A Liquidity Aggregator acts as a centralized trading portal by accepting and normalizing several data feeds, feeding that data into algorithmic engines and receiving orders and routing them into the market. By presenting available liquidity in a single and consolidated order book, Aggregator act as a ‘Virtual Forex Exchange’ for buy-side traders. Traders can get a complete picture of available liquidity in a single trading environment, which enables them to have maximum control over their order flow by easily sorting, analyzing and making profitable decisions. Aggregation solutions are developed using Complex Event Processing technology, which are real-time in nature. Leading banks have now recognized opportunities in providing market aggregation services to their customers, creating sophisticated order types and implementing smart-order routing technology.
Trading institutions and market making banks can build their own trading platform that provides an aggregated view of the market. On getting an aggregated view of the market, algorithms can be created to apply orders based on their trading strategies. Trading firms can also purchase a third party aggregating and trading platform with prebuilt screens, algorithms and connectivity (referred to as ‘Black-box solutions’). Alternatively, they can also apply systems which also come with pre-built features but can be configured to meet the trading firm’s specific trading needs, commonly known as ‘ White-box solutions’. White box solutions are particularly applied by top-tier hedge funds and large dealers.
Competitive Advantage
The biggest challenge faced by all market participants (including sell-side and buy-side traders and market makers) in Forex market place today is managing complexity driven by drastically growing trading volumes and growing dispersion in liquidity sources. Significant investment is essential for updating old technologies or risk losing money on trades. A well developed and maintained liquidity discovery and aggregation solution can provide a trading firm competitive advantage, especially for market making banks which have traditionally relied on EBS and Reuters for accessing liquidity. Banks are increasingly using aggregation tools not only to track the available liquidity in the market but also in their own orders books. For example, HSBC has internally built its own liquidity discovery solution by applying aggregation and algorithms. Large hedge funds and banks view algorithms as a competitive advantage and do not rely on third-party vendors for algorithm development.
Costly and Time-Consuming
According to TABB Group, by the end of this year, 68% of all forex trades will be executed online. Historically, only the largest corporate customers dealt electronically, however infrequently trading customers are also looking for trading electronically with their banks. To satisfy this growing clientele, banks are therefore focusing on building robust and scalable trading platform. They use Complex event processing technology to build a series of rules that enable them to locate the best available price. They can also build algorithms to reflect their trading habits and preferences instead of applying a standardized third party trading platform. However, developing such a platform in-house is costly and time-consuming which can be afforded by only a handful of tier one banks that have enough resources. By outsourcing technology to best suppliers, banks can reduce their time to market and IT costs.
Current market conditions have further aggravated the problem of lack of resources. Both tier 2 and tier 1 banks are therefore entering into partnerships with vendors and other banks for developing white-labeled solutions to capture forex business. Some banks prefer third party providers which provide the same tools but without the burden of in-house development cost and cost of maintaining and updating algorithms. Ready to use aggregated platforms act as a telecom grid wherein market participants can easily dial anyone and engage in a conversation without investing in infrastructure. Moreover, vendors are increasingly adopting FIX standards for trading and FIX FAST for providing market data, thus improving connectivity to execution venues and overall performance.
Changing Motives to Trade
Foreign exchange is now treated as an asset and the trading volume has increased drastically over the last few years. New market participants have different approaches and trading motives and demand different trading venues and trading styles. Traders may be active or passive, patient or impatient and may be informed or uninformed. Besides they may also have different risk-return expectations, investment time horizons and may react differently to market conditions. To satisfy varying needs of their customers and distribution channels, banks are now in the race to aggregate the fragmented forex market and provide their customers a single view of the market. Market making banks that lack resource to develop their own aggregated trading platforms can either outsource developing task or opt for white-labeling solutions. The choice generally depends on the proportion of their high frequency and low frequency customers. However, the biggest challenge they face is that the existing electronic infrastructure and aggregation system available provide limited flexibility and customization.
Control in Dealings
Some trading firms and market making banks prefer developing their own trading platforms based on their business strategies and risk appetite. In-house developed platforms provide them better control over their dealings. However, it is important to analyze the cost and return benefits of building an in-house platform. To keep up with the arms race, third party providers have started investing and building faster technologies and products that enable banks to provide different executable pricing streams to different customers based on their needs and trading motives.
Speed and Capacity
Speed of execution becomes a critical factor due to the ever increasing use of algorithmic trading. Increasing ticket volumes challenges banks and liquidity providers to get their prices out in the market fast enough and confirm trades at the rate at which they are being traded. While several banks continue spending heavily on their websites to keep it updated, internet lack capacity, cannot be scaled easily and can have security issues. Introduction of Black box trading has resulted in an increase in small ticket trading thus increasing trading frequency. As the number of tickets traded increases, it creates a real capacity constraint and cost pressures for banks and brokers. Not having enough capacity can further create latency issues. Developing solutions that takes care of both pre-trade and post-trade execution issues may not be cost-effective for banks and trading institutions.
Flexible and Customizable
Innovations in technologies enable system providers to unbundle and re-package their core services to provide optimal set of network and trading services to their customers. Given the dynamic nature of trading relationships and increasing number of available liquidity venues, flexibility is now considered to be the most important feature in a trading system by all market participants including liquidity providers, market making banks, buy-side and sell-side firms. White-label solution providers are now providing new and improved aggregation platforms that allow banks to not only provide prices in chosen currencies but also get liquidity from a partner banks when required. Market participants prefer solutions that are intuitive and stream best prices to their screens in customized ways besides allowing them to trade in large order sizes. New aggregators are also expected to have the ability to enable traders to trade unique order types, including sweeps, triggers, and time varying orders.
Integral’s FX Grid is one such trading platform which allow market participants to connect to its FX Grid through a single Integral API from which they can negotiate, execute and settle trades with counterparties. Besides providing system integration and eliminating the need to manage multiple systems and services, FX Grid also insulates its participants from changes in technology made by other participants in the network, such as modifications to their systems' APIs. It is an end-to-end automated system which allows for provisioning of liquidity, thus enabling banks to provide flexible and customized liquidity solutions to customers.
Implementation of Aggregation Platform
Market making banks today have access to a wide range of white-label solutions available in the market; however implementation of these services is equally important. While some of the older solutions available are considered to be very good at scanning the market, they lack in adaptability and dynamic decision making ability. Building a technology is only half the battle won, the other half lies in proper implementation and integration of this technology into strategic decision making.
Cost of Maintaining and Updating
Changing dynamics and increasing velocity of forex market demand constant monitoring of aggregating solutions and keeping them updated and in tune with the market developments. Liquidity venues and the way liquidity is posted are constantly changing. The importance of successfully choosing, upgrading and maintaining a system cannot be overlooked. Banks have realized that it does not make any business sense for them to build aggregation solutions themselves and spend heavily in maintaining them. They rather focus on creating value-added services and use the best available technology to launch these services quickly into the market. Purchasing white-label solutions is therefore a more efficient way to offer new services to their customers.
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