e-Forex-July-23-HighRes-SCREEN

FX Liquidity Management: Addressing the challenges of a seriously complex undertaking
TRADING OPERATIONS
“When you add a new LP there is trading documentation
and credit agreements to sign, integration work to be done
and APIs to be used, and much more. It is a complex exercise
that takes time and money and success cannot always be
guaranteed. This should no longer be the case.”
Guy Hopkins
into the behaviour of each, says
Durrant. “It will slice this data
across any axis that the liquidity
manager desires providing the ability
to understand exactly how each
instrument and liquidity provider
performs at any time of the day and
under different markets conditions.
It will clearly identify trends in the
data in a timely manner so liquidity
management is no longer consigned
to a quarterly review but can instead
have daily, or even real-time, visibility.
The benefit of this will clearly differ
from company to company but we
have clients who have saved millions
of dollars on execution costs by
optimising liquidity so the benefits are
very clear.”
“Such platforms are not cheap or easy
to build and maintain. Fortunately,
the advances in cloud infrastructure
for elastic compute and storage
along with the availability of cheaper
time-series databases have made
building and accessing data platforms
easier than the once were. Building
a full in-house liquidity management
platform, however, is still a major
undertaking that should not be taken
lightly. There are some excellent third
party providers in this space and
many execution platforms offer such
a service. Liquidity management is
central to the offering at Reactive
Markets and we have invested heavily
in this technology for our clients.”
Effective liquidity management also
requires the ability to quickly action
decisions in order to change the shape
of the liquidity pool, says Durrant.
“Consequently, a firm’s technical
connectivity strategy must be agile
enough to support these changing
requirements. Similarly, platforms that
provide centralised access to liquidity
must be flexible and scalable enough
to support bespoke pricing for each
client and allow the LPs to provide a
tailored pricing stream to meet their
requirements.”
IMPORTANT METRICS
Clients are becoming more selective
and deliberate about how they
construct a pool of LPs, focusing less
on the explicit number of LPs and
more on the value each LP brings to
the table, says Durrant. “Metrics such
as market impact and rejection cost
provide insights on overall cost of
execution across counterparties, whilst
pricing insights such as the percentage
of time at top of book and spread
comparisons versus a benchmark
give clients a clearer picture of the
current and potential value of these
relationships.”
This selectiveness also makes the
auditing of FX Liquidity Management
a more useful process, provided firms
know who to achieve this benefit,
says Durrant. “The benefit of an active
liquidity management process should
be clear. In its absence pricing quality
and performance will often deteriorate
over time. The hidden costs of trading
in the spread and costs of rejects
will inevitably increase and reduce
execution performance. Opportunities
to include specific LPs that can add
value to areas of the liquidity pool may
be missed.”
Once a firm has decided that liquidity
management is valuable, it is important
to put in place a consistent process
that is performed regularly, says
Durrant. “They should have a clear idea
on the design of their liquidity pool
including the numbers and types of LPs
they would like in that pool. Once they
have the pool in place it is important
to have a good understanding of how
they will measure the performance
of the LPs and the relative costs and
benefits that each brings to the pool.
For example, having a view of the
costs of rejects can be as important
as an overall spread number. Armed
with the quantitative data, a regular
discussion with the active LPs should
be scheduled.”
In order to drive this process, the firm
needs access to the data and analysis
insights, says Durrant. “If they can’t
access it themselves then there are a
number of third party providers who
can help with this function. Indeed,
there is often additional benefit with
going externally as the providers will
often have access to information that
is not publicly available or available to
the firm; for example, reference mid
rates that can benchmark LPs or access
to LP data that the firm is not currently
trading with.”
Relationships continue to be at the
heart of liquidity management,
says Durrant. “Building a trusting
relationship with open dialogue
between counterparties is key to a
symbiotic pricing setup that works
for all parties involved. Regular active
22 JULY 2023 e-FOREX