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January 2010
wel<strong>com</strong>e to<br />
e-FOREX<br />
WINTER 2010<br />
This is the tenth winter edition of e-<strong>Forex</strong>. Over the last<br />
decade there have been numerous exciting developments<br />
arising from the deployment of new electronic trading<br />
technologies. During this period we've been privileged to report<br />
on how the application of many of these technologies has shaped<br />
the evolution of electronic FX. The rapid development of e-FX<br />
has also been mirrored by equally significant regulatory and<br />
infrastructure initiatives which promise to have far reaching<br />
effects on the way the FX market will operate in the future.<br />
Everyone has different views about what were the key watershed<br />
moments in e-FX over the last few years. For us, important<br />
milestones include the arrival of the multi-bank FX portals with<br />
their innovative business models which ultimately worked for<br />
some but not for others. Then there was the electronification of<br />
FX options, which opened up new opportunities for traders and<br />
investors and offered a hybrid broking market in currency<br />
derivatives. The launch of EBS Prime represented a key point in<br />
the evolution of the FX Prime Brokerage landscape and the<br />
appearance a few years ago of more active traders in FX,<br />
particularly hedge funds, was another major driver of change.<br />
Their sophisticated trade execution requirements heralded the<br />
arrival of algorithmic FX trading which was facilitated by efforts<br />
to further adapt the FIX Protocol to the needs of FX.<br />
Regulatory initiatives have also been gathering pace over the last<br />
few years with efforts to clean up the rapidly growing Retail FX<br />
trading space being top of the list. The recent crisis within the<br />
financial markets has led to calls for more transparency and<br />
improved risk management which has revived the debate about a<br />
central clearing model in FX. More recently, we have seen the<br />
preparation of sweeping reforms to the OTC derivatives markets<br />
which might well lead to significant changes in the way FX<br />
derivatives are traded.<br />
Whatever challenges lie in store for the FX market over the<br />
<strong>com</strong>ing decade, it's important to look back and remember what<br />
a crucial role electronic trading has played in helping to keep the<br />
capital markets functioning smoothly. This was particularly<br />
evident in times of severe market turbulence and global<br />
instability as witnessed during the events surrounding 9/11 and<br />
more recently during the sub-prime crisis of Autumn 2008. As<br />
we enter the second decade of the 21st century, we believe the<br />
future of e-FX is assured.<br />
As usual we hope you enjoy this edition of the magazine.<br />
Charles Jago<br />
Editor<br />
Susan Rennie<br />
Susie@Aspmedialtd.<strong>com</strong><br />
Managing Editor<br />
Charles Jago<br />
Charles@Aspmedialtd.<strong>com</strong><br />
Editor (FX & Derivatives)<br />
Charles Harris<br />
Charles@Cjag.demon.co.uk<br />
Advertising Manager<br />
Helen Rochford<br />
Helen@Aspmedialtd.<strong>com</strong><br />
Production Manager<br />
Michael Best<br />
Michael@Aspmedialtd.<strong>com</strong><br />
Subscriptions Manager<br />
Louis Riley<br />
Louis@Aspmedialtd.<strong>com</strong><br />
Features Manager<br />
Anthony Brannan<br />
Anthony@Aspmedialtd.<strong>com</strong><br />
Commercial Manager<br />
Felix Shipkevich<br />
Contributing writer<br />
Regulatory Roundup<br />
ASP Media Ltd<br />
Suite 10, 3 Edgar Buildings<br />
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Printed in the UK by Buxton Press<br />
e-<strong>Forex</strong> (ISSN 1472-3875)<br />
is published quarterly in<br />
January, April, July and October<br />
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Although every effort has been made to ensure the accuracy of<br />
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expressed in this publication are not necessarily those of the<br />
publisher.<br />
Please note, the publishers do not endorse or re<strong>com</strong>mend any<br />
specific website featured in this magazine. Readers are advised to<br />
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conditions and obligations.<br />
The entire contents of e-<strong>Forex</strong> are protected by copyright and all<br />
rights are reserved.
Manfred Wiebogen<br />
Liquidity or taxation<br />
Jim Nuzum<br />
Shari'ah <strong>com</strong>pliant<br />
currency trading<br />
Nicholas Pratt<br />
DMA - an increasingly<br />
attractive toolset<br />
A<br />
ACI page 14<br />
Advanced Currency<br />
Markets page 21<br />
Advanced Markets page 97<br />
Aegisoft page 81<br />
Afme page 99<br />
Aite Group page 22<br />
B<br />
Bloomberg FX page 69<br />
Bloomberg<br />
Tradebook page 79<br />
BNP Paribas page 7<br />
Boston Technologies page 107<br />
Broco Group page 128<br />
Bulbrokers page 142<br />
C<br />
CFH Markets page 118<br />
Cfx Intermediazioni page 127<br />
Charles Schwab page 25<br />
CIBC page 31<br />
Citi page 83<br />
ClientKnowledge page 30<br />
CME Group page 47<br />
Cognotec page 105<br />
Currenex page 92<br />
Currensee page 125<br />
D<br />
360 Degrees page 116<br />
DeltaStock page 141<br />
Deutsche Bank page 9<br />
DGCX page 45<br />
Dr. Yuval Levy<br />
Changing the future<br />
landscape of FX<br />
Roger Aitken<br />
Historical FX pricing data<br />
Heather McLean<br />
Social Networking<br />
Digitec page 44<br />
Divisa Capital page 100<br />
Dow Jones page 4<br />
Dukascopy Outside<br />
Back Cover<br />
E<br />
EBS page 37<br />
Equinix page 4<br />
eSignal page 33<br />
Eurobase page 63<br />
F<br />
FastBrokers page 161<br />
Fienex Group page 154<br />
FIX Protocol Ltd page 58<br />
FlexTrade Inside<br />
Back Cover<br />
Fortex Inc page 111<br />
FSA page 14<br />
FXall page 71<br />
FX Bridge page 61<br />
FXCM page 11<br />
FXDD page 13<br />
FX V-room page 122<br />
G<br />
GCC Markets page 34<br />
H<br />
Hibernia Atlantic page 51<br />
I<br />
ICAP page 37<br />
ICE page 43<br />
2 | january 2010 e-FOREX<br />
Sang Lee<br />
Growth in Retail FX<br />
Mark Biezup<br />
Real-time FX Margining<br />
Larry Levy<br />
Retail FX in Central &<br />
Eastern Europe<br />
Companies and organisations in this issue:<br />
IMF page 14<br />
InMage page 112<br />
Integral<br />
Development page 95<br />
Interactive Brokers page 8<br />
Interbank FX page 153<br />
ISDA page 58<br />
ISE page 46<br />
ISITC page 58<br />
J<br />
JPMorgan page 85<br />
K<br />
Knight Capital<br />
Group page 55<br />
M<br />
MIG Bank page 19<br />
Misys Summit page 59<br />
MoneyTec page 122<br />
Murex page 64<br />
N<br />
NASDAQ OMX page 48<br />
NFA page 48<br />
Nordea page 5<br />
Numerix page 12<br />
O<br />
Oanda page 4<br />
P<br />
PFSoft page 26<br />
Phillip Futures page 149<br />
Frances Maguire<br />
Single bank FX platforms<br />
Michelle Neal<br />
The e-<strong>Forex</strong> Interview<br />
Ian Naismith<br />
TraderTalk<br />
Progress Apama page 87<br />
R<br />
Reval page 65<br />
Rockshore Partners page 96<br />
Royal Bank<br />
of Scotland page 88<br />
S<br />
Safecharge page 121<br />
Sarasota page 158<br />
Saxo Bank page 130<br />
SmartTrade page 39<br />
SSC Technologies page 109<br />
Standard Chartered Inside<br />
Bank Front Cover<br />
SunGard page 74<br />
SuperDerivatives page 16<br />
SWIFT page 58<br />
T<br />
360T Trading<br />
Networks page 40<br />
Thomson Reuters page 66<br />
TMS Brokers page 133<br />
TraderTools page 57<br />
Traiana page 10<br />
TwoFour page 60<br />
W<br />
WallStreetSystems page 59<br />
West LB page 12<br />
WBR page 163<br />
January 2010<br />
contents<br />
FOREWORD<br />
14. Liquidity and stability or taxation and<br />
change the whole system?<br />
The global financial crisis has revived the<br />
discussion on a financial transaction tax as a<br />
means of raising revenue, discouraging<br />
international currency speculation and helping<br />
to shrink ‘a swollen financial sector’. Manfred<br />
Wiebogen illustrates what the consequences<br />
of this tax would be, for the FX market.<br />
LEADER<br />
16. The push for standardisation - can we<br />
risk changing the future landscape of FX?<br />
Regulators are currently preparing sweeping<br />
reforms to the OTC derivatives markets on<br />
both sides of the Atlantic and FX<br />
derivatives are in danger of being caught up<br />
in these clearing reforms. Dr Yuval Levy<br />
argues why the regulatory authorities should<br />
act with caution and in consultation with<br />
knowledgeable market participants before<br />
acting in a way that may ultimately be<br />
costly to all.<br />
INDUSTRY REPORT<br />
22. Retail FX Market: Growth, Consolidation,<br />
and Evolution<br />
Sang Lee examines why the retail FX market<br />
is booming with strong adoption across all<br />
major financial centers.<br />
FEATURES<br />
28. Single bank FX platforms - will they<br />
keep powering ahead?<br />
Despite new research showing a slight shift<br />
towards multi-dealer platforms, the demand<br />
for single bank portals, and relationshipbased<br />
pricing, is still high. Frances Maguire<br />
examines how the continued investment by<br />
banks in their platforms is ensuring they<br />
continue to grow.<br />
34. FX e-<strong>com</strong>merce in Shari'ah<br />
<strong>com</strong>pliant currency trading - the new<br />
embracing the old<br />
Jim Nuzum explores why there is growing<br />
demand for Shari'ah <strong>com</strong>pliant FX trading<br />
solutions and how the latest FX e<strong>com</strong>merce<br />
technologies can help address the<br />
needs of Islamic traders and investors.<br />
42. Continuing innovation in exchangebased<br />
currency trading<br />
The world’s futures exchanges continue to<br />
make in-roads into FX, the biggest OTC<br />
market in the world. Frances Maguire explores<br />
how currency trading innovation continues to<br />
gather pace within the exchanges.
