FX aggregators: a neat option when

choosing between ‘sweeping’ and ‘full

amount’
• Published on March 12, 2019

Matt Clarke

Matt Clarke

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Traders seem to like aggregation software. It follows that aggregators are becoming more and
more common in FX.
And why not? Unlike a single dealer platform, an aggregator allows every single trade to be
competed by all available LPs so the trader can benefit from all their skews.

In the illustrative example below the tightest spread from a single LP is one pip and yet the
aggregated spread is just 0.4 pips, coming from two separate LPs.

Nuances exist such as increased adverse selection due to over-aggregation -- fewer LPs may
in fact deliver lower execution costs -- but this note will take aggregation itself as a
given.

'Sweepable' vs 'full amount'

The next question is how do you aggregate LPs? Do you ask them for 'sweepable' or 'full
amount' streams? Or both?

A note first on 'full amount' which is rather confusing terminology because it means
different things to different people. If I have 60 mio to trade over an hour and split it
into clips of 10 mio each ten minutes and trade each one with a single counterparty,
what is that? Henceforth in the article read 'full amount' as meaning 'single clip'. There
may or may not be more flow coming later on but each particular clip will only be
traded with one counterparty.
LPs will often favour 'full amount' trading and with pretty good reason. The argument goes
something like:

• If you trade with just one person that person may be able to hold the
risk and better manage the market impact of the hedge.
• This means they may have a better chance of monetising the flow and
may accordingly show tighter spreads in future.
• If instead you split e.g. 20 mio across six LPs, you might create a race
condition in which everyone is incentivised to hedge faster (prisoner's
dilemma at work) and the flow may end up looking worse for
everyone. You could get a sharp reval curve like the illustrative one
below. This might result in all LPs finding your flow sharp and widening
your future spreads.

• It can also prove very time-consuming to perform liquidity

management on 'sweepable' pools: if you put a single externaliser into
a pool of risk holders (or an existing LP changes behaviour) they could
ruin the outcome for everyone so you might need to regularly monitor
market impact of each LP alongside metrics like fill ratio and $ Cost of
rejects.
And in practice?
Well, it sometimes works. However, the problem is that the situation is a bit chicken-and-egg.

The LPs may see a sharp 'sweepable' curve and accordingly the 20mio 'full amount' price they
show might not be super competitive.

The client might then look at the 'full amount' spreads and observe that 'sweepable' is still tighter.
That's a hard sell.

What's the third option?

An impressively pragmatic innovation has appeared on a number of aggregator software
platforms and is on the road-map at many others. The feature is often referred to as 'price
improving FA '.

It works like this:

1. LPs give clients two streams: 'sweepable' and 'full amount'.

2. The aggregator automatically compares the VWAP price on both
streams in real-time and displays and hedges on whichever stream is
the cheapest.
3. It never trades across both streams of course and the user doesn't
have to change any workflow or make a binary and static choice
between one style or the other.
This is extremely neat.

It gives LPs a chance to prove that 'full amount' results in reduced execution costs and does not
require the client to make a leap of faith as they are always automatically dealing on the best
price available to them across either stream. It elegantly sidesteps the chicken-and-egg situation
and does not require the client to make an upfront change. LPs can start gently by focusing on
particular pairs or sizes and then, if it works as expected, you might expect the flow to iterate
such that the majority of activity takes place on the 'full amount' stream -- because that stream
proves to be cheaper for the client.

The result may be that LPs are happier and clients get tighter spreads because of platform
innovation. Some will find this a little too cute but you can even extend the idea by comparing
 not just displayed price but effective price. If the 'sweepable' stream rejects 10% of orders on
average then you can weight the price it shows by the expected cost of going into the market and
covering the remainder.

For day one, though, you might find that even a simple price comparison with ties going to the
'full amount' stream gets you a long way. Consider asking your aggregation software vendor if
they support option three and doing a little experiment.

Latency floors can be great for venues as well

as end-users. So why do we not see more of
them?
• Published on June 27, 2018

Matt Clarke

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Over the last few years people have been increasingly preoccupied with ‘speed traders’ and
questioning whether certain marketplaces would be better off with latency floors to equalise
market data speeds across all participants. Primary markets in FX already have latency floors, of
course. This is not the case for the majority of central limit order books in equities, futures, rates
and commodities.

