indicating orders to beplaced on a particular venue, areconverted by adapters into orderplacement messages that theparticular trading venue canunderstand. In this way theintegration adapter layer is able to

>>>


Figure 1: An example FX algorithmic trading rule

078-080 082 Apama 18/3/08 19:45 Page 2

translate between events andmarket data and orders.

Using events as the basic buildingblocks of trading strategies alsoyields advantages beyond straightFX. Cross-asset class trading caneasily be implemented sincemessages from equities, derivativesand fixed income systems can alsobe treated as “events”. CombiningFX events with other asset classescan enable applications such ascross-border trading, using FX as areal-time conversion for dual listedinstruments.

In addition to other asset classes,the ability to connect to, monitorand respond to patterns in real-time news feeds is another way inwhich CEP is being used forcompetitive advantage by the FXtrader. For example, an algorithmmay buy Swiss Franc crosses onnews of a conflict – reacting beforehumans can. News may also becombined with analysis of othermarket data – alerting a traderwhen a news article seems to beaffecting a particular currency pair.

FX Market Aggregation, LiquiditySensing and Smart Order Routing

Most traders are not satisfied tosimply connect to the FX venues;they want to aggregate theinformation coming from theliquidity pools – in order to gain aunified view of the market. Ratherthan watching each poolindividually, an aggregator createsa “rolled up” view of the marketfor each currency pair. Forexample, the top 3 best bids onEUR/USD could be on EBS,whereas the next best could be onFXAll Accelor and so on. Anaggregated view combines thisinto one super book.

Aggregation is a computationallycomplex task, which increases asmore liquidity pools are addedinto the mix. Every time one ofthe pools changes the aggregationalgorithm must detect this,consider whether the changeimpacts the aggregated marketview for a particular currency pairand make any necessary changes.This must be done with theminimum possible latency. CEPprovides a powerful platform foraggregation. Event-based rules canbe used to instantly detect and acton FX market changes that requirefine-grain reorganizing of theaggregated view.

With an aggregated view comesthe ability to immediately sensebest liquidity and pricecombinations in response to anorder from a client or anautomated algorithm. The CEPsystem is able to monitor andanalyze the aggregated view toidentify the right liquidity androute orders to the appropriatetrading venues to capture thatliquidity. It is critical that thisliquidity sensing and smart orderrouting happens with minimallatency – before a competitormoves first. Given that low latencyactions are the foundation of CEPmakes such technology ideal forthis kind of application.

High Frequency FX algorithms

Traders are increasingly interestedin developing proprietaryalgorithms that can capitalize onan aggregated view of the FXmarket. These algorithms monitorfor particular tradingopportunities in the market andupon detection, they are able toautomatically place and manageorders in one or more FX venues.

One key driver that is evolving inalgorithmic trading as a whole isthe desire to differentiate fromother players. It is becomingapparent that buying pre-builtalgorithms, built by third parties,does not provide the edge thattraders need to competeeffectively. There is a growingrecognition within many firmsthat if an algorithm is available toeveryone then the competitiveadvantage achievable is limited.Traders often want to eithercustomize an existing algorithm ordevelop a completely new one.This is accentuated by the factthat the market is continuouslyevolving and new opportunitiesmay be spotted at any time. It isthe first-mover that capitalizes onsuch opportunities – so buildingand customizing algorithmsrapidly is also key.

The technology requirements toenable such a scenario arecomplex. Analytics need to becontinuously recalculated,complex logical and temporalconditions need to becontinuously monitored, andtrading actions need to be taken,such as placing orders. All thismust take place with the minimalpossible latency – as otherwiseanother algorithm may move firston an opportunity. CEP is anapproach that has been proven todeliver these complexities, alongwith the advantage that complexscenarios are easy to develop, sincethe platform has been designedwith this in mind.

Real-time Risk Management andBacktesting

Increasing the automation andproductivity of FX tradingthrough algorithms can also


UNDER THE MICROSCOPE >>>

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081 Integral Ad 18/3/08 19:46 Page 1

increase the potential riskexposure. Trading institutionsknow that managing risk is critical– and in this fast-movingenvironment being able to checkrisk before making tradingdecisions is the optimal solution.To this end CEP is being used tocreate real-time risk rules thatexecute “in-band” with thealgorithmic trading rules. Riskrules may check, for example, thatthe quantity being traded does notexceed a certain level for a certaintrader. Also, real-time analytics canbe used to calculate, on an on-going basis, the value-at-risk forFX positions. If the risk exceeds acertain threshold, actions to auto-hedge the positions throughtrading can be automaticallyexecuted.

In order to ensure that as manypotential risk situations arecovered, as well as that tradingalgorithms actually work aspredicted, the technique ofbacktesting is used. CEP platformsenable sequences of historicalevents to be used, in conjunctionwith market simulators toaccurately test how algorithmswould behave in certain realsituations.

Of course, recent events make clearthat one cannot always predict thefuture with data from the past.Thus, key to any quantitativestrategy – in FX or any other asset– is the ability to respond tomarket circumstances quickly withnew strategies that accommodatenew market realities.

Conclusions

Competitive advantage in FXtrading is being gained byinnovative firms that use the latesttechnologies in new and excitingways. The FX algorithmictechniques that have evolved, suchas market aggregation, rules-basedalgorithmic trading, smart orderrouting, real-time risk managementand trading on the news, aretailored to the characteristics of theFX market. As introduced in thisarticle, the technology challenges ofconnecting to a wide variety of FXvenues and implementing thesealgorithmic techniques with lowlatency performance are beingsuccessfully addressed throughComplex Event Processing. Andmore exciting developments are onthe way - stay tuned!!


078-080 082 Apama 18/3/08 19:45 Page 4

083 GL Trade Ad 18/3/08 19:46 Page 1

FX MYTHBUSTERS


Given the ready acceptance of frontend trading technology connectingsell and buy side participants in thetrading chain, it is surprising that thepost trade environment for FX andother OTC instruments is still drivenlargely by resource-intensive, error-laden, expensive and risky manualprocesses - on both sides. Nick Dyne,CEO and Founder of LogicscopeLimited, pioneers of post-tradenotification technology, dispels someof the myths surrounding STP for FXand other OTC assets.

Post-trade STP for FX

Nick Dyne, CEO, Logicscope

Post-trade STP is nice, but notan imperative?

Theories abound as to whypost-trade efficiency lagsbehind front end tradinginnovation in the FX/OTCmarkets. “The processes ain’tbroke (only inefficient) sothere’s no imperative to fixthem”. “Traders aredisconnected from everythingthat happens after the button ispressed and don’t really see (orindeed feel) the impact of post-trade cock-ups”. “Marketsthrive on inefficiency and realend to end trading STP furthererodes competitive advantageand potential profitability(“what we lose on the price, wewin back on the overall cost of

execution”)”. “Frankly, it’sjust not sexy enough to getexercised about”. Etc, etc.

“Trading systems have not keptup with the growth in datacoming at them. Thecomplexity of the high-performance infrastructure andthe rapidity with which itevolves has createdopportunities for specializedvendors”. Brad Bailey, senioranalyst, Aite Group.

There are, however, someirrefutable facts about thisimportant market. The first isthat volumes are growing andwill continue to grow,particularly since new market

084-087 Mythbusters 18/3/08 21:03 Page 1

participants have been allowed toplay directly with the ‘big boys’ -be they asset managers, hedgefunds or corporates. The secondis that technology spend by banksand other trading venues onbuilding and enhancing theiroverall e-commerce propositions –and the FX/OTC elements withinthem - is also growing (in absoluteterms and in respect of share of ITwallet within organisations).Third, more and more OTC assetsare moving up the technologycurve - Standard Chartered, forexample, launched automatedNDF (Non-Deliverable Forwards)instruments on its proprietaryStraight2Bank e-commerceplatform (and via FXAll) at thebeginning of the year, offeringefficient access to emerging marketcurrencies to their institutionaland corporate clients. And relatedto all of the above, maintaining acompetitive edge increasinglyrequires liquidity providers to takean ‘enterprise’ approach that looksat the whole of their tradinginfrastructure, rather thanbuilding and managing theconstituent parts (asset types, frontend trading, middle/back officeprocessing etc) in relativeisolation.

As Justyn Trenner, CEO,Clientknowledge, noted in anUpdate in June 2006, “Success forthe sell-side will be predicated ontheir effectiveness in implementinginterconnected technology, tradingand distribution strategies - andthey will be penalised rapidly forfailing to do so. Technologystrategy and spend, therefore, willbe at the heart of futureprofitability”.

End to end STP only really workswith e-instruments?

Deal capture is the vital firstcomponent of any post-trade

action from printing a ticket toupdating credit and/or riskmanagement systems and ipsofacto, an electronic tradeautomatically ‘captures’ a raft ofmessage data in respect of everytrade. So far, so good. However,every message still has to be routed,transformed and delivered usingthe right protocols and in the rightformat to ‘talk’ to internal end userapplications. And this becomes lessstraight forward for end users whoare likely trading with multiplevenues - proprietary bank systems,multi-bank platforms, primebrokers – each of which may utilisedifferent technologies, protocolsand message standards.

Equally and oppositely, methodsfor capturing non-electronic tradedata are being developedcontinually – NCI’s Direct DealNotification/TIM TradeInformation Manager, forexample, supports electroniccapture of voice/direct tradedetails for the purpose of efficient,automated, confirmation andsettlement. Other systems extracttrade data from ‘e-chats’.

Since all trades, however executed,need to move efficiently along thepost-trade lifecycle it makes senseto ‘pick up’ non-electronictransaction data at the point of dealcapture, to review it on-screen in ablotter (and accept/deny it online)and then to route it alongside e-trade notifications to deliver to endusers in a single ‘pipe’.

The value of STP is outweighedby the effort/cost of achieving it?

Nobody would dispute the highcost attached to building,delivering and maintaining leading-edge, trading technologies. EBSand Reuters spent (and continue tospend) hundreds of millions ofdollars establishing their

predominant position in dealingtechnology and continue to investsignificantly in enhancing their ‘fullservice’ trading capabilities – boththrough internal development andacquisition (like Traiana’s recentpurchase by ICAP). Banks remaincommitted to significant spend onenhancing their proprietary e-commerce and trading capabilities,not least because of growingpressure from end users for moreefficient access to prices andexecution. And this is across theboard, not just in respect of FX.Catering to growing demand fromcommercial/retail customersegments, for example, banksincluding ABN AMRO andStandard Chartered, to name justtwo, have implemented integratede-commerce platforms that provide,in addition to FX/OTC executioncapabilities, a single point of accessto a wide range of treasury, cashmanagement (payment) and tradefinance products.

Having committed so much timeand investment in the pre-tradethrough to execution end of thetrade lifecycle, is it then a falseeconomy to 'nickel and dime'when it comes to incorporatingautomated, post-trade STP, whenthe benefits - on both sides - arematerial and measurable? (Or,looking at it another way, whenthe cost of getting trades wrong isso high.) One bank client hassuggested that the cost of a missedor failed trade can be $500 ormore for a plain vanilla FXtransaction and potentially $1000s in respect of morecomplex trades - and these costsare, typically, passed on to thecustomer.

And why is it always assumed thatimplementing IT solutions mustbe complex and costly? APIinterfacing and SaaS (software

>>>



delivered as a service) businessmodels should mean fast, remoteimplementation and support.Through a single delivery ‘pipe’ toa post-trade STP host (likeLogicscope’s TradeSTPConnect,for example) trading venues canautomatically deliver multi-assettrade data (pre-filtered orotherwise) into a post-trade‘sorting office’ for transformationand routing, simultaneously, tomultiple end users. Yes, thisrequires some effort and cost – thecost of not doing it, however, ispotentially far greater.

And this type of solution is eveneasier to achieve for end users - asingle connection to the hostenables them to receive near real-time trade data from all the venueswith which they trade,standardised, transformed androuted as appropriate, straight intotheir middle and back office

applications (and, if required,distributed onwards to branch andcustomer networks). With verylittle effort, in less than a fortnight(elapsed time). What’s not to like?

What is the real value to tradingvenues?

Our experience of connectingtrading venues directly with endusers for guaranteed, real-time posttrade notification shows, in fact,that STP realises significant value,on both sides. End users are more‘loyal’ to trading venues offeringefficient post-trade STP – andconsequently do more businesswith them. It’s a no brainer. Whowould you rather trade with - thevenue(s) offering a genuinely‘straight through’ tradingexperience and guaranteed real-time trade confirmation, that dropstrade data directly into middle andback office applications (position,credit, risk etc) or one that maysupport efficient electronicexecution but leaves you to walkthe trades through the requiredpost-trade processes, with theattendant risks of error, delay andpotentially, fraud.

On this latter note, one of thereasons given for the recent, andmassive, Societe Generale trading‘issue’ was a failure to separatetrading front end and back officefunctions. I expect there aremuch clearer dividing lines inplace today, although thisparticular horse has, arguably,already bolted. In short, in thishighly competitive space, tradingvenues that do not deliver post-trade STP to their end users aregoing to find themselves at bestcompetitively disadvantaged and atworst, out of the game.

End users don’t see a direct costbenefit from automated STP?

For end users, straight throughdelivery of trades that aretransformed and routed straight intotheir own middle and back officeapplications (position-keeping,credit, risk management, ticketoutput, ERP/SAP etc), reducesoperational burden and cost,minimises errors and has thepotential to lower, by a significantmargin, the overall cost of trading.Given that hedge funds in particulartend to trade big but operate smallin terms of physical resources,eliminating manual intervention -and error - from the process goesdirectly to lowering overall tradingcosts and also supports ‘bestexecution’ strategies as required byMiFID and other regulatoryobligations.

And meeting best execution is notjust about ‘best price’. If the costof accessing the execution venue -hardware and/or transaction fees - ishigh, relative to the volumes ofbusiness being executed (the tradingequivalent of travelling 50 miles inyour Hummer to buy cheap petrol)or you get the ‘best price’ but it allgoes horribly wrong post-execution,through manually re-keyingtransaction data, then the fact thatyou got the ‘best price’ is moot.

Trading venues prefer to buildrather than buy post-tradesolutions?

While our interest in promotinggreater STP may well be self-serving, it really is something of awin-win for trading venues andtheir clients. All venues want toimprove profitability from tradingFX (and other asset classes). Thismeans maximising revenuesthrough organic growth(volumes/cross-sales), reaching newcustomers and reducing operatingcosts by leveraging scaleeconomies, through greaterautomation and/or by devolving


FX MYTHBUSTERS


non-core processes to lower costcentres or to outsource partners.Efficient post-trade STP touchesall of these points.

“Tremendous growth in datavolume has been brought on by anincreased reliance on electronic andalgorithmic trading, as well asrecently enacted regulations thatstress existing infrastructures in thefront offices of global investmentbanks. However, technologies suchas data normalization, complexevent processing engines, messagingsoftware and distributed cachehave enabled firms to meetrequirements and maintain acompetitive advantage for trading.A number of vendors providingthese technologies as packagedsolutions have mitigated the needfor costly and time-consumingsystems development andmaintenance”. Aite Group report“High-Performance TradingInfrastructure: Cost, Opportunitiesand Challenges” - January 2, 2008

When deciding whether to buildor buy, however, trading venuesneed to decide which processes inthe complete trade lifecycleshould, for reasons of competitiveadvantage, remain proprietary andwhich ‘behind the scenes’ activitiesmight more effectively be providedby specialist third parties – andindeed, managed entirely by them.By utilising ‘best of breed’ post-trade STP software developed byproviders, trading venues canmore efficiently keep ahead ofSTP technology innovation and atthe same time focus their resourceson real product and servicedifferentiation. Even those venueslike FXAll that appear to offerpost-trade STP buy in elements ofthe solution from external vendorsand integrate them within their‘full service’ solution.

Ultimately, the market might bebest served by the creation of apost-trade processing ‘utility’ alongthe lines of SWIFT or Euroclearto handle these ‘co-operative’ ormutual processes, enabling allparticipants to benefit from fullservice provision and scaleeconomies. In essence, tradingvenues would continue to managethe economic components of thetrade (value, risk) while handingoff other elements of the process –allocations, affirmations, exceptionreporting, SSIs and so on to theutility. Think about it as a‘message bus’ which picks up (anddrops off ) required processesautomatically as the messagemoves from A to Z.

Post-trade STP only benefitshigher volume players?

Banks want to engender greaterloyalty and deeper relationshipswith all their target markets –wholesale, commercial and retail.Outside the wholesale arena,integrated (one stop shop) e-commerce platforms, offeringacross the board execution and

reporting capabilities, supportclient demand to reduce thenumber of bank relationships theyneed for their local and globalbanking needs. For this group,while the FX piece may berelatively small – and directlylinked – to other banking services(global payments, say) itnonetheless makes sense toprovide some form of post-tradecapability that simplifies tradeconfirmation, overallcredit/position-keeping and so on.

While this group’s notificationneeds may not be as time-sensitive, and their outputrequirements perhaps muchsimpler (automatic download toan excel application, for example),the benefits to them of efficientpost-trade STP are otherwisemuch the same - lower costs andfewer processing errors, moreefficient (credit) limitmanagement and the ability torelease treasury resources frommundane processing tasks to morevaluable activities like cash flowforecasting.


Post-trade STP for FX


China has come a longway in eFX over thepast four years. Hosan

Chan, the manager at FortuneFree Holding, says that in1994, the central bank, whichis the People’s Bank of China,and the State Administrationof Foreign Exchange (SAFE)clamped down on all margintrading activity in China. Shesays that is because manyinvestors lost a lot of moneyon the market due to poorlyjudged risk management.

As most of these investorswere state owned banks,organisations or enterprises,the central bank and SAFEacted quickly. Chan says FXthen disappeared from theChinese market. However, shestates that the situation hasgreatly improved in morerecent times. Chan claims all

the evidence is indicating thatafter over 10 years in exile, FXhas come back to the Chinesemarket, sneaking in the backdoor and making itself knowngradually.

“A lot of major market makersand brokers have beenpromoting their activities inmainland China in FX,” Chancomments. “Most of theinvestors are individuals,because SAFE has strictregulation for wiring outforeign currencies. Thepotential market has attracteda lot of international FXorganisations to open theirbusiness here. Now there arefour commercial banks thathave licences to openderivatives businesses. As aresult of this, we are seeing anoptimistic, very bright futurefor FX in China.”