52. Navigating the <strong>com</strong>munications<br />
minefield: High performance connectivity for<br />
High Frequency FX trading<br />
Joe Hilt outlines some of the key issues<br />
facing FX trading firms who are planning<br />
how best to link their trading<br />
infrastructures to trading venues and what<br />
lessons they can take from latency,<br />
networking and trading connectivity<br />
developments in other markets.<br />
58. Tracking new developments in currency<br />
derivatives processing<br />
Increasing numbers of banks, asset managers,<br />
pension funds, hedge funds, and corporates<br />
are looking to ramp up their use of currency<br />
derivatives, both for hedging purposes and as<br />
a <strong>com</strong>ponent of their investment<br />
management strategies. Frances Maguire<br />
outlines how great strides have been made in<br />
automating the processing and workflow<br />
associated with Over The Counter derivatives<br />
but why much still remains to be done.<br />
66. Sourcing and Integration of historical<br />
pricing data for FX applications<br />
Roger Aitken looks at the drivers fuelling<br />
increased demand for accessing historical<br />
FX pricing data and what issues FX trading<br />
firms need to consider with regard to<br />
sourcing and storing the data.<br />
VIEWPOINT<br />
74. Regulatory measures and real-time FX<br />
margining<br />
Mark Biezup outlines why recent and<br />
projected regulatory changes along with a<br />
focus on risk management will have<br />
significant implications for FX brokers.<br />
ALGORITHMIC FX TRADING<br />
76 The next wave of FX Algorithms:- taking<br />
order execution strategies to another level<br />
What will be the next wave of FX<br />
algorithms? Nicholas Pratt charts the<br />
development efforts of the leading<br />
algorithmic trading providers to examine<br />
how execution strategies in FX can be taken<br />
to another level.<br />
e-FOREX INTERVIEW<br />
88. e-<strong>Forex</strong> talks with Michelle Neal, Global<br />
Head of electronic markets at The Royal Bank<br />
of Scotland about the consolidation of the<br />
banks' electronic platforms and the<br />
continuing development of its best of breed<br />
FX e-<strong>com</strong>merce solutions and e-trading tools.<br />
FOCUS<br />
92. DMA - an increasingly attractive toolset<br />
for the FX buy-side<br />
The concept of ‘Direct Market Access’<br />
(DMA) is a simple one and is yet another<br />
example of an invention that started out in<br />
the equities market and is now being<br />
adopted in the FX market. Nicholas Pratt<br />
examines the evolution of DMA and what<br />
it means for FX traders.<br />
RETAIL e-FX PROVIDER<br />
102. Achieving more effective Risk<br />
Management in Retail FX platform<br />
operations<br />
Faced with a need for more effective risk<br />
management of their retail FX customer<br />
positions, banks and brokerage firms in the<br />
FX space are being challenged by<br />
ballooning small ticket items, varying<br />
customer credit limits, risk mitigation issues<br />
as well strains on their back office<br />
processing capabilities. Roger Aitken talks<br />
to leading industry players to explore the<br />
key issues involved.<br />
112. Taking steps to prepare for Disaster<br />
Recovery<br />
Eric Burgener highlights the key elements<br />
for creating an effective DR plan, and<br />
illustrates how a leading provider of Retail<br />
foreign exchange trading services<br />
implemented an updated DR plan to meet<br />
their requirements.<br />
RETAIL e-FX CLIENT<br />
122. Social networking helping to get Retail<br />
FX traders together<br />
Social networking has now <strong>com</strong>e of age and<br />
Heather McLean explores how this<br />
maturing technology is seeing increasing<br />
interest from the Retail FX trading<br />
<strong>com</strong>munity.<br />
130. Regional Retail FX perspectives on<br />
Central & Eastern Europe<br />
Larry Levy interviews two leading FX<br />
providers within Central & Eastern Europe<br />
to learn more about the growth prospects<br />
for Retail FX in this region.<br />
146. Service, innovation and security: taking<br />
key steps to improve the Retail FX trading<br />
experience.<br />
Heather McLean explores what efforts<br />
leading brokers are making to improve the<br />
FX trading experience for the armies of<br />
retail traders spilling out of the woodwork<br />
across the globe.<br />
TRADERTALK<br />
158. With Ian Naismith, co-Principal at<br />
Sarasota and co-Manager of The Currency<br />
Strategies Fund (Ticker: FOREX)<br />
Pushing for standardisation -<br />
can we risk changing the future<br />
landscape of FX?<br />
New developments in currency<br />
derivatives processing<br />
DMA - an increasingly attractive<br />
toolset for the FX buy-side<br />
Preparing for Disaster Recovery<br />
january 2010 e-FOREX | 3
NEWS<br />
Dow Jones agreement with Oanda<br />
Richard Hanks<br />
4 | january 2010 e-FOREX<br />
Dow Jones & Company<br />
has signed an agreement<br />
to provide Oanda<br />
customers with Dow Jones’s<br />
streaming currency news and<br />
information in six languages<br />
including English, Arabic,<br />
Chinese, German, Japanese and<br />
Russian.<br />
“Dow Jones is <strong>com</strong>mitted to<br />
bringing users the targeted locallanguage<br />
news that moves<br />
FXall offers platform<br />
through Equinix<br />
data centers<br />
Equinix, Inc has announced<br />
that FXall will offer<br />
connectivity to its foreign<br />
exchange platform within the<br />
Equinix NY4 International<br />
Business Exchange (IBX ® ) data<br />
center. The service will be<br />
available to the <strong>com</strong>munity of<br />
Equinix Financial eXchange<br />
financial trading <strong>com</strong>panies<br />
currently operating within the<br />
New Jersey campus, including<br />
buyside and sellside firms which<br />
trade multiple asset classes. In<br />
addition, the deployment to<br />
Equinix will enable FXall to<br />
directly reach the rich aggregation<br />
of networks and other strategic<br />
partners operating within<br />
Equinix’s Financial eXchange to<br />
service FXall customers with<br />
optimized performance.<br />
Phil Weisberg, CEO of FXall<br />
said; “Our partnership with<br />
Equinix presents another way for<br />
active traders to gain an edge in<br />
Phil Weisberg<br />
the market and we look forward<br />
to expanding the connectivity<br />
options available to further grow<br />
this client segment through<br />
Equinix's extensive network of<br />
users."<br />
currencies in a format that can be<br />
quickly digested by individual<br />
traders trying to stay ahead of the<br />
market,” said Richard Hanks,<br />
senior vice president and chief<br />
<strong>com</strong>mercial officer, Dow Jones<br />
Enterprise Media Group. “The<br />
in-depth pre- and post-economic<br />
indicator analysis and forecasts<br />
available via Dow Jones<br />
<strong>com</strong>mentary and forex columns<br />
offers traders an unmatched<br />
advantage.”<br />
CIBC<br />
develops<br />
liquidity<br />
aggregation<br />
engine<br />
CIBC World Markets Inc. is<br />
optimizing access to global<br />
FX liquidity by leveraging a<br />
low latency electronic trading<br />
infrastructure and concurrently<br />
processing <strong>com</strong>plex events. Clients<br />
benefit from the resulting<br />
aggregated access to liquidity, as<br />
well as proprietary quantitative<br />
algorithms, including full depth of<br />
book modeling, to achieve<br />
accurate, <strong>com</strong>petitive, consistent<br />
and timely pricing. These features<br />
highlight the importance of pricing<br />
liquidity correctly, especially when<br />
the market is thin or gaps. Other<br />
benefits include tight integration of<br />
the liquidity aggregation engine<br />
with algorithmic hedging, smart<br />
order routing and execution<br />
models that can be leveraged to<br />
minimize the number of hedge<br />
trades and hence minimize slippage<br />
and execution costs.
NEWS<br />
Digitec launches<br />
new release of D-3<br />
Hamburg-based technology vendor Digitec has<br />
launched a new release of the D-3 Pricing<br />
System. The rate engine for FX spot and<br />
forwards is used by a growing number of major banks<br />
to provide their e-<strong>com</strong>merce systems with real time<br />
updates for FX rates. “Our clients are helping us with<br />
their <strong>com</strong>ments and invaluable advice to add<br />
innovative features to D-3 with every new version”<br />
said Andreas Kiesselbach, sales manager at Digitec.<br />
“We are consolidating our market position as<br />
worldwide market leader for FX pricing solutions.<br />
After a year where many banks have been pushing<br />
ahead new projects very hesitantly, we now can<br />
observe a growing interest in our sophisticated FX<br />
solutions”.<br />
Fast Trading Beta<br />
Testing registration<br />
now open<br />
Fast Trading Services LLC – dba<br />
FastBrokers.<strong>com</strong>, a California based online<br />
Futures and <strong>Forex</strong> broker, is now accepting<br />
applications for beta testing of its proprietary trading<br />
screen Pathfinder Trade (PFT). PFT is the result of<br />
several years in research and development and it will<br />
include charting, order management and features<br />
highly customizable trading algorithms executing<br />
across multiple FX liquidity pools (Currenex,<br />
Integral) as well as major electronic Futures<br />
6 | january 2010 e-FOREX<br />
Deltastock deploys<br />
true ECN/STP<br />
Deltastock AD has launched a true ECN/STP<br />
module (L2) integrated into the <strong>com</strong>pany’s<br />
in-house developed Delta Trading platform -<br />
v. 5.0.1 Beta. Clients are now able not only to trade at<br />
spreads as low as 0.1 pips on FX majors, but also to<br />
choose a Liquidity Provider for the execution of their<br />
orders through STP (agency execution).<br />
Company officials pointed out that Deltastock’s<br />
ECN/STP solution is the first of its kind because<br />
traders view the names of the Liquidity Providers<br />
along with their price feed. Moreover each order can<br />
be tracked with which<br />
Liquidity Provider it has<br />
been executed.<br />
Deltastock’s Liquidity<br />
providers are Banks,<br />
Market Makers and Brokerages such as, among others,<br />
Deutsche Bank, FXCM, Interactive Brokers.<br />
Commissions apply for ECN/STP trading.<br />
Exchanges. Pathfinder aims to satisfy the needs of the<br />
most sophisticated retail and institutional derivatives<br />
traders. To apply for beta testing please visit:<br />
www.fastbrokers.<strong>com</strong>/pathfinder
NEWS<br />
Bloomberg Tradebook<br />
launches Tradebook Order API<br />
Bloomberg Tradebook has<br />
launched Tradebook Order<br />
API, giving users<br />
extraordinary flexibility in<br />
sending orders directly from a<br />
desktop model to stock, option,<br />
futures and FX smart order<br />
routers. The new Tradebook<br />
Order API enables users to build<br />
proprietary spreadsheet models<br />
and integrate them into<br />
Tradebook's trading capabilities in<br />
more than 60 global markets.<br />
According to Brian Coffaro,<br />
manager of derivatives<br />
Interactive Brokers has recently<br />
introduced a new free iPhone<br />
application that allows users to<br />
view global quotes across multiple<br />
asset classes including forex,<br />
stocks, options, futures, and<br />
bonds. This application is<br />
available to customers as well as<br />
non-customers. Customers have<br />
the added feature of real-time<br />
trading and account monitoring<br />
capabilities just as they can from a<br />
regular <strong>com</strong>puter. Increasing<br />
participation in currency markets<br />
8 | january 2010 e-FOREX<br />
development at Bloomberg<br />
Tradebook, Tradebook Order API<br />
is a tool that enables users to<br />
write code in the most <strong>com</strong>monly<br />
used languages from Java, Visual<br />
Basic and Excel and then take<br />
advantage of Tradebook's order<br />
execution capabilities. Tradebook<br />
API is seamlessly integrated with<br />
all the Tradebook blotters, market<br />
depth trading screens,<br />
Tradebook's electronic sales trader<br />
buddy (BUD ), Tradebook<br />
analytics and other functionality<br />
on the Bloomberg terminal.<br />
Interactive Brokers launches<br />
new iPhone application<br />
means more users want to keep in<br />
touch with the value of the dollar,<br />
euro and Japanese yen, which is<br />
why IB has now made real-time<br />
forex quotes available by using the<br />
App. The iTWS Application is<br />
available for free download at the<br />
App Store. Users can also receive<br />
real-time price alerts not just on<br />
currency pairs and stocks but also<br />
on any electronically traded<br />
futures or options contract<br />
around the globe.<br />
Interbank FX<br />
to launch UK<br />
Company<br />
Todd Crosland<br />
Interbank FX has announced<br />
plans to open a sister<br />
<strong>com</strong>pany, Interbank FX UK<br />
Ltd., in Central London, aimed to<br />
ac<strong>com</strong>modate and better serve the<br />
retail FX customer in the UK and<br />
Europe.<br />
“We find it paramount to provide<br />
the best possible trading<br />
experience for our customers,”<br />
said Todd Crosland, Chairman<br />
and President of Interbank FX<br />
LLC. “Opening a London sister<br />
<strong>com</strong>pany would cater to our<br />
European and International<br />
customer base and provide our<br />
customers with the ability to trade<br />
additional asset classes, including;<br />
Spot Metals, oil, Indexes and<br />
CFD’s. Registration with the FSA<br />
provides brokers with the ability<br />
to hold customer funds in<br />
segregated margin accounts.”
NEWS<br />
Integral offers<br />
<strong>com</strong>plete, hosted solution,<br />
for algo FX trading firms<br />
Harpal Sandhu<br />
Integral has announced an end-to-end hosted<br />
solution designed specifically to address the needs<br />
of algorithmic trading firms in foreign exchange.<br />
Delivered On Demand, Integral’s solution provides<br />
everything a systematic trading firm requires to run its<br />
algorithms: From the machines, to the network, to<br />
applications, access to liquidity and APIs. Co-located<br />
in data centers with FX Grid ® , the service virtually<br />
eliminates latency. Clients have the option of using<br />
their own proprietary hardware of lease managed blade<br />
servers from Integral. Both options allow customers to<br />
reside in managed enclosures run by Integral. Said<br />
Harpal Sandhu, CEO, Integral Development<br />
Corporation. “Some very smart algorithmic traders<br />
spend countless unnecessary man-years building and<br />
deploying IT infrastructure on which to run their<br />
trading strategies. Since Integral has the means and<br />
resources to get algo traders up and running in no<br />
time, we decided to package this service and make it<br />
available for a nominal fee.”<br />
Traiana extends Harmony<br />
FX Options capabilities<br />
Traiana has extended its Harmony FX options<br />
solution beyond prime brokerage to direct<br />
trading relationships. The enhanced Harmony<br />
solution for options automates the operational lifecycle<br />
of options contracts from booking through settlement<br />
through a central processing hub - ensuring <strong>com</strong>plete<br />
system-to-system <strong>com</strong>munication while reducing<br />
operational risk and costs associated with processing<br />
FX options trades. Advances in the processing of cash<br />
FX have raised client expectations for related products<br />
- including FX options.<br />
10 | january 2010 e-FOREX<br />
Deltastock launches<br />
MT4<br />
Deltastock AD has released Deltastock Meta<br />
Trader 4. MT4 is integrated with the<br />
<strong>com</strong>pany’s proprietary Delta Trading platform<br />
to allow MT4 clients to run Expert Advisors and trade<br />
with Deltastock. The <strong>com</strong>pany’s MT4 is the front-end<br />
client application for submission of orders to Delta<br />
Trading via the MQL script Meta-Delta, which uses the<br />
Deltastock API. Meta-Delta script synchronizes the<br />
positions in MT4 and Delta Trading platforms, which<br />
share the same price feed. Clients can trade <strong>Forex</strong>,<br />
Precious Metals and Stock Index CFDs in Deltastock<br />
MT4. Deltastock’s fixed dealing spreads remain fixed<br />
under all market conditions in Deltastock MT4. Beside<br />
trading through MT4, the <strong>com</strong>pany’s clients benefit<br />
from the full functionality of the Delta Trading platform<br />
without having to open a separate account.<br />
A new bank is born -<br />
MIG BANK<br />
After two years of intense preparation and<br />
investment, Neuchâtel –based <strong>Forex</strong> Brokerage,<br />
MIG, was recently granted a Swiss banking<br />
license last December by the Swiss Financial Market<br />
Supervisory Authority (FINMA), earning the distinction<br />
as the ‘first <strong>Forex</strong> Brokerage to be<strong>com</strong>e a Swiss Bank’,<br />
offering a unique package of best trading conditions,<br />
highly personalized service, and the security and<br />
integrity of a Swiss bank. CEO of MIG BANK,<br />
Hisham Mansour, adds: “Obtaining the banking license<br />
has been a major phase in our planned development,<br />
allowing us to diversify our activities providing<br />
brokerage services in precious metals and other added<br />
value services.”
