Disadvantages of Forex Aggregation

Forex Aggregation is still a fledgling technology. Applying Complex Event Processing and Stream Event Processing, this technology has advanced noticeably. However, there are still a number of challenges and issues that need to be addressed from implementation point of view primarily due to the nature of Forex market. The following section discusses some of the disadvantages and challenges of employing a Forex Aggregator.

Some of these are, in part, due to the nature of the FX market such as ‘multiple hitting’ and the ‘liquidity mirage’ leading to clients experiencing reduced success ratios in their trading.

Consolidating Different Systems and Technologies

For presenting information in an aggregated format, Aggregators have to deal with the different ways in which the data is provided by various liquidity sources. Some sources provide the data in industry standard FIX format and others provide it in a proprietary binary format. While some sources provide a level two order book, which displays live orders that a trader can trade against, others work on an RFQ system. Aggregating data from RFQ liquidity sources that continuously stream information is relatively easier. However, RFQ sources that do not stream data on a real time basis, Aggregators face a challenge of updating information on a real time basis as request for quotes have to placed every few minutes. Ensuring connectivity to all venues is therefore the biggest challenge for Aggregators. Experts suggest that the key for achieving this connectivity is to build and maintain relationships with the venues rather than any technical or technological wizardry.

Implementation and Latency Issues

Several buy-side trading firms are rethinking their approach of using an Aggregation service after not achieving the benefits they had expected. This may be primarily due to the attitude of many participants that expect unilateral access to every available liquidity source rather than taking a more selective view of aggregation and the sources and venues included within their trading strategy. Lack of strategic focus affects the effectiveness of aggregation. Besides challenges in implementation and method of delivery, Aggregators also face another major issue of latency with which the data is delivered. In other words, while the technology is very good, its application needs to be revised. Experts suggest that pure aggregation services alone are an incomplete solution and Algorithmic Traders can embed Aggregation services in their strategies to save valuable execution time and cost.

Liquidity Mirage

While liquidity aggregation is beneficial especially for buy-side traders, it could also become counterproductive. Banks dealing in forex typically display the same price on multiple portals and electronic trading sites, thus creating a certain level of duplication. The liquidity displayed by the Aggregator may therefore not be true liquidity.