China


China is the word on trembling lipsacross the world. This enormousmarket is opening up andexpanding, getting online andlearning how to take advantage ofits mass and its closeted economy,to make money on an ever-granderscale. From the eFX perspective thecountry has just started makingtentative inroads. The Chinesegovernment has a strong grip on thecountry’s finances and informationcirculation. It is learning to relax thathold and to allow electronic tradingto take place, yet this is just thebeginning of that process; for eFX toreally be able to take off in China,the government needs to place moretrust in people and systems.

By Heather McLean

088-092 094 096 098-099 Regional Perspective 18/3/08 19:50 Page 1

Increasing importance of China inFX market

The country’s FX reserves grew inthe fourth quarter of last year tohit $1.528 trillion, up by a healthy$94.6 billion from the thirdquarter, the central bank stated.That amounts to a rise of 43.3%for the same period in 2006.Altogether for 2007, China’s FXreserves rose by $461.9 billion.

Additionally, the latest BIS surveyreported that the renminbi saw itsmarket share rise from 0.1% in2004 to 0.5% in April 2007, withChina as a market centre registeringa market share (0.2%) for the firsttime on $9 billion a day.

In 2007, Singapore joined the UKand Switzerland as one of the topthree major financial centres bygaining market share, while theUS and Japan dropped down thelist as they lost market share.Hong Kong’s share of the marketrose to 4.4% in 2007, from 4.2%in 2004, and the Hong Kongdollar’s percentage share ofturnover rose from 1.9% to 2.8%in that period. This, the BISsurvey concludes, is a reflection of

the increasing importance ofChina in the foreign exchangemarket.

Customers everywhere arebecoming increasingly aware ofthe FX market, says ToddCrosland, CEO at InterbankFX.He comments: “It seems withrecent economic concerns in theUS, people are not only hearingabout a looming recession but alsohow the US Dollar is droppingagainst its counterparts. We feelFX will be very important in thedays to come as investors becomemore and more familiar with it.And as their concerns with the USeconomy increase, investors willseek out other forms of investmentthat will provide returns.

“Forex in China is equallyimportant, but the situation is abit different,” Crosland continues.“The stock market in China hasbeen booming recently, with asurprising amount of everydaycitizens trading the stock marketthemselves. There will be a lot ofhype once the Chinesegovernment allows the Yuan to betraded, and this hype will attractmany of these individual stock

>>>


Hosan Chan“..after over 10 years in exile, FX has

come back to the Chinese market,sneaking in the back door and making

itself known gradually.”

Todd Crosland“There will be a lot of hype once theChinese government allows the Yuan

to be traded, and this hype will attract many of these individual stock

traders over to Forex”


traders over to Forex, because, asthey say, the grass is always greeneron the other side.”

Growing Investor confidence

Like most emerging markets, Chinaseems to have been unaffected by theworst of the US sub prime lendingfallout, and there is a growingconfidence in the robustness of thismarket. If this confidence ismaintained then it can be assumedthat foreign investor interest willcontinue, leading to further growthin the FX market, with aproportionate increase in eFX,comments Rob Close, President andCEO at CLS Bank International.

Close continues: “We may also seeChinese investors beginning tolook abroad, driving further FXgrowth. In the medium termmarket liberalisation, which hasmany other facets than justallowing faster renmimbiappreciation, will further drivegrowth. We believe this growthwould be assisted by the renminbibecoming in the medium term aCLS currency, and we are havingdiscussions in relation to this.

“The cost of execution anddemand for greater efficiency will

also help fuel growth in the use ofelectronic platforms [in China],”states Close. “Key platformsalready exist in China, which isprobably already exceedingpredicted global market growth ofaround 20% in platform basedtrading. The caveat is that if wecontinue to see the volatilityexperienced over the last fewmonths, then these growth figurescan be doubled. A proportionateincrease in the Chinese market isto be expected.”

As of 11 December 2006, theprotective period for Chinesebanks following China’s entry intothe World Trade Organisationcame to an end, so China’sfinancial industry opened fully.This has meant that more banksare increasing investment intechnology and managementresources to be more competitive,both onshore and offshore.

Importance of Hong Kong

While there are differences intechnology and infrastructurebetween mainland China andHong Kong, those are a mootpoint given that eFX is designedto be traded at any time, fromanywhere, at least in theory.

K.C. Lam, director and head ofAsian FX sales at CME Group,states: “Hong Kong has alwaysprided itself as the gateway toChina, and has benefitedtremendously from the growthand trading going via Hong Kongto the rest of the world. The HongKong economy has a free andfriendly business environmentwith excellent infrastructure, andabsence of FX and capital controls.It also has a good pool of talent inthe FX and e-commerce arena thatwill be very helpful in maintaining



Rob Close“The cost of execution and demand

for greater efficiency will also help fuelgrowth in the use of electronic

platforms [in China],”

KC Lam“there has been a major investmentin infrastructure that will only help

to improve the environment for electronic FX trading.”


Hong Kong’s lead in theutilisation of FX e-commerce.CME Group has had an office inHong Kong since 2006.”

Lam adds: “Infrastructure in HongKong and major cities in China isgenerally very good. Other citiesin China lag behind, althoughthere has been a major investmentin infrastructure that will onlyhelp to improve the environmentfor electronic FX trading.”

Yet Crosland points to theenormous class divide that resides inChina, making Forex most readilyavailable to residents of the EasternTier-1 cities such as Beijing,Shanghai, Tianjin and Chongqing.Crosland continues: “The lack oftechnology in rural areas, though, isnot the only hindrance to tradingForex online; there’s also thefundamental fact that they areextremely poor and can barely feedthemselves, let alone dabble in amarket like this. As far as the largercities are concerned, sincetechnological advances are mostlydependant on the brokers, [forinstance those companies withadequate servers, software, and thelike,] a client only needs a computerand basic internet connection [inorder to trade].”

Network Buildout

There is a large difference betweenthe technological infrastructure ofmainland China and Hong Kong,Chan agrees. She comments: “Wehad a wide application ofbroadband in 2000, and then eFXcame to individual investors inChina. However, the broadbandfrom China to overseas is narrowcapacity, and there is very strictsurveillance of what is sent outonline. On top of that, the datatransfer is not steady, so data loss

and going offline occurs often. Yetin July this year, China andAmerica will be working togetherto build a high speed broadbandnetwork, which will greatly impactonline trading. We will still havethe worry of the National SecurityBureau, however, as thisorganisation can interfere or blockany website.”

The network build out that Chanrefers to is a deal between Verizonand five major Asian telecomscompanies - China Telecom,China Unicom, China Netcom,Korea Telecom and Taiwan’sChunghwa Telecom – to increasethe current capacity of China’sbroadband networks by 60 times.

eFX is becoming increasingimportant for China as thecountry moves rapidly to integrateitself to the rest of the world.CME Group has noted increasingliberation of trade policies and amore flexible regulatoryenvironment, conducive for theflow of trades and investment, inthe country.

Yet regulation is a big issue inmainland and offshore China, forboth its restrictions and also itslooseness. On the loose side, thebulk of FX regulations in Chinaare fuzzy at best, Crosland claims.He says the majority of lines aresimply not clearly drawn out.

“Although I doubt this ambiguityis deliberate, it nevertheless leavesinvestors and organisations opento trying new things, to push thesemi-existent boundaries, thusspurring additional growth,”Crosland states. “But that’s not tosay the regulatory bodies arepassive and don’t play a role,either. Yet the market is growing


>>>China

Richard Koh“If a trader goes online and prefers

a multibank platform to a single bank platform, we are presented with another challenge because how would you do a pre trade

documentary proof?”

Hosan Chan"the charge for FX trades in domesticbanks is very high, so most buyers are

not willing to trade with them"


so fast and attracting such a myriadof new investors, I feel, to someextent, that it is the investor andorganisations shaping theregulations; investors spur the speedof growth, and inspire marketevolution, whereas a regulatorybody is slower to adjust.”

Regulation lost in translation

Regulation is literally getting lostin translation in mainland China.Whereas in Hong Kong there areclear guidelines in gettingapprovals, in China, providers aresometimes left trying to interpretand reinterpret the state andnational level guidelines. Thisoccurs because the translation ofregulation from Mandarin intoEnglish is often not done byagencies that have anunderstanding of the market theyare writing about, which is one ofthe reasons that eFX regulation inChina is so vague.

Most of the banks that have gotthe capability to operate in Chinatend to be foreign players. Thesebanks, states Richard Koh,Director/Regional Head of eSales -Asia at Standard Chartered, getregulation translated by

professional departments andbusinesses which may not be wellversed in the language of trading,technology and financial markets.This means many interpretationshave either lost their meaning orbeen over interpreted, so thetranslator creates a hurdle evenhigher than the regulationrequires.

In terms of regulation, theChinese government hascommitted itself to greater FXflexibility, which involves both thepace of liberalising andrationalising capital controls, suchas relaxing administrativeconstraints on FX transacting, andthe optimal degree of flexibility inthe exchange rate. With thedevelopment of various hedginginstruments, China is increasingthe options of FX trading for bothbuy side and sell side. This in turnwill hasten the use of electronicFX trading, as this is a moreefficient way to scale in country aslarge as China.

Yet, the advance of eFX remains achallenge in China due to theregulatory requirement for strictdocumentation supporting eachtrade on a pre trade basis.

Regulators impose a stringentneed for documentary evidence inorder to prove a trade can beachieved. In other words, trades,other than those done by banks,cannot be done for speculativereasons; it must be for a genuinetrade reason, Koh says.

“Because of the need for pre tradedocumentary proof, trading isseverely challenged,” Koh says. “Ifyou are on the phone, you have tosay you will send an email or fax thedocument over, then ask ‘Are youstaring at it?’, ‘Are you happy withit?’, get verbal confirmation, andthen do the trade. It becomes veryawkward if you were to require pretrade documentary proof and thengo online to do an actual execution.It’s two separate, disparate processesrather than one single phone call.”

Yet this also explains the lack ofmultibank platforms on Chinesesoil. Koh continues: “If a tradergoes online and prefers amultibank platform to a singlebank platform, we are presentedwith another challenge becausehow would you do a pre tradedocumentary proof? You have tosend a document to five banksbefore you decide which price youwant to take? This is why most ofthe multi bank platforms do nottry very hard to operate in Chinaas it is operationally verycumbersome in order to achievethis requirement for pre tradedocumentary proof.”

The solution to this issue, Kohclaims, would be for the Chinesegovernment to emulate those inTaiwan and Thailand, and even inKorea to a large extent. Theregulators in those countries haveunderstood that e-trading makesthe process of pre trade contracts



>>>


093 Standard Chartered Ad 18/3/08 19:51 Page 1


>>>

cumbersome, so they allow tradesup to a certain size followed bydocumentary proof sent at the endof the trading day.

Chan states the regulatoryenvironment for FX trading inChina is still intangible, but thatshe can see that the government ispreparing the way for a more openmarket. “The government needs tobuild up a good environment forthe domestic banks to have a goodshare of this market before it isopen,” she explains. “However, thecharge for FX trades in domesticbanks is very high, so most buyersare not willing to trade with them.If there is open policy for thebanks, they are going to have greatmarket margin.”

SAFE

One organisation working toimprove the FX situation in Chinais SAFE. SAFE works from aregulatory, policy and riskmanagement perspective in China,with responsibility for managingand monitoring foreign exchangetransactions under capitalaccounts, including inward andoutward remittance and payments.It is responsible for managing theforeign exchange reserves of thecountry in accordance to the rulesand regulations set by the Chinesegovernment, Lam says.

SAFE has many functions coveringthe Chinese FX market. SAFE istasked with designing andimplementing the balance ofpayments (BOP) statistical systemin conformity with internationalstandards, developing andenforcing the BOP statisticalreporting system, and collectingrelevant data to compile the BOP

statement; it is analyzing the BOPand foreign exchange positions,providing policy proposals withthe aim of achieving anequilibrium BOP position, andconducting feasibility studies onthe convertibility of the renminbiunder capital account; draftingrules and regulations governingforeign exchange market activities,overseeing the market conduct andoperations, and promoting thedevelopment of the foreignexchange market.

SAFE is also involved withanalyzing and forecasting theforeign exchange supply anddemand positions and providingthe People's Bank of China (PBC)with propositions and referencesfor the formulation of exchangerate policy; promulgatingregulatory measures governingforeign exchange transactionsunder current account andsupervising the transactionsaccordingly; monitoring andregulating the foreign exchangeaccount operations both in Chinaand abroad; supervising andmonitoring foreign exchangetransactions under capital account,including inward and outwardremittance and payments;managing foreign exchangereserves of the country inaccordance with relevant rules andregulations; drafting foreignexchange administration rules,examining the domestic entities'compliance with foreign exchangeadministration rules andregulations, and penalizinginstitutions engaging in illegalpractices; participating in relevantinternational financial activities;and performing other duties andresponsibilities assigned by theState Council and the PBC.


Rob Close"continued economic growth and

related international investment will drive the growth in currency derivatives

in the Chinese market."

Todd Crosland"investors spur the speed of growth,

and inspire market evolution, whereas a regulatory body is slower to adjust."


095 Cognotec Ad 18/3/08 19:52 Page 1


Yet despite this massive remit,Chan says SAFE does still nothave clear regulation laid out forE-Forex. However, she adds that itdoes not forbid citizens ininvesting in foreign countries, buteach citizen can only transfer$50,000 in one year. “Thisallowance greatly limits thedevelopment of eFX,” she claims.

Retail FX potential

It seems obvious that China is onthe cusp of bigger and betterthings. So much so that retail FXprovider, Interbank FX, decided inlate 2007 to open a satellite officein Beijing. The company iscurrently focusing a lot of energyand manpower in that region andanticipates the number of newChinese accounts to quicklysurpass the number of new USaccounts it has, where most of itsbusiness in conducted.

Retail is thought by many torepresent the greatest potentialmarket for eFX, through retailbrokerages and aggregators, asevident by the same segment inJapan where households make upa large proportion of retail FXplayers, Koh claims. However, headds that comparing China to theJapanese market, as far as retail FXis concerned, is not a like for likecomparison. This is due to theinherent carry-trades in the latter,which is not present in the former;in fact, Koh says conventionalwisdom dictates to hold on toCNY due to its relativeundervaluation.

“Whereas in China, everyoneknows that the CNY isundervalued so keeping yourcurrency in your home country

where the interest rate is actuallyhigher, compared to the Yen,makes sense,” Koh states. “Thismeans eFX is not that popular inChina right now. However,everyone in China likes dealing inshares which means the market isstill vibrant.”

So retail FX in China is at an earlystage; while some offshore retailplatforms are making inroads intothe country, the market is far fromrealising its full potential.However, Lam says: “Mid to longterm, this is going to be one hugemarket, rivalling the size of theretail market of Japan.”

Lam continues that FX futures isimportant for the Chinese retailmarket. “Currently, there is not afutures FX market available forretail in China. Yet FX futures isideally suited for retail FX tradingas they are very liquid, with easyaccess and execution, fully disclosedpricing and a level playing field forall market participants, with thesafety and security of a regulatedFX environment. Most retailcustomers trading FX in a cashmarket will end up paying a pip ormore of the price on every trade.”

Pushing FX delivery through e-channels

In China, other than the big fourlocal banks, the middle tier bankslargely have insufficient liquidityso they source liquidity fromoffshore banks, Koh comments.He says most of these offshoreliquidity providers have in the lastcouple of years been consistentand successful in pushing FXdelivery through electronicchannels.


Richard Koh“Banks have largely converted to eFX for non strategic – read, non market

moving trades of less than $15 million to $20 million”

KC Lam“as a result of greater awareness on

various risk management and hedgingtools available in the market,

the future prospects for FX e-commerceis only going to improve.”

>>>


097 SmartTrade Ad 18/3/08 19:52 Page 1

Local banks in China do around70% of all FX transactionselectronically, Koh states: “Bankshave largely converted to eFX fornon strategic – read, non marketmoving trades of less than $15million to $20 million - since2006, with the proliferation of e-platforms from foreign liquidityproviders and state driveninitiatives, such as CFETS. Fortrades that may move the market,deals are done largely over thetelephone still.”

The investment and assetmanagement community in Chinais likely to embrace the benefits ofe-trading, states Lam. He saysincreased awareness and trainingwill be key in propagating thebenefits of e-trading to the localinvestment and asset managementcommunity.

Local corporates are a lot slower incatching on to eFX, Kohcomments, primarily due to theirpreference for US dollaraccounting for international trade,which therefore requires onlyUSD/CNY trades that are still notvery widely available due toregulatory restrictions.

Chinese corporates’ response todevelopments in treasurytechnology and the use of onlineFX trading platforms offered bybanks and portals is still in theearly stages of development, Lamsays. In the interbank arena lastyear, CFETS launched cashtrading in five currency pairsagainst the reminbi, utilising anew trading platform customisedto support the reminbi.

Participants on the platforminclude the 300 CFET memberbanks as well as 20 large banks,many of which are large globalinstitutions. This adoption willeventually filter down tocorporates, says Lam, who addsthat although there are some largercorporates already using treasurytechnology offered by banks, it isstill not pervasive.

Demand for currency derivatives

Lam continues: “However, webelieve the treasury technologyuptake and online FX trading willbe greatly improve when CFETSstarts to offer currency derivativehedging for its members.”

As early as 2001, the CSRC andSAFE enacted regulationspermitting Chinese corporationsto trade foreign derivativesproducts to hedge corporate risks.Lam says his company is seeingthis demand increasing as theusers in China become moresophisticated in the way theymanage risks.

“There is also greater awarenessamongst investors,” Lamcontinues. “Recently, the ShanghaiFutures Exchange (SFE), wasgiven regulatory approval tolaunch gold futures. Recentcombined volume turnover of thenation's three commodity futuresexchanges totaled 40.97 trillionyuan in 2007, up 95% from theyear before.”

CME has entered into anagreement with the China ForeignExchange Trade System (CFETS)to which CFETS will become a‘super clearing’ member of CME,providing CFETS members(which include all of the majorChinese banks in China) withaccess to CME Group FX andinterest rate futures markets.

