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 20<strong>23</strong> e-FOREX
Welcome to the next generation of bilateral FX trading. Ultra-low latency, 25+ global liquidity providers, Zero cost to trade. Book a demo at reactivemarkets.com JULY 20<strong>23</strong> e-FOREX <strong>23</strong>
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