Most market structure arguments – like this one – are generally informed by the author’s frame
of reference so let’s be upfront about mine.
I believe the point of markets is ultimately to serve end-users and their agents e.g. asset
managers investing on behalf of public pension schemes. It is from that perspective that I’ll
approach this topic. Does a given market design feature holistically benefit or harm this group?

Market makers are important but only inasmuch as they provide a service to end-users i.e.
providing immediacy of risk transfer and taking on time/fluctuation risk in return for spread.

Arbitrageurs – who may or may not also make markets – can be helpful as they perform the
unexciting but useful service of aligning multiple venues. However, if they introduce negative
externalities for end-users whilst doing so, their needs are further down the food chain. A lot
further down the food chain.

The commercial fisheries example on page four of this paper is an entertaining

illustration of how net value destruction can occur due to speed wars.

OK, so how does a typical one-way latency floor work?

All aggressive/liquidity removing orders are subject to a speed bump of up to several
milliseconds (one millisecond is a thousandth of a second). In some designs the length of the
speedbump may be randomised. If the passive/liquidity adding order is still available for
matching after the aggressive order has traversed the speed bump you get a fill; if it is not, a
miss.
Note carefully this is totally distinct from ‘last look’ in FX, which is sometimes erroneously
conflated with speed bumps. With last look, the liquidity provider knows about the order and can
choose whether to accept it; with a speed bump the exchange determines the match and the
liquidity provider has no knowledge of orders that missed.

What’s the argument for latency floors for end-users

on all-to-all ECN?
A market that incentivises raw speed is an operational tax on end-users of the market

If raw speed is the determining factor, any liquidity provider who is systematically outpaced will
consistently get ‘picked off’ as the fastest arbitrageurs observe quotes move in one venue and
race to hit quotes in another a few milliseconds before the liquidity provider receives the same
market data and can react. The end result is that all liquidity providers are forced into an
expensive arms race.

This is a classic prisoner’s dilemma wherein participants are commercially obliged to participate
in a negative sum activity due to the participation of others. Liquidity providers are not charities
and that additional operational expense is passed onto … you guessed it … end-users via wider
spreads than would otherwise be possible.

By promoting a level playing field in terms of market data, liquidity providers are more
confident in tightening spreads

End-users tend not to be informed on market-making horizons. HFT certainly are. Any market
maker on an all-to-all exchange has no idea with whom they will trade; they get a mix of 'toxic'
HFT flow and regular end-user flow.

The end-user flow is thus subsidising the 'toxic' HFT flow because the spreads charged on a
venue are determined by the average quality of flow on the venue. A speed bump normalises
market data transport across all participants: if a market ticks in Chicago and a HFT is able to
ship that data over to New York (before you can) the latency floor will give you a chance to see
and incorporate that tick before the HFT can hit your stale price.
Latency flooring across all participants makes it harder for HFT liquidity taking strategies to pick
off liquidity providers and thus encourages market makers to quote tighter (and in larger size) to
attract more flow from end-users whose orders stem from genuine economic exposures rather
than intermarket races.

They reduce barriers to entry and encourage competition

If raw speed is a prerequisite for success in liquidity provision, any participants – especially new
entrants, who may not have access to such expensive infrastructure – cannot compete and
logically withdraw. We’ve known this since the seventies.

This is a shame as such liquidity providers may well have risk absorption appetite and removing
these limit orders from the market entirely (because they systematically get picked off each time
a related market moves) reduces valuable liquidity. Regional banks in FX are a good example:
they are an important source of liquidity to the interbank market.

What’s the argument against latency floors?

Any additional complexity is bad

All being equal, simpler is better since end-users and their agents tend to react to change less
efficiently than specialists. As a principle this is entirely fair, although it is worth noting that the
existing effort of trying to measure latencies and jitter across related venues is no less complex.

It slows down price discovery and/or increases risk

It is risky to create a new price point (improve the 'top of book' price) and market makers should
thus be incentivised for doing so. This is however a spurious point since passive (liquidity
adding) orders are not subject to one-way speed bumps and therefore the market maker does get
rewarded with queue position.

Some market makers argue that latency flooring the matching process on venues (even by a
handful of milliseconds) is bad for the market as it hampers risk management but this also misses
the point. That is absolutely true at extremes – imagine a market updating once an hour vs once
per second – but we have gone far, far beyond the point of diminishing returns.