This agreement and proposal iscurrently being reviewed byCFTC, says Lam. “This agreementwill promote the infrastructurebuilding of China's FX marketand the further opening ofChina's financial markets,” Lamstates. “The agreement will be animportant step in the developmentof China's FX market. It will helpfinancial institutions in terms ofprice discovery and riskmanagement of their exposures inthese markets.”




The demand for currencyderivatives as hedginginstruments is quite high inChina, and is partiallydependent on the health of theUS economy. Take for instancethe recent economic stimuluspackage recently passed by theUS Congress; according toCrosland that money usuallycomes in the form of TreasuryBonds sold to foreign countries.“Estimates say China owns 10%of our [the US] debt,” Croslandelaborates. “China will be happyto loan us more as our economystruggles and their economybooms, as a good portion of themoney lent to us goes straightback to China soil in the formof purchased goods.”

Close says it is likely that thecontinued economic growth andrelated international investmentwill drive the growth in currencyderivatives in the Chinesemarket. As the renminbiremains a non-convertiblecurrency, derivatives are playingan increasing role for thosewishing to invest in China, andin hedging in particular, heclaims.

A key example is the growinguse of non-deliverable forwardswhich are used by corporationsand fund managers as theirpreferred hedging tool forshorter dated hedging, generallywith 90 day tenors, Closecontinues. He says several majorfund managers have indicated toCLS Bank International that asmuch as 20% of their daily andquarterly volumes are traded asNDFs rather than outright.

Close says: “CLS is supportingthis growth in NDFs byextending its service to processand settle these instruments,” hecomments. “We are deliveringautomation in an environmentwhere little automation exists,facilitating more convergence andstandardisation, bringingincreased efficiency and deliveringsignificant ticket cost reductions.NDFs have traditionally beenassociated with manual processes,long-form confirmations, and lackof standardisation. These factorscontribute to expensive processingcosts for NDFs, estimated at $20per trade or more, a multiple ofthe cost to process an FX spot orforward trade.”

Future eFX prospects

On the future for eFX in China,Lam says the regulatoryenvironment has become moreflexible. He adds: “Moreover, asa result of greater awareness ofvarious risk management andhedging tools available in themarket, the future prospects forFX e-commerce are only goingto improve.”

While Chan is enthusiastic. Shesays: “eFX has huge marketpotential in China. Theeconomics of China hasdeveloped for 26 years andaccumulated substantive wealth.Most of that wealth was saved,but when saving does not satisfyvalue increment expectations,people seek other tools ofinvestment. Now most of thatmoney is going to the stockmarket. With the developmentof regulation for FX, I believethe growth of eFX in China willbe explosive.”

China


It wasn't too long ago that somecommentators were calling theend of single bank FX tradingplatforms and the emergence ofmulti-bank portals as thedominant FX trading venue of thefuture. Why hasn't that happened?

Hagenauer: While there has beenmuch written about multi bankportals, it is important to note thatsingle bank platforms continue toaccount for a significant proportionof the global deal flow across eFXplatforms. Banks such as the ANZcater to a number of client

segments. While these segmentshave common needs (at its simplestreceiving a rate to execute atransaction); it is incorrect toassume that all segments requireand value the same functionality –and therefore that the multi bankportal is the optimal model for all.Multi bank portals have a strongmatch to clients who have multipledealing relationships, require rapidexecution and a clear audit trail as aresult of regulatory and operationalrisk requirements. Single bankplatforms cater for a number ofdifferent client segments. Whilethese segments have commonrequirements they also each havespecific individual needs.

Gavsie: Multi-bank platforms andaggregation arrangers have gainedmomentum. However, manysingle-bank platforms continue toprovide very tight, competitiveprices to all market segments withno associated usage fees. In thefuture, multi-bank platforms willundoubtedly gain wideracceptance - it is simply a matterof time, reliable technology andmost importantly cost. In themeantime, clients of varying size

and trading volume are enjoyingtransparent prices from multiple,single-platform providers. If oneprovider fails to show consistent,tight prices during regular tradingand event-driven volatility, usershave the ability to log-intoanother bank’s platform.

O'Flaherty: I have commentedbefore that single bank systemslike autobahnFX and multibankportals can exist side-by-side. Theyeach cater for different clientneeds.

Hoffmann:The eFX market hasmuch evolved during the past fewyears and has become verydiversified in its offerings. Therehave been some significantevolutionary milestones. The co-existence of single bank portals formarket user banks alongsidemulti-bank portals for corporateclientele is nowadays the norm.Each market place handles its owndemand for client focused service.Amongst corporate clients, multi-bank portals are the tailor-madesolution, where as in the market-user bank business single bankportals have their dedicated

e-FOREX : ROUNDTABLE

Single bank platforms:still an unrivalled value proposition?


With Peter Hagenauer, Head ofeCommerce Applications &Technologies, Markets, ANZInstitutional, Lorne Gavsie,Director, Foreign Exchange,BMO Capital Markets, IanO'Flaherty, Global Head of e-Commerce, Foreign Exchange,Deutsche Bank, KlausHoffmann, Global Head ofForeign Exchange and PreciousMetals at Commerzbank andEddie Wen, Global Head of FXe-Commerce at JP Morgan.

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clientele. Market user banks havealso rediscovered the importanceof bilateral relationships, withsingle-bank portals serving theirspecific demands much betterespecially under this aspect.Market user banks basically chosethe platform which fits most theirbusiness model, based on theirexisting relationships.

Wen: Many banks have been ableto effectively differentiatethemselves with their single dealerofferings. Whether it is pricecompetitiveness, post/pre tradeservices, prime brokerage, orderprocessing, research, or depth ofproduct offerings, single dealerplatforms have excelled in theseareas making them an attractivechannel for customers.

In what ways do you think thevalue proposition of single bankplatforms has strengthened overthe last few years ago?

Hagenauer: The value propositionof single bank platforms has beenstrengthened over the last fewyears by both product extension(for example FX derivatives) andalso by providing greater depth toexisting transaction flows. Overallsingle bank platforms are makingbetter use of the information intheir core systems by exposing thatinformation to the client frontend. Additionally, banks arelinking products and servicesacross various core systems toprovide targeted solutions todifferent client segments.

Gavsie: Electronic bank platformexecution in its basic form enabledprice-takers to transact outside ofthe interbank dealers and brokers,providing direct access to on-demand prices at the click of abutton. Over the past few years,connection latency is less of anissue, allowing platforms to streamand update prices faster and more

reliably than in the past. This hasresulted in more consistent priceavailability to price-takers duringevents (CB announcements,economic releases, etc.), therebyincreasing dependability of singlebank platforms.

O'Flaherty: Single bank platformshave traditionally appealed to abroader base of clients thanmultibank portals have. AtDeutsche Bank, our efforts areconcentrated on producingproducts and functionality thatmeet our clients’ needs. What hashelped strengthen the valueproposition of the single banksystems? A wider range ofproducts available, theintroduction of client to clienttrading, deeper liquidity, tighterprices and greater flexibility ofexecution have all meant singlebank platforms are almost a “musthave” on a client’s desktop.

Hoffmann: In the market-userbank business, single-bank portalsare the most capable of servingclient needs. Single-bank portalscreate and maintain an interactionbetween client and bank. Evolvingfrom daily business, furtherdevelopments are then directedorganically in the right direction.Solutions can thus become tailor-made for individual clientele. Oneof the keywords nowadays is the“Multi Asset Class Platform”.Clients are able to tradeCommodities, Fixed Income, FXand other products on the sameportal; one-stop shopping is moreand more the name of the game onsingle bank platforms. The abilityto react to the needs of a specificclient has been another keydevelopment over the past years.These developments have broughtthe rudimentary first portals alongway to the present day highlyaesthetic and practical GraphicalUser Interface. This is why we at

>>>


Peter Hagenauer“The value proposition of single bankplatforms has been strengthened over

the last few years by both productextension (for example FX derivatives)and also by providing greater depth to

existing transaction flows.”

Lorne Gavsie“Nowadays, clients are far less tied toparticular counterparties due to prime

brokerage arrangements and platform accessibility”

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Commerzbank, have decided todevelop our own portal.

Wen: Single bank platforms haveevolve remarkably in the past fewyears. They have been able to offerthe tightest bid-offer spreads evenrelative to ECNs and othermultidealer portals. Furthermore,the product innovation cycle ismuch shorter for bank platforms.Whether it is the creation of newfunctionality, products, screendesigns, liquidity controls ORpricing tiers, the single bankplatforms have always been at theforefront of some innovation, whichsome consortiums or exchangeshave been slower to introduce.

Have any of the main factors thattraditionally influenced a clients'choice of FX trading venue in thepast significantly changed and ifso, what impact has this had onsingle bank platform providers?

Hagenauer: Key differentiatingfactors in yesterday’s single bankplatform are now mainstream.Most single bank platforms todayshare the same core features centredaround pre trade (research, analysis,portfolio / outstandingsinformation, price discovery) trade(deal, negotiation, order placement)and some post trade (usually STP)activities. Clients of single bankplatforms are looking for banks todeliver greater functionality inorder to achieve increasedproductivity gains. This includes astrong client service proposition,greater alignment to the clientbusiness process flow to allow formore efficient business execution aswell as stronger post trade support(including STP to payments,ability to revalue portfolios andaccess to risk reporting).

Gavsie: Traditionally, clientsselected their FX providers basedon credit availability, dealer

relationship, price consistency, andpost-deal processing. Nowadays,clients are far less tied to particularcounterparties due to primebrokerage arrangements andplatform accessibility. Prioritiesfor platform users now includeease of execution, electronicconfirmation process, straightthrough processing, liquidity &consistency in price and finally‘freeze-time’ and bid/offer spreadduring economic or event risks.

O'Flaherty: The barriers to enterthe e-FX market have reduced inrecent years as technology hasimproved and become more costeffective, this means clients havemore choice in what system orsystems to take with lessoperational risk if they don’tchoose wisely. This has meant thatthe single bank systems likeautobahnFX have had to raisetheir game and ensure they meetthe needs of their clients. Therehas also been a huge increase inthe numbers of intermediaries or“middle-men” that use new feebased technology to reach out to agrowing client base, providingthem with execution tools, but notholding any market risk, justclient risk. This has meant there isa whole new client base that haslittle or no relationship with thesell-side liquidity provider. Ibelieve this has led to the singlebank liquidity providers being alittle more selective on where theirliquidity ends up.

Hoffmann: Professional clientsdemand tailor-made solutionswith a comprehensive focus ontheir daily business. In the past,the sales person and theinterpersonal relationship madethe difference. Nowadays the salesperson is still the main drivingfactor in this relationship, butwithout the necessary tools thesalesperson is no longer able to



Klaus Hoffmann“Professional clients demand tailor-made solutions with a

comprehensive focus on their daily business.”

>>>

Ian O'Flaherty“I believe electronic trading of products is like a conveyor belt

that just keeps moving along with no sign of abating.”

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compete. This shows us howimportant single bank platformofferings are for banks and for theclients. So although in general wecan say none of the overall factorsin a client relationship have reallychanged, the way the client likesto execute his business has nowchanged towards as muchautomation as possible. A clientrelationship covers manyperspectives of the business. EFXis now one element of this, butone of the most important.

Wen: Nowadays Clients expectmore from banks and theirplatforms. Whereas in the pastthe offering of tight bid-offerspreads, consistency and highavailability were the hallmarks ofexcellence, the future demandswill be even greater. This willforce banks to rethink how theyleverage their electronic dealingcapabilities. Is it just a tool forcustomers to trade or will itbecome a conduit from whichthey will form partnerships withtheir customer community?

Will single bank platformscontinue to be focused towardssupporting a relationship-basedtrading model or can you seeproviders extending the scope ofplatforms to attract a widerspread of customer typesincluding model based and highfrequency clients?

Hagenauer: Ultimately, a bank’splatform is a delivery channelwhich is part of the overall bankstrategy and its client serviceproposition. On this basis, bankswill provide a technology basedsolution where it makes sense, thatis, where the service propositionrequires reach, scalability, highavailability and cost efficiencies.In the past this has been targetedat the relationship based clientsegment. Given the general

acceptance of the FIX protocol,which supports speedy and costeffective connection betweencounterparties (B2B, B2C), thereis no doubt that platforms can beextended to accommodate a widerspread of client types. Where thatstrategy involves technicallysophisticated counterparties, itbecomes vitally important that thebanks’ supporting infrastructure –price sourcing and construction,liquidity and risk managementand algorithmic capability - areleading edge.

Gavsie: Corporate clients willcontinue to support theirrelationship syndicates, but willinsist on technology and pricesavailable via multi-bank platforms.Multi-bank platforms are bestsuited for model-based and highfrequency users because priceconsistency and platform stabilityare of optimal importance,whereas access to marketinformation and daily contact arenot priorities.

O'Flaherty: I think it is worthexamining the term “relationship-based”. A relationship can meanhaving our single bank platform, asalesperson at the end of thetelephone, research on tap and tohave a trusted advisor to helpmake your business moreprofitable. A relationship can alsomean liquidity and tight spreadsand nothing else. In this context,we will continue to strive toensure autobahnFX can touch aswide an audience as possible.

Hoffmann: Single Bank platformsare a part of a relationship orprobably one of the mostimportant elements or serviceswhich banks can offer to theirdedicated clients.The portal is atool that enables our dedicatedclients to handle their business ina modern and efficient way.

>>>



Peter Hagenauer“Given the general acceptance of the FIX protocol, which supports

speedy and cost effective connectionbetween counterparties (B2B, B2C),

there is no doubt that platforms can beextended to accommodate a wider

spread of client types.”

Eddie Wen“Whether it is the creation of new

functionality, products, screen designs,liquidity controls OR pricing tiers, the

single bank platforms have always beenat the forefront of some innovation,”

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There are ongoing developments inall major banks to monitor all theresulting flows closely, to ensure thatthey are able to handle their clientbusiness correctly. If the businessmodel is to achieve the largestmarket share, than it is absolutelynecessary to expand the scope ofyour trading platform into themodel based on high frequencytraders, and thereby accepting allpositive and negative aspectsresulting out of this model. There isanother large market segment that isalso a target for some players, whichis the retail area and one whoseimportance cannot be downplayedin the market. The volumes seen inretail are quite significant andinteresting. We at Commerzbank,however, believe in a relationshipdriven approach in our e-business.

Wen: Single bank platforms willcontinue to evolve and adapt todifferent client’s needs. Theservice levels will vary dependingon the type of clients and theirtrading styles. Many single bankplatforms have learned thatshowing deep and tight liquidityto the high frequency models maybe loss making proposition, butshowing them an interest-onlyfeed may be a good way to sourceliquidity from this customer base.

Do you expect to see substantiallyincreased demand for trading ofmore complex instruments suchas currency derivatives via singlebank platforms and if so, is thislikely to be driven by the buy-sideor sell-side?

Hagenauer: As products becomeincreasingly traded across both thesell and buy side they becomestandardised and thuscommoditised, with greatertransparency resulting innarrowing spreads and margins.This encourages a move toplatforms for both trading and(then) distribution. We have seen

this cycle evident across FX (spot,forwards, swaps, NDFs etc)commodities, and rates (cash,commercial paper, fixed incomeand IRS). It is only logical thatthe more “complex” products suchas currency derivatives follow thispath. The growth in the eFXoptions market is being driven byboth the buy and the sell side.On the buy side, participantsinclude corporates, non marketmaking banks, asset managers andhedge funds. On the sell side,growth is rising but the mainplatforms utilise a combination ofelectronic and voice trading.

Gavsie: The market in general haswidely embraced electronic tradingin spot and forward FX. The nextstage of e-dealing is undoubtedlycurrency derivatives. However, thespeed at which the market enablesthis next phase is more dependenton user sophistication anddemand for structured FXderivatives as opposed totechnological capacity.

O'Flaherty: Clearly the mainconduit for this will be clientdemand. There is no pointpushing products that clients don’twant. That said, I believeelectronic trading of products islike a conveyor belt that just keepsmoving along with no sign ofabating. Many of the productsthat are now consideredmainstream were not available“online” in the recent past and Iam certain that other products willbe available in the coming monthsand years. They appear on theconveyor belt once they havebecome truly commoditised andliquid, as electronic distribution isthe only scaleable way to provide aservice to clients.

Hoffmann: A decade ago nobodyreally expected to see the nowhuge success of e-trading


>>>e-FOREX : ROUNDTABLE

Lorne Gavsie“As technological development takes

hold across all financial markets,model-types are increasingly looking at

cross-asset class execution capabilities.”

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platforms in the plain vanillabusiness. Nowadays it is a musthave for all banks.We see a similardevelopment coming up for morecomplex products. As we haveseen over the years, the trend hadalready begun with plain vanillaFX Options and than moving tothe most Exotic. We should expectthat this trend on the single bankportals will continue over the nextyears in Interest Rates and also inCommodities. On the FX side thetrend into more complex optionstradable over platforms willcontinue. In my opinion it isdriven from both sides, from thebuy side and the sell side. Withclients requesting these products,banks are more than happy todistribute them over the mostefficient way possible.

Wen: The more complexinstruments generally requiregreater technology investments todevelop a robust offering. In thepast, the lower hanging fruit hasbeen the cash products, thus wheremost of the investment have beenmade. I believe that banks thathave enjoyed early success withcash products will be devotingmore resources to develop orextend their derivatives tradingcapabilities with their on-linesystem. But the uptake will alsorequire greater willingness by thebuy-side to gradually use more on-line option systems for dealexecution.

How much demand is there forcross-asset class trading onsingle bank platforms and whereis it coming from?

Hagenauer: There is demand forcross asset class trading on singlebank platforms, particularly fromthe medium to largecorporate/institutional marketsegment, which is an importantsegment to the ANZ. Clients in

this segment have both an FXexposure (either import or exportor both) as well as rates exposure –usually as part of a liquiditymanagement programme. Thisincludes cash as well as short datedsecurities investments. Banks havetraditionally handled thisrequirement by offering “singlesign on” capability which permits(seamless) access to differentunderlying platforms. However, asmentioned before, there isrecognition that buy side solutionswithin this segment must includea strong client service propositionwith greater alignment to theclient business process flow. As aresult, single bank platforms willneed to provide “true” cross assetclass capability, most likelydelivered by loosely coupledservices based architecture. Theinteresting opportunity within thisservice proposition would be toincorporate a debt management(including hedging) capability insuch a platform.

