Sovereign Wealth Funds: India's Stand on SWFs

India has realized that SWFs can play an important role in financing its growing economy and has started drawing attention of Oman, Kuwait and Qatar, countries holding largest SWF assets. India and Oman recently entered into MoU with $100 million of seed capital increasing to approximately $1.5 billion over the next two years. Core sectors like infrastructure, telecom, health, tourism and utility are expected to benefit from this funding. At present, large pool of foreign exchange reserves have been invested in low yielding OECD government securities bonds and other low yield deposits.

Indian Government had announced in its recent meeting with Gulf nations that it needs around $500 billion investment over the next decade to fund their growing infrastructure requirements. This also presents an opportunity for rich and wealthy Gulf nations that are hunting for better investment avenues beyond developed countries which are still under recession post Subprime mortgage crisis.

A section of industry experts however opine that since India’s reserves are not derived by commodity exports, unlike cash rich Gulf nations, establishing its own SWF is not a good idea. With its current account deficit still running around 2% of its GDP, it makes more sense to hold as much reserve as possible as against long term investing through SWFs. While reserves of Middle East countries come from oil and commodity exports, India’s reserves are derived from FDIs, External Commercial Borrowings and other term credits.

Opening up to Islamic banking will enable India in attracting huge amount of SWFs which are being diverted to China and other emerging Asian economies. Singapore is cultivating Islamic Banking so as to leverage its position as a leading financial centre.

Sovereign Wealth Funds: Concerns attached with SWFs

Several countries are keeping their economies away from SWFs due to the concern that some investments are being diverted for political objective to acquire control of strategically important assets. It has been observed that OPECs have been diverting large pool of funds in acquiring strategic assets and investing in important sectors like infrastructure, telecom, energy and media across developed countries. After much opposition from US Congress, Abu Dhabi's Investment Authority had to withdraw from its ADIA Dubai Port after 9/11 terror attacks.

China Investment Corporation’s $5 billion stake in Morgan Stanley and acquisition of Citigroup by Abu Dhabi Investment Authority for $7.5 billion was severely criticized after the recent subprime crisis.

Lack of transparency continues to be a major concern for nations that are experiencing increasing SWF funding in their economies. SWFs are being criticized for inadequate disclosures regarding size and source of funds, investment objectives and their holding in private equity funds. While in the U.S., these concerns are addressed by the Exon-Florio Amendment to the Omnibus Trade and Competitiveness Act of 1988, European Union preferred to avoid SWF funding. Some experts opine that such a fear is unwarranted if we compare the size of SWFs assets ($2 trillion) with the size of global investment funds assets ($20 trillion) and securities traded in dollars ($50 trillion).

IMG tried to address this concern of transparency and governance by issuing the Santiago Principles in 2007, a set of 24 voluntary principles to ensure transparency and sound governance by sovereign wealth funds (SWFs). However, very few SWFs have been following these principles seriously.

Sovereign Wealth Funds (SWFs)

Sovereign Wealth Funds (SWF) are owned and managed by governments or central banks of various countries around the world to invest their trade surplus globally, usually on a long term basis. They are funded by trade surplus of international trade, foreign currency deposit, International Monetary Fund reserves and other national funds like pension funds and oil funds. With subprime crisis haunting the global financial sectors, several SWFs are being criticized for investing heavily in Citigroup, Morgan Stanley and Merill Lynch which left them gasping for cash infusion. Nevertheless, from $500 million in 1990 to $3.8 trillion in assets today, SWFs have their presence now spread across 27 countries.

Around two-third of SWFs are held by the commodity and oil exporting and gulf countries like Qatar Investment Authority, primarily with the objective of diversifying their revenue streams and reduce oil-related risk and their dependence on oil export revenue.

Over the last decade, large current account surplus enabled Russia and China to build up their sovereign funds. They seemed to have realized (after Asian financial crisis of 1997-98) that it is better to build up their own reserves instead of depending on IMF to bail them out at the time of crisis. Russia and China now manage around $450 million and $1.44 trillion in SWF assets respectively.