NEWS<br />
WestLB goes Live with Eurobase’s Siena Gateway<br />
WestLB has gone live<br />
with Eurobase’s market<br />
leading price<br />
distribution solution, Siena<br />
Gateway. The product replaces an<br />
existing vendor system at the<br />
Bank and is, initially, providing<br />
connectivity and FX trading<br />
capability to the 360T platform.<br />
‘’We are delighted with the<br />
deployment of the Siena Gateway<br />
and its use for such a key area of<br />
our e-trading business and look<br />
forward to concluding further<br />
phases including upgrade of our<br />
Single Bank Platform Siena<br />
eTrader’’ said Chris Johnson,<br />
Head of eTrading at WestLB.<br />
“We are delighted to have<br />
delivered Siena Gateway to<br />
12 | january 2010 e-FOREX<br />
manage such a crucial area of the<br />
Banks eFX business. We are<br />
seeing a marked increase in the<br />
number of banks now looking to<br />
be<strong>com</strong>e automated price-makers<br />
Numerix introduces suite of<br />
trader applications<br />
Numerix has introduced its<br />
suite of Numerix trader<br />
workbook applications –<br />
Numerix FX Trader, Numerix<br />
Rates Trader and Numerix Credit<br />
Trader. FX Trader and Rates Trader<br />
join the newly enhanced Numerix<br />
Credit Trader application which<br />
was launched earlier this year, with<br />
all three <strong>com</strong>prising the suite of<br />
Numerix workbook applications.<br />
Numerix FX Trader:<br />
• facilitates rigorous pre- and<br />
post trade FX analysis<br />
• provides risk reporting and<br />
monitoring capabilities that<br />
include Rho Phi and Delta<br />
Gamma worksheets for<br />
monitoring FX spot-price risk<br />
• analytical modeling capabilities<br />
and volatility smoothing<br />
features for: Black-Scholes,<br />
Dupire, Heston, SABR and<br />
Vanna Volga models.<br />
PFSoft offer MyExchange technology<br />
PFSoft has released a new<br />
version of ProTrader, adding<br />
new functionality for<br />
trading between traders within<br />
the trading platform. The basis<br />
for this is an orders matching<br />
engine with splitting execution.<br />
With MyExchange technology the<br />
broker is able to create his own<br />
Exchange or ECN in order to<br />
have more transparent pricing and<br />
risk management. From now any<br />
broker can use local orders<br />
execution without any risk." said<br />
Denis Borisovsky, CEO of PFSoft<br />
Company. "It saves <strong>com</strong>missions<br />
paid to external liquidity<br />
providers and at the same time<br />
provides traders with better<br />
spreads, aggregated from external<br />
and local orders".<br />
or wishing to replace legacy e-FX<br />
trading products and are<br />
convinced our Siena e-Solution<br />
provides the optimal mix of<br />
performance, scalability and rich<br />
functionality to service their<br />
requirements’’ <strong>com</strong>ments David<br />
Mallinder, Business Development<br />
Director at Eurobase.<br />
BT expands<br />
beyond MT4<br />
Boston Technologies (BT) is<br />
expanding its portfolio of<br />
products to include not<br />
only STP solutions for the MT4<br />
<strong>com</strong>munity, including names like<br />
CitiFX Pro, FXCM, dbFX and<br />
MF Global, but a portfolio of<br />
solutions enabling BT to supply<br />
FX brokerages with nearly every<br />
service they could possibly need,<br />
large or small.<br />
"We are delighted to be taking<br />
this step to widen our market<br />
focus. We are not de-focusing<br />
from MT4, we just think we can<br />
do a better job faster and cheaper<br />
in more areas than most brokers<br />
can themselves, simply by<br />
automating, defining robust,<br />
reliable processes, using<br />
economies of scale and sharing<br />
best practices," says George<br />
Popescu, CEO of the Boston<br />
Technologies.
FOREWORD<br />
14 | january 2010 e-FOREX<br />
Manfred Wiebogen,<br />
President ACI<br />
The Financial Markets<br />
Association<br />
The global financial crisis has revived the<br />
discussion on a financial transaction tax as a<br />
means of discouraging international currency<br />
speculation, help shrink ‘a swollen financial<br />
sector’ and perhaps simply to raise funds as<br />
an international (or national) source of<br />
revenue.<br />
Liquidity and<br />
stability or taxation<br />
and change the<br />
whole system?<br />
For more than one year different (mainly) European<br />
politicians have called for options on how the financial<br />
sector could make a contribution to pay for<br />
government interventions during the crisis, how to raise<br />
future tax in<strong>com</strong>e and even to use such funding in fighting<br />
poverty in developing countries. The discussion itself became<br />
more colourful when back in August Lord Turner, head of<br />
Britain’s Financial Services Authority (FSA) supported such an<br />
idea and Gordon Brown, the British Prime Minister recently<br />
shared his views and presented some proposals at the Group<br />
of 20 meeting in November.<br />
At this stage the discussion around the so-called Tobin tax are<br />
supported by some groups (e.g. the IMF by Dominique Strauss-<br />
Kahn) but was also for instance refused by the US Treasury<br />
Secretary Timothy Geithner and Yves Mersch, European Central<br />
Bank Governing Member, who called the initiative a ‘scurrilous<br />
idea’ (according to a Dow Jones news wire).<br />
What to tax?<br />
Today’s call for a financial transaction tax includes a wide range<br />
of products: foreign exchange markets, transactions in<br />
bonds, stocks, <strong>com</strong>modities and all kind of<br />
derivatives. But the talks are just beginning.<br />
The original idea of the Tobin tax was on<br />
currency speculation, one per<br />
transaction. In 1971 James Tobin<br />
proposed such a tax on currency<br />
trading to reduce or avoid speculation<br />
in the wake of the collapse of the<br />
Bretton Woods system. His proposal<br />
was for a tiny percentage tax<br />
(suggestions range from .1% to<br />
.5% in these days) – on<br />
speculative transactions only. For<br />
this idea (which was never<br />
implemented) and his work on<br />
financial markets, Tobin won<br />
the Nobel Prize in 1981.
One of the main arguments for such a tax is the<br />
debacle of the past two years in the financial markets.<br />
But stop – aren’t the backers of Tobin mixing all the<br />
financial markets? Is the reason for this new initiative<br />
really fighting future crisis or just simply a mechanism<br />
for raising money? Many arguments are aimed towards<br />
the enormous volume traded in the daily FX markets.<br />
Let me emphasize, foreign exchange didn't cause the<br />
current financial crisis nor is it guilty in any aspect for<br />
this crisis! As President of<br />
the ACI The Financial<br />
Markets Association,<br />
I’m calling for more<br />
rational and<br />
responsibility in all<br />
discussions about<br />
financial markets<br />
and taxation. What<br />
the markets now<br />
need is trust! But<br />
let’s face the truth:<br />
and that’s definitely<br />
our problem - Trust<br />
was lost on 9/15 in<br />
2008, when Politics<br />
let Lehman collapse. -<br />
A new tax will not<br />
bring back trust.<br />
OTC IR<br />
1.350 bn<br />
25%<br />
US Treasuries<br />
675 bn<br />
13%<br />
US Equities<br />
105 bn<br />
2%<br />
Fall of mankind<br />
To understand the numbers involved I shall<br />
breakdown some official figures from the past:<br />
Considering a 0.1% transaction tax at daily Global FX<br />
traded volume of USD 3.2 trillion the daily tax<br />
in<strong>com</strong>e could equal USD 3.2 billion a day! – (or just<br />
half the amount by a reduced rate to 0.05% or so).<br />
This of course is just a simplified demonstration of the<br />
discussed topic. As this chart and matrix illustrates,<br />
over the counter interest rates (OTC IR) and the<br />
Foreign Exchange business are totalling around 84%<br />
of the overall above figures. Again, both product<br />
groups absolutely have nothing in <strong>com</strong>mon with the<br />
current financial crisis but should they be forced to<br />
pay for it? FX is a class on its own and the OTC IR,<br />
mainly the short term products, helped solve the crisis<br />
by providing the markets and the banks balances with<br />
short term liquidity. If they are to be targeted by<br />
politics, there is something wrong.<br />
Politicians have to be very cautious in not discouraging<br />
the markets from short term funding (financing). A<br />
taxation here will again damage the short end of<br />
liquidity, causing a run on<br />
EMEA Equities<br />
70 bn<br />
1%<br />
Average Daily Turnover / in USD billions<br />
Source: BIS 2007 Survey<br />
FX<br />
3.200 bn<br />
59%<br />
long term funding and<br />
dry up short term<br />
liquidity/trading<br />
again. But do<br />
investors (long term<br />
lenders) want to be<br />
only in long term<br />
placements making<br />
them unable to take<br />
out their money in<br />
difficult times as<br />
short term-lenders<br />
did during the past<br />
year? Again, the<br />
markets need trust<br />
and liquidity. Repo<br />
business in the short<br />
term market has already<br />
eroded a part of the overall liquidity but markets do<br />
not need additional uncertainties.<br />
Hedgers and speculators are important to provide and<br />
to keep liquidity running. We have to accept the<br />
fragility but also the necessity of over-trading. A<br />
constructive discussion of such a transaction tax<br />
immediately will call for rational appeal. If the voices<br />
from the industry are not heard the whole financial<br />
system will be forced to change.<br />
ACI The Financial Markets Association<br />
(www.aciforex.org) would be more than happy to<br />
obtain your point of view. Should you have any<br />
<strong>com</strong>ments or proposals you can contact<br />
managingdirector@aciforex.org<br />
january 2010 e-FOREX | 15
LEADER<br />
The push for<br />
standardisation<br />
can we risk changing the future landscape of FX?<br />
By Dr. Yuval Levy, Chief Technology Officer, SuperDerivatives<br />
The recent disasters in the global banking<br />
system and the ensuing fallout in the<br />
derivatives markets fundamentally changed<br />
the way market participants use FX<br />
derivatives. The crippling widespread<br />
disappearance of liquidity and leverage as well<br />
as the over-regulation that many doom sayers<br />
predicted has not materialised; instead, market<br />
participants are refocusing on the core uses of<br />
derivatives that built the industry.<br />
Concurrently, there are greatly increased<br />
efforts at addressing systematic problems with<br />
efficiency and operational risk. In addition,<br />
regulators are preparing sweeping reforms to<br />
the OTC derivatives markets on both sides of<br />
the Atlantic and FX derivatives are in danger of<br />
being caught up in these reforms.<br />
16 | january 2010 e-FOREX<br />
Over the past decade, structured products, in<br />
which FX (and other asset class) derivatives<br />
have been used to create ever more <strong>com</strong>plex<br />
and often highly tailored risk profiles in bonds and<br />
other investment vehicles, have be<strong>com</strong>e the driving<br />
force of revenue for many derivatives dealers. Overthe-counter<br />
derivatives remain the most effective and<br />
useful vehicles for hedging a critical <strong>com</strong>mercial risk.<br />
While the use of simple derivatives in liability side<br />
hedging, asset side hedging, and hedge fund<br />
speculation remained important core drivers of the<br />
industry, it became increasingly difficult to see these<br />
flow activities through the forest of structured<br />
products hands ‘high-fiving’ each other over the latest<br />
highly leveraged and highly <strong>com</strong>plex structured bond<br />
issuance. As a natural result of this evolution,<br />
<strong>com</strong>petition, for many derivatives dealers, became<br />
focused on creating the newest, most innovative<br />
structures a few weeks before every other dealer could<br />
price them and enjoying a short but very profitable<br />
monopoly. Naturally, derivatives technology became<br />
focused on valuation and risk managing structured<br />
products.<br />
All of this changed, quite rapidly, in the wake of the<br />
collapse of Bear and Lehman and the widespread<br />
banking system problems having arisen out of the<br />
massive over leveraging of the retail and home-buying<br />
public. The derivatives dealing <strong>com</strong>munity is, as a<br />
result, having to rethink its business and retool for a<br />
very different reality.<br />
The regulatory environment<br />
There are many solid reasons for the existence of a<br />
bespoke FX OTC market and the ability for a<br />
counterparty to match exactly their underlying risk. It<br />
is important that we have an environment where the<br />
risk factors for doing business across the financial
markets are understood as clearly as possible. The<br />
markets have witnessed over 25 years of derivatives<br />
and OTC growth which has delivered enormous<br />
economic benefits.<br />
But these benefits have also carried substantial risk.<br />
Many risks associated with derivatives can be<br />
mitigated through employing robust, scalable, and<br />
transparent technological solutions that help to<br />
accurately reflect market prices. This can be supported<br />
by better, more robust and resilient industry<br />
frameworks and infrastructures.<br />
As such, there is a useful and healthy role for regulators<br />
to review and monitor the activities of those they<br />
regulate. However it is important that the regulatory<br />
authorities act with caution and in consultation with<br />
knowledgeable market participants before acting in a<br />
way that may ultimately be costly to all.<br />
Regulating swaps, as the US authorities are proposing,<br />
is absolutely the right thing to do as these are<br />
standardised instruments. However, extending this<br />
model to all OTC derivatives and overburdening the<br />
regulation of <strong>com</strong>plex options simply won’t work.<br />
That would reduce the ability to create specific<br />
hedging instruments which are useful to help<br />
<strong>com</strong>panies manage their risk.<br />
The value of derivatives lies in the fact that they allow<br />
market participants to take security on underlying<br />
assets rather than having to invest cash upfront.<br />
The debate and focus should be about how<br />
investment and risk management decisions are taken<br />
by individual institutions, not OTC derivatives<br />