Gavsie: The demand for this newformat is quickly building and isone of the more excitingdevelopments in FX trading today.As technological development takeshold across all financial markets,model-types are increasinglylooking at cross-asset classexecution capabilities. It is excitingbecause it presents the opportunityto increase FX dealings with non-traditional counterparties. Bypositioning ourselves as a bank thatcan change readily with the times,and specifically as early adopters ofthis new trading area, we are betterequipped to advise and partnerwith our clients.

O'Flaherty: Cross-asset tradingwill appeal to a subset, albeitimportant subset, of our clientbase. In 2007, we embarked on aproject to integrate our electronictrading platforms under one


Ian O'Flaherty“the outlook for single bank platformslike autobahnFX looks good as long asthey can continue to deliver services to

their clients in a cost efficient andinnovative manner.”

Klaus Hoffmann“The key drivers behind the evolution

of single-bank platforms will berelationship, liquidity and further

product developments in thefinancial markets.”

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>>>

autobahn umbrella. We now haveFX, FI, Equities, Money Markets,Futures & Options and StructuredProducts all under a single login,tradable from the desktop. We seedemand growing in this spacefrom a variety of client segments,from CTAs to Asset Managers toCorporates.

Hoffmann: The demand forcross-asset class trading is growingday by day. The momentum ofthis trend is definitely comingfrom buy-side players like asset-managers and hedge funds whichare the main drivers in trends ofcross-asset class trading. On theother hand privateindividuals trading onplatforms are another groupof demanding customerslooking for multi asset classproducts. All of them are ingeneral looking for a one-stop-shopping solution, andhave no interest in having anumber of platforms on theirdesk for trading differentproducts.We believe that thistrend will grow in the future.There is huge potential for thestreamlining of trading business inall asset classes.

Wen: Some retail or speculativeclients may have interests intrading across different assetclasses. But a substantial part ofthe traditional bank customer basestill tends to specialize in a singleproduct. Even for funds that tradeacross multiple assets, theexecuting trader tends to beseparate individuals for differentproducts. However, from atechnology cost sharing and brandbuilding perspective, there arestrong compelling reasons todevelop cross-asset trading onsingle bank platforms.

In terms of product innovation,where do you think providers will

be focusing their efforts in thenear term to improve andsafeguard the futurecompetitiveness of theirplatforms to cater for the nextgeneration of clients?

Hagenauer: Ultimately, a bank’splatform is a delivery channelwhich is part of the overall bankstrategy and client serviceproposition. Banks willconcentrate on product innovationacross their platforms where itsupports that strategy, so it will bedifferent for different banks.Generally speaking, we are seeingstrong trends in the developmentof structured product distribution

(for example deposits withembedded optionality). Serviceinnovation will also be a key factorin the near term to safeguardfuture competitiveness of singlebank platforms. Key to this is theflexibility to cater to differentsegment needs and business flows.

Gavsie: There are very few low-cost multi-bank platformsavailable, I think over the comingyears this will become a morecrowded space, with more servicesto choose from, at lower costs.On single-bank platforms,resources will be focused on theservice side of the dealingrelationship. Single and multi-bank platforms are still verysimplistic from a user’s perspective– improvements will be made inthe area of research accessibility,short and long term technicaltrade idea generation, and back-end processing.

O'Flaherty: Whilst refrainingfrom giving away our 2008 and2009 deliverables, I can say, thatgiving clients more tools toenhance their returns or efficiencyin operations will be part of ourfocus.

Hoffmann: As mentioned already,we expect currency derivatives andstructures to be one of the mainstories of the future. In terms ofmulti asset thinking, the lessdeveloped product areas on thesingle bank platforms are InterestRate Derivatives andCommodities. I can imagine thatin the future there will be a lot of

development especially inthese two areas. The aimwill be to automate as muchas what we see today on theplain vanilla FX business. Inall of these developmentsthere is one importantfactor we must all take careof and bear in mind, that isto make the platform as

easy to use and as simple aspossible. Banks will also investinto and develop their owncapabilities to handle the flowsfrom their platforms in anefficient way. Using the liquidityfrom proprietary platforms in themost efficient way is a key tosuccess in e business.

What key drivers within the FXmarket are likely to shape theevolution of single bankplatforms over the next fewyears?

Hagenauer: Productcommoditisation and connectivitywill be key drivers over thecoming years. Commoditisationis a recurring theme in financialmarkets and as price transparencyincreases and costs rise, we wouldexpect to see electronic platformstaking an increasing share ofoverall market turnover, both inproducts that are currently

Single bank platforms: still an unrivalled value proposition?


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Eddie Wen“banks that have enjoyed early

success with cash products will bedevoting more resources to develop or

extend their derivatives tradingcapabilities with their on-line system.”

delivered electronically and thosetraded by voice. Connectivitysupported by FIX will make forinteresting times ahead. In thepast, bank connectivity to thesophisticated buy side has beenhindered by the bespoke nature ofconnection, making it anexpensive and lengthy process.The widespread use of FIXpromises to make connectivityspeedy and cost effective, yet againdemonstrating that technologywill continue to challenge allparticipants in the eFX market.

Gavsie: Electronic dealing capacityhas inflated FX trading volumeexponentially, as witnessed by thelatest BIS survey. The current,increased liquidity levels are real,but are hugely reliant on electronicplatform trading – anyinterruption to price availabilitywill precipitate unwelcomedvolatility. The concern amongseasoned traders is the impact onliquidity during a market crisiswith platforms sharply widening,or even halting live prices (as seenin August 2007). This is whererelationships become paramount.I believe client-dealer and dealer-dealer relationship building will beback in vogue – which arguably isalready in the works as witnessedby the overwhelming use ofinstant chat tools, already popularfor information sharing.

O'Flaherty: Creating efficiencyand enhancing returns are whatour clients crave at present. But inthese difficult times for the capitalmarkets our clients want security.They want to be sure that theyhave relationships with institutionsthat are there for their businessesnow and more importantly in thefuture. This means that clientswant relationships with theirbanks. They are happy to givethem business, they are happy touse their electronic systems as longas it works for both parties. I

believe the outlook for single bankplatforms like autobahnFX looksgood as long as they can continueto deliver services to their clientsin a cost efficient and innovativemanner.

Hoffmann:The key drivers behindthe evolution of single-bankplatforms will be relationship,liquidity and further productdevelopments in the financialmarkets. Just as over the lastcouple of years the relationshipfactor has made a comeback. itwill definitely be on the agenda inthe future. In the market-user-bank business this will be a keydriver along with the rest of thebuy and sell side package. Withthis situation and scenario, IT andproduct developments will groworganically out of the feedbackbetween buy- and sell-side, thustaking the development of singlebank platforms in the rightdirection.Liquidity is another issuethat will push every single bankplatform provider to be morecreative in terms of handling theirflows and pricing on theirplatform. As the financial marketsand investment banking havealways been quite creative indeveloping new products, this willbe yet another area which will leadto new developments at somestage.

Wen: How the liquidity pools willevolve in the coming years willhave some impact on single bankplatforms. The concept of a singleexchange may seem very far fromreality. But perhaps the singleexchange is really about liquiditybecoming decentralized intonetworks of connections acrossmany different ECNs and softwaresystems. Will single bankplatforms be viewed as a liquiditysource as well? Or willproliferation of API connectionschange our definition of what asingle bank platforms means?

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FOCUS


Electronic CurrencyDerivatives:prospects for the future

Last year GFI Group tookthe decision to open up itsinterbank options hybrid

trading system, ForexMatch, toselected hedge funds, bringing tothe FX market the closest it has toan ECN. Evgeni Mitkov, manager,electronic trading, at GFI Groupsays that technology gains inrecent years have made it possibleto trade options electronically, inreal time. The key driver ofgrowth in electronic trading is thedemand for a liquid multi-contributor electronic FXderivatives market, similar to spot,from traders.

Mitkov says: “FX options growthhas been restricted by the lack oftransparency and phone execution.There have been swift increases involumes and renewed interestfrom participants that haveshunned or under-traded themarket because it was not tradedelectronically. Naturally hedgefunds and banks that are looking

to grow their FX options businesshave been the major driversbehind the trend. As with FXspot, the early adopters are alreadyreaping the benefits and are aheadof the curve.”

He believes that most of FXderivatives have come of age nowand are considered commoditised.For this reason GFI is puttingspecific FX options online, and

Frances Maguire asks if the FX industry will ever successfully trade FXoptions electronically or if the hybrid model is here to stay.

Francis Maguire

The hotly contested debateover whether electronicoptions can ever truly betraded electronically, withoutthe need for any telephonenegotiation, is continuing assome in the industry are justgetting on with moving firstgeneration and the morevanilla options on to thescreen and letting time, andfast-moving technologicaldevelopments, take theircourse in enabling morecomplex products to slowlymove away from the hybrid model.

Evgeni Mitkov “FX options growth has been

restricted by the lack of transparency and phone execution”

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Mitkov believes complexity is nolonger the issue. “As soon as theinterbank had electronic trading,hedge funds wanted to be in thatmarket. With access to electronictrading in options, hedge fundsand smaller banks can now play ina market that required significantheadcount in the phone era. Theestablished banks have also usedthis to leverage more their traders.”

He says that first and foremost,the buy-side is looking for a multi-contributor transparent platform,where it can trade options just likeFX spot or equity options –something that was not availableto buy-side firms only 6 monthsago. “FX option pricing is helpfulon a platform and it eliminatesdouble entry. Risk managementhas remained on the client side orprime broker side,” he says.

Algorithmic trading

According to Mitkov, the sameplayers using algorithms to tradeequity options are already re-tooling their models for FX

options. “Several banks have beenworking hard on their algo modelsto stay ahead of the pack and theirefforts are starting to pay off.Capital requirements are intensivefor long-dated options, so expectmost of the action to be in thesub-three-month tenors. Thepopularity of FIX not only in spotbut in equity options has made itvery easy for new participants toenter the FX option market.”Mitkow puts the success of thehybrid-trading model for FXoptions down to the volatility inmarket conditions where voicebrokers excel at bringing marketparticipants together. But, he saysthat voice brokers at GFI haveactually been the driving force inpushing the electronic platformand helping traders migrate theirtrading electronically. “This waythey can service the existing clientsbetter, service a bigger client base,and trade more sophisticatedproducts by voice.”

Now that electronic trading of on-the-run options is picking up

speed on ForexMatch, specificinterest in vanillas is the nextmarket that will go electronicwithin the next month. “Thegrowth potential for vanilla FXoptions, forwards and crosscurrency basis swaps is the same aswhen spot went electronic. Thereally complex products are notgoing electronic anytime soon,because of the bilateral nature oftrading”

GFI Group is also gearing up forthe commercial launch ofFENICS Enterprise later in 2008.It is already installed in a fewbanks to enable them to price andrisk manage FX options andprovide straight throughprocessing for FX options. RichardBrunt, global head of sales for dataand analytics at GFI Group says:“Banks already have elements ofwhat will be known as FENICSEnterprise and the new elementsare trading, client reporting andimproved straight throughprocessing, alongside FENICS'proven abilities in pricing and riskmanagement, to help banks tostreamline processing and lowerthe cost of trading through furtherautomation.”

Exotic FX options

Credit Suisse began offering theability to trade structured exoticFX options on its new internetplatform, Merlin, in Q3 last year,enabling banks to structure, priceand execute complex, multi-leggedexotic option transactions online,manufactured from vanilla optionsand a wide variety of first andsecond generation exotic options.

Richard Elliott, director, FXoptions e-commerce, at Credit

>>>


ForexMatch


Suisse says: “There are certain partsof the market where electronictrading benefits both us and theclient and in these areas we areincreasingly looking to provide ourclients with electronic access to ourpricing and execution capabilities.There are clearly still some areaswhere this is difficult to do, whereit is not appropriate and wherethere is no demand.”

One of the key benefits of theMerlin platform is the ability tospecify a complex trade once, andthen it can be used by customer,sales person and trader without itbeing re-keyed, saving a great dealof time. Says Elliott: “We handlethe full range of vanilla and firstgeneration exotic options and ourMerlin platform enables users topick-and-mix these trades and puttogether an arbitrarily complexstructure. Subject to a set of deal-ability checks, the platform willgenerate a deal-able price andallow execution the entire stripwith a single click.”

The platform generates a dealableprice automatically before givingthe client the ability to execute thetrade online, providing more speed,transparency and direct control ofthe transaction for clients. Theplatform has already auto-executedstructures of exotic optionscontaining over 150 legs, and isbeing used by participants acrossthe industry from wealth managers,to counterparty banks, to funds.

Elliott says: “The first stage is tobe able to create the structure ofthe deal, easily and quickly, andthen crucially to be able to get adeal-able price, without having tospeak to a salesperson. Often

when a user is putting these dealstogether they are trying outdifferent features and repricingconstantly. It is very inefficient ifthey have to get back to a salesperson with each change,particularly when they want toexperiment and see what thesedeals really look like when itcomes to execution. Giving theoption to execute on thesedealable prices is the keycornerstone for Merlin’s success.”He adds that the hybrid modelwill continue to be used because itis not always possible to calculatea dealable price without someinteraction from a trader. This isparticularly true in the moreexotic space where producingdealable prices can be complicatedand where there are circumstancesor transaction features that requirea Credit Suisse trader or structurerto make the price.

“And clearly there are someproducts that are too complex tobe able to generate a dealable pricequickly and that are complicatedto hedge when it comes toexecution. But there are a lot ofsecond generation products thatcan go electronic and the samebenefits apply – such as the ability

to look at basket options oraccumulators and get a dealableprice, experiment with thetransaction features and ultimatelyexecute,” he says. Credit Suissewill be adding second-generationexotic options to the Merlinplatform later this year.He believes the platform isenabling Credit Suisse to serviceits clients better. The evidence isthat clients are requesting moreprices electronically than they everdid over the phone. Also, some ofthe first generation products arebecoming more commoditised andso naturally should move to amore efficient platform, which ispartly a function of the availabilityof electronic platforms.

David Perkins, managing directorand head of Tullett Prebon’selectronic broking division forEMEA, says that the broker hasrecently increased its focus onelectronic broking. “Theheightened interest in electronicbroking is due to many factorswhich include; client demand,efficiency gains and greaterscalabilty than a pure voicebroking model. Additionally, interms of regulation, tradingelectronically produces audit trails

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Merlin


and the use of STP not onlysupports this requirement but alsoimproves our clients work flows”.

Tullett Prebon has built anelectronic trading platform for FXoptions, which, since November,when Perkins joined with a teamfrom ABN Amro, has seen a

dramatic increase in screenliquidity and subsequent tradedvolumes. He says: “Tullett Prebonhas such a strong franchise, we arethe number one voice broker inmany markets, that it is importantthat this market position is alsoreflected in our electronic business.Part of our strategy centres arounda re-branding exercise, for all ofour global electronic platforms,which are either live already or arein development.”

A Live Hybrid model

The FX option platform inEurope, tpTRADEBLADE, isTullett Prebon’s first rebrandedproduct. One of the mainadvantages Perkins believes TullettPrebon has over its peers is that itselectronic broking strategy iscomplementary to the voicebusiness. “We see this as being veryimportant. The electronic platform

for FX options has been developedin conjunction with the voicebrokers so that they can leveragethe screen liquidity to improvetheir overall business. It is verymuch a live hybrid model, and thisis why it is growing in popularitywith our users,” says Perkins.

“The whole tpTRADEBLADEmodel was designed inconsultation with many of the keyplayers,” adds Marcus Bolton,managing director of the volatilitydivision of Tullett Prebon. Hebelieves that the demand forelectronic trading in FX options iscoming from the continuoussteady increase in the number ofcurrency pairs being traded in thebroker market. “When you havethis many currency pairs, from G-7 through to emerging marketsand all the related crosses, there issimply too much information tobroke successfully using voice

Electronic Currency Derivatives:- prospects for the future


>>>

Demand for other exotic option structures

David Perkins “electronic broking strategy is

complementary to the voice business”


alone. There needs to be a way ofdisplaying electronically the vastrange of currencies and tenors thatcan be traded today,” he says.

Bolton adds: “Where there is a lotof interest and desire to close theprice, the voice broker attracts themarket’s attention to that fact, butthere also needs to be an elementof passive broking where theinformation is generally broadcast,via pages of electronic prices. Thisleaves the voice broker free toaddress the exact points of activeinterest, where the probability oftrading is very high.”

Due to the diversity of products, theneed for both active and passiveinformation increases. Some usersjust want to know what is availableso they can structure a product,while the flow desks areconcentrating on the active dealsthat are going down on a minute-by-minute basis. “This is why thehybrid model is essential, becauseyou can address both sides of themarket simultaneously,” says Bolton.

Multi-leg trade execution

Another important reason for thedevelopment of electronic tradingis the growing demand fromclients to be able to execute multi-leg trades at the click of a button.These trades are virtuallyimpossible for the voice brokers toexecute with the accuracy andspeed of an electronic platform.With the inevitable informationoverload generated by thesesystems comes an understandable

demand for aggregators, but,according to Perkins, it is too earlyfor an aggregator, or an ECN, forFX options.

“If you look at one of the extremepoles of commoditisation, spotFX, the fact that voice brokers stillexist indicates that there is somefundamental reason why pureelectronic may dominate but willprobably never be the onlysolution,” says Bolton. Even inhitherto transparent and well-supported markets, when liquiditycrunches occur customers do notwish to have their hand shownindiscriminately to the market.“Control of the market to ensureorderly execution of a trade atsuch times is very difficult on anelectronic platform and in theshort to medium term I cannotsee any way in which voicebroking could be completelyreplaced. In addition there willalways be illiquid parts of themarket that cannot be executedwholly electronically, withoutvoice.”