I do buy the line of thinking that we must consider all this in the context of computing time,
rather than anthropomorphising ... however, if a market marker is concerned about an increase in
risk holding times of such tiny increments, they’re ultimately acting as an arbitrageur rather than
a liquidity provider who absorbs risk for a meaningful period. Whenever an arbitrageur
disappears, experience shows another will immediately pop up and perform the task – maybe a
few microseconds later. They're at the bottom of the pyramid.
End-users, on the other hand, have long-run economic exposures; it may take several minutes for
an asset manager to process an order internally and they may hold the position for weeks or
months. Speeding up the process by a millisecond or two at time of trade is of little to no benefit
to them so why should they pay the tax?

Why, then, don’t we see more experimentation with

latency floors in listed products?
This is the right question to ask!

From an exchange CEO’s perspective, any change is risky – even when it will demonstrably
benefit end-users. If your top five brokerage payers are speed-focused HFT and they all hate
speed bumps (they would as it would have the effect of levelling the playing field) it takes real
confidence to implement one. If you’re right, you’ve improved the business and end-user client
experience; if you’re wrong, you may lose your job!

This doesn’t mean that exchanges haven’t deeply considered adding latency floors. See this
patent for example. This is because there are also great benefits to exchanges of latency
flooring.

Any exchange would much rather have their revenues diversified across many participants than
have 50% come from the top 10 as this exposes them to less ‘key client’ risk and allows them to
develop products broadly without being beholden to a small special interest group.

Furthermore, because the top participants typically receive meaningful volume discounts on
brokerage, exchange revenues would be higher if the same volume were spread across many
(individually smaller) liquidity providers.

Finally, it would improve conditions for end-users of the exchange. Let’s not forget them since
they are, after all, the whole reason for markets existing!
 How can venues experiment?
Well, the easiest thing to do is to experiment, thoughtfully. Each venue and product has a
different set of conditions (tick size, participant mix, regulations, proxy venues etc.) so design
decisions need to take these factors into account. In some cases – like one-tick markets, where
the bid-ask spread is practically always at the minimum tick increment – there may be
preparatory work required.

Determine a list of market/liquidity quality criteria and try adding a speed bump in a subset of
smaller products. Do the data indicate conditions have improved and holistic costs reduced for
end-users? Do activity levels change? Is brokerage income more diversified?

If – and only if – it has the desired effects, continue to experiment more boldly and roll-out on
major products.

It really cannot get much worse than the current situation whereby market participants are
trapped in a prisoner’s dilemma of wasting collectively hundreds of millions annually on
networks, whose only effect is to speed up intermarket price discovery by a few milliseconds …
which is of no practical economic benefit to end-users of markets but for which they must
implicitly pick up the tab in the form of wider bid:ask spreads.

2017 in review: FX market structure

• Published on December 13, 2017

Matt Clarke

Matt Clarke

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I’m always surprised when I hear folks say that 2017 was an uneventful year in FX.
Volatility and revenues
It certainly feels like we are living in ‘interesting times’ from a macroeconomic perspective with
Brexit, Trump and China’s continued ascendency. Yet it is absolutely true that volatility in FX
(as in all asset classes) was rock-bottom again this year. The VIX is currently hovering near its
lowest recorded levels.

As everyone knows, FX revenues are highly correlated with volatility. Accordingly it has been a
down year for most FX divisions. Those in growth mode or with a large corporate franchise or
exposure to bespoke FX risk management products have fared relatively better but, across the
market, revenues have been challenging. On the other side of the accounting ledger many mature
institutions find they have an already pretty optimised cost base that cannot be meaningfully
reduced from here without pulling out of core activities.

If history is any guide, volatility cannot stay down here indefinitely but those who designed their
business on the assumption it might are looking smart. Exacerbating this has been the work
required for MIFID II. This has been a huge focus at most institutions and has sapped resource
from new business initiatives. This is likely to continue into H2 of 2018. After that life should be
a bit more fun as focus returns to new ideas and products.

Regional banks
One bright spot has been the improvements that banks outside the traditional top 10 have made.
Often boasting strong corporate franchises and excellent credit ratings, these institutions are in
many cases using third-party vendors to outsource non proprietary aspects (connectivity, credit
checks etc.) and are thus able to launch high quality eFX client offerings at a fraction of the
upfront or maintenance cost that a DIY approach would’ve required, even just a few years ago.
Anecdotally this seems to be bearing fruit.