instruments themselves. It is important that we have<br />
an environment where the risk factors for doing<br />
business across the financial markets are understood as<br />
clearly as is reasonable.<br />
The derivatives industry in Europe is certainly in<br />
need of a better, more robust and resilient<br />
industry framework and infrastructure.<br />
Overwrought regulation could hamper<br />
investment and <strong>com</strong>merce just<br />
when markets need them most of<br />
all. Regulations that increase<br />
trust and ,ultimately,<br />
liquidity can only be good<br />
for the market.<br />
>>><br />
The derivatives industry has strong foundations which<br />
will enable it to successfully address current issues. We<br />
champion accuracy in pricing – this is what the<br />
market needs. Technology is part of the answer but<br />
this cannot be done overnight.<br />
Exchange traded derivatives<br />
Moving derivatives onto an exchange would result in<br />
market participants having to post large amounts of<br />
cash with the exchange to secure their hedging. Some<br />
instruments are ideally suited to exchange trading,<br />
notably the simpler options structures which can be<br />
<strong>com</strong>moditised onto an e-trading system, much as has<br />
happened with spot FX and other simpler<br />
instruments.<br />
But more<br />
advanced and<br />
customisable<br />
FX instruments<br />
are simply not<br />
suited to<br />
exchanges, chiefly<br />
because they are<br />
just that - nonstandard<br />
- and they<br />
require an OTC<br />
market. Companies<br />
january 2010 e-FOREX | 17
LEADER >>><br />
“It is very important to be clear that a<br />
speculative and unmanaged boom in asset<br />
prices as well as leverage and faulty credit<br />
decisions on the part of customers and<br />
providers, not the financial instruments<br />
themselves, have been at the root of recent<br />
market turbulence.”<br />
often use OTC derivatives to customise hedges to<br />
their specific exposures when standardised, exchangetraded<br />
products do not reflect their actual risk. The<br />
effect of forcing such <strong>com</strong>panies to go through an<br />
exchange or clearing house would limit their ability to<br />
manage the risk they incur in operating their business.<br />
Currency derivatives have a number of variables and<br />
correlations based on underlying assets and the OTC<br />
market is not bound by fixed strikes or expiry dates in<br />
the way that exchange traded derivatives are, which is<br />
a real restriction for a counterparty. The OTC<br />
derivatives market must remain in a flexible form<br />
with the ability to enable institutions to<br />
establish structures that fit their<br />
needs to hedge and manage<br />
their risks.<br />
We must not throw the<br />
baby out with the<br />
bathwater. FX<br />
derivatives are useful<br />
insurance policies,<br />
which allow firms to<br />
manage the<br />
fundamental risk in<br />
currency and <strong>com</strong>modities<br />
fluctuations, interest rates<br />
moves, supporting trade,<br />
investment and economic output.<br />
They have a useful, real world<br />
application.<br />
It is very important to be clear that a speculative and<br />
unmanaged boom in asset prices as well as leverage<br />
and faulty credit decisions on the part of customers<br />
and providers, not the financial instruments<br />
themselves, have been at the root of recent market<br />
turbulence. The issue is to ensure that the underlying<br />
assets which underpin derivatives are sound.<br />
The OTC derivatives market has performed very<br />
effectively in helping <strong>com</strong>panies and investors to<br />
manage their risks in a time of higher than usual rates<br />
of default, and the credit events that have occurred<br />
18 | january 2010 e-FOREX<br />
thus far are being settled in an orderly fashion.<br />
Moving all instruments to an exchange could make<br />
hedging and hedge accounting unworkable, therefore<br />
leaving institutions unhedged, just when markets are<br />
more volatile and real <strong>com</strong>panies more susceptible to<br />
<strong>com</strong>modity, interest rate and currency movements.<br />
Institutions and investors in the future will still need<br />
to be prepared for unusual market circumstances with<br />
the proper tools before the event happens, during it<br />
and after it. There is also a key role for independent,<br />
effective pricing across the whole derivatives universe<br />
to set the 'benchmark' price for valuations for<br />
derivatives.<br />
We are already seeing growth in the use of FX,<br />
interest rates and <strong>com</strong>modity derivatives because they<br />
retain a crucial role supporting real, physical markets,<br />
in terms of hedging currency risk, managing resources<br />
and enabling cross border trade.<br />
This is backed up by the latest figures from the Bank<br />
for International Settlements (BIS). The notional<br />
amount of over-the-counter derivatives<br />
trades outstanding bounced back to<br />
reach USD 605 trillion by the<br />
end of June 2009, up 10%<br />
on the previous survey<br />
released in May.<br />
Push to create a<br />
central counterparty<br />
The push to create a<br />
central counterparty<br />
could prove to be a<br />
valuable step to regain<br />
confidence in the global<br />
financial markets and in<br />
these instruments that have a<br />
real-world application to help<br />
manage risk and hedge effectively<br />
against, for example, fluctuations in currencies,<br />
energy costs and interest rates.<br />
There will inevitably be resistance to change but the<br />
out<strong>com</strong>e could well be a resurgent market across both<br />
vanilla and structured financial products, with clearer,<br />
less opaque processes and reporting encouraging more<br />
counterparties to use these instruments. Publishing<br />
post-trade prices also makes sense and will serve a<br />
practical purpose in terms of analytics and analysis.A<br />
central counterparty, together with prompt reconciled<br />
confirmations and warehouse in our view could help<br />
to firewall against failures and ensure accurate<br />
reporting of system-wide activity to regulators.
LEADER<br />
Brave New World<br />
So what is really happening in the world of OTC<br />
derivatives? The trends in the industry are quite<br />
readily apparent:<br />
• A huge scaling back in the structured products<br />
business as gun shy investors lick their wounds<br />
and park their money in perceived safer havens<br />
• The last 18 months taught us that even simple<br />
derivatives can be<strong>com</strong>e difficult to price where<br />
markets are illiquid.<br />
• A huge increase in the difficulty of pricing even<br />
the simplest derivatives as never before<br />
considered systemic liquidity factors drive the<br />
short end of yield curves<br />
• An intense focus on “B-School” principles:<br />
operational risk, operational leverage, credit<br />
exposure, funding exposure, etc.<br />
• A move by an increasing number of dealers to<br />
utilise non-traditional derivatives distribution<br />
channels such as regional lending networks<br />
• A refocusing of the business around core<br />
hedging related activities<br />
• Competition through better client service,<br />
rather than through rapid innovation of<br />
<strong>com</strong>plex structures<br />
• A major shift in technology spending from the<br />
development of sophisticated multi factor<br />
pricing and risk management models to the<br />
building of integrated front office solutions<br />
which address the new reality<br />
The OTC derivatives business has changed<br />
dramatically over the past 18 months; those firms<br />
who have adapted or are adapting rapidly and<br />
effectively to these changes are, while perhaps not<br />
thriving, surviving and seeing a potentially bright<br />
future. Those who have not adapted successfully are<br />
struggling. Critical to adapting to this new reality is<br />
technology and systems tailored to that reality.<br />
The new technology of <strong>com</strong>petition<br />
Virtually every derivatives dealer we speak with across<br />
the world is, to a greater or lesser extent, trying to adapt<br />
or augment their technological capabilities to facilitate<br />
<strong>com</strong>petition and efficiency within the rapidly changing<br />
landscape of the derivatives market. The simple reality<br />
is that an overwhelming percentage of the money spent<br />
on system development over the past decade has gone<br />
towards increasing the trading desk’s ability to price and<br />
warehouse increasingly <strong>com</strong>plex risk.<br />
Traditionally, dealer IT and Quant departments are<br />
extremely good at delivering <strong>com</strong>plex models and risk<br />
management technology to the trading desk; they<br />
20 | january 2010 e-FOREX<br />
have been less successful at delivering the tools<br />
necessary for the front office to <strong>com</strong>pete effectively<br />
and operate efficiently in the vanilla derivatives space.<br />
This is partly due to lack of experience and partly due<br />
to an almost obsessive focus on model development.<br />
As the derivatives industry and the nature of dealer<br />
<strong>com</strong>petition be<strong>com</strong>e centred on client service,<br />
technology that supports this service, both indirectly<br />
and directly, is be<strong>com</strong>ing the focus of both the IT<br />
departments and the front offices of dealers across the<br />
globe.<br />
Our discussions around technology needs with almost<br />
every dealer we speak to revolve around the same<br />
themes:<br />
• The ability to deliver accurate option pricing<br />
and high quality supporting documentation and<br />
research to clients faster than the <strong>com</strong>petition<br />
can manage.<br />
• The ability to efficiently provide peripheral<br />
services to clients, such as ad hoc risk analysis.<br />
• Tools that support a more efficient work-flow<br />
between sales and trading.<br />
• The reduction of operational risk through<br />
integration of front and back office systems.<br />
• The ability to pro-actively sell to clients based<br />
on their exposures and needs rather than purely<br />
based on the desk’s trading axes through better<br />
tracking of the clients’ activities.<br />
• Foolproof, easy to use pricing and analysis tools<br />
to enable distribution channels with less<br />
derivatives expertise to effectively sell.<br />
• “Economies of scale” in the derivatives<br />
distribution process through better sharing and<br />
archiving of information.<br />
There is almost universal recognition among derivatives<br />
dealers of the need for scalable, integrated front office<br />
and distribution software to address these issues. Dealers<br />
are currently facing the age old dilemma of technology<br />
procurement: build or buy. Fortunately, a few vendors<br />
have emerged over the last few years that are focusing on<br />
building these technologies. Those dealers who have<br />
embraced the changing landscape of derivatives<br />
<strong>com</strong>petition by addressing the need for new technologies<br />
are seeing opportunities in the FX derivatives market<br />
that have not existed in years; this edge, coupled with the<br />
decreased dominance of the franchise players, has created<br />
enormous growth potential for the small to midsize<br />
derivatives dealer. This has created more business growth<br />
potential for a broader spectrum of derivative experts. As<br />
long as risk is managed, accurate valuations are adhered<br />
to and client service is exemplary this market will<br />
continue to be robust.
e-FX INDUSTRY REPORT<br />
The Retail FX Market<br />
Growth, Consolidation and Evolution<br />
Sang Lee is Managing partner<br />
of the Aite Group<br />
With the passing of the<br />
Commodity Futures<br />
Modernization Act (CFMA) in<br />
December 2000, the<br />
Commodities and Futures<br />
Trade Commission (CFTC)<br />
became officially<br />
responsible for regulating<br />
the retail FX market, thereby<br />
legitimizing the existence of<br />
the burgeoning retail<br />
market. Today, the retail FX<br />
market is booming with<br />
strong adoption across all<br />
major financial centers.<br />
22 | january 2010 e-FOREX<br />
While the retail FX<br />
market is focused on<br />
providing products<br />
and services that target retail<br />
clients, the definition of what a<br />
retail client entails is not so<br />
straight forward. In fact, most<br />
retail FX firms would also include<br />
small hedge funds and CTAs<br />
among their clients. The typical<br />
profile of a true retail client could<br />
vary widely from those high-networth<br />
individuals with more than<br />
US$1 million in average account<br />
size to small-time retail clients with<br />
a mere US$250 in account size.<br />
Due in part to broader acceptance<br />
by retail customers, the retail FX<br />
market has experienced<br />
phenomenal growth in the past<br />
few years. After a slow start in the<br />
mid- to late-1990s, retail<br />
customers have finally be<strong>com</strong>e<br />
more familiar with currency as a<br />
legitimate asset class, and not just<br />
as an inevitable by-product of a<br />
cross border transaction.<br />
Of course, retail investor acceptance<br />
is just one reason behind the<br />
market’s staggering growth. Some of<br />
the other key factors behind include<br />
the following:<br />
• Acceptance as a legitimate asset<br />
class. FX has indeed be<strong>com</strong>e<br />
widely accepted as a legitimate<br />
asset class. The active trading<br />
market is not the only venue<br />
through which retail investors<br />
can participate in this growing<br />
marketplace. Similar to other<br />
asset classes, those with shortterm<br />
speculative incentives can<br />
engage in active trading using<br />
many of the available global FX<br />
retail firms. However, there are<br />
signs that a growing number of<br />
options are be<strong>com</strong>ing available<br />
for those investors with a more<br />
long-term perspective on FX as<br />
an asset class.<br />
• Global nature of a market that<br />
is open 24 hours per day. FX is<br />
a truly global market that is<br />
open 24 hours per day. This<br />
simple fact provides added<br />
convenience for those retail<br />
customers that may only have<br />
time during the evening hours<br />
to conduct most of their<br />
trading. Since the FX market is<br />
open at all hours, the down side<br />
of trading in after-hours such as<br />
drastically diminished liquidity,<br />
can be avoided.
