e-Forex-May-23

MARKET COMMENTARY
“P2P liquidity is a potential additional liquidity source with
tremendous benefits.”
James Singleton
levels the playing field, irrespective of
the kind of trade involved. When asked
about the broad advantages P2P offers
market participants, Jay Moore, CEO and
co-founder of FX HedgePool, concurs
with Singleton’s observations and adds
that some instruments benefit more
than others.
“Take swaps for example,” he says.
“Swaps are the largest part of the
largest capital market in the world and
volumes have grown in large part due
to the increased demand for passive
hedging from everyday investors. Unlike
reactionary spot trading, passive hedging
generates predictable, recurring, and
directionally consistent swap volume
that most of the market knows is
coming – making swaps arguably the
most vulnerable orders in the market
with the most to gain from peer-topeer
trading. Recycling this type of
benign liquidity through the market
unquestionably creates excess costs
that are ultimately borne by investors.
FX HedgePool brings the natural
partners together to avoid that.”
One of P2P’s underrated advantages
for buy-side desks is its ability to
slot into operational workflows. For
instance, P2P effectively automates
operational trades, freeing up a
trader’s time to focus on strategically
important positions in a portfolio. With
some venues offering fully electronic
execution, buy-side desks can now
potentially automate their operational
trades, using P2P as a liquidity
source. “The use of algo execution is
becoming more and more prominent
with the buy side,” Singleton explains.
“Once an FX trader understands and
adapts to the advantages of “slicing”
an order, he or she can then determine
which liquidity sources to incorporate
in that execution, including a peer-topeer
pool if available.”
When asked about incorporating
algo-based execution, Singleton says,
“Our platform delivers the advantages
of electronic execution - execution
speed, anonymity, no last look, and
low market impact - without the
disadvantages of other ECNs - last look
and risk of information leakage.”
Continuing the algo adoption theme,
Moore notes that P2P adoption is
increasing since it fulfills many of the
same requirements traders demand
off algos. P2P delivers benefits such
as streamlining operational trades
and automating non-strategic trade
execution, mirroring the ones that
algos originally offered.
“Just as algos have become a
standard tool for today’s traders, P2P
is emerging as a standard “first stop”
for much of tomorrow’s liquidity,” he
says. “In our experience, it’s the same
traders who embraced algos early are
the same ones who are embracing
P2P.”
SUPPORTING BEST EXECUTION AND
TRANSPARENCY
“Best execution” is relative in FX.
Despite different definitions, almost
every buy-side trader agrees that
achieving it is challenging. Information
leakage and establishing a pattern
that LPs recognize before execution
impacts prices, thanks to pre-hedging.
While the GFXC’s paper on the subject
addressed the issue, the problem
persists.
MARKET COMMENTARY
One of P2P’s underrated advantages for buy-side desks is its ability to slot into operational workflows
Moore points out that information
leakage, or any form of predictability,
creates an adverse market impact
for the buy-side. “No matter how
carefully managed, whenever there is
predictability, there is market impact,”
he says. “The challenge, and perhaps
why many choose to ignore the
problem, is that market impact is not
MAY 2023 e-FOREX 17