Industry experts predict that assets under SWFs’ control could reach $12 trillion by the end of 2015.

The two main purposes of SWFs are short term foreign currency stabilization and liquidity management. The Global Financial Stability Report (2007) classified SMFs into five groups depending on investment objectives of their respective governments. They are:

(i) Stabilization Funds

(ii) Saving Funds for Future Generation

(iii) Reserve Investment Corporate

(iv) Development Funds; and

(v) Contingent Pension Reserve Fund.

During the period of rising oil prices, SWFs of oil exporting nations drastically due to increase in their foreign exchange reserves which are then used to make strategic acquisitions across the world. On the other hand, SWFs of emerging economies like China, Singapore, Malaysia and South Korea tend to grow steadily.

Another point of difference is the SWF to Foreign Reserve Exchange ratio which is used to determine the proportion of reserves which are invested using SWFs. It has been observed that OPEC have higher ratio compared to emerging economies. Last year, ratio for Qatar Investment Authority was 5.9 times compared to China Investment Corporation’s 0.12 times.

Cement Industry: Problem of Excess Capacity

According to CMIE (Centre for Monitoring Indian Economy), Cement industry is expected to increase its capacity by 30 million tones, reaching total capacity of around 276 million tones by March 2010. This will be the highest capacity addition in any single year. Given the current consumption levels of 178 million tones, expansion in capacity will put the pressure on the already plummeting cement prices.

Manufacturers have been cutting cement prices since September to ensure proper capacity utilization. The industry has been consolidating and the top five manufacturers now control around 60% of the entire production. The remaining capacity continues to be largely fragmented, primarily because cement is highly freight intensive and costly to be transported over large distance.

While the industry experienced a 10% growth in 2009, excess supply due to large capacity addition coupled with curtailed exports to Middle East and South East Asian Nations, the rate of growth can be expected to boil down.

Despite these challenges, industry experts opine that cement industry can be conservatively expected to grow 8% to 9% next year on the back of Government initiatives towards boosting the infrastructure and housing sector. Housing and Infrastructure sectors consume around 55% and 35$ of India’s cement output respectively and will now act as a major driver of growth for cement industry.

Islamic Banking in India

State Bank of India, India’s largest lending bank and Life Insurance Corporation (LIC), the country’s largest insurance company are planning to launch Islamic products, despite a study by RBI concluding that Islamic banking is not feasible in the current regulatory environment. Amendment to the Banking Regulation Act of India, 1949 is the prerequisite to allow Islamic banking system to operate in India. Such changes however cannot be made without strong political will.

According to RBI, except offering basic current account facility, almost no other banking product in India can be modified to meet the conditions of Islamic banking. Shariah law prohibits making money out of money, therefore shunning the idea of paying interests to depositors.

While SBI is still working on the feasibility of launching Shariah-compliant products and changes in system that will be required, LIC is looking forward to launch Takaful products catering to Saudi nations. Takaful is the insurance equivalent of Shariah-compliant Islamic Banking.

Some experts suggest that given the fact that 15% of India population comprises of Muslims, Islamic banking will open up a significant resource for funds during this period of credit crunch. Most importantly, it will attract large number of cash rich Middle Eastern economies that are looking for new investment avenues.

Current Scenario of NBFCs

Global credit crisis followed by increase in interest rates in October and November 2008 resulted in widespread crisis of confidence. Chain of events after the collapse of Lehman Brothers is still fresh in the minds of investors. Non-Banking Finance Companies (NBFCs) in India were severely impacted due to economic slowdown coupled with fall in demand for financing as several businesses deferred their expansion plan. Stock prices of NBFCs’ crashed on the back of rising non-performing assets and several companies closed their operations. International NBFCs’ still continue to close down or sell their back end operations in India.