• Highly liquid and accessible<br />
market. Despite the fact that<br />
the FX market is largely<br />
unregulated and over-thecounter<br />
(OTC) in nature (at<br />
least in the cash FX market), it<br />
is incredibly liquid. Even in low,<br />
volatile market conditions, there<br />
is always someone on the other<br />
side that is constantly providing<br />
trading opportunities.<br />
• Ease of access to market. Even<br />
less than a decade ago, gaining<br />
access to the FX market was<br />
difficult, as a handful of global<br />
banks dominated every aspect of<br />
the market. However, the<br />
emergence of the Internet as the<br />
key connectivity infrastructure<br />
for retail trading <strong>com</strong>bined with<br />
the development of sophisticated<br />
and reliable retail FX trading<br />
technologies have contributed<br />
greatly in nurturing the overall<br />
growth of the retail FX market.<br />
• Regulatory acceptance. In most<br />
countries, local securities<br />
regulators have jurisdiction over<br />
various types of retail FX<br />
Figure 1: Projected Market Share of Automated Trading in Retail FX<br />
trading. In the U.S. market, the<br />
passing of the Commodities<br />
Futures Modernization Act of<br />
2000 (CFMA) provided<br />
legitimacy and support for “offexchange”<br />
trading of FX<br />
products for retail customers.<br />
In addition, the higher net<br />
adjusted capital requirements<br />
have eliminated weaker service<br />
providers and reinforced the<br />
<strong>com</strong>petitive positions of those<br />
legitimate FX retail brokers.<br />
• Active market education. A lack<br />
of understanding was one of the<br />
major impediments in the retail<br />
FX market. Thanks to the<br />
accessibility supported by the<br />
Internet and the aggressive<br />
educational campaigns by leading<br />
retail FX firms, customer<br />
education has be<strong>com</strong>e widely<br />
spread and has lead to the<br />
development of a more<br />
sophisticated retail FX client base.<br />
• Migration of customers from<br />
other markets looking for<br />
higher returns. Similar to the<br />
institutional FX market, a<br />
>>><br />
significant percentage of active<br />
retail customers have migrated<br />
from other asset classes, looking<br />
for higher profit margins. Not<br />
surprisingly, the most <strong>com</strong>mon<br />
migration path has been from<br />
the equities and futures markets.<br />
• Availability of technology. Even<br />
with regulatory and market<br />
structure changes that are<br />
favorable to the development of<br />
the retail FX market, without<br />
the availability of reliable and<br />
cost-effective trading platforms,<br />
the current pace of growth in<br />
the retail FX market could not<br />
be sustainable.<br />
• Gradual customer on-boarding.<br />
Most (if not all) of the major<br />
retail FX firms provide a demo<br />
account funded with thousands<br />
of dollars of virtual money. These<br />
demo accounts provides live<br />
prices and all of the margin and<br />
collateral features to simulate a<br />
live trading environment. This is<br />
an extremely important step in<br />
account acquisition, especially<br />
when courting novice FX traders.<br />
january 2010 e-FOREX | 23
e-FX INDUSTRY REPORT<br />
Key market trends<br />
The growing legitimization of the<br />
retail FX market through various<br />
regulatory changes and availability<br />
of technology have certainly aided<br />
in the overall growth of the retail<br />
FX market. Over the last couple of<br />
years, a few key market trends<br />
have emerged to help define the<br />
further evolution of the market:<br />
• Adoption of automated trading<br />
systems. Similar to what has<br />
happened in the institutional<br />
market, sophisticated retail FX<br />
traders have turned to<br />
automated trading strategies to<br />
take the emotion out of their<br />
daily trading activities.<br />
Depending on what the trader<br />
wants to achieve and their<br />
tolerable risk levels, specific<br />
trading strategies can be<br />
automated to drive trading<br />
volume. The popularity of<br />
automated trading systems in<br />
24 | january 2010 e-FOREX<br />
the retail market has reached a<br />
point where even on eBay, one<br />
can find variety of automated<br />
trading systems ready for<br />
purchase. Aite Group estimates<br />
that automated trading systems<br />
account for approximately 35%<br />
of the overall retail FX market.<br />
• Market consolidation. Driven by<br />
stiffer <strong>com</strong>petition and higher<br />
adjusted net capital requirements,<br />
the retail FX market has gone<br />
through massive consolidation<br />
over the last 12 months. With<br />
the net capital requirement<br />
moving from US$10 million in<br />
September 2008 to US$20<br />
million by May 2009, smaller<br />
retail FX FCMs have either<br />
exited the market or have been<br />
consumed by the larger players.<br />
As of Q3 2009, the US retail FX<br />
industry had about 15 retail<br />
brokers, a drastic decline from<br />
over 30 at the end of 2007.<br />
• Growth in emerging markets.<br />
Going beyond the major<br />
financial centers for currency of<br />
United States, UK, Japan, Hong<br />
Kong, and Singapore, many<br />
retail FX firms are discovering<br />
new revenue opportunities in<br />
emerging markets, including<br />
China, Southeast Asia, Latin<br />
American and the Middle East.<br />
For certain retail FX brokers,<br />
while the total number of<br />
clients from traditional FX<br />
market centers still account for<br />
a significant portion of their<br />
client base, an increasing<br />
percentage of revenue is actually<br />
<strong>com</strong>ing from clients based in<br />
emerging markets.<br />
Market Sizing<br />
In 2001, the estimated average<br />
daily trade volume in the retail FX<br />
market stood at US$10 billion,<br />
representing 0.8% of the overall<br />
FX market. By the end of 2006,<br />
Figure 2: Average Daily Trade Volume in FX (In US$ Billions)<br />
Source: Bank for International Settlements, Bank of England Foreign Exchange Joint Standing Committee (JSC), New York Foreign Exchange Committee,<br />
Singapore Foreign Exchange Market Committee, Canadian Foreign Exchange Committee, Tokyo Foreign Exchange Joint Standing Committee, Aite Group estimates
the average daily trade volume<br />
reached over US$60 billion,<br />
representing over 2% of the entire<br />
market and signaling plenty of<br />
room for future growth.<br />
At the end of 2009, the retail FX<br />
market is expected to reach<br />
US$125 billion in average daily<br />
trade volume, representing over<br />
3% of the global FX market. This<br />
is an impressive growth<br />
considering that the overall global<br />
FX market has declined in size<br />
from US$4.3 trillion in average<br />
daily trade volume in 2008 to<br />
US$3.7 trillion in average daily<br />
trade volume by Q3 2009.<br />
Conclusion<br />
The potential growth of the retail<br />
FX market appears limitless at this<br />
point, as potential key<br />
<strong>com</strong>petition is still missing from<br />
The Retail FX Market: Growth, Consolidation and Evolution<br />
Figure 3: Market Share of Retail FX<br />
Source: Bank for International Settlements, Bank of England Foreign Exchange Joint Standing Committee (JSC), New York Foreign Exchange Committee,<br />
Singapore Foreign Exchange Market Committee, Canadian Foreign Exchange Committee, Tokyo Foreign Exchange Joint Standing Committee, Aite Group estimates<br />
the <strong>com</strong>petitive landscape. One<br />
such group is the major dealing<br />
banks that have, to date,<br />
functioned simply as liquidity<br />
providers to the leading retail FX<br />
players. As evidenced by the direct<br />
entrance of Deutsche Bank and<br />
Citi into the retail market, Aite<br />
Group expects other dealing banks<br />
with significant retail businesses to<br />
seek new revenue sources from the<br />
retail FX market.<br />
One glaring absence from the<br />
retail FX market has been the<br />
traditional online brokers in the<br />
United States, such as Charles<br />
Schwab, E*Trade, and others. In<br />
the past, the lack of regulatory<br />
guidance and reputational risk<br />
may have played a role in<br />
dissuading these firms from<br />
providing FX trading as part of<br />
their active trading platform.<br />
However, as they continue to<br />
focus on enhancing functionality<br />
within their active trader<br />
platforms, most of the traditional<br />
online brokerage firms will have<br />
no choice but to seriously consider<br />
the addition of FX into their<br />
overall asset class coverage or risk<br />
losing out on capturing this most<br />
liquid market to specialized retail<br />
FX brokers and large global banks.<br />
Whether through the use of active<br />
trading firms profiled in this<br />
report or increasingly through<br />
other FX-related products, such as<br />
FX deposit products, FX funds, or<br />
FX ETFs, a growing number of<br />
retail clients are turning to FX as<br />
an asset class to diversify their<br />
portfolios and to achieve the<br />
higher returns that are unlikely to<br />
be gained from more traditional<br />
asset classes.<br />
january 2010 e-FOREX | 25
FEATURES<br />
Frances Maguire<br />
Despite new research showing a slight shift<br />
towards multi-dealer platforms, the demand for<br />
single bank portals, and relationship-based<br />
pricing, is still high, especially in times of crisis.<br />
Frances Maguire examines how the continued<br />
investment by banks in their platforms is<br />
ensuring they continue to grow.<br />
28 | january 2010 e-FOREX<br />
Single bank<br />
FX platforms<br />
will they keep<br />
powering ahead?<br />
The importance of liquidity was severely<br />
highlighted during the recent financial crisis<br />
and the need for solid credit lines, liquidity<br />
and relationship based pricing in times of uncertainty,<br />
for both those customers using multi-bank platforms,<br />
for best execution, and single bank platforms, became<br />
apparent.<br />
Andrew Cohen, global head of e-Commerce<br />
marketing, at BNP Paribas says that during the crisis<br />
there was a noticeable flight to quality, with clients<br />
wanting to trade with highly rated resilient banks.<br />
This resulted in a large increase in customers trading<br />
over the traditional channel (phone) - the trades were<br />
large in nature and required execution excellence.
He says: “I think it has shown the world that the FX<br />
business is still relationship driven. Despite the<br />
increasing volumes of business being done<br />
electronically, clients still want a sales person at the end<br />
of the phone, therefore showing that voice single bank<br />
and multi bank platforms <strong>com</strong>pliment each other.” “In<br />
times of extreme crisis people always pick up the<br />
phone. The chat systems are also used extensively and<br />
are integrated into some platforms to keep that oneon-one<br />
relationship going.”<br />
Best execution<br />
The definition of best execution in foreign exchange<br />
trading goes beyond the notion of best price. Many<br />
buy-side firms define best execution in FX trading by<br />
looking at the total cost to execute, allocate, and<br />
settle an FX trade, including the potential for<br />
operational risk inherent in moving cash<br />
between accounts and counterparties.<br />
Cohen believes the two models will<br />
continue to exist side-by-side, simply<br />
because of the <strong>com</strong>pliance<br />
requirement for certain fund<br />
managers to get three quotes<br />
for every deal. However,<br />
banks are continuing to invest<br />
in the single bank platforms and<br />
Cohen says they continue to show growth.<br />
“Relationship-based pricing enables banks to tailor<br />
their services more specifically to individual client<br />
needs and offer value-added post-trade services, such<br />
as aggregation and straight-through-processing to the<br />
client’s front office booking systems as well as back<br />
office systems to enable automated allocations and<br />
providing online reporting tools,” he says.<br />
The recent crisis has put all the over-the-counter<br />
market instruments firmly in the spotlight. Cohen<br />
believes there has been greater focus on leverage in the<br />
retail space. In the US and Japan the tighter leverage<br />
regulations may have an impact on retail volumes<br />
further down the line, but Cohen says the single bank<br />
FX platforms are here to stay, due to the sheer<br />
volumes being traded on them, the resources that<br />
banks are putting into them and the fact that some<br />
clients prefer to trade on them.<br />
Going forward, Cohen says the banks will be<strong>com</strong>e<br />
more innovative to keep clients on their single bank<br />
platforms and this will take many different guises,<br />
from adding liquidity, better pricing models, more<br />
sophisticated execution models and algorithms, to<br />
adding more products, such as more exotic options.<br />
>>><br />
Andrew Cohen<br />
“Relationship-based pricing enables banks to tailor their<br />
services more specifically to individual client needs and offer<br />
value-added post-trade services...”<br />
Focus on relationships<br />
For Takis Spiropoulos, managing director and head of<br />
the e-Solutions group at CIBC World Markets, this<br />
innovation will be very much web-based, and the<br />
increased services that this enables banks to deliver<br />
will be a key <strong>com</strong>ponent in building single bank<br />
portals in the future. Spiropoulos says there has been<br />
a recent focus on client relationships across all asset<br />
classes, and the banks with strong balance sheets and<br />
high credit ratings were able to focus more on their<br />
relationships and saw an increase in market share.<br />
He says: “The events of the last year were a real<br />
testament to the importance of the relationships with<br />
clients. We saw a reduction in the number of bank<br />
counterparties, defaults and credit constraints, and as<br />
a result clients became more dependent upon fewer<br />
banks for liquidity provision and funding. For a<br />
number of primary dealers this presented<br />
opportunities to strengthen relationships with existing<br />
clients while opening the door to new clients in need<br />
of products that were challenging to hedge.”<br />
Spiropoulos believes that both FX ECNs and single<br />
bank portals will continue to grow, but at different<br />
rates, that are currency pair-dependant. The single<br />
bank portals maximise the internalisation of what is<br />
predominantly client flow for the more liquid G10<br />
currency pairs, but the banks rely upon ECNs to<br />
january 2010 e-FOREX | 29
FEATURES<br />
minimise hedging and execution costs. The emerging<br />
agency e-<strong>com</strong>merce approach also relies on accessing<br />
ECN liquidity, using Direct Market Access, and<br />
leveraging execution algorithms. He says:<br />
“Additionally, banks are starting to trade with each<br />
other directly, on an interest only basis. This way<br />
banks can offload some of the risks between e<strong>com</strong>merce<br />
desks without leaving a large execution<br />
footprint in the ECN market.” The higher the<br />
consumption of liquidity, the higher the volatility so<br />
as liquidity differs significantly between different time<br />
zones and currency pairs it is natural for banks with<br />
expert market knowledge in specific currency pairs, in<br />
our case USD/CAD, to express this advantage in the<br />
single bank platform through <strong>com</strong>petitive pricing and<br />
value-added offerings to attract client flow.”<br />
Gateway to tailored solutions<br />
Spiropoulos says that single bank platforms are ideally<br />
suited to servicing the bank’s own retail discount<br />
brokerage and wealth management businesses,<br />
especially when the platform is enriched with suitable<br />
content and integrated with efficient processing<br />
management – key to successful custodian and<br />