Perkins adds that while the bigbroking houses embrace electronicplatforms as a leveraging tool tocomplement voice incommoditised markets, it is verysurprising how quickly othermarket possibilities develop. “Nottoo long ago you would not haveexpected such a breadth ofproduct or functionality to beavailable on-line. The benefit of agood and relevant electronictrading platform is that it allowsthe brokers to concentrate on themore interesting and esoterictrades where they can add morevalue.” He believes the majority ofhigh flow, low margin productswill be executed through thesystems and subsequently free up


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Marcus Bolton “I cannot see any way in which voice

broking could be completely replaced.”

tpTRADEBLADE


the brokers’ time to manage morebespoke solutions. “There ishistorical evidence of electronictrading improving the P&L ofbanks and bringing increasedrevenue growth to brokers byallowing them to do morespecialised trades with their clientsand letting the systems take thestrain on the commoditisedtrades,” he adds.

Graham Mansfield, managingdirector of Kalahari, pricingsystems provider, says that thehedge funds and the buy side aredriving the growth of electronictrading in currency derivatives.“Hedge funds like electronictrading because they can seeexactly where the market is, butelectronic trading is suited tocommoditised products, not FXoptions. Volbroker failed as a puree-trading platform for this reason,however it is now widely used as avery successful high breed in thatthere is electronic ticketing andconfirmations, along side voiceexecution,” he says.

While electronic currency tradingbrings straight through processing,

cuts costs and picks up errorsquickly, Mansfield believes it canonly really be used successfully forthe more vanilla products. “Itwould be very difficult to tradebarriers and knock-outs etcelectronically as there are often toomany parameters to deal with.Both parties would have to agreethe spot price, the FX Forwardprice, barriers, knock-in dates,knock-out dates before a deal couldbe completed electronically. A lotof this is done by the broker, with acertain amount of negotiation,which cannot really be done easilyon screen. More straight forwardproducts like futures, spot FX andbonds are the instruments thathave worked best electronically. Asfar as I am aware bonds options arestill traded OTC.”

Technology blurring lines

To a certain extent, Mansfield saysthat technology is blurring thelines between the buy and sell sideas the hedge funds now use thenames of their prime brokers totrade. In this way technology isbreaking down barriers inproviding anonymity, but thehedge funds will not go very farwithout funding from the banks,he adds. “There are less pure FXoptions funds, and hedge fundsare very likely to want to take thecredit risk on themselves.”

He stresses that if past successesare anything to go on electronictrading has only really workedwere there are only two numbersfor a buyer and a seller to dealwith, there is little or no creditrisk, and there is a goodunderlying market. For thisreason, he believes that one of theareas electronic trading mightflourish is for options on

exchange-traded FX futurescontracts particularly now withthe increased volumes in theunderlying Spot FX Contracts

One of the main difficulties in FXOptions going electronic is“Because they can be traded overany dates and not regular contractdates, whereas exchange tradedcontracts are standardised. As anexample forward rate agreements(FRAs) remain over the counterand brokered by voice whereas theunderlying futures areelectronically traded. This is whythe hybrid trading model willcontinue to flourish for FXoptions because this problem isnot going to go away and whilemarkets remain volatile it will bevery difficult to support a newlaunch. I am sure that it willhappen one day. It will most likelybe a bank initiative, similar toVolbroker, which was perhapsbefore its time.”

Alfred Schorno, managing directorand head of sales, at 360 TreasurySystems, says that buy-side usersthat feel comfortable with usingelectronic platforms for FX andmoney market products haveexperienced stable workflows andgood system performance butthere is a natural barrier stoppingthem from trading complexoptions products whollyelectronically.

The systems provider is seeinggrowing interest and tradingvolume in first generation OTCFX options from the buy-side.“Quoting and trading of liveprices is still the most commontrading mode for most of ourcustomers, but we also recordincreasing interest to trade onvolatility basis. Demand for higher


Electronic Currency Derivatives:- prospects for the future >>>

Graham Mansfield “It would be very difficult to trade

barriers and knock-outs etc electronically as there are often too

many parameters to deal with”


transparency and requests forautomated workflows and audittrails are the driving factor on thebuy side,” he says.

Schorno adds that the sell side issupportive of customer requestsfor OTC FX vanilla options, andafter some time of manual quotingthe growing volumes have ledsome banks to link in theirautomatic pricing engines forstandard vanilla option products.He also adds that FX futures areeasy adaptable to a technicallyflexible electronic tradingplatform, and that the electronictrading of currency derivatives hasthe potential to grow.

But while first generation optionsare traded on 360T’s platform andthe finishing touches are being madeto introduce second generationoptions within the next few months,Schorno says there is little demandto bring third generation options onto the platform.

Buy-side perspectives

But talk to the buy-side and itseems the debate has moved on –it is not so much about thetechnological advances but the

fundamental nature of the marketthey are looking at. Jenny Sullivan,a currency dealer at ABN AmroAsset Management, whichcurrently does not trade FXoptions, says that the marketcontinues to attract investors ofdifferent size, constraints and timehorizon which is fragmentingliquidity and making it harder toaccess. However, while she has seena recent shift in FX towardsmaking an increasing capabilityand access to liquidity available tothe buy side, she believes thegoalposts have moved and that it isno longer deemed adequate forbuy side traders to have access to afast streaming price platform wherethey are essentially price takers.

She adds that it is taken forgranted today that all platformswill be fast and have sufficientaccess to a certain amount ofliquidity. She says what the buy-side now want is ever deeperliquidity on platforms across allcurrency pairs in G10 andemerging market currencies, theability to trade using algorithmictools into dark pools, or directlyinto sell side price engines in thespot market, to be able to roll that

spot trade to a few forward datesfor hundreds of differentallocations, fixed connectivity toorder management systems,historical pricing data, dealerperformance and best executionreports and data capture. “And,last but not least, we demandoperational and downstreamefficiency. As far as I am aware,this platform does not yet exist!”

According to Sullivan, buy sidetraders are not only increasinglydemanding multi asset priceaggregation across multiplevenues, that has fixed connectivityto their order managementsystems, but now they also wantthe ability to interface with themarket in the same way that sellside traders do, and in ananonymous fashion. “Whilst thismay provide them with a widerrange of 'tools' to access themarket, this is not without riskand probably has implications forliquidity over the medium term -in very simplistic terms, the skillset required to be a 'price maker'is not necessarily the same as thatof a 'price taker',” she says.

But, as always, any real moves aremore likely to happen in the morecommoditised markets than theoptions market. As Credit Suisse’sElliott points out when askedabout the possibility of buy-sideinstitutions entering the market asboth price maker and price taker:“One of the features of offeringliquidity in the options market isthat the risk tends to hang arounduntil expiry. So providers need tobe committed to running anoptions book. This makes theblurring of the lines between buy-side and sell-side less likely than inthe cash market.”


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Alfred Schorno “Demand for higher transparency

and requests for automated workflows and audit trails are the

driving factor on the buy side”

Jenny Sullivan “no longer deemed adequate for buy side traders to have access to a faststreaming price platform where they

are essentially price takers.”


119 Tullett Ad 18/3/08 19:59 Page 1

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Technology:opening up exchange listed FX products to new breeds of trader

In the absence of a centralisedmarketplace for the FXmarket, the derivatives

exchanges have long since set theirsights on attracting FX businessand are designing productsaccordingly. The natural fit of FXtrading alongside equity and fixedincome derivatives means thatthey are gaining business fromboth new and existing players,further helped by the fact that, onthe retail side, FX options cantraded through the same brokerageaccount as stock options.

David Schulz, director, ForeignExchange Products, at CMEGroup says the exchange’s FXproducts began tradingelectronically in April 2001 andhave become a must have pool of

liquidity averaging nearly $110billion notional daily in the first halfof March. “We are constantlystriving to add new marketparticipants with algorithmictrading models streaming prices intothe CME Globex® platform. We areconstantly improving the speed ofexecution times, currently about 12milliseconds per transaction. Thecost of trading has droppedconsiderably for retail traders whohave access to the same liquiditypool as institutional investors.”

As a global exchange providingaccess from more than 80countries, Schulz says there areseveral common regulatory hurdlesto be overcome. For example, somecountries do not allow residents totrade offshore products. “Indeveloping new FX products, it iscrucial to work closely with thatcountry’s central bank andgovernment agencies to ensureyour products add credibility tothe monetary policy. A particularcountry may offer a similar futures

contract with a smaller or largernotional value and by adding yourcurrency contract to the tradingcommunity it ensures liquidity andtransparency to all marketparticipants.”

Improving technologyinfrastructure

Schulz says that CME Group isconsistently using state-of-the-art

Frances Maguire looks atwhether the exchanges aresucceeding in attracting bothretail investors and quantfunds to trade FX on-exchange.

David Schulz “the exchange has cut response time for FX products by about 50 per cent,

bringing it down to about 12 milliseconds per transaction.”

120-124 126 128 Maguire2 Focus 18/3/08 20:00 Page 1

technology to support the growthof our customer’s trading demandsand already has the capacity toaccommodate a range of tradingstyles. He says: “CME Globex is avery sophisticated and scalableplatform and customers tell us it isone of the fastest, most reliableplatforms available today. Wehave customers around the worldand so we offer six trading hubs –five in Europe and one in Asia –that improve connectivity andprovide low cost access to CMEGlobex.”

FIX FAST, which reducescustomer bandwidth needs, is akey part of CME Group’s marketdata strategy as well as the basis ofa new industry standard for marketdata. This year alone, Schulz saysthe exchange has cut response timefor FX products by about 50 percent, bringing it down to about 12milliseconds per transaction.

According to Schulz retailinvestors are looking to tradecurrency products with areasonable notional size, forexample €125,000. The mostimportant component of trading isliquidity and a very tight bid/askspread. He says: “They need to beable to work the bid or offer andare allowed to improve the marketprice at their request.Connectivity is very simple byworking with the independentsoftware vendor or front-endprovider, approved or accepted bythe Futures CommissionMerchant.”

Attracting quantitatively driventrading firms

CME Group is also looking toattract hedge funds and

quantitatively driven trading firmsand has responded to theirspecialised requirements through anumber of solutions. Latencysensitive customers can use LNet,which provides a direct connectionto the exchange's fiber optictransport network.

Says Schulz: “This innovation is ofparticular interest to algorithmicand proprietary trading firms thatrequire speed and reliability intrading transactions, as well as tocustomers in Asia and Europe.Additionally, our DataMine suiteof products provide historical datathat allow high frequency tradersto back test their trading models

He also points out that CMEGroup’s FIFO, First in, first out,matching algorithm means a levelplaying field for all participants.“It does not matter if you’re a onelot trader or a large institutionalplayer; you have access to the sameprices” he adds.

Kris Monaco, director of newproduct development at theInternational Securities Exchange(ISE), says there was not a greatdeal of work the exchange had todo in terms of technologyinfrastructure to offer trading in anew asset class. He says: “Althoughthere were some factors specific toFX that we needed to build outprior to launching the product, wewere able to leverage quite a bitfrom our equity and index optionsmarket. There are also somegeneral technological advances weare making that are not specific toany product but will benefit ourFX market.”

He says that from a buy-sideperspective there were no

regulatory barriers as FX optionscan be traded from a brokerageaccount in the same way as equityand index options are traded.However, since ISE had previouslytraded only equity and indexoptions, the exchange did have tofile new rules with its regulator,the SEC, that specified criteria formarket makers in FX options.

Catering for a new class of FXmarket maker

“These rules allowed new marketmakers, who were not familiarwith ISE, to make markets in FXoptions at a fraction of the cost ofequity and index options markets.Making markets on the ISE is verydifferent from making markets inthe OTC space because it is muchmore advanced from a technologypoint of view. Market makers inequity and index options havevery complex quoting engines thatwere developed over many yearsand FX market makers will haveto adapt to the high speed tradingand particular features of ISE,”Monaco says.

>>>


Kris Monaco “Making markets on the ISE is very

different from making markets in the OTC space because it is much more

advanced from a technology point of view.”


The new class of FX marketmakers are charged a lower fee, fora certain amount of time, througha trading right, or license.Launched in April 2007, there arecurrently two FX market makersthat are actively quoting and threemore preparing to start in thecoming weeks. These are existingISE market makers, who havebuilt their quoting engines forequity and index options and haveleveraged their technology toinclude FX. Monaco adds thatnew market makers will take moretime to come on board as theyhave more preparation work to do.

“We are currently seeing a diversegroup of participants trade our FXproduct – both large orders andsmall retail orders. It is too early tosay how much is retail versusinstitutional as active retail tradersare trading large size and some

institutional traders are testing thewaters,” he says.

The contract sizes were madesmaller to focus on the retailinvestor without excludinginstitutional investors, and whileMonaco says that the spreads aregood, institutional investors stillneed to see more liquidity beforethey will feel confident, which hebelieves will happen as moremarket makers come to ISE.

The major six currency pairs aretraded on ISE currently, and theexchange is planning to expandthe product line to includeemerging markets andbenchmarks, which ISE willcreate, to enable trading inpackaged groups of currencies.

The exchange is also trying toattract firms that are either market

makers overseas or on specialistvenues in the US, such as thehedge funds and quants. Monacosays: “They are interested inmarket quality and will only comein when they see more tradingactivity, and yet they generate it.Beyond that, their main concernsare speed and new order types.”

To accommodate these firms, ISEallows them to co-locate theirtrading hardware in the samebuilding as ISE’s data centrethrough a service provided by thefacilities management firm. ISEalso offers a low-latency proximityservice through BT Radianz.“These firms are looking forcontinual improvements toexchange access, regardless of theasset class,” he adds.

He stresses that the exchange istrying to win new business bycomplementing the OTC market.“We never expected to takesignificant market share from theOTC market. We are not trying tocompete with our member firmsbut complement that activity. Wecame to a crossroads in theproduct design and decided tocreate products that would be newto FX participants, that were easyto understand, and that alsoaddressed the needs of retailinvestors. We chose this route todeliver a product that is attractiveto a wide range of participants andcomplements other FX productsthat are available.”

ISE believes the regulatorystructure it operates in was also anadvantage, and it enabled theexchange to reach a broaderaudience because investors cantrade exchange-listed products

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A new breed of FX trader!


through an existing brokerageaccount. Says Monaco: “BecauseISE is regulated by the SEC, asopposed to the CFTC, it was ableto list FX options under itsexisting regulation and make themavailable to investors who may notwant to open a futures account ora spot FX account.”

Philadelphia Stock Exchange(PHLX) has a subsidiary forfutures, Philadelphia Board ofTrade. It lists currency futuresthat mirror currency options onthe PHLX side -meaning theunderlying contract specs are thesame (10,000 currency units).These products are regulated bythe CFTC. As the SEC regulatesFX options, PHLX would needSEC approval for new FX options.

Daniel Carrigan, vice president,New Product Development, atPHLX says the exchange hasproven state-of-the-art technologythat combines streaming quotesfrom market makers with ordersfrom the major retail wire-housesto form a robust marketplace.

“A standout feature of PHLXtechnology is called ‘rapid Fire’which defines risk for liquidityproviders. In essence, a marketmaker can set defaults to have thematch engine purge all quotes ifhis maximum size is exhausted.What this means is for liquidityproviders that make markets or‘stream’ into several thousandoption classes, if they determinetheir risk should be limited togetting hit on 500 contracts at onetime, the PHLX match engine willremove all additional quotes theyare generating. Accordingly, themarket maker cannot get run over

by a truck if its technology goeshaywire and generates bad quotesat inferior market prices.”

Tailoring for Retail Investors

For retail traders, PHLXintroduced dollar-settled foreigncurrency options, aka ‘WorldCurrency Options’ January of2007. These products cover asmall amount of currency (10,000units) and are cash-settled atexpiration (in dollars).Accordingly, World CurrencyOptions marked for the first timethe ability for retail securitiesinvestors to trade the direction ofthe six major currencies.

Carrigan says that the hedge fundsare looking for high messagethroughput, confirmation of thatmessage traffic being received andacknowledgement by the exchange,risk management of confirmedtrades, risk controls to limittrading due to errant quote

pricing, single point ofconnectivity. “PHLX has organisedits telecom protocol whereby onepoint of entry provides access tothree markets: equities, options,and futures. As a result, firms canbetter manage their telecom costswith one connection versus havingto purchase and maintain multipleconnections.”

According to Andrew Wilkinson,senior market analyst at InteractiveBrokers, the launch of the PHLX’sWorld Currency Options serieshas been extremely successful. Hesays: “These currency optionsprovide retail investors with accessto an appropriately-sized contractusing dollar-based pricing. Becausethese options can be treated assecurities rather than futures, the

exchange has successfully managedto reach a wider audience.”

The attraction of exchanges

Richard A. Ilczyszyn, seniormarket strategist at Lind-Waldock,a Chicago-based subsidiary ofMan Financial, says that thebiggest attraction of the exchangesis the fact that they operateregulated markets, which does notexist in the FX markets, and thissecurity is winning them newbusiness. Ilczyszyn offers retailcustomers both the CME GroupFX futures and the SEF contractlisted on the USFE for thosetraders in the OTC FX market.

He says: “I prefer the combinationof the SEF for trading OTCaround the FX market and theCME FX contracts across allcurrencies for the opening hours,the contract sizes and theliquidity.”

The currency trading is newbusiness for Lind –Waldock.Primarily the business of Lind-Waldock is retail but its also has

>>>


Technology: opening up exchange listed FX products to new breeds of trader

Daniel Carrigan “PHLX has organised its telecom

protocol whereby one point of entryprovides access to three markets:

equities, options, and futures.”


some institutional traders tradingFX derivatives. He also adds thatthe new retail traders coming tothe exchange products for the firsttime are seeing a difference in thecommission being upfront, tighterspreads and better designedoptions products. “Unlike theOTC market where someone ismaking a market two to threepoints wide, our products at theCME are one tick wide. Themarkets are tighter, deeper in theeuro currency, trading 70,000contracts a day, which doesn’treally compete with the OTCbusiness if you look at theindustry as a whole, but they havethat guarantee,” says Ilczyszyn.

He says liquidity is good in all theexchange-traded contracts andtraders can go out by years and haveany market made on both theUSFE and the CME Group.“Liquidity and the cost are themain concerns of retail traders, andthe spot months in exchange

contracts can go out a couple ofyears if they want to set a coreposition in any particular currency.”