The positive news however is that, this crisis has forced NBFCs to improve their operations and strategies. Industry experts opine that they are much more mature today than they where during the last decade. Timely intervention of RBI helped reduce the negative effect of credit crunch on banks and NBFCs. In fact, aggressive strategies helped LIC Housing Finance to grab new customers (including customers of other banks) and increase its market share in national mortgage market. Surprisingly it was able to maintain its profitability in 2009 (around 37%). HDFC, the largest NBFC in India, however experienced a slowdown in customer growth due to stiff competition, especially from LIC Housing Finance and tight

monetary conditions.

Other NBFCs that were stable during this period of credit crunch are Infrastructure Development Finance Company (IDFC) Power Finance Corporation (PFC) and Rural Electrification Corporation (REC). Growth prospects are strong for these companies given the acute shortage of power in the country and expected increase in demand for infrastructure projects.

The segment which was hit hardest was Vehicle Financing. Companies financing new vehicle purchases experienced a drastic reduction in new customer numbers. Fortunately, since vehicle finance is asset-based business, their asset quality did not suffer as against other consumer financing businesses. Contrary to this, Shriram Transport Finance, the only NBFC which deals in second-hand vehicle financing was able to maintain its growth primarily due to its business model which does not entirely depends on health of the auto industry.

Indian Newspaper Industry

With 42% market share, newspaper continues to be a dominant advertising medium across the world. As most of the cost is fixed, profitability of a newspaper company is primarily driven by the circulation volume. Large newspaper companies around the world are becoming multi-dimensional and are increasing their stakes in television, radio, magazines and other businesses. They are also operating online news websites to take advantage of economics of scale achieved by sharing resources while providing a range of outlets to advertisers.

The most important characteristic of Newspaper industry is the significant start-up cost that is required for buildings, presses, establishing distribution channels and large editorial staff to develop original content on a daily basis. Building brand value and maintaining a large circulation volume therefore is crucial to recover these high fixed costs. While the rate of renewed subscription is usually high, gaining new subscribers gets difficult in tough competition scenarios.

Advertising is a major source of revenue which directly depends on the health of the economy. Advertising also depends on Circulation, which is the second most important source of revenue and is based on the number of copies sold and subscription rate charged. As circulation drops, advertising revenue also falls. Thus a small fall in circulation can have a much higher impact on a newspaper company’s total revenues.

Newsprint cost comprises of a large proportion of newspaper publishing cost. While it is procured by weight, its production is measured in number of copies produced, commonly referred to as GSM (grams per square meter). Normal wastage of newsprint during this process of conversion is around 3% to 5%.

Historically, newspaper has always been a profitable industry. Despite significant start-up and fixed costs, once a newspaper is able to establish its brand, its dominance is indisputable. However, the last decade witnessed melt-down of several large newspaper companies across US and Europe only because they ignored the threat coming from growing Internet penetration. Several newspapers have filed for bankruptcy or are already looking for a buyer.

Ironically, while analyst across the globe are debating whether any valuation proposition still exists in the outdated newspaper model, one industry continues to hold promises for future growth; the Indian Newspaper Industry. While American newspapers have been struggling to survive the competition from growing internet advertising, Indian newspaper experienced dramatic growth during 2000 and 2005.

Circulation of Dailies in India increased from 5,91,29,000 in 2001 to 7,29,39,000 in 2003 to 7,86,89,000 in 2005. The key drivers for the growth of newspaper penetration in India are the expanding middle class and improving literacy rates. Marginal (though increasing) internet penetration is also one of the important reasons why Indian newspaper industry has not yet come across stiff competition from this medium.

According to a KPMG-FICCI report, Indian print media can be expected to grow conservatively at around 9% over the next 4 to 5 years. However, the industry has been experiencing growing margin pressures due to increasing newsprint costs which are not yet being passed on to readers due to intense competition. Newsprint costs soared almost 50% last year. While Indian newspapers are the cheapest in the world, industry experts opine that it may not be long that newspaper companies will increase their circulation charges and advertising rates to counter the increasing newsprint costs.

Last year, several publishers postponed their plans to expand their capacity in the wake of drastically increasing newsprint costs. On the other hand, they were unable to increase advertising rates as advertisers are slowly moving to other cheap medium like the internet. Publishers are not concerned about the slowly shifting advertising revenue to mediums such as radio and internet.