payment orientated solutions. “Multi-bank platform<br />
represent the lowest <strong>com</strong>mon denominator, which for<br />
highly <strong>com</strong>moditised products, such as FX, essentially<br />
means price and straight through processing, whereas<br />
single bank platforms can further enhance the client<br />
relationship by targeting functionality to different<br />
client segments, thus providing banks with the<br />
opportunity to differentiate their service to the client.”<br />
In the corporate sector, working closely with the<br />
treasury department to help them streamline their<br />
operations and exposure management, and satisfy<br />
their ever-increasing accounting requirements, can be<br />
catered for by the single bank platform.<br />
Single bank platforms leverage the aggregated<br />
liquidity and proprietary market making algorithms<br />
to produce <strong>com</strong>petitive and consistent pricing.<br />
“The initial perception was that e-<strong>com</strong>merce platforms<br />
were about price and execution. It is now understood<br />
that single bank platforms also add value to the client<br />
by providing pre-trade and post-trade functionality.<br />
We see the single bank portal as an investment in<br />
client relationships. It is a gateway to tailored solutions<br />
to meet client needs,” Spiropoulos says.<br />
Going forward, Spiropoulos believes that as<br />
technology and web browsers evolve, web based<br />
solutions are be<strong>com</strong>ing viable alternative to installed<br />
applications and are more suitable for cross-asset single<br />
bank portal development. For example, auto-hedging<br />
30 | january 2010 e-FOREX<br />
>>><br />
the FX risk inherent in cross-border trading of equity<br />
and fixed in<strong>com</strong>e instruments will be much easier. He<br />
says: “Leading single bank platforms will increasingly<br />
be<strong>com</strong>e client-focused, rather than product-focused,<br />
and leveraging emerging web-based technologies to<br />
enhance the user experience and bring the user closer<br />
to the trading venue. For example, client designed<br />
pages on a single bank platform, advanced searching<br />
capability and stored searches, decision support using<br />
analytics and calculators with linked charting<br />
capability, integrated news, research and chat facilities.<br />
All these features are much easier to integrate on webbased<br />
technology rather than installed application.”<br />
Growth patterns<br />
Every year, since 1993, consultancy ClientKnowledge<br />
interviews 2000 wholesale customer counterparties in<br />
the foreign exchange market to survey the different<br />
channels FX business is being traded, and the research<br />
reports a slight shift towards the multi-bank platforms.<br />
Justyn Trenner, Principal of ClientKnowledge, says<br />
that all currencies, including the most liquid, were<br />
impacted by the financial crisis across all platforms<br />
and electronic venues. As a result business,<br />
particularly large orders, shifted back to the phone<br />
and although there is flow is starting to go back to the<br />
electronic trading systems, this is not the case for<br />
much of the large order business. He says: “There is<br />
also an interesting nuance that banks are sometimes<br />
restricting their trading with other banks as<br />
counterparties in order to ensure that they can<br />
Takis Spiropoulos<br />
“We see the single bank portal as an investment in<br />
client relationships. It is a gateway to tailored<br />
solutions to meet client needs,”
FEATURES<br />
Justyn Trenner<br />
“Bilateral connections still matter. They are a very large<br />
part of a bank’s business and the dealer portal within<br />
that will tend to be more profitable...”<br />
allocate their trading lines with that bank for the<br />
occasions where that bank is supplying a broker or<br />
hedge fund with whom they want to trade – that they<br />
reserving lines for prime brokerage relationships.”<br />
ClientKnowedge found no growth in ‘black box’<br />
trading between 2008 and 2009. Algorithmic trading,<br />
however, has grown as a process for the sell-side to<br />
internalise client risk, but the buy-side has not grown,<br />
not least because some of these models became<br />
unstuck in the last year. Where algorithms are used to<br />
split up trades and find best execution in the market,<br />
there has been growth, according to ClientKnowledge,<br />
but the use of execution algorithms for large orders<br />
still remains at around just 5-15 per cent of how large<br />
orders are traded, depending upon the region.<br />
Says Trenner: “The net effect is that customers have<br />
moved a little of their trading away from the electronic<br />
systems and this has offset the natural growth in the<br />
adoption of e-trading so that the growth pattern for etrading<br />
as a proportion of total activity has flat-lined,<br />
across all client types, in the past year.” The impact of<br />
this lack of growth of e-trading has been that there<br />
has been a slight shift towards multi-provider<br />
platforms, and a slight reduction in bilateral trading<br />
platforms. “Within the bilateral trading sector we are<br />
seeing an increased take-up of APIs (Application<br />
Programming Interfaces) <strong>com</strong>pared to using the<br />
bank’s single dealer platforms. We think that single<br />
dealer platforms, depending on the region and client<br />
type, still account for 30 per cent of e-trading.”<br />
32 | january 2010 e-FOREX<br />
Importance of bilateral connections<br />
Last year, the ClientKnowledge survey measured the<br />
single dealer platforms as close to a 60/40 split<br />
between multi and single dealer platforms. Says<br />
Trenner: “Bilateral connections still matter. They are a<br />
very large part of a bank’s business and the dealer<br />
portal within that will tend to be more profitable<br />
because it is less <strong>com</strong>petitively priced, but it is<br />
important that banks understand and support multiprovider<br />
platforms and API connectivity.”<br />
However, Trenner stresses that the figures show that<br />
even though the larger part of FX business streams is<br />
going through the multi-provider platforms, it does<br />
not mean that buy-side firms are dealing with a higher<br />
number of banks electronically than they were year<br />
ago. The number of trading partners has not changed,<br />
it is just that firms prefer to see their banking partners<br />
in either multi-dealer venues or in an aggregated<br />
format of their own, which requires an API, so they<br />
can readily <strong>com</strong>pare pricing. The marginal change<br />
there has been in the number of banks used, Trenner<br />
puts down to the recent squeeze on credit availability,<br />
rather than the desire to <strong>com</strong>pare more banks’ prices.<br />
Trenner believes the main driver for buy-side firms in<br />
choosing where they trade is convenience of market<br />
access and the use of aggregation technology, provided<br />
by firms like FlexTrade and Apama, is growing.<br />
However in the immediate future, he believes both<br />
the multi-dealer and single bank platforms will<br />
continue to grow, side by side, for different customer<br />
types and requirements.<br />
However, the fact still remains that the main focus for<br />
the banks behind both the single and multi-bank<br />
platforms is the single bank portal and it is there that<br />
greater investment is being made. In 2001, many<br />
thought the arrival of the multi-bank portal would<br />
mean the death of single bank portals but the reality<br />
is that there will always be a number of <strong>com</strong>panies<br />
that continue to use a single bank credit provider as<br />
they simply do not have the kind of FX volumes that<br />
warrant the multi-bank portal subscriptions.<br />
At the end of the day, challenges to the sustainability<br />
of the multi-bank platforms will <strong>com</strong>e from the<br />
supply side not the demand side, and how liquidity<br />
providers can maintain FX revenue by trading<br />
through a multi-bank portal. And once the focus on<br />
price transparency shifts to credit lines, or to the cost<br />
efficiency of straight through processing, it looks as<br />
though the banks’ portals will continue to give the<br />
multi-bank platforms a run for their money.
FEATURES<br />
Jim Nuzum<br />
Jim Nuzum CEO of GCC Markets (www.gccmarkets.<strong>com</strong>),<br />
explores why there is growing<br />
demand for Shari'ah <strong>com</strong>pliant FX trading<br />
solutions and how the latest FX e-<strong>com</strong>merce<br />
technologies can help address the needs of<br />
Islamic traders and investors.<br />
34 | january 2010 e-FOREX<br />
FX e-<strong>com</strong>merce<br />
in Shari'ah<br />
<strong>com</strong>pliant<br />
currency trading<br />
the new embracing the old<br />
Depending on which scholar’s view you are<br />
referring to, the Islamic Golden Age ran for<br />
about 400 years, from the early 9th century,<br />
well into the 13th century. During this time Islam<br />
contributed to and either, directly or indirectly,<br />
influenced economic doctrine on every continent.<br />
Today, with total assets somewhere around the $750<br />
billion level, Islamic finance is a relatively small but<br />
vital element of the conventional finance sector<br />
globally; vital not just for its obvious geopolitical<br />
significance, but vital numerically too. At around 1.6<br />
billion, almost 1 in 4 people in the world today<br />
practice Islam and on current growth rates this will<br />
increase to 1 in 3 by 2025. Comparatively, (ignoring<br />
the recent events in Dubai) and not by accident or<br />
oversight, Islamic finance hardly missed a beat<br />
throughout the credit crisis and continues to maintain<br />
double digit growth rates, upwards of 15% pa.<br />
Demographic diversity – globally visible, more<br />
globally integrated<br />
The notion that all Arabs are Muslim and all Muslims<br />
are Arab is also false. Findings in a recent report by<br />
Princeton University confirms that 60 percent of all<br />
Muslims live in Asia and only 20 percent live in the<br />
Middle East and North Africa. Importantly, a significant<br />
concentration of Muslims exist in the new economic<br />
powerhouses of India (161 million) and to a lesser<br />
extent, China (22 million) and Russia (16 million) as<br />
well as in-vogue, technology and resource rich countries<br />
of Malaysia and Indonesia (another 240 million).<br />
However you look at it, these are <strong>com</strong>pelling<br />
numbers. Together with major infrastructure<br />
development already underway or in the pipeline<br />
throughout the GCC alone, they will underpin the<br />
continued emergence of Islamic capital markets in a<br />
manner that will dwarf the oil boom of the 90’s. Little
wonder, you’d agree that global banks<br />
have established specialist Islamic<br />
“windows” or dedicated subsidiaries to<br />
address the immediate opportunity and<br />
resource up for the inevitable medium<br />
term potential.<br />
How Shari'ah <strong>com</strong>pliant FX operates<br />
To see the precise and, well<br />
<strong>com</strong>plementary role for eCommerce in<br />
Shari’ah <strong>com</strong>pliant trading, it helps to<br />
understand some basic principles of<br />
Islamic finance and application of those<br />
principles to the FX market*.<br />
The Shari’ah (‘the way of life’) is a<br />
<strong>com</strong>plete set of principles and rules<br />
governing the day to day life of Muslims<br />
including trade and investment. It is<br />
codified in the Quran and the Sunna (the<br />
recorded sayings and actions or “traditions”<br />
of the Prophet) and elaborated on by Islamic scholars<br />
through interpretation and analogy.<br />
Islam has a problem with the concept of making<br />
money simply by virtue of having money, a practice<br />
which it considers exploitative. Other specific<br />
prohibitions are generally unambiguous and include<br />
but are not limited to tangibles such as alcohol and<br />
tobacco and intangibles including 1)<br />
gambling/speculation, 2) uncertainty (gharar) and of<br />
course 3) interest (riba) as well as 4) non-asset backed<br />
transactions. So in summary, a <strong>com</strong>pliant FX trade:<br />
1. Must not be in support of a prohibited item<br />
(alcohol, pork products, etc.)<br />
2. Must have a legitimate, underlying cross<br />
border trade or investment transaction,<br />
hedging and risk management acceptable<br />
3. Cannot simply be a speculative or short<br />
position in a currency<br />
4. Must not involve interest or interest rate<br />
differentials.<br />
In conventional foreign exchange, anything other<br />
than a spot deal obviously falls foul of 1 or several of<br />
these. The market has evolved to address the issue of<br />
outrights and swaps with a number of structures, all<br />
of which are generally based on one or two <strong>com</strong>monly<br />
accepted philosophical approaches:<br />
Trader A Trader B<br />
Bank<br />
1 3<br />
Commodity A Commodity B<br />
Commodity A<br />
USD Principal + Profit<br />
EUR Principal + Profit<br />
Cash Flows Commodity Flows<br />
2<br />
4<br />
Commodity B<br />
Cust.<br />
>>><br />
Diagram 1: Sharia’h <strong>com</strong>pliant FX forward based on simple Commodity Murabaha structure<br />
*These are relatively simple examples of <strong>com</strong>pliant structures; detailed analysis of structural options is beyond the scope of this article.<br />
**OIC Fiqh Academy (Organisation of the Islamic Conference) - a most respected Saudi Arabian based body established for advanced study of<br />
Islam has be<strong>com</strong>e an outspoken critic of several high profile, scholar endorsed structures <strong>com</strong>mon in the market, among them Tawarruq.<br />
a. Wa’ad (single or double) essentially a<br />
unilateral promise or promises (see Diagram 2)<br />
b. Murabaha – <strong>com</strong>modity purchase and resale<br />
(see Diagram 1)<br />
As with most structured Islamic products,<br />
benchmarks and the basis of pricing somewhat<br />
controversially** originate in the non-<strong>com</strong>pliant<br />
world – in the case of forward FX, swaps and<br />
underlying interest rate differentials are the “culprits”.<br />
Murabaha based structures are the basic building<br />
blocks of Islamic finance with variations deployed to<br />
ac<strong>com</strong>modate a range of funding, asset and liability<br />
management and FX activities. In the Murabaha<br />
based FX example in Diagram 1, <strong>com</strong>pliance is<br />
attained by mapping the cash flows that would<br />
ordinarily exist via the swap(s), to the purchase and<br />
sale of a <strong>com</strong>modities (say non-precious metals on the<br />
LME or a pre-agreed basket of <strong>com</strong>pliant assets),<br />
which has the same/similar cash flow implications for<br />
the customer.<br />
This approach requires the customer and the bank to<br />
enter into two separate Murabaha transactions to<br />
replicate the FX forward cash flows. The customer<br />
buys the metal value spot and sells it to the bank for<br />
the purchase price plus an agreed profit (the swap<br />
<strong>com</strong>ponent in a conventional forward deal), payable<br />
on a deferred basis, aligned to the end value<br />
date/delivery of the FX deal. On the other side of the<br />
january 2010 e-FOREX | 35
FEATURES<br />
forward, the bank buys another <strong>com</strong>modity and sells<br />
it to the customer, again for the purchase price plus<br />
an agreed profit, settlement on a deferred basis. The<br />
customer then sells the <strong>com</strong>modity back into the<br />
market to recover its initial investment and CCY<br />
requirement.<br />
The Wa’ad based approach achieves a similar out<strong>com</strong>e<br />
for the customer in cash flow terms but utilises a<br />
number of unilateral promissory notes as depicted<br />
below.<br />
T0<br />
T88<br />
T90<br />
Counterparty<br />
A<br />
Counterparty<br />
A<br />
Counterparty<br />
A<br />