The Global FX Code

One defining feature of the year, unfortunately, was a number of high profile fines for historic
FX conduct activity. It will be a relief when the last of these is out of the way and the industry
can focus on the future instead of the past. Promisingly the zeitgeist of 2017 was animated by
one such forward-looking initiative: the Global FX Code.
To get hundreds of private and public institutions across the world to work together and agree on
best practices is an achievement in itself. The most contentious topic was pre-hedging in the last
look window (‘Principle 17’) with a robust debate on whether this was or wasn’t acceptable best
practice. Following a comment letter period, it was agreed that this was not in line with best
market practice and the Code’s language will be updated this month to reflect this. Although it
may seem subtle, this is a huge victory for FX market consumers and will put an end to one of
the biggest rent-seeking activities in today’s market structure. The big challenge now is adoption.
It seems certain that all major banks will sign up but a question remains on how to deal with
major HFT who market make on anonymous venues and may wish to remain unencumbered by
industry best practices.

In their comment letters a number of institutions argued that the Code should go further and ban
last look entirely. It seems unlikely that this will happen since, unless there is a third-party
matching agent in-between the LP and its client, the LP will always need the right to reject a
trade. Why? Because it is the LP who must determine the contract is within credit and position
limit thresholds. Nonetheless it does seem that last look’s overhang on the market is set to
reduce.

TCA
One reason for this is the increased use of TCA in the market. There are now a number of high
quality independent providers and the uptake amongst the buyside in 2017 has been
unprecedented. This can only be a good thing. Certain ECN’s are also bringing a new level of
transparency to their platforms with several introducing analytics that show their clients their
cost of rejects and market impact for the first time. What gets measured gets managed and it
seems inevitable that once consumers see the cost of rejects they’ll vote with their feet in cases
where the cost is disproportionate.

For various reasons, systematic approaches to portfolio management - whose practitioners have
always been at the forefront of the market in terms of execution analytics and quality - appear to
be in favour with investors at the expense of discretionary global macro traders, who were
typically a huge part of G10 FX client volumes over the last decade. Due to the vastly different
execution styles and business requirements of these two types of participant this is quite a pivot
and the sell-side is cautiously adjusting its personnel to accommodate this shift.
Interbank venues and market data
The second headwind for last look is the faster data from primary markets. This changes
everything. Over the last year primary market updates have sped up meaningfully: in some cases
from 100ms to 5ms. Now LPs looking at the primary market to perform an ‘on market check’ in
EURUSD or USDJPY can do so in 5ms or less. Just as a drop in oil prices must eventually result
in cheaper petrol at the pump, so last look times are being slashed to reflect the step change in
the underlying interbank market that powers price discovery. Incidentally one interesting
development in the interbank market is the conscious tying of market quality to market data: in
some cases, one must contribute (i.e. provide liquidity) in order to receive the fastest market
data.

The faster interbank market data has had another effect: the number of quotes generated on
secondary venues or single dealer API has exploded. Some executives have gone on record as
saying quotes are increasing at over 30% compound each month! This puts extraordinary
pressure on systems at a time of low revenues, since an increase in quotes does not result in an
increase in matched trades. Expect to see more focus on this in 2018 as end-users (whose
systems may also struggle) and ECN’s begin to evaluate the cost of processing these quotes. It
seems likely that the business approach will be to measure quotes generated:traded volume ratios
for each LP and offboard those who generate a lot of quotes without adding much value by being
top of book and winning trades. This is likely to spell hard times for liquidity recyclers who
generate a huge number of quotes whilst rarely trading.

Clearing and NDF trading

Credit has always been a defining feature of FX market structure. Clearing in NDF continues
apace and next year might reach the tipping point of >50% of dealer-to-dealer volumes being
cleared. Increased adoption is important as it drives unit economics with the relative cost of
clearing decreasing versus the alternatives with each additional % gained. Dealer-to-client
activity is different entirely and is likely to remain bilateral for the foreseeable future. The
infrastructure required to trade NDF electronically has also blossomed over the last 12 months
with the market rapidly transitioning from a manually risk-managed and priced product set to an
electronic one.

There are a variety of clearing initiatives beyond the existing NDF market. Whilst compression
services and repapering have been effective in alleviating some of the pain faced by banks’
forwards desks, there is a gradual path of regulation-mandated deadlines that mean that each year
we are likely to see an increase in clearing of FX products. As before - once economic tipping
points in terms of unit costs are reached, expect to see a rapid acceleration in uptake.