Despite such concern one important growth area for Indian newspaper publishers is that several rural areas are still untapped. Improving literacy rates, increasing income and benefits from development schemes of the Government will definitely open up penetration opportunities for Indian publishers.

In House Developed Vs. Ready to Use Solution

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.

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.

Advantages of Aggregation

Virtual Forex Exchange

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 the liquidity in a single and consolidated order book, Aggregators 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.


Limiting Transaction Costs

By accessing multiple sources of liquidity, Forex Aggregators put back the market together for buy-side traders. Besides lowering transaction costs and time spent for searching liquidity, they also limit the potential risks involved by placing all execution orders in one order ticket. The cost of aggregation services will be offset as traders spend less time searching for the best price.


Increasing Trading Efficiency

By employing Aggregators, traders will no longer require to subscribe to multiple portals on their desktops. By aggregating the functionality, pricing and liquidity under one portal, traders can save on the cost of staff and infrastructure which they would have otherwise employed for managing various portal connections under traditional execution system. A major challenge faced by traders using traditional execution process is the ‘last look provision’. Bank portals have a waiting period of several hundred milliseconds to several seconds before a deal is executed. Seconds can make a huge impact on profitability especially for algorithmic trading system. However, by aggregating various liquidity sources, last look provisions can be minimized, thereby increasing trading efficiency.


Better Price Discovery

Forex Aggregators internally match trade orders between all buy-side traders and liquidity providers thus providing better price discovery, greater liquidity. This further improves the response time and order confirmations for the users.


Maintaining Anonymity

Buy-side firms prefer maintaining anonymity while trading in Forex marketplace as they do not prefer reveal their trading strategies. Forex Aggregators enable them to execute daily currency flows without revealing their position or identity.


Smart Order Routing

Forex Aggregators also allow for ‘smart order routing’, wherein buy-side firms can continuously observe all the liquidity sources to determine where the best market opportunities lie. After an order is executed, the Aggregator automatically decides where to route, how much of the total amount to send to which venue and what orders to send. Also, users can refer to only one screen instead of referring to several single or multi-screen portals at the same time, thus saving on cost of employing systems for each trading venue. Besides delivering efficiency gains, this technology also enables market players to retain more trading value. Forex players are therefore giving increasing services that deliver a single point of access to market liquidity, combined with a common trading record.

Forex Aggregation

Banks have historically been the principle source of liquidity and major market makers in Forex market. Banks dealing in forex and other providers of liquidity to the market are referred to as sell-side players. A customer (including a multinational bank or a treasurer) interested in engaging in forex transaction was required to call his/her bank and place a ‘Request for Quote’ (RFQ). Depending upon the credit rating of the customer, the bank would provide him/her a quote based on the current pricing of desired currency and a mark-up. For obtaining the best and the fairest price available, the customer would therefore be required to call several banks to place RFQs. This is however an inefficient and cumbersome process, given the number of phone calls, assembly of the quote information from several banks, and then placing of additional phone calls to finalize orders. Besides, the customer would also be required to have a credit established with all these banks prior to placing RFQs.


Alternatively, for achieving the best and fair deal, the customer can simply visit web sites of several banks and get quotes and place orders online. Almost all the sell-side dealers now offer an online portal for forex dealings. Several banks now maintain Forex trading via the FIX Protocol Specification, in support of both executable streaming prices and the Request for Quote trading model. Currently, there are also several multi-bank foreign exchange portals available on the internet wherein a large number of multi-national banks, such as JPMorgan Chase, Deutsche Bank and Citibank, provide their quotes to a portal. By subscribing onto such portals, customers can receive and view, at one location, a set of quotes from some of the largest providers of liquidity in the foreign exchange market.