Counterparty<br />
A<br />
Counterparty<br />
A<br />
With a double Wa’ad approach, both counterparties<br />
promise to deliver a given CCY to each other at a set<br />
price (amount) if the other party exercises the option,<br />
but without entering into a contract that would<br />
include the uncertainty forbidden by Shari’ah.<br />
While these are the most <strong>com</strong>mon structures in the<br />
market, imperfections exist with both approaches.<br />
They are not universally accepted by all Islamic<br />
scholars in all jurisdictions (very few are). To the<br />
extent that the <strong>com</strong>pliant Murabaha structure<br />
involves 4 parties and another asset class, there is an<br />
economic cost attached to execution over and above a<br />
typical bid/offer spread in an FX outright or swap,<br />
which is passed through to the customer. With the<br />
Wa’ad based structures, issues exist in many<br />
jurisdictions around questionable or untested<br />
enforceability of promissory notes. Still, for now<br />
they’re getting the job done.<br />
36 | january 2010 e-FOREX<br />
Buys EUR<br />
Sells USD<br />
Wa’ad agreement to buy<br />
USD against EUR at a<br />
predetermined rate on T88<br />
Offer to buy USD<br />
against EUR at a<br />
predetermined rate<br />
Counterparty B accepts<br />
offer from Counterparty A<br />
Buys USD<br />
Sells EUR<br />
Buys USD<br />
Sells EUR<br />
Counterparty<br />
B<br />
Counterparty<br />
B<br />
Counterparty<br />
B<br />
Counterparty<br />
B<br />
Counterparty<br />
B<br />
Diagram 2: Sharia’h <strong>com</strong>pliant FX forward based<br />
on simple (single) Wa’ad structure<br />
>>><br />
Fragmentation remains a problem for now<br />
So, we have a large, growing, globally visible<br />
addressable market; it’s multi-jurisdictional,<br />
increasingly sophisticated and benefitting more than<br />
ever from a significant influx of intellectual and<br />
human capital. Sure, it has its structural peculiarities<br />
but it still represents a beacon in the post credit crisis<br />
financial markets landscape.<br />
So why does it continue to underperform and fail to<br />
realise its fullest potential? Informed conjecture on<br />
this would probably consider 3 areas<br />
– standards, standards and standards<br />
– or lack of them.<br />
For the sell side, both global banks<br />
and to a slightly lesser extent,<br />
regionalised Islamic banks,<br />
standardisation and convergence is a<br />
two edged sword; <strong>com</strong>moditisation<br />
normally ac<strong>com</strong>panies introduction<br />
of standards and, as we all know,<br />
margin <strong>com</strong>pression rapidly occurs<br />
on the heels of (product) increased<br />
<strong>com</strong>moditisation. In<br />
acknowledgement of this<br />
inevitability and for the benefit of<br />
the industry as a whole, only the<br />
more enlightened institutions are<br />
genuinely pushing for agreement on<br />
and adoption of standards and<br />
documentation. After all, why<br />
should Islamic investors and traders<br />
pay onerous premiums for so called<br />
proprietary structures that deliver<br />
little, if any economic benefit? And<br />
why should Islamic investors tolerate sell side<br />
“convenience” of lower standards of transparency,<br />
disclosure and reporting?<br />
Spot Contract<br />
Wa’ad Contract<br />
Wa’ad Contract<br />
Spot Contract<br />
Settlement of<br />
Spot Contract<br />
Scholars’ tendency toward divergent views has led to<br />
widespread calls for intervention by standards bodies<br />
and state regulators. Some progress has been made in<br />
this regard with ISDA, IIFM (International Islamic<br />
Financial Market in Bahrain) and AAOIFI<br />
(Accounting and Auditing Organisation for Islamic<br />
Financial Institutions) but much work still needs to<br />
be done and probably as an industry wide initiative to<br />
accelerate needed out<strong>com</strong>es.<br />
FX platform <strong>com</strong>pliance with Islamic principles<br />
In terms of structure and process, in order to<br />
successfully address the Islamic sector, single and<br />
multibank (FX eCommerce) platforms need to<br />
substantially mirror the off-line world as described<br />
REF: International Swaps and Derivatives Association (ISDA) and the International Islamic Financial<br />
Market (IIFM), Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI)
FEATURES<br />
above. Although addressing a relatively small subset of<br />
their customer base, to varying degrees of automation,<br />
the single bank platforms offered by global banks all<br />
do this. Structures offered are for the most part<br />
customer driven, en<strong>com</strong>passing <strong>com</strong>binations of<br />
single Wa’ad, double Wa’ad and <strong>com</strong>modity<br />
Murabaha.<br />
In the event of Murabaha based transactions, in-line<br />
electronic integration with an approved <strong>com</strong>modities<br />
broker(s) would automate the process of discovery,<br />
execution and<br />
confirmation enabling the<br />
sell-side to leverage<br />
immediate operational<br />
efficiencies, dramatically<br />
reducing CPT (average<br />
Cost Per Trade).<br />
To enjoy widespread buyside<br />
support, <strong>com</strong>pliance<br />
models should be signed<br />
off by a dedicated<br />
Shari’ah <strong>com</strong>pliance<br />
board, which would<br />
consider and issue fatwas<br />
(religious opinion<br />
typically issued by an<br />
eminent Islamic scholar<br />
or <strong>com</strong>pliance board<br />
<strong>com</strong>prised of such<br />
scholars) on a bystructure<br />
basis.<br />
Addressing the needs of<br />
Islamic traders and<br />
investors<br />
• Streamline buy-side<br />
workflow:<br />
Asked to name the single<br />
biggest benefit of eFX<br />
platforms, many Islamic<br />
investors and traders (the<br />
tiny minority who use them) fail to mention ease of<br />
price discovery, convenience or even better liquidity,<br />
instead praising the advent of progress toward<br />
streamlined workflow. Given the nature of Islamic<br />
finance, the end-to-end processing of an outright or<br />
swap is a resource-intensive business. Together with<br />
an acceleration of standards and regulatory<br />
convergence, this has be<strong>com</strong>e an enduring barrier to<br />
widespread buy-side adoption of <strong>com</strong>pliant FX and a<br />
stubborn impediment to the sell-side scaling the<br />
business to anything like meaningful volumes.<br />
38 | january 2010 e-FOREX<br />
• Advance standards and regulatory convergence:<br />
A multi-bank eCommerce platform as an industry<br />
solution for the global Islamic investment and trading<br />
<strong>com</strong>munity is the ideal vehicle to level the playing<br />
field with standards based <strong>com</strong>pliance models and<br />
documentation.<br />
• Spectacularly reduce ticket processing costs:<br />
With such cumbersome trade lifecycle events,<br />
processes and workflow, the sell side arguably has the<br />
greatest incentive; fully costed, the CPT for banks<br />
currently providing<br />
<strong>com</strong>pliant FX in the Gulf<br />
ranges from $150 to an<br />
eyebrow raising $300+.<br />
Progressively higher levels<br />
of integration and STP, all<br />
of which originate from<br />
electronic execution, will<br />
substantially eliminate the<br />
processing bottlenecks<br />
currently placing an<br />
“artificial” handbrake on<br />
volumes.<br />
The more generic benefits<br />
of eCommerce<br />
deployment such as<br />
reduced market and<br />
operational risk of course<br />
also apply. With bilateral<br />
credit the moving feast<br />
that it is these days, so too<br />
the relevancy of reduced<br />
credit risk/credit<br />
enhancement, with<br />
integrated messaging<br />
handling prime broker<br />
functions.<br />
Conclusion<br />
The unique characteristics<br />
of Islamic finance are rooted in centuries old values.<br />
Operational challenges posed by these characteristics<br />
lend themselves perhaps even more than conventional<br />
FX, to electronic automation.<br />
Up to the minute, twenty first century technology,<br />
sensitively coupled with Islamic jurisprudence will<br />
accelerate the emergence of the Shari’ah <strong>com</strong>pliant<br />
trading sector and deliver a confluence of undeniable<br />
benefit to all market participants.
PLATFORM REVIEW<br />
The TEX ® Multidealer<br />
Trading System<br />
By Alfred Schorno<br />
With global currency markets more<br />
volatile than ever, buy-side clients in<br />
the foreign exchange markets are<br />
looking for partners they can trust to<br />
provide reliable, cost-effective and<br />
secure electronic trading services.<br />
e-<strong>Forex</strong> talks to Alfred Schorno at 360<br />
Treasury Systems AG (360T) about<br />
how the <strong>com</strong>pany's multi-bank<br />
platform is meeting this demand.<br />
Alfred, 360T was formed in 2000 and<br />
maintains a state-of-the-art multi-bank<br />
platform for Foreign Exchange, Money<br />
Market products and FX/Interest Rate<br />
Derivatives. Who are your main clients<br />
today?<br />
Banks acting as market taker, corporate<br />
treasuries and institutional clients like real<br />
money and hedge funds as well as<br />
broker/dealer are trading on our multibank<br />
portal.<br />
40 | january 2010 e-FOREX<br />
The TEX ® Multidealer Trading System is 360T´s<br />
global multi-bank portal. How many international<br />
and regional liquidity providers are now connected<br />
to the platform?<br />
Globally more than 70 market makers are offering<br />
pricing across the different OTC products tradeable.<br />
What range of integration options is available to<br />
customers with TEX ® ?<br />
Being rated as one of the top provider of integration<br />
solutions we offer and maintain online deal export<br />
interfaces to most treasury or portfolio management<br />
systems. Online order routing via an upload API is<br />
also available.<br />
What do clients particularly like about TEX ® and<br />
what are the key benefits the platform offers them?<br />
Being the only real multi-product portal, customers<br />
TEX ® Multidealer Trading System
Workflow I-TEX ® Intra-Group Trading System<br />
highly value the fact that TEX ® enables trading in a wide<br />
range of FX and money market products including FX<br />
options, FX limit orders, money market funds, as well<br />
as precious metals and also interest rate derivatives.<br />
Then, beside the fact that 360T offers unlimited access<br />
to the full bank basket of buy-side customers, it is also<br />
much appreciated that we are the only multi-bank<br />
platform not owned by banks. Also our strong service<br />
orientation is especially valued by our customers.<br />
What trade execution options are available on TEX ® ?<br />
Customers can choose between Request for Stream<br />
(RFS), Streaming executable rates (SEP) and limit<br />
orders with a wide range of order types.<br />
360T also provides an Intra-Group Trading system<br />
called I-TEX ® . What key features and trading<br />
functionality does I-TEX ® support?<br />
I-TEX ® offers well focussed range of features to the<br />
different user groups:<br />
For market taker banks our white label trading /<br />
single bank trading solution can support all products<br />
types as available on our multi-bank portal TEX ® . On<br />
customer wish the offering can of course be limited in<br />
terms of products. Furthermore we just launched our<br />
enhanced FX margin trading and position<br />
management tool to cater<br />
FX spot trading for margin<br />
trading customers.<br />
Corporates can link the<br />
world wide subsidiaries<br />
and centralize FX and<br />
intra-group financing<br />
transactions in one or<br />
more central treasury hubs.<br />
Asset managers use us to<br />
centralize market or limit<br />
orders in a central<br />
execution desk and<br />
aggregate or group<br />
transactions easily before<br />
execution to the market.<br />
Our integrated auto dealers<br />
support all I-TEX ® -trading<br />
hubs with a wide range of<br />
features including spread<br />
management, internal and external counterparty limit<br />
control as well as price management via back-to-back<br />
market liquidity.<br />
How have you extended the traditional features<br />
available on I-TEX ® ?<br />
The latest and most important enhancements are:<br />
• Enhanced features for FX margin trading<br />
• Additional routing rules for the auto dealer with<br />
minimum spread management, trader spreads<br />
• Extended possibilities to set up external bank<br />
baskets<br />
• Market link (back-to-back functionality)<br />
supporting also limit orders<br />
What plans does 360T have for extending the range<br />
of products and services available on your multibank<br />
platform?<br />
Our first priority is to maintain and support the<br />
existing already quite wide range of services and<br />
products but we are always open to discuss customer<br />
requests. Lately enquiries to enhance FX option<br />
trading to volatility quotes, not limited to live prices<br />
as today, and also trading features for base metals have<br />
summed up. We are carefully evaluating this and<br />
other options.<br />
january 2010 e-FOREX | 41
FEATURES<br />
Continuing innovation<br />
in exchange-based<br />
currency trading<br />
By Frances Maguire.<br />
The world’s futures exchanges continue to make<br />
in-roads into the biggest OTC market in the<br />
world and with recent regulatory discussions on<br />
the need for greater use of centrally cleared<br />
products, currency trading innovation continues<br />
to gather pace within the exchanges.<br />
During the uncertain times of the banking<br />
crisis the exchanges saw renewed interest in<br />
central clearing and now that the regulators<br />
are deliberating over which instruments should be<br />
centrally cleared, it looks as though the exchanges will<br />
continue to benefit from the trend, both mandatory<br />
and voluntary, to mitigate counterparty risk through<br />
centrally cleared instruments. As a result, the futures<br />
exchanges have continued to innovate in launching<br />
products and reducing fees to attract this new<br />
business.<br />
42 | january 2010 e-FOREX<br />
CME Group<br />
Recently, CME Group gained regulatory<br />
authorisation to launch a new service to clear FX<br />
instruments traded over the counter through CME<br />
Clearport. A pilot will begin at the end of the year, in<br />
readiness for a customer for launch in 2010. The<br />
service will enable bilaterally traded spot, swaps and<br />
forwards on eight currency pairs to be cleared using a<br />
centralised counterparty model, with flexible notional<br />
values and settlement dates available, and tenors out<br />
to five years. Post-launch, additional currency pairs,<br />
options and NDF currencies will be available through<br />
CME ClearPort.<br />
In March, CME launched E-micro FX contracts, in<br />
six currency pairs. At one tenth the size of CME’s FX<br />
contracts, the micro contracts are quoted in interbank<br />
terms and are the first FX products the exchange has<br />
launched, specifically designed for retail and selfdirected<br />
traders.<br />
Derek Sammann, managing director of financial<br />
products, at CME Group says that the interest is<br />
<strong>com</strong>ing from a range of investors, many of which are<br />
not new to listed products, but new to FX. “We<br />
wanted to position a product that was the right size<br />
for customers in terms of risk tolerance. Our noninstitutional<br />
customers indicated a need for smaller<br />
contracts to more easily access the FX market, and we<br />
have carried out an extensive educational programme<br />
with the brokerages to support this.”<br />
Sammann says that the CME Group’s growth in<br />
volumes, in the last two years, continues to<br />
outperform the over-the-counter market. However,<br />
the two markets are correlated and cash market<br />
growth has a positive impact on the exchange traded<br />
volumes and Sammann says the liquidity pools<br />
<strong>com</strong>plement each other.