Bitcoin
I can't even.

Transactional FX
With business conditions poor in institutional FX markets it is unsurprising major players have
invested in and focused on consumer payments i.e. physical FX. Valuations (often based on
 relatively small notional investment rounds) look seriously optimistic for tech entrants, who are
having the effect of repricing consumer FX from circa 300bp to 50bp (or less) from mid. It is
likely these tech entrants will never reach meaningful profitability but their existence will
nonetheless be a drain on retail banking franchises over the next decade since they’re likely to
have to reprice defensively. This transactional FX business is of course totally benign in profile
and largely uncorrelated with institutional FX revenues. With cross-border retail increasing at
circa 25% compound annually and 85% of transactions still involving physical cash the received
wisdom is that there’s plenty of room to grow the payments pie.

Anyway...
If you got this far, congrats, and I wish you a relaxing and enjoyable break. Look forward to
catching up with you in 2018!

Top 10 Trading & Market Structure Reads

• Published on August 31, 2017

Matt Clarke

Matt Clarke

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Someone asked me last week on Twitter what my favourite trading-related books would be.

As I mentally made the list I remembered how much I'd enjoyed reading a number of them; and,
after hearing back from someone who read one of the books and also really enjoyed it, thought
I'd share them.

Without further ado and in no particular order here are my top 10. Would love any
recommendations from you in return...
1. A Man for All Markets: From Las Vegas to Wall Street,
How I Beat the Dealer and the Market
The Godfather of quant finance. Amusingly written autobiography of the man who invented a
system to beat Blackjack and then - after being effectively barred from Las Vegas and bored with
academia - launched the convertible arb industry, inventing the options pricing formula later
published by Black-Scholes and refining the early Morgan Stanley stat arb and factor models.
Would be great at dinner parties.

2. Make The Trade

That rare thing: a book written by a current practitioner. Incredibly candid - almost inadvisably
so - and heavy on folksy Kansas wisdom, this is the quintessential HFT origins story of a humble
pit trader who automated his strategies and ended up surfing the wave and becoming a billionaire
with a huge firm that trades a meaningful % of all US equities. Worst cover photo ever.

3. Market Wizards
A series of mid length interviews with a number of the world's most famous traders : Bruce
Kovner; Paul Tudor Jones; Ed Seykota etc.. Because the author, Jack Schwager, trades himself
the line of questioning is great and you get a real insight into how each of these hedge fund guys
operates and thinks about the market. Schwager does a really good job of editing and distilling
succinct ideas and fun anecdotes from what is typically a very guarded crowd.

4. Dark Pools
A journalistic account of the electronification of US equities markets. At its best when it tells the
story of the fun characters like Island's Josh Levine and the SOES Bandits. Some of the unusual
features of the market become obvious when you understand the patchwork context in which
they evolved and this book is good at telling that story. I also finally learned why ITCH/OUCH
are called that (Levine was poking fun at NASDAQ, the acronyms don't stand for anything).

5. Inside the Black Box : a Simple Guide to Quantitative

and High Frequency Trading
A kind of 'Dummy's Guide' to setting up a quantitative or market making strategy, running
through all the basic concepts with intuitive examples and managing to avoid making the reader
do any maths. Made credible because Rishi - and more prominently his brother, Manoj, who
helped with the book - ran Tradeworx, which was another large US equities HFT. The final
chapter in which he attempts to justify HFT's role in society is boring and weak but the practical
explanations and schematics on things like transaction cost models, alpha models, portfolio
composition etc. are well structured and clear. Again: very rare for someone who is still (sort of)
in the industry to share this kind of information.

6. More Money than God

Please look past the ridiculous click-bait title as this is a great book. It runs through the evolution
of hedge funds, all the way from Alfred Winslow Jones to Jim Simons. What is great is that the
author demystifies their strategies. There's no macro guff about reading the tea leaves of the
world economy or having a 'feel' for price action. You see in each case a clear 'edge' that each
manager enjoyed at the time from being able to short (when everyone else was long-only) to
using leverage (when it was uncommon) to taking on block executions (when markets were
inefficient) to using statistical techniques and computers (when others did not). He is perhaps not
as critical as he might be and the style is journalistic but the book is well researched.