Retail traders are looking for speedand because all products are goingelectronic, it makes it easier forLind-Waldock offer this, in termsof risk management and execution.However Ilczyszyn says: “The onlydrawback is that the exchangeshave not quite mastered thepricing of FX options online, tothe same extent of stock options,but they will. We have systems thatcan calculate delta and wheretheoretical value is but wesometimes have to go the tradingfloor for the best price. Spreads canwiden quickly in volatile marketsbecause of the risk factor and thisis something that the systemscannot accurately calculate yet butwhen this comes the open outcrytrading floors will close.”

The US-based online retailbrokerage firm optionsXpress

began offering retail investorstrading in exchange-listed FXfutures and options as soon as theycame available. The broker offerstrading in listed products, such asfutures, options and mutual funds,in the US, Europe and Asia andspecialises in options trading.

Dan O’Neil, head of futures atoptionsXpress, says the brokeraims to offer retail investors accessto the same products asinstitutional investors byconnecting to the exchanges. Thebroker connects to ISE forcurrency options, approximately16 currency futures and options atCME Group, as well as US dollarindex futures, which trade at ICE.

O’Neil says “Investors are startingto see the value of trading anexchange-traded product, at aregulated exchange, following therecent spotlight in the press oncredit risk. Investors take great

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125 GFI Ad 18/3/08 20:01 Page 1

comfort in the fact that theexchange’s clearing house becomesthe buyer to every seller and theseller to every buyer. This removesthat question of creditworthiness.”

While he believes that CMEGroup currency futures contractsare perhaps a little bigger thansome retail investors would prefer,consideration has been given tothe contract size for the retailmarket as they are not undulylarge and are well suited to theretail investors.

O’Neill adds: “We are a lot morecomfortable with the brokermodel, rather than the dealermodel that exists in the spot FXmarket. We feel that exchange-traded currency futures offer ourclients a much better overalltrading experience because of theregulated marketplace, thetransparent pricing and the factthat currency futures are tradingalmost 24 hours a day,electronically. It is a competitivemarketplace as opposed to a dealer

model where the dealer may betaking the other side of the retailclient’s trades.”

Technology vendor initiatives

The fact that the technologyvendors are also connecting theircustomers to the exchanges for theFX products means that exchange-traded FX products look set togrow. FFastFill has connected toCME Group and ICE for FXfutures and options, using the FIXprotocol, and the vendor alsooffers connectivity to the ReutersDealing 3000 platform as well as anumber of FX spot and forwardsplatforms within the banks.Hamish Purdey, COO at FFastFillsays: “Co-location is important forFFastFill. We have our data centrein Equinix Chicago Data Centre,which is well regarded as the

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>>>

Dan O'Neil “Investors are starting to see the

value of trading an exchange-tradedproduct, at a regulated exchange,following the recent spotlight in

the press on credit risk. “


127 AthenaTrader Aegis Software Ad 18/3/08 20:02 Page 1

premier data centre in Chicago, toprovide very low latencyconnectivity to CME Group.ICE’s US hub and matchingengine is also in the same datacentre so in terms of proximityhosting we have some greatsolutions for our customers.”

Purdey adds that while theexchange protocols are different,there is more dependence on theexchange back-end technologythan the actual protocols. FFastFillis also fully conformed to theFAST FIX protocol, deployed byCME Group and developed inconjunction with the US equitiesexchanges.

“We have now got a number ofbank feeds, the futures productsand a virtual exchange, where wewill take multiple bank feeds andmerge them into one price feed, tooffer our customers a lot of FXfunctionality, “ he says.

Orc Software currently offers low-latency connections to threeexchanges offering FX products --

CME Group, ISE and PHLX – andexpects to complete buildingconnectivity to the US FuturesExchange this quarter. The vendoruses FIX to connect to CME Groupand PHLX and offers both FIX andthe ISE's proprietary protocol toconnect to ISE. The vendor iscurrently writing the USFE’sproprietary exchange protocol.

CME Group has alreadyimplemented FAST, for efficientlycompressing and uncompressingmarket data for distribution, andthis has improved latency and cutbandwidth requirements. FASTprovides a standardised way ofdistributing market data in anefficient way, and distributingmarket data has become the firstmajor application for the FASTstandard. Orc Software provides aFAST solution within itsCameronFIX offering.

Jesper Alfredsson, Orc's vicepresident of Trading Solutions saysthat many of the exchanges have

been struggling with the volumeof market data they need todisseminate to their customersbecause they use the FIX protocolfor order entry and execution, butuse a proprietary protocol formarket data. “With FAST they geta way to not only to provide anorder entry standard but a marketdata standard,” he says.

With FAST, it is estimated thatexchanges could cut theirbandwidth by 70 per cent,providing a massive saving ontelecoms costs for the exchangeand its members, while alsolowering latency.

Alfredsson also adds that thegradual migration of FX optionsfrom the trading floor to thescreen is also prompting greaterdemand for connectivity to theexchanges, especially the CMEGroup. He says: “A lot of the firmsused to be on the trading floor foroptions trading and are moving toscreen so they need an electronicsystem. We connect severalcurrency options market makerson the CME Group. Furthermore,the exchange has just launched anew initiative where you can quoteoptions on volatility rather thanprice and Orc is one of the fewvendors which supports these newcurrency instruments.”

With these initiatives and theexpectation that exchange-tradedoptions will eventually move tothe screen, the increased interest inFX products, and improvedaccessibility, looks set to make newplayers reconsider the exchangesfor FX.

FOCUS


Hamish Purdey “while the exchange protocols

are different, there is more dependence on the exchange back-end technology than the

actual protocols”

Jesper Alfredsson “many of the exchanges have

been struggling with the volume of market data they need to

disseminate to their customers because they use the FIX protocol fororder entry and execution, but use aproprietary protocol for market data.”


129 MIG Ad 18/3/08 20:04 Page 1

FOCUS


e-FX Options: Providing new profit and hedgingopportunities for Retail Investors

The retail FX market ismaturing and is now socrowded and competitive

that FX dealers have become acommodity, differentiated only bythe tightness of their dealingspreads. As industry competitionfurther narrows dealing spreadsand cuts deeply into profitmargins, the marketplace is ripefor a profitable new product. Theflexibility of customisation FXoptions bring, as well as theincreased trading opportunitiesthey offer, in both volatile andquiet markets, explain why thistrend looks likely to grow.Furthermore, FX options not onlyanswer the growing retail traderdemand for new trading strategiesbut they are more profitable thanconventional spot transactions andoffer dealers more trades overall.

Growing interest in options

Michelle Gibson, executivedirector of ABN Amro and headof marketindex UK, says theincrease in global risk aversion andincreased volatility in the markets

is driving the recent interest inoptions trading from retail FXinvestors looking for hedgingopportunities in uncertainconditions. FX options enableinvestors to hedge spot positionsor reduce the potential loss oninvestments for the cost of anoption’s premium.

Taking a self-directed approach totrading options needs sufficientcapital and can be riskier as there isgreater volatility in the portfolio.Managed accounts are becoming anincreasingly popular way of tradingoptions. Gibson says: “Managedaccounts have the advantage ofhaving pooled equity so often theyare more conservative about theamount of equity they commit tothe market at any one time lendingitself to a much more diversifiedportfolio. This may not suitindividuals who are more impatientor seeking instant results.”

Gibson says that traders consideringusing an API or automated model,to lower execution costs, willusually still

by Frances Maguire

The growth of electronicallytraded FX options by retailtraders, both over the counterand on-exchange, is alreadytaking off as moresophisticated retail investorslook for new trading andhedging opportunities. Inresponse, brokers and banksare rapidly developing e-FXtrading platforms that supportand educate investors aboutthe different products andtrading styles available, and FXoptions is being pitched as thefastest growing new revenuestream in FX.

130-132 134 136 138 Maguire3 Focus 18/3/08 20:05 Page 1

have to pay a charge for the APIpackage. She says: “This is notsomething that can be set up andleft to run on its own. Markets arenot static and models decay overtime so constant intervention isrequired to re-calibrate or inputnew market information into themodel. Another pitfall ofalgorithmic models is that theyoften focus on entry signals it isequally important to ensure exitpoints are identified in the strategy.”

Marketindex offers box options onthe major currency pairs. Theseare an innovative financial productbased on option pricing theoryand are primarily influenced bythe level of volatility expected inthe market.

Says Gibson: “Using a mouse overthe chart, a user simply plots anarea to either hit or miss. If theprediction is correct, then the useris paid the predefined successpayout. If the predication isincorrect, the user only loses thepremium. Premiums are definedby the user, and the payout successis calculated in advance of placingthe trade.”

Professional tools for Retailtraders

She adds that there are a host oftrading tools being provided bytechnology platforms that werepreviously the preserve of aprofessional trader. These includeportfolio tools, API and

algorithmic trading, pre and posttrade analytics, improved marketinformation and increasedtransparency leading to betterexecution quality.

“The marketindex ethos is centredon transparency and fairness. Ourplatform is fully automated frommarket making through tohedging. In this way we can treatall our customers fairly and in thesame manner. Regardless oftransaction size all trades areexecuted as soon as they arereceived by the server and theprice and spread are the same for aone or five million poundinvestment.”

Marketindex offers unlimited useof a demo trading platform, usinglive process, and is constantlydeveloping its traders ‘cockpit’ -- asegmented section within thetrading application to access realtime Reuters news, participate in atrading forum discussing strategiesand objectives with other traders,use enhanced technical analysistools such as news overlays andview the economic calendar.

Marketindex does not chargemonthly fees or commissions ontrades and offers the same spreadsto retail traders as institutionalinvestors, and provides technicalanalysts complimentary use ofstudies and overlays. The platformalso allows users to select leveragelevels for different strategies usingsub-accounts this allows flexibilityfor traders to assist them creating adiversified risk portfolio.

Gibson says: “Traders should usedemo accounts to practice with

>>>


Michelle Gibson "Traders should use demo accounts to practice with different leverages,study past mistakes to minimise real

losses and maximise profits. "

marketindex box options


different leverages, study pastmistakes to minimise real lossesand maximise profits. We alsoprovide a range of educationalDVDs in the traders ‘cockpit’ andstudy tools to help you look fortrends and study marketmovements. You can also talkwith other traders’ onlinecommunity.”

Growth prospects

Gibson believes the growthprospects for online FX optiontrading amongst retail investorsare high as individuals becomemore aware of the variousproducts and strategies available.“Access to real time information isquickly becoming the norm,trading tools and software areconstantly being developed intomore sophisticated and easier touse systems all for less cost,” shesays. The increasing globaluncertainty and the prospect of anequity bear market will forcetraders to seek investmentopportunities elsewhere. “The FXmarket has no concept of bull orbear markets as currencies aretraded relative to each other. Sothere are always tradingopportunities.”

High levels of liquidity allowinstitutions to provide higherlevels of leverage than cansometimes be found on otherunderlyings and this is attractiveto traders who wish to hedgeexisting positions without tying uplarge amounts of capital, she says,and many companies are offeringexotic crosses, including some newmarkets with growth potential likeBrazil and China.

Above all, the fact that options canbe customised will ensure theirgrowing popularity. Says Gibson:“Options are traded over-the-counter, which essentially meansthat you decide the strike price,the exercise date and the currencypairs involved in the optioncontract, giving traders muchsought after flexibility.”

Multi-asset class investments

Andrew Wilkinson, senior marketanalyst at Interactive Brokers saysthe growth in volume and liquidityhas brought with it an increasingnumber of players who want tohedge, which has benefited theoptions market. He also adds thatthe search for multi-asset classinvestment has spawned thegrowth of the derivative optionsmarket for currencies. InteractiveBrokers is one of the few brokersthat allows multi-asset class tradingfrom within a single account.

He says: “Increased liquidity has abeneficial impact on the option

market since it does two things.First, it gives a market maker araison d’etre since they can quotea fair price on an option in theknowledge that they can lay offany risk in the market for theunderlying. Second, the moreinvestors who are willing to makea market in options ultimatelycompete on price. That furthercreates a liquid derivative marketwhere option prices are narrowenough as to make it appealing toall denominations of investor.”

FOCUS


Andrew Wilkinson "Volatility is tradable in its own

right, which is a significant factor behind the appeal of currency options

in the last year,"

>>>

Interactive Brokers Options Trading platform


133 FX Solutions Ad 18/3/08 20:06 Page 1

Wilkinson says that an integralpart of any options pricing modelis implied volatility, which is basedupon a rear-view observation ofthe price behaviour of theunderlying. Most professionaloption traders position their bookaround some expectation ofimplied volatility. This relianceoften supersedes any expectationon what might happen to theunderlying currency itself.“Volatility is tradable in its ownright, which is a significant factorbehind the appeal of currencyoptions in the last year,” he says.

He adds that while self-directedtrading will incur commissions,these will most likely be less thanunder a managed account, themore active a trader is will have aninfluence on the overallcommission paid. Speed ofexecution is an importantconsideration and because optionsorders can be routed to a varietyof exchanges, Wilkinson adds thatretail investors need brokers thatare using smart order routing to

ensure best price. InteractiveBrokers will simultaneously routeseparate legs of a combinationstrategy to different exchanges in abid to achieve priceimprovements.

Another important factor for self-directed traders trading the purevolatility of the underlyingthrough various optioncombinations is the need to ensurethat their online provider offers anefficient access to the types ofcombinations that they are likelyto require.

Interactive Brokers has addedsome significant user-friendlyfunctionality, such as allowingcustomers to trade some optionsusing implied volatility as thevariable rather than price. Thesoftware then calculates the priceand submits the order to theexchange. All orders can be leftonly as day orders. In addition thecustomer can specify the range inwhich the underlying must be forthe order to be executed.

The broker does not discriminatebetween institutional and retailcustomers. “ Our software wasdeveloped with the professionalinvestor and institutional inmind,” says Wilkinson.

Need for superior technology

Apart from ensuring thatcommission charged are as low aspossible, Wilkinson says thatoptions traders should ensure theplatform uses superior technology,where quotes are updatedimmediately and that speed ofexecution is the best, as well asoffering the full range optioncombination orders.

IB offers live webinars teachingusers how to use the onlineplatform and how orders can beexecuted, as well as explaining thedifferent order types, variousoption combinations andstrategies, and hosts events givenby leading exchanges and otherindustry co-sponsors to outlinestrategies and products that areavailable. “Live webinars are wellattended, while an increasingnumber of customers prefer tolisten to reruns hosted on ourwebsite,” says Wilkinson.

IB allows anyone to run the demoaccount from its website.Although prices are not live,investors can get a strong sense ofthe products offered. He adds:“For anyone who opens a liveaccount, they can also use thepaper-trading account for practicepurposes until they are fullyaccustomed to the capabilities andconfiguration of the TraderWorkstation.”


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when you really need to keep all your options open

>>>


135 Gain Captial Ad 18/3/08 20:07 Page 1

Wilkinson believes that there maybe demand in the future forpegging currency option orders toequity transactions overseas and IBhas recently launched client accessto Mexican stocks, options andderivatives, enabling a non-Mexican investor to hedge thepeso risk of an investment usingcurrency options rather than theunderlying currency.

He says: “The FX market is ripefor derivative growth. Equityoptions growth was borne out ofelectronic trading and enhancedside-by-side liquidity. Thecurrency market is world’s thelargest market and trades roundthe clock. Narrower spreads andthe growth in demand from retailare extremely exciting factors likelyto create added usage of currencyoptions. Even if currency volatilitydrops off, investors will still wantto be positioned for the nextround of currency sparring whenit occurs. The recent bout ofexchange rate mania has served asan irreversible catalyst that willinevitably create ever-more liquidoption markets.”

Standardised exchange-styleoptions

Joe Cunningham, president of FXBridge, believes that standardisedexchange-style (not exchange-traded) options are about to takeon the same phenomenal growthpath in retail FX as US exchange-traded equities and futures optionshave, and will become the fastestgrowing retail FX trading product. He says: “Retail FX has maturedover the last ten years. The spacehas become crowded with dealers

and competitive advantage comesdown to the tightness of dealingspreads. Retail FX traders havebecome much more sophisticated.

Where retail traders were oncecontent to simply trade online,they now demand (and get) robusttrade stations, lightening-fast pricefeeds, instantaneous executions,slick chart packages, andalgorithmic trading.”

He also adds that most retail FXtraders also have stock portfoliosand trade futures and they want touse the same strategies in FX.

But he firmly believes that not justany style of option will work inthis space. So far, most of the FXoptions offerings have reflectedwhat is most familiar to FXdealers -- institutional-stylecustomisable options, but theseproducts are unfamiliar to retailtraders, and is not what hasworked in equities and futures.“Standardised options on stocksand futures contracts are wildly

popular with retail investors in theUS and abroad and it is thisproduct design that will best serveretail traders,” says Cunningham.

There are many managed accountofferings that use spot and to alimited extent options, but thereare few, if any, API tradingalternatives. Although somefinancial institutions are makingtheir institutional-style optionsavailable to the retail trader, theproduct is foreign to their tradingexperience, confusing to use andhas limited appeal. Cunninghamsays: “A standardised, exchange-style, option holds the most valueto a trader as they are comfortablewith the valuations, the ability toposition themselves relative toanticipated market moves, andbasically, they are simple to use.”

FX Bridge offers retail FX traders aplatform with familiar standardisedexchange-style options. Retailtraders can trade both spot andoptions in the same account, in afeature-rich environment thatincludes: multiple option screenviews, showing bid, ask, open, high,low, last, range, volatility, skew,Greeks, a wide range of statistics,and historical premiums; an OptionMatrix screen showing bid/offerquotes on a multitude of strikeprices and expirations, facilitatingease in executing multi-leg optionsstrategy orders simultaneously; andan integrated spot and optionsposition summary.

A Risk Manager module for spotand options positions gives tabularand graphical displays of thecombined market portfolio,including the ability to add

FOCUS

Joe Cunningham "Standardised options on stocks andfutures contracts are wildly popular with retail investors in the US and

abroad and it is this product design that will best serve retail traders,"

>>>



137 ABN Amro Ad 18/3/08 20:08 Page 1

simulated trades to best evaluatetheir portfolios sensitivity tochanges in the underlying asset.Analysis includes P&L, Greeks,volatility, premium, and intrinsicvalue. A Margin Calculator, usingVolatility-Based Margining,enables a retail trader to quicklycalculate net margin for strategiesthat include multiple long andshort call and put optionscombined with spot positions, andthe Option Calculator allowstabular and graphical analysis ofoption positions over various timeand price scenarios.