Technology upgrades<br />
CME Group invests heavily in enhancing its<br />
infrastructure and speed of its matching engine. A<br />
number of technology upgrades during the past year<br />
has seen the matching speed on the exchange’s<br />
electronic trading platform, Globex, change from 12<br />
milliseconds for FX down to around 2.5 milliseconds.<br />
Says Sammann: “We think this is a significant<br />
increase in speed and efficiency and for our market<br />
participants, where speed is important and latency<br />
concerns abound, we continue to invest in our<br />
infrastructure across all asset classes.”<br />
In addition to this is the increasing rollout of CME<br />
Group’s co-location facility to provide a service to<br />
enable high-velocity trading customers to co-locate<br />
their application server alongside the Globex<br />
matching engine.<br />
According to Sammann, another benefit to our<br />
customers that trade cash and futures is that CME has<br />
reduced the EFP (exchange-for-physicals) fee, for<br />
firms to take an OTC position and migrate that onto<br />
an exchange-listed futures position, to give customers<br />
a 43 per cent saving. He says: “This makes it easier<br />
and more cost effective for firms that want to take<br />
advantage of our central counterparty clearing service<br />
and apply that to their cash positions, and as a result<br />
Derek Sammann<br />
“Our non-institutional customers indicated a need for smaller<br />
contracts to more easily access the FX market..”<br />
>>><br />
EFP volumes have increased by 25% in the last<br />
quarter. Customers, particularly in the last 12<br />
months, have started to see the significant benefit of a<br />
clearing element in their FX transactions.”<br />
The recent crisis has prompted a flight to quality, with<br />
concerns for risk reduction and the deleveraging of both<br />
banks and buy-side trading books, and the increased<br />
redemptions of hedge funds means that customers are<br />
looking to go back to basics in risk management.<br />
Sammann says: “This has been reflected not only in a<br />
reduction of emerging markets business but also the<br />
options volume has pulled back a little more<br />
dramatically than the spot and the futures business.<br />
This speaks of a simpler view of risk, and customers<br />
are moving away from <strong>com</strong>plexity and are drawn to<br />
liquidity. By offering liquidity, transparency, and<br />
credit risk mitigation, we provide our customers with<br />
the solutions they need to manage their risk.”<br />
He adds that best performing currencies through the<br />
crisis were the high yielding currency pairs of the<br />
British pound, Canadian dollar and Australian dollar.<br />
ICE<br />
Ray McKenzie, vice president of US Futures Product<br />
Sales at the InterContinental Exchange (ICE) says the<br />
exchange has recently launched block trade<br />
capabilities for its FX futures contracts, and a Trade at<br />
Settlement (TAS) facility for the ICE US dollar index.<br />
The TAS capability allows a trader to enter an order<br />
to buy or sell an eligible futures contract month<br />
january 2010 e-FOREX | 43
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Ray McKenzie<br />
“.. we are constantly looking for ways to improve execution<br />
speeds and other functionality in our matching engine.”<br />
during the course of the trading day at a price that will<br />
be equal to the settlement price for that contract<br />
month, or at a price that is up to two minimum price<br />
fluctuations above or below the settlement price. TAS<br />
trades are confirmed when TAS bids and offers match.<br />
In addition, ICE has waived all fees for electronic ICE<br />
FX futures products, and added the ICE dollar Index<br />
to its 30-member exchange program. Real time dollar<br />
index and FX quotes are now available, free of charge,<br />
on the exchange’s website.<br />
He says: “ICE currently has the fastest futures<br />
platform in the industry and we are constantly<br />
looking for ways to improve execution speeds and<br />
other functionality in our matching engine.”<br />
>>><br />
He adds that there has been a surge of interest in the<br />
ICE US Dollar Index futures contract, and there has<br />
been increased activity in cross currency products in<br />
the EFP market, especially South African Rand,<br />
Hungarian Forint, and Czech Koruna.<br />
This growth in interest in exchange-traded products<br />
has <strong>com</strong>e as a direct result of the recent financial
FEATURES >>><br />
crisis. “The value proposition for clearing OTC FX<br />
products on exchanges has strengthened, as buy side<br />
customers are looking to reduce counter party credit<br />
risk for all products,” he says.<br />
ISE<br />
Kris Monaco, director of new product development at<br />
the International Securities Exchange (ISE) says that<br />
the exchange now lists options on nine currency pairs,<br />
four of which have a dual convention so that trades<br />
can use the USD-based or USD-counter convention<br />
for four currencies: Euro, British pound, Australian<br />
dollar, and New Zealand dollar. ISE is also preparing<br />
to launch options on the Brazilian real (USDBRL),<br />
and pending regulatory approval, the exchange will<br />
offer dual conventions on all currency pairs listed.<br />
Says Monaco: “Innovation requires experimentation.<br />
It is impossible to create new products and services in<br />
a vacuum, so we elicit feedback from a broad group of<br />
market participants and we test our ideas, keeping in<br />
mind that we need to be flexible. We recently<br />
launched a beta version of a new website called<br />
FXoptions.<strong>com</strong>. With the new site, we hope to create<br />
the best resource available for everything related to FX<br />
options. The site will have trading ideas, virtual<br />
trading contests, our new online TV program, trend<br />
opinions and technical analysis, breaking news,<br />
economic data, market <strong>com</strong>mentary, options market<br />
data, and much more. This is obviously a new area<br />
for any exchange, but we feel that the best way to<br />
promote a product is to educate, and this will be our<br />
university.”<br />
The exchange is also experimenting with product<br />
enhancements, and is currently seeking regulatory<br />
approval for an early market opening. Currently, the<br />
options markets in the US open at 9:30AM ET and<br />
ISE wants to begin trading at 7:30AM ET to capture<br />
the critical cross-over trading session between London<br />
and New York.<br />
Additionally the exchange is also seeking regulatory<br />
approval for a “penny strike.” The penny strike<br />
would allow ISE to list a single $0.01 strike for each<br />
expiration month. Monaco says: “In essence, a deep<br />
in the money call would provide investors and traders<br />
with more direct exposure to the spot price, and<br />
would allow for tied-to-spot trading strategies. For<br />
example, a trader could buy the penny strike call and<br />
sell a slightly out of the money call against it.”<br />
46 | january 2010 e-FOREX<br />
Kris Monaco<br />
“Innovation requires experimentation. It is impossible to<br />
create new products and services in a vacuum...”<br />
Monaco believes the key attractions of the ISE market<br />
are liquidity, customer service, technology, execution<br />
speed, and reliability. Using the expertise of ISE and<br />
the Deutsche Börse Group, a new trading platform is<br />
being developed and will be rolled out at ISE in late<br />
2010. The new trading system may ultimately<br />
support all the markets within Deutsche Börse Group.<br />
“Together with Eurex, we are also establishing a<br />
transatlantic clearing link between The Options<br />
Clearing Corp (OCC) and Eurex Clearing. When the<br />
link is implemented, pending regulatory approval,<br />
Eurex members will be able to access ISE’s listings<br />
while using their current Eurex membership and<br />
clearing accounts. The link will facilitate trading in<br />
US listings, including FX options,” says Monaco.<br />
Impact of regulatory initiatives<br />
While the financial crisis has certainly resulted in<br />
increased scrutiny of OTC products, Monaco says<br />
that without regulatory intervention, it is hard to<br />
predict future migration of OTC products onto<br />
exchange platforms. “Nevertheless, it is easy to<br />
envisage firms putting risk controls in place that<br />
would favour exchange-listed products with<br />
centralised clearing,” he adds.<br />
Monaco also says that regulatory changes in the retail<br />
FX market appear to be having an impact. The
FEATURES<br />
48 | january 2010 e-FOREX<br />
National Futures Association has recently<br />
announced new rules, such as the adjusted<br />
net capital requirement, the FIFO rule,<br />
and leverage limitations, which could<br />
make things more difficult for FX-only<br />
brokers. Monaco says: “A natural reaction<br />
for certain firms is to broaden their<br />
products and services. I believe we will see<br />
more retail-focused FX firms be<strong>com</strong>e<br />
securities broker-dealers, offering their<br />
customers a full range of exchange-listed<br />
products.”<br />
“All exchange-listed products that provide<br />
exposure to currencies, whether by way of<br />
individual pairs, baskets, and unleveraged<br />
or leveraged strategies, help reinforce the<br />
concept that exchanges can provide costeffective<br />
alternatives to OTC trading. I<br />
expect those types of products to grow in<br />
popularity, and I expect a broader range<br />
of market participants use them.<br />
Regarding listed product innovation, I<br />
think we have just barely scratched the<br />
surface.”<br />
NFX<br />
NASDAQ OMX Futures Exchange’s<br />
(NFX) now offers world currency<br />
futures products in the Australian<br />
dollar, British pound, Canadian dollar,<br />
Euro dollar, Japanese yen, Swiss franc<br />
and earlier this year the exchange<br />
launched futures on the Colombian<br />
peso. Also this year, Nasdaq OMX<br />
PHLX’s launched four new world<br />
currency options in the Mexico peso,<br />
New Zealand dollar, South African<br />
rand, and Swedish krona, bringing the<br />
total of currency options at the PHLX<br />
to ten.<br />
NFX offers trading of IDEX USD<br />
interest rate swap futures, world<br />
currency futures and sector index<br />
futures, and in November 2009 NFX<br />
launched IDEX USD forward start<br />
interest rate swap futures. Customers<br />
can exchange semi-annual fixed-rate<br />
payments in exchange for quarterly
floating-rate payments on the 3-month US Dollar<br />
London Interbank Offered Rate.<br />
Ben Craig, president of NFX, says that market<br />
participants have expressed interest in trading<br />
currency futures of countries like Brazil, Russia, India<br />
and China and that NFX is looking into these<br />
opportunities.<br />
Nasdaq OMX Co-Location Services offers customers<br />
the opportunity to place their own trading systems<br />
within Nasdaq’s data centers, enabling access to all five<br />
of Nasdaq’s US markets, including NFX and PHLX.<br />
We are increasing our supply on an incremental basis<br />
to match demand and to ensure that all firms continue<br />
to have equal access to the service.”<br />
Craig believes that both investors and traders view the<br />
potential regulatory changes in Congress and a move<br />
from OTC to a regulated exchange as gaining<br />
momentum in the near term. “For FX traders who<br />
chose exchange-traded currency futures, the increased<br />
value proposition is the removal of counterparty risk,<br />
due to CFTC [Commodity Futures Trading<br />
Commission] customer segregated funds treatment.”<br />
DGCX<br />
The Dubai Gold & Commodities Exchange (DGCX)<br />
is the most recent to offer exchange-traded FX<br />
products and