7. Reminiscences of a Stock Operator

A common favourite book for many traders and market structure types, it is often named as the
book that made many 'want to go into trading'. Published in 1923 this fictional (some
convincingly argue semi autobiographical) account of a young man's journey through the bucket-
shops and brokers to speculative fortune is full of wisdom and insights that are as relevant in
today's markets. The fictional format works beautifully - you'll not put it down - and by the end
you'll want to start speculating on sugar and soybeans yourself!

8. Trading and Exchanges : Market Microstructure for

Practioners
Yes, it is a textbook; but it is fantastic. Still the best cross-asset market structure education you
can get on paper. Edge givers and demanders; rebates and incentives; taxonomy of trading
participants; quote and order-driven markets; matching logic; market manipulation; volatility and
liquidity; circuit-breakers; market efficiency ... it is all there and clearly explained with plenty of
real-world examples and sufficient detail. Provides a great framework for thinking about market
structure.

9. Flash Boys
Contentious but it has to be on the list. Nowhere near as entertaining as his best book - Liar's
Poker - and hated for its reductionism by many equities market makers. Nonetheless Lewis has a
talent for taking esoteric subjects and making them readable for the masses : how many people
outside the narrow world of finance, before this book, cared or knew about about 'hide not slide'
orders? It is also an important part of the current zeitgeist, precipitating a live shouting
match on CNBC which forced BATS' then president to resign and all the subsequent furore
about IEX's exchange status and 'magic shoebox' which has dominated US equity market
structure of late.

10. The Internet

I'm cheating a bit by subsuming this into one entry but, what the hell, it's my list.

1. Cliff's Notes (now renamed, did he get sued?) is an archive of posts

from AQR's outspoken founder and quant king, Cliff Asness. The
writing is hugely entertaining - always read the footnotes - and he
brings a lucid and intuitive but rigorous approach to bear on a variety
of investing topics. As you'd expect given AQR's background, has a lot
to say on factor investing.
2. James Simons' Numberphile Video Interview offers a rare insight into
the workings of the world's most famous quant fund, RenTech. From
1994-2014 it averaged a >70% annual return and since closing to
outside money has minted several billionaires. I find Simons a bit
pompous at times but he's worth $18 billion and has both a proof and
an asteroid named after him so I guess if he can't be pompous, who
can? At his most interesting when he describes the general approach
to the success behind RenTech: how to hire great researchers and
build a conducive environment for them (he favours collaboration
rather than competition).
3. Memos from the Chairman is the archive of Howard Marks' memos on
markets and investing, dating back to 1990 so these really are memos
and not posts. Oaktree and Marks have always taken the long-view
and he believes patience (and patient capital) provides an edge.
Wonderfully lucid throughout, I really enjoy reading some of the past
memos, knowing with hindsight what happened next ... they age well.
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Five predictions for 2017

• Published on January 5, 2017

Matt Clarke

Matt Clarke

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I think there is a world market for maybe five
computers
IBM President (supposedly) in 1943

Committing predictions to writing is a wonderfully effective way to appear foolish at some

future date when they’re reviewed with the benefit of hindsight.

Still, there’s no fun in sitting on the sidelines. Here are five topics that seem important as we
begin 2017.

1. Clearing of FX swaps
With voluntary NDF clearing picking up steam and cleared IRS already a huge success, 2017
may be the year this finally happens. I’m not the only person to think so: last year saw an
exchange group purchase a major OTC venue and publicly announce plans to extend the product
suite. Banks, who may historically have been lukewarm, are now looking at the ROE of their
swaps businesses, post implementation of the Leverage Ratio rules, and are likely to be
supportive of such a move. Expect the market structure to look like it does in Rates where large
interbank institutions clear amongst themselves but corporates continue to hedge exposure
bilaterally with their banks. Keep an eye out for key ECN launching electronic swaps offerings
in 2017: clearly electronic volumes would explode upon the market moving cleared.

2. Volume growth
After a subdued macro environment (uniformly low rates; depressed realised volatility with
episodic crashes) things are looking more lively. The geopolitical environment seems likely to
provide sustained volatility whilst interest rates are rising and will begin to diverge, which ought
to see more carry trade activity. Secular shifts across fixed income and equities alongside
increased corporate hedging should both contribute to increased overall FX activity. Expect 2017
to be a good year for those that remained committed to the FX business and look for the CLOBs
to be outsized beneficiaries in periods of heightened volatility when internalisation drops.
3. The year of the regional bank
A constellation of factors are working in favour of regional banks. Key real money accounts and
global corporates, attracted by the credit ratings, are enquiring how they can work together more
closely. The technology required to run a scaled eFX business – with internalisation, analytics
and so on – is now available from a number of SaaS providers at a fraction of the price it would
have cost to develop in-house several years ago and comes already battle-tested in the market.
Finally, experienced talent is available as a number global banks reshuffle their
businesses. Elsewhere but related, ever more sophisticated prime of primes are poised to onboard
institutional clients that the tier one prime brokers no longer wish to service.