FX Bridge also offers theProTrader Tool Suite on all itsretail trader interfaces, whichcomprise the same institutional-grade risk management, optionsportfolio analysis, and value-at-risktools as it offers its topinstitutional customers.

FX Bridge plans to offer, in threeseparate releases over the next 12months, several optionsenhancements, including tradablecharts for spot and options,algorithmic trading and back-testing for spot and optionsstrategies, multiple-leg optionstrategy stop and limit orders, andStrategy Builder.

Strategy Builder is a tool thatallows a trader to input what he orshe thinks the market will do interms of price change and timewhile specifying parameters forholding risk and/or profitconstant. Strategy Builder thenoutputs the optimisedcombination of long and shortcalls and puts and spot positionsthat best maximises profit and

minimises risk for the anticipatedmarket move.

Demand for new instruments

Cunningham believes retail FXtraders are seeking newinstruments, primarily options, tobroaden the number of tradingstrategies they have available totake advantage of market moves.He says: “Many are tired of beingright about a market direction, butrepeatedly stopped-out of themarket in short-term reversals andnoise gyrations.” FX options offerthe retail trader the opportunity totake a long spot position and limitrisk in a volatile market bypurchasing a put option orimplement a short straddlestrategy where he sells both out-of-the-money-calls and putsseeking to benefit from thedecreased volatility. Both strategiesare simply unavailable in a spot-only environment. “The strategiesare as limitless as the permutationsof long and short call and putoptions, with multiple strike pricesand expirations. And, mostimportant to FX dealers, both

strategies are already available tothe same retail traders in the stockand futures markets.”

Cunningham says that while thereare a myriad of services currentlyavailable, from training seminarsto demo accounts provided bydealing principals, the biggestconsideration for retail investor isin finding a dealer with theplatform to handle combinedoptions and spot trading.

“Many firms have alreadyintroduced product derivationslike binaries, exotics, and mostoften, institutional-style customoptions. So far, these newproducts have not gained realtraction and, due to theirunfamiliarity to the retail spaceand inherent complexity. Wedoubt they will achieve thewidespread acceptance with retailinvestors. We believe that optionscan only achieve widespreadacceptance in FX in the formoffered by FX Bridge, thestandardised exchange-styleinstrument.”

FOCUS


FX Bridge Multi-Window Workspace with option pricing and volatility surface modeler open on top


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Other white label solutionsinclude FX Bridge and avariety of partners in

other asset classes such as stocks.Clearly the white label model is animportant part of TeleTrader’sbusiness, allowing brokers to add avery powerful analysis tool for theirclient’s use thus making their ownplatform more attractive to users.

TeleTrader is currently available inEnglish, German, Hungarian,Serbian, Slovenian, Arabic andChinese.

For those requiring morecomprehensive data on FX,Equities, Futures and other marketsTeleTrader is available directly viathe TeleTrader.com website ataround 85 euros per month for thePro package (plus relevant exchangefees) and for less for the FX (forex)and LT (light) variants.

Features Summary

The package itself features awealth of over 150 indicators,some of which have been specially

added to TeleTrader. Some of themore unusual indicators includedas standard are Cyber Cyles,Coppock Curves, GMMA,Historic Volatility, DSS, FisherTransforms, Force Index, ElderRay, KRI, HPI, a variety of PivotPoint calculations, PsychologicalLine, Starc Bands, Vegas Tunnelsas well as the Ulcer Index.

Drawing Tools

Drawing tools are clearly an areaof strength in the package. Apart

Product ReviewTeleTraderProfessionalWorkstation


Pivot Points

TeleTrader ProfessionalWorkstation is asophisticated all-roundcharting, quotes, news andanalysis package sold inPro, FX and LT (Light)editions as well as beingavailable as a “white label”solution. In its white labelversion (known as “FXAccuCharts” to clients of FXSolutions, LLC), it isavailable free of chargewith data provided by thebroker system’s quoteengine on all of its FX pairs.

RETAIL e-FX CLIENT

by Larry Levy

140-142 Product Review 18/3/08 20:09 Page 1

from regular trendlines, FibonacciRetracements, Arcs, Fans, GannAngles, Speedlines and theAndrews Pitchfork, point andclick Pivot Points are available asstandard.

The strength of any drawntrendline can be de-emphasized byclicking on another icon, makingthe lines thinner and thicker againby sequentially clicking.

An easy to apply cycle finder isavailable for conventional andFibonacci time cycles.

Custom Indicators

The package has its own scriptinglanguage, called TT-Language formodifying and creating indicators.This is similar in concept to EasyLanguage from Trade Station orsimilar offerings from eSignal and

Metastock. “We can offer supporton coding own indicators, andoften add new indicators to thepackage on a user’s request”according to TeleTrader productdevelopment technician GeraldTomez.

TeleTrader does not currentlysupport back testing oroptimization, though this isplanned for the future. “We areexpanding the TeleTrader languageto make it more sophisticated, andthis will soon be the basis for ourback testing and forward testingplatform. This should also providean algorithm for auto execution atthe server end in a later stage” saysMr Tomez.

Appearance and Ease of Use

This native Windows XP/Vistacompatible package is actually

refreshingly fast, intuitive, andeasy to use, especially as it doesnot suffer from the drawbacks inspeed, power and reliability thatappear to plague some of theJava/browser based chartingofferings on the market.

Default colours and designfeatures such as the default gridlines have a tactile, well thoughtout and easy to use factor solacking in many of today’scharting packages. Clicking on anempty area of the chart brings upthe crosshair feature, whichsimultaneously brings up a boxshowing the values of themathematical indicators at thatpoint as well as drawn lines, suchas Fib Retracements, Arcs andGann Lines. This can be veryuseful in easily identifying exactprice levels at certain time points.

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TeleTrader Workspace

The e-FOREX Product Review


It cannot be stressed enough that itis the ease of use and well thoughtout, functional and intuitiveapproach within TeleTrader thatdistinguishes it from otherpackages in the market – not tomention value for money. As afurther example, double clickingon a price instantly brings up adefault chart rather than having tonavigate via the menu bar.

Like with any software though, itis critical to study and go throughthe features. A number of basiconline tutorials are provided andare easy to follow, but the coreonline Help area is the best placeto start. The full TeleTrader Proversion is available on a 14 daytrial basis from the website,TeleTrader.com

Data Coverage and Export

As well as most major and minorFX pairs, (1000 pairs with theGTIS Premium FX Spot package,for example) TeleTrader canprovide data on German, US,Austrian and Swiss stocks andfutures, as well as a variety ofother news and bespoke dataservices, such as GTIS FixedIncome, Precious Metals and otherdata such as Worldwide Fundsinformation.

Delayed data is included on mostexchanges thus avoiding exchangefees.

Data export is provided via DDEexport features to externalpackages such as Excel.

FX AccuCharts

We also tested FXAccuCharts, a white labelversion of TeleTrader, which isintegrated with FX Solution’sGTS trading frontend.

FX AccuCharts shows ordersand positions in the chart andlets you adjust them. It alsoshows upcoming orders in thechart already before they areplaced , regardless of whetherthe ticket originates from FXAccuCharts or directly fromGTS. FX AccuCharts istherefore fully integrated withthe GTS ticket order entrysystem and supports directfrom chart order entry.

Charting analysis features arethe same as TeleTraderProfessional except for thefact that all data is sourcedfrom the broker platform.

Support

On the few occasions we neededto consult TeleTrader directly forsupport, we found it easy to getthrough, and the support peoplewe came across were well informedand very helpful.

Conclusion

It is clear that TeleTrader is a cutabove most of the other whitelabel solutions on the FX markettoday. This package will continueto play a valuable role in themiddle to upper level retail marketfor a powerful, yet easy to use andvery economical overall chartingand analysis tool.


Trading Integration

RETAIL e-FX CLIENT The e-FOREX Product Review


143 Eurobase Ad 18/3/08 20:10 Page 1

144 Square Financial Ad1 18/3/08 20:13 Page 1

144 Square Financial Ad1 18/3/08 20:13 Page 2

FXdirekt Bank is nowspreading is wings furtherby offering its services to

English speaking clients as well asoffering a platform that allowsusers to seamlessly trade stocks,indices, commodities or cash FXunder one roof with very highgearing possibilities (1:100) as wellas the advantage of trading minilot sizes. A 24h helpdesk is alsoavailable in German and English.

The website is very clear andemphasizes the relationship the bankhas with its customers. For example,customers can apply to join a selectfive member “Customer Board”(known as a “kundenboard” inGerman), with the aim of providinga strong link between the customerand the bank.

Clearly the operation is veryproactive in the sales department.At the time of writing the bankwas running a competition

celebrating its offering of mini lotsizes by offering as a prize a MiniCooper. Within hours of openingthe demo account I was contactedby a very pleasant salesperson,who again popped up in a chat

window on the application itself aweek later. FXdirekt run spots onGerman television as well asoffering daily and weeklycommentaries/research on Forexand commodities.

The e-FOREX

Site Inspection


Larry Levy looks at FXdirektBank, one of a small handfulof German banks offering acomprehensive range of FX,and CFDs and so calledFFDs (Futures for Difference)contracts on a wide range ofinstruments for the retailclient. Founded by currentCEO Wolfgang Stobbe in2004, FXdirekt Bank hasseen rapid growth, bycatering to its market – theGerman-speaking customerand has won theBrokerwahl.de Forex Brokerof the Year prize for the pastthree years.

RETAIL e-FX CLIENT

the concept of the Customer Board, known in German as the "kundenboard".

146-149 151 Site Inspection 18/3/08 20:14 Page 1

Core offering

The core of the FXdirekt offeringis its customer interface dealingapplication, known as FEXtraderPro®. This is a Windows XP/Vistacompatible offering withcomprehensive charting, quotes,dealing and research built in.

The application is very well laidout from a design & defaultcolours point of view, with defaultpages set up and accessible via tabsat the top of the application forSpot Forex, Stock CFDs, IndexFFDs, Interest Rate FFDs, andSpot Metals. FXdirekt’s

terminology forCFDs on futures, isthe FFD whichstands for Futures ForDifferences.

A very comprehensivelist of 70+ indicatorsis possible with thecharting package aswell as a range ofdrawing toolsincluding Gann andFibonacci lines,shapes and othertrend identificationhelpers.

Customers can placeorders directly from

the chart including limit entries,stop losses and contingent orders.Fulfillment of orders can then beoptionally transmitted to the uservia email or SMS Text message toa mobile phone.

At the bottom of the application isa so called “Margin Meter”showing how much margin theclient has utilized graphically aswell as current statistics such asNet Equity, Open P/L, UnrealisedP/L, the currency of the accountand also remaining SMS credits.Immediate callback via telephoneto your registered phone number

can be requested from theapplication menu, which marksanother customer oriented touch tothe FXdirekt offering.

A window, amusingly called “Topsand Flops” lists the five biggestgainers and losers on the Germanstock market. A position-keeping

>>>


FXdirekt Bank Home Page promoting the Mini FFD contracts and Mini Cooper prize

FEXtrader Pro: Multi Quotes Default "Multi" Screen showing typical spreads,default screen tabs and icons as well as menu bar layout.

Right Click to bring up deal ticket directly from chart with options email and SMS alerts on trade.

Over 70 indicators and a range of powerfuldrawing tools are available in FEXtrader Pro


tab allows an instantly generatedPDF of current open and / or pastclosed positions.

Forex spreads range from 1.75 to2.5 pips on EURUSD, 2.5 – 4.25pips on GBPUSD and 3 pips onthe DAX 30 Index (spreads varyaccording to account size).

Future Direction

We ask Jörg Ernst, (Member ofthe Board, FXdirect Bank) totells us about the directionFXdirekt is taking for the future:

How long has FXdirekt Bank AGbeen around for?

The forerunner to FXdirekt BankAG was ibas AG – a former CTAand introducing broker establishedin 1996. In 2001 the companysuccessfully launched FXdirekt,the first German-language onlinetrading platform.

FXdirekt Bank was subsequentlyfounded in 2004 and we have sinceachieved a high level of sustainedgrowth in our customer base.

How do you feel that the FXdirektBank differentiates itself fromnormal FX broker offerings and other bank offerings in theFX sector?

FXdirekt Bank is one of very fewGerman registered banks offeringonline FX and CFD trading in theGerman market. This means that

we are regulated by the GermanFinancial Supervisory Authority –one of the important reasons whyclients choose to trade with us,rather than with many otherbrokers.

We’ve also been voted ForexBroker of the Year for the pastthree years which is a reflection ofour high levels of customersatisfaction. Our toll-free customerservice hotline is available 24-hours a day – providing ourclients with all the help andsupport they require. Furthermore,our trading platform offers a widerange of innovative features and isextremely fast and stable.

How has the recent turmoil in thebanking market affected theoutlook for FXdirekt Bank?

The current problems in thebanking market have thankfullyhad no effect on our business. Infact, volatility tends to have apositive effect on trading activity,as clients like to trade volatilemarkets and our trading platformFEXtrader Pro® is optimallydesigned for this purpose.

What proportion of your businessis in the retail sector of themarket?

FXdirekt Bank specialises in theretail market, therefore themajority of our business is retail.

Can you tell us something abouthow your business model is setup and operates?

Our aim is simple – we provideour clients with a best-in-classtrading platform combined withfair pricing and outstandingcustomer service. We are currentlyexpanding our business, offering abroader range of products, whichcan be traded via our multi-market trading platformFEXtrader Pro®.

Most of your current businesscomes from German speakingclientele. Do you plan to growyour client base significantlyoutside this area, and if so, how?

Our website and trading platformare both available in English and wealready have a significant number ofclients in Eastern Europe –particularly Hungary, Slovakia andthe Czech Republic. We are nowlooking to broaden our internationalpresence – both in Europe andworldwide – by developing furtherstrategic partnerships andinternational subsidiaries.

What are the minimum andmaximum deal sizes and theminimum and maximum accountsizes you accept?

Our minimum account size is€4,000 or the equivalent amountin other currencies – there is noupper limit for account sizes.However, it is possible to adjustaccount size requirements asappropriate for other markets. Theminimum deal size for FX is onelot and there is no limit to themaximum deal size.

Do you accept credits and debitsfrom clients via credit card?

No, we only accept bank transfers.

You have a 24h dealing deskduring the week. What languagesdo they speak?

Our Customer Service Advisors andDealing Desk speak German andEnglish. We work with introducingbrokers in other countries, whoprovide dedicated customer servicein other languages.

Is latency an issue for you?Our platform is named FEXtraderPro® which stands for FastExecution – and our orderexecution is extremely quick, wetherefore have no problems withlatency.


RETAIL e-FX CLIENT

Jörg Ernst


>>>


What kind of redundancy is builtinto your systems?

We have the highest possibleredundancy and our tradingplatform is extremely stable andreliable. We have multiple serverunits – plus a thoroughly testedemergency system, which wehaven’t yet had to make use of.

Do you run your own book or doyou hedge every trade above acertain size in the market?

In FX we hedge all tradesimmediately in the market andtherefore do not bet against ourclients. It is in our best interest toenable our clients to tradesuccessfully.

What new asset classes orinstruments do you plan to add inthe near term?

In FX we already offer over 200currency pairs and are constantlyreviewing our range of instrumentsto ensure that our clients haveaccess to all the currencies theywish to trade. In CFDs we alreadyoffer a wide range of stocks andindices and we’ve just introduced anumber of German interest rates.We will shortly be introducing arange of commodities, includingcrude oil, sugar and coffee. As weexpand internationally we alsoexpect to introduce further stocksand indices from a range ofdifferent countries.

Which countries do you currentlycater for?

We currently actively cater forGermany, Austria, Switzerland,Hungary, the Czech Republic andSlovakia. However, we do alreadyhave clients from numerousdifferent countries.

Is customer churn a problem?

We don’t really have a problemwith customer churn – obviouslythere’s always a degree of

movement when clients closeaccounts and new clients openaccounts. We are fortunate to havea very loyal customer base.

Besides FX, CFDs and FFDs whatother activities does the bankengage in?

FXdirekt Bank is positioned as aspecialist in online FX and CFDtrading and therefore this businessarea is our main focus. However, we do also offer amanaged portfolio for clients whodon’t have the time to tradethemselves. Our managed accountis available with a minimum depositof 100,000 Euros and providesaccess to a range of speculativeinvestment instruments. Our clientsreceive exclusive access to a range ofinstitutional instruments withexcellent potential returns – clientscan access their managed accountvia our trading platform, enablingthem to check their real timeaccount balance and currentpositions whenever they wish.

The online FX market is verydynamic. Looking ahead is itlikely to get harder for providersto differentiate their offerings

from othercompetitors and ifso, how do youplan to address thischallenge?

There has certainlybeen a lot of activityin the German FXmarket over the pastfew years – the largenumber of newbrokers entering themarket can make itdifficult forcustomers to decidewhich broker orbank to trade with.However, thisincreasedcompetition ishealthy and willultimately result in

the best possible prices andservices for the client.Furthermore, despite the increasedcompetition in the FX market wehave continued to go fromstrength to strength – winning thetitle of Forex Broker of the Yearfor the previous three years.

Are you continuing to addconnections to different liquidityproviders, or do you feel youalready have sufficient access toliquidity?

As we add further instruments toour trading platform we may needto add connections to furtherliquidity providers. However, wecurrently have sufficient access andexcellent liquidity.

Is your technology licensed froma third party provider?No, our trading platform wasdesigned and developed in house.

The retail FX market haspractically been created fromnothing over the past few years.How do you anticipate theindustry evolving over the nexttwo to three years?

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150 Sub Form 18/3/08 20:18 Page 1

The past three years have shown a tremendous rateof growth in FX transactions worldwide and weanticipate that this trend will continue in the nearfuture. There is likely to be a phase of consolidationand increased awareness – particularly retail clientswill gain confidence and increased knowledge of themarket. Customers will begin to favour thosebrokers who do not trade against their clients. Manycustomers come to us because they’ve had enough offeeling like their broker is working against them andthey want a fast secure trading platform wheresuccessful trading is permitted and encouraged!

