e-Forex-July-23-HighRes-SCREEN

FX Liquidity Management: Addressing the challenges of a seriously complex undertaking
DATA ANALYTICAL
TOOLS ARE ALREADY
THE ONLY WAY TO
TACKLE MOST OF THE
KEY CHALLENGES
FACING FX LIQUIDITY
MANAGERS
TRADING OPERATIONS
a completely different process
depending on the type of
organisation, and who is having the
conversations with LPs.”
What is increasingly clear across
the FX market, is the impact that
liquidity can have on a firm, says
Hopkins. “Liquidity management
has become both more complex
and more important. For example,
there are new ways of trading (some
firms have replaced sweeping with
full amount execution styles) and a
liquidity manager has to be able to
assess the impact of that change.
Sales teams at liquidity providers (both
banks and non-banks) also now spend
far more time talking about liquidity
and execution than they used to, as
opposed to the traditional model of
solely discussing directional market
moves and macroeconomics. This is
reflected in the significant appetite
on the buy-side for this type of
information, the importance of which
in many cases outweighs that of more
traditional types of content supplied
by the sell-side.”
All of these questions are
unanswerable without technology;
it is no longer sufficient just to be
eyeballing spreads on a GUI or relying
on a quarterly market share report.
Liquidity management technology
is an ongoing exercise, and hugely
important as the counterbalance to
the growing complexity of liquidity,
says Hopkins.
In terms of AI, a lot of the problems
with liquidity management are multidimensional
so are very suited to
machine learning (ML), says Hopkins.
“There are many areas where ML can
have a lot of value. However model
explainability is key - the ultimate
objective is to understand liquidity and
to increase transparency. If you come
to rely on complex ML models that are
effectively black boxes as the basis for
your liquidity management approach,
the danger is that you are just moving
the complexity from the trading
process to the measurement process.”
That said, there are only so many
ways that FX can be traded. Algos
introduced a new way of trading
but also brought more visibility into
the market. And the changes to last
look are good examples of how the
technology has evolved. Another
example of the evolution of liquidity
management is the greater use of
liquidity audits and using data analysis
to better understand how to use and
rotate a panel of liquidity providers.
When it comes to the next generation
of liquidity management solutions,
Hopkins identifies three phases of the
process – measurement (what does my
liquidity look like?); simulation (what
would happen to my liquidity under
certain conditions?); and optimisation
(what is the best outcome?)
“The much longer-term objective
will likely be to take the results of
those simulations and feed them into
execution systems and then automate
that process and create a closed-loop
circuit,” says Hopkins. “The sell-side
is already making those adjustments
in how they manage the liquidity they
distribute to their clients, and it is
inevitable that this will start to happen
on the buy-side. At some stage, the
solutions also have to go beyond
explicit transaction cost measurement
to include factors like the cost of
capital or the cost of clearing so that
you have a more complete picture of
liquidity and the associated costs.”
26 JULY 2023 e-FOREX