Availability of several Forex avenues can be beneficial for buy-side traders as they can spread their orders over as many different venues while maintaining anonymity. However, this also increases complications as information regarding actual orders for foreign exchange simultaneously exists on several Forex trading platforms including direct bank quotes, electronic exchange and multi-bank portals. When liquidity is fragmented, multiple trading venues or destinations are required to complete a given order size at a given price which leads to direct and indirect costs for buy-side traders. The direct costs include ticket charges for splitting orders across portals. Adding new portals also increases the chances of information leakage. The time spent searching for liquidity across venues and associated overheads involved in connecting to each venue adds to the indirect costs. Moreover, a customer who subscribes to several portals and is a member of several exchanges may need several screens in front of him to be able to view and take advantage of all of the information available simultaneously. Dispersed liquidity therefore leads to increase in trades, decrease in order sizes, thus making it extremely difficult to gain complete market visibility which further results in higher costs and inefficient executions. Fragmentation of liquidity is the single most important reason why seeking liquidity and aggregating the market for optimizing execution is the key for players in Over-the-Counter Forex market.


Forex Aggregators effectively address the issue of fragmented liquidity by linking traders and brokers, as well as liquidity providers to one another to facilitate and provide for distribution of foreign exchange information and execution of foreign exchange transactions. Developed on Complex Event Processing (CEP) technology, Aggregators facilitate price discovery and provide buy-side institutions and traders with the best price offer and increased liquidity by aggregating liquidity providers. In simple words, Aggregation services enables buy-side firms to easily access a range of different liquidity streams including bank APIs, ECNs and other multi-bank platforms through a single screen.


Liquidity aggregation tools can be classified into two broad categories. The first category is typically an Execution Management System, which create an organized and integrated environment where various market participants can come together to provide full visibility and transparency. Such tools have open and clear rules for price discovery and trade execution. Integral’s FX Grid and FX Inside Professional trading platforms fall into this category.


The second type of liquidity aggregation is often referred to as ‘Aggregators’. Evolved from CEP technology, they provide aggregation engines or algorithmic engines to buy-side traders for developing and executing ‘black box’ trading methods that are inherently non-transparent. Players that employ these engines can program them to decide when and how to trade as well as using aggregation for price discovery and best execution. In contrast to Execution Management Systems, Aggregators have no rules guiding their execution models. They can filter and display the market data according to the pre-defined criteria of the end user. Players can therefore use them for arbitraging one source of price with another.

Foreign Exchange Markets

Foreign currency market continues to remain non-centralized and fragmented. While the collective daily volume in spot, forward and swap foreign exchange market is around 3 trillion, lack of transparent price discovery and liquidity amongst numerous institutional Forex dealing platforms still remains a prime concern due to the fragmented nature of Forex market. Given the increasing interest in online foreign exchange dealings, new and improved trading venues are becoming available. Foreign exchange is now being treated as an asset class by investors, thus further increasing the depth of the market and driving trading volumes higher. However, traders still find it difficult to get a complete and true picture of liquidity in forex market. They are therefore left competing for order flow with decreasing ability to offset trades efficiently.


Due to the decentralized, segmented and over-the-counter nature of Forex market, liquidity has always been dispersed. However, in the last ten years the number of sources from where liquidity can be sourced has increased enormously. Forex Liquidity Aggregators are tools that enable market participants to view all of the various sources of liquidity on one screen. Last few years have seen a drastic increase in a number of solutions being developed and applied by numerous buy-side firms.Given the segmented and over-the counter nature of Forex market, the need for fast and easy way to access multiple sources of liquidity for establishing the right price and market depth cannot be underestimated.


Liquidity Aggregation tools that enable forex traders to view all of the various sources of liquidity on one screen are now considered to be a vital trading tool especially for buy-side traders. Forex Aggregators act as a centralized trading portal for accepting and normalizing data from various liquidity sources, feeding this information into algorithmic engines, receiving orders and routing them out into the marketplace. This enables traders to have access to all available liquidity in a single trading platform, thus enabling them to sort, analyze and achieve trading efficiency. However, Aggregation is still relatively a new concept and the focus is not on the quality of this technology but on the way it is applied.