4. Last look
As more and more market data products offer real-time (or very close to real-time) feeds, the
case for last look as a tool for market data equalisation protection erodes – certainly in G10
currencies. The second stage of the Code of Conduct will be released in 2017 and this, too,
should harmonise key players’ approaches. Keep fingers crossed for standardised metrics and
analytics that permit like-for-like comparisons – such as Cost of Rejects – to be provided by
major ECN and multidealer platforms and for responsible market makers to provide clear
disclosures on how they operate last look i.e. whether they are active within the last look window
and on rejected orders (ideally: no and no).

5. MIFID II : the Great Unbundling

As the world prepares for the implementation of this wide-ranging legislation in early 2018,
expect to see changes working through the marketplace. Spot FX is of course not technically in
scope; however institutions and venues that offer multiple products (the majority of which are in
scope) are likely to take a belt and braces approach. Expect more transparency and a greater
unbundling of services : especially where dealing and research currently intertwine. Already we
are starting to see a ‘platform’ approach whereby trading venues partner with independent
algorithm and TCA providers in order to offer their clients an open choice. As we’ve seen in the
consumer world (Facebook, Amazon, App Store etc.) early adopters whose platforms reach
critical mass are difficult to catch up with and enjoy great forward multiples.
 The views expressed on this blog are the author’s personal
views and should not be attributed to any other person,
including that of their employer.

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John Farrell
 John Farrell 2nd degree connection2ndNever
argue with an idiot, they will bring you down
to their level and beat you with experience

Prime is one to watch.. will disruptive techs eventually remove this requirement?
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Jon Vollemaere 尊波理梅

Jon Vollemaere 尊波理梅 2nd degree connection2ndCEO at R5FX

Always a good strategy to begin with a disclaimer Matt.....But fully agree on all 5 points. Many long
lasting trends in there. Nice one
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The true cost of rejects in $PNL

• Published on December 8, 2016

Matt Clarke

Matt Clarke
 Following

XTX Markets

6 articles

• Like52
• Comment7
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There are probably six main things anyone who operates or sells an FX aggregator should know
and look out for.

Here we’ll run through one of the most overlooked and yet most revealing.

USD opportunity cost of rejects

Everyone knows to monitor response times and acceptance % of each LP or venue and kick off
poor performers.

Are all rejects equal, though? Clearly not.

Imagine an LP or venue who fills you in normal markets and rejects s-l-o-w-l-y during NFP,
during which the price ticks a big figure higher. That particular reject would be super expensive,
even if they filled you on the other 99.9% of trade requests.

The at-a-glance metric to track is USD opportunity cost of rejects.

Compare the move in (mid)price from the time you sent the order to when you got rejected and
must presumably re-attempt to trade … now multiply it by volume requested … that’s how much
that LP or venue’s rejects cost you in hard cash terms.

You’ll be quite amazed at how much the results differ across LPs and venues, whose rejection
figures and response times would otherwise look extremely similar.

The obvious next question is : who or what caused these rejects and how can they be prevented?
 The views expressed on this blog are the author’s personal
views and should not be attributed to any other person,
including that of their employer.

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Amit Raja
 Amit Raja 2nd degree connection2ndVice President; Electronic Equity Sales Trading

Interesting read on a topical subject. Thanks Matt

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Troels Estrup

Troels Estrup 2nd degree connection2ndHead of eFX at Danske Bank

thanks Matt
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Matt Clarke

XTX Markets
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 FX aggregators: a neat option when choosing between ‘sweeping’ and ‘full
amount’
Matt Clarke on LinkedIn

Latency floors can be great for venues as well as end-users. So why do we not
see more of them?
Matt Clarke on LinkedIn

•
 2017 in review: FX market structure
Matt Clarke on LinkedIn

Top 10 Trading & Market Structure Reads

 Matt Clarke on LinkedIn

Five predictions for 2017

Matt Clarke on LinkedIn

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