What are the main advantages of your tradingplatform compared to other competitors?

Our trading platform FEXtrader Pro® is extremelysimple and intuitive to use – the functionality issimilar to Microsoft Windows, which most clients arelikely to be familiar with. Furthermore, the platformcan be customised to meet individual needs. Clientscan configure individual layouts and decide whichinformation they wish to receive. Accountinformation and order information can be pre-configured – for example whether open positions aredisplayed in the chart. The OneClick function –whether orders are sent with just one click or with anextra confirmation – can be switched on and off asrequired. A wide range of variables can be customisedand amended ensuring that all clients, be theybeginners or experienced traders, can configure thetrading platform to meet their individualrequirements. Furthermore, FEXtrader Pro® is by farthe safest and securest trading platform on themarket. The level of security is comparable to that ofa credit card – to carry out a trade the client mustenter their trading pin number. In addition, allclients have a telephone password, which they mustprovide when placing a free of charge telephone order.

What plans you have to improve and enhance thefeatures offered on the platform?

We are constantly evaluating and monitoring ourtrading platform and our levels of customer serviceto ensure that we provide our clients with the bestpossible trading experience. We are also planningto review and optimize our pricing structure in thenear future.

We were the first to introduce .NET technologyand our platform already features a wide range ofinnovative features such as region orders and singleversus grouped position displays – wherebypositions can either be viewed separately orgrouped according to the currency pair orunderlying. There are still plenty of new featuresand innovations in the pipeline and we will releasedetails of new features once they are implemented.

RETAIL e-FX CLIENT


Tim, how long have you been tradingin the currency markets and what doyou particularly like about youroccupation?

2008 will mark my 21st year inforeign exchange. During my tenure,I have witnessed the migration oftrade execution from the telephone tothe Internet. The technologicaladvances over the past 20 years havetruly changed both the dynamics ofthe FX market, as well as opening upthis market to a new set ofparticipants namely retail investors.In addition to gaining access to theFX market, retail investors areprovided with a full suite of products& services – everything frominstitutional quality trading platformsto advanced charting packages, news,research and more. In my opinion,the retail FX providers havedeveloped quite a robust offering in arelatively short amount of time.

In terms of my role at GAIN, perhapsthe most satisfying aspect of my job isthat I help shape our product &

TRADERTALK


With Tim O'Sullivan, ChiefDealer at GAIN Capital Group

TraderTalk

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service offerings, everything fromfunctionality of our trading platformto the type of research we makeavailable to our customers. I enjoythe entrepreneurial aspect of workingat GAIN, as it affords me the uniqueopportunity to work closely withmany different groups within thefirm - not just the trading desk-which is atypical of someone in myrole at a large financial institution.

You manage the day to dayoperations of GAIN's trading desk,which handles over $100 billion intrade volume each month, which isa significant increase from a fewyears ago. How has the firmimproved your trading technologyinfrastructure to cope?

We have made significantinvestments in our infrastructure inorder to stay ahead of our growth intransactions and overall tradingvolume. We continually improve oursoftware to be more efficient and, asa result, our trade execution times(on average) are faster every year,even as our transaction volume hasincreased. Likewise, our tradinginfrastructure has moved towards amore decentralized model to supportthe global nature of our client base –which now includes clients in over140 countries. We have client-facingservers spread out over the globe,which allows us closer proximity toour clients and improves latency andoverall system performance.

What major currencies and marketsdo you trade and are you currentlyfocusing on any exciting new areasto expand these?

We currently focus on G-10currencies because that’s where thevast majority of trading activity isoccurring today. Retail clients tend tomigrate to the best spreads and the

most fluid execution. Also, veryliquid markets enable clients toexpress themselves without fear ofextraneous shocks that could act as ashort term negative. Point being, if atrader believes the dollar is going toweaken, the ride is likely to besmoother in a “major’ currency.

That said, some of the emergingmarkets currencies can provide ampleopportunity for those investors whohave a greater tolerance for risk. Asthe global marketplace is increasinglydefined by countries outside theG10, the risks inherent to tradinglocal currencies are becoming morepalatable. We also know that ourretail clients desire the ability to tradetheir domestic currency. This trendis not likely to diminish anytimesoon, and so we are planning to addseveral of the more acceptedemergent currency pairs in the nearfuture.

Over the last 5 years there has beenremarkable innovation in FX tradingtechnology. Where do think this hashad the greatest impact on how youcarry out your job? Is it really aboutimproving operational efficiencies orhas technology allowed you todiversify more and usemethods/techniques not possible in amanual environment?

I would say that we considerourselves as much a technologycompany as we do a tradingcompany. Technology hasdefinitely changed how we managethe trading desk. Over the years,we’ve developed a full suite of toolsthat help streamline desk operations,improve trader productivity, managerisk, and maximize desk profitability.Case in point: we have basically thesame number of traders today that wehad the first year of operations.

>>>


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Trading volume has increasedexponentially during that timeperiod, but we’re able to manageand scale our volume with samenumber of traders because we’veleveraged technology.

What particular advantages doesworking with a firm like GAIN,which has a proven tradingplatform and superior tradingtechnology, given you?

Without question, I believe theemployees at GAIN Capital havebeen a prime factor in our success.When assembling themanagement team in 1999, it wasour dedication to the ideal thatGAIN would become the premieroperator in retail FX that drovefounder Mark Galant to hire theteam he did. All decisions fromthat point forward were conceivedunder the auspices that offeringthe best possible service, in allpossible forms, would be the

overriding goal. That cultureremains very strong here almost10 years later.

GAIN is regularly applauded forthe quality of its currencypredictions, which we haverecently seen with your bearishand accurate position on the USD.How important are advancedtechniques such as quantitativeanalysis becoming in helping youmaintain your position on thecurrency forecast rankingsleader-board?

There are many facets of ourforecasting models but, to behonest, it is our fundamentalanalysis of the dollar that dictatesthe majority of our forecasts.Global interest rates havecontinually proven to be the bestindicator of what is driving themajor currency pairs. The recentdrop in the USD Federal Fundsrate has turned the USD into a

funding currency. The key factorin this analysis is to determine towhat degree lower yields in theUnited States have been factoredin by currency traders. That iswhere the artistry of currencyforecasting comes into play – andwatching our own customer flowsalso provides us with a strongindication of sentiment.

Volatility has returned to themarkets. In the currentenvironment, do you expect to bemonitoring and measuring Riskmore aggressively this year?

We have always managed risk veryaggressively and consider it one ofour competitive strengths. Weutilize a combination ofproprietary technology and anexpert 24/6 trading team tomonitor trading risk. Historically,we have proven that ourproprietary risk managementpolicies have worked extremely

TRADERTALK >>>


Back row left to right: Tim Radigan- Director, Back Office Operations, Anthony Piccolo-Senior Dealer, Scott MacGregor - Assistant Dealer, Ugur Arslan -Quantitative Analyst. Bottom row left to right: Stephen G. Reilly-Senior Dealer, Timothy O’Sullivan-Chief Dealer, Darren Zhang- Quantitative Analyst

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well in all types of markets andperiods of volatility. Although weconstantly review our proprietarymodels and make minor tweaks aswe deem appropriate, we do notanticipate significant changes to ourrisk management strategy this year.

Do you feel that retail currencytraders are becoming much moresophisticated in terms of thedecision support and tradeexecution tools they are seekingand could that impact on howyou manage the trading desk?

In my opinion, the evolution ofthe retail investor is really nothingshort of incredible. Today, themost successful firms in the FXspace are offering far more thanjust pricing and execution services.Tight spreads are still important,but increasingly clients are looking

for more -- trading tools,automated trading capabilities,research, education & training,etc. I think that retail clients willcontinue to demand the veryhighest level of service.

The last few years has seenexplosive growth in the overnightand electronic markets withsystems needing to run 24 hoursa day. Do you expect toexperience substantial growth inautomated and API-based FXtrading?

Over the past year, there has beena lot of media coverage ofalgorithmic trading, withspeculation that up to 25% ofdaily FX volumes are beinggenerated by users of algorithmicmodels. Institutional investors,and hedge funds in particular,have dominated this area, butretail clients are increasinglysophisticated in this area, as well.Savvy retail traders are developingalgorithmic models and we’vesupported this trend by makingour API available to clients whowish to automate their tradingstrategies. Currently, GAIN offerstwo APIs for automated trading -FIX and soap-based web services.Looking ahead, we anticipate thata larger percentage of retail forexvolume will come fromalgorithmic trading models, asfirms make it easier to implementsystems-based models and moreretail traders embrace them.

Many more investors are nowlooking at FX as an asset class,so one would anticipate seeingthe volumes of your businesscontinue to rise. What impactcould the arrival of new playerssuch as the big market making

banks have on your tradingactivities?

Generally speaking, having thebanks arrive on the retail FX scenefurther validates FX as an assetclass and is a positive for theindustry. Over the past year,several banks have entered theretail FX market by white-labelingthe technology of retail brokers.This strategy allows the banks totap into the market expertise oftheir retail partner and leveragetheir experience acquiring andsupporting retail traders. Weexpect to see more bankspartnering with leading retailfirms in 2008.

Looking to the future, where doyou see increasing use of theelectronic channel opening up and creating the most significanttrading opportunities in thecurrency markets?

We expect to see more speculativetrading activity in some of theemerging market currencies,including Mexico, South Africa,Singapore and others. Retailtraders in these markets are nowcoming online and with theadditional volume we should seeimproved liquidity. Liquiditybegets liquidity, which willgenerate more interest & activityfrom FX traders.


TRADERTALK

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There has been an ongoingrevolution in trading sincethe first exchanges went fully

electronic back in the 1990s. At thattime, screen-based tradingapplications began to be created tomeet the needs of users regardingreliability, speed and volumes. Thoseapplications rapidly covered a widescope of work in order to enhanceday to day tasks related to marketdata processing, market research, riskmanagement, order management andclearing and settlement. More than adecade ago, full end-to-end automaticfinancial processes like electronictrading, black box trading,algorithmic trading, automaticexecution engines and direct marketdata feeds were concepts on which afew leading edge experts wereworking. Program-based tradinginnovators were already showing thepath along which tradingtechnologies would ultimately evolve.Recent modifications such as thecombination of regulatory changes,technology’s rapid evolution and newtrading needs are forcing the financial

community to change at an evenfaster pace to stay ahead.

Finance and Technology aremerging...

In today’s world of discretionarytrading, the vast majority of tradersare specialised by asset classes. Thosespecialisations are the consequence ofyears and years of human experiencededicated to trading those specificinstruments and asset classes. Thosegroups form sub communitiesspeaking their own language andcommunicating through instantmessaging systems. FX market tradersare known for their in-depthknowledge as they “ feel the market”.They also ensure the success of thetrading desk they are working forthrough their strong relationshipswith their clients built over years.Traders working for Market makers,clients and prime brokers are evolvingin a known universe driven by humanbehaviour.

…and the Quants are coming!

Everything could carry on like thisfor ever if the “Quants” were not ontheir way. For this new community oftrading players, GBP/US$ orSoyBean or IBM are just signals in auniverse of data. They research allmarkets and analyse it throughstatistical or mathematical filters todetect patterns and trends they could

LOG OFF >>>

Systematic TradingTechnologies:changing the behaviourof the FXmarket


Stephane Leroy, Head of globalSales & Marketing at QuantHousediscusses how various types oftrading technology are facilitatingthe evolution away fromdiscretionary trading.

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leverage to generate profits. Whatabout the feeling of the market?Well, if correlation calculations orco-variance analysis are telling thatinstruments A and B should betraded in a certain way, it could becalled a scientific feeling. And whatabout building relationships withclients? Well, I’m not sure thatblack boxes are interested byhaving a beer at the nearest pubafter hours!

If you see any relationshipsbetween human behavior androbots… then press #1!

The entire financial community,including the FX Market, is goingthrough a Quantum Leap.New profiles are joining the traderscommunity with a improvedanalytical and scientificbackground. The IT /Development teams who were seenas minor in the picture arebecoming key elements of thetrading teams inside eachsystematic trading firms. Each organisation has to find itsown evolution path and manage itstransition from discretionarytrading infrastructures and peopleto a systematic trading orientedorganisation. Besides people,technologies and processes eachfinancial firm engaged in settingup a systematic trading businessalso has to think about what is atotally new service which has to bebuilt for the traders: tradingmodels back testing capabilities.

The Systematic Trading QuantumGap:The result of technologies,regulations and trading technicschanging at the same time

A definition of Systematic Trading,called also Algorithmic trading,could be technologies, resourcesand organisation put together tohave a human free trading process.Contrary to what a poll sponsored

by IBM revealed at the end of2006, traders will not disappear.This prediction said that in the nextcouple of years, more than 90% ofthe traders will be out of job.

It’s less a matter of necessity to havetraders in the process than howfinancial knowledge, technologyexpertise and organisationalstructures will be combinedtogether in order to have anultimate trading process for anoptimum return. It’s obvious to saythat the entire process, fromresearch, development down toback testing and trading can’t behuman- free of course. ProgramBased Trading will allow humanbeings to do what they are best at,concentrating them into theresearch, development and backtesting phases letting the tradingphase be managed by the machinesas a pure commodity.

Why be so extreme in the waythese changes are introduced?Maybe because the financialcommunity is facing a real marketmutation. It’s true that we have torecognize that drastic changes arehappening at the same time and nodoubt about the fact that the marketevolution will be far superior than ifthose changes where happening oneafter the other over a decade. Thefirst root cause is of course theimplementation of the newregulations on both sides of theAtlantic : RegNMS for the US andMIFID for Europe.

We might say that the financialworld is going … flat! Flat becausethe long time market organisationsbased on silos where buy side, sellside and exchanges were interactingwith one each other in a verystructured way is not valid anymore.The financial market is entering aperiod where the ANY TO ANYtype of business model makes the

world flat. In itself, this change is areal earthquake and it’s hard to havea clear understanding of how thefinancial ecosystem will adapt: whowill benefit from this increasedcompetition? The exchanges? Thesell side? Maybe the buy side willprove that intermediaries are notneeded anymore? In a similarsituation, size is always an asset for acompany and it’s the reason whymajor mergers and acquisitions aretaking place between exchanges, sellside firms and financial technologyproviders as well. Everyone tries toget ready for an increasedcompetitive environment wherecreation capabilities and speed tomarket will be key success factors.

What’s the difference betweendiscretionary and systematictrading… trading Technologies ofcourse !

More specifically, the buy sidesector is getting the marketenvironment, trading tools andknowledge to change the way theyinteract with the financial market.For those who wish to reduce theholding period of financialinstruments, going monthly toweekly, daily and ultimatelyintraday, the need to endorse thenew program trading technologiesis a must do. But when we thinkabout what is needed to research,develop and back test automatedtrading strategies, new talents willbe needed to complement existingprofiles. The current knowledge ofscreen based trading users are notsufficient enough to be able to usethose new tools. Everybody willhave to go through this quantumgap, and specifically the traders.The organisation structure of aprogram based tradingorganisation will have 3 key talentsworking together. First the trader,who will be able to have a verysynthetic view of the markets inorder to detect trading trends and

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look after existing tradingstrategies running on the marketto make sure the expectedbehaviour is under control. Thenthe researchers whose job will beto define and validate new tradingstrategies and the quant developerswhose role will be to developthose trading strategies usingsophisticated languages such asC++ or C sharp.

The reader would have noticedthat we are talking here aboutalgorithmic trading strategies andnot about algorithmic executionstrategies. Thetrading strategiesare developed bybuy sidemembers togenerate orderssent to theirexecution servicesprovider; ie, abroker or directlyan exchange or apool of liquidity.An algorithmicexecution strategyis a programmanaging theorder to makesure that it issent to the right destination forminimum market impact. Most ofthe time, those applications areincluded into the servicesdelivered by brokerage firms totheir buy side clients and areconsidered as a commodity.So, good news, traders will remainin the picture but those who willbe able to have a very syntheticunderstanding of the market willcertainly have better chances to gothrough this quantum gap.

Systematic Trading quantum gap:company staff, infrastructuresand organisation will evolve

The time has long gone whentraders were recruited by going

through a beer testing process atthe nearest pub! That was acomment made by a CEO of oneof the major financial providersduring the last Tradetech 2007Paris event who went to this sameprocess 30 years ago. Answering a question from theaudience on the future profile oftraders, this CEO indicated that amajor change was happening asthe traders with a mathematicalbackground will be a must havesuch as PhDs, Ms of Science andMBAs in the coming years. Iwould add that Traders with

development knowledge as well asDevelopers with financial expertisewill become the most searchedresources. Although those newgenerations might appreciatedrinking beer, they will radicallychange the culture andorganisation of discretionary basedtrading firms. Those organizationswill naturally evolve towardsprofiles working together usingcommon tools and intellectualbackground : the traders, theQuant Developers and theResearchers. This necessity forthem to use common tools andprocesses will push the concept ofIntegrated DevelopmentEnvironments that allow trading

strategies development cycleoptimisation.Infrastructures willalso face a big need to change asthe new users, the robots, aremuch more demanding thathuman beings. Ultra low latencymarket data, accurate data withfull market depth, market replaycapabilities, complex back testingprocesses, execution throughDMA on a global basis willbecome standard. No need to saythat buy side and sell side firmswith heavy legacy infrastructureswill face some significantchallenges to cope with this new

market demand.

Opportunity orThreat for the FXMarket?

Do we have to befrightened by thisnext evolutionarystep? Are there moreconstraints thanbenefits for the vastmajority of today’smarket participants?Is this a good thingor not? Given thecentral role of theFX Market – afterall, everything has to

be bought or sold through acurrency! – FX markets volumewill certainly continue to grow astrading robots will be more andmore active on the market.

The only thing which is certain isthis - everyone, every singleorganisation involved in theprogram trading business or notwill have to go through thisquantum gap. As in every marketshift, you’d better have your ownidea on how it might affectyourself, your organisation, yourclient base in order to bepositioned to embrace this changeand exploit the opportunitieswhich will arise for everyone.


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First day at the new job after a robot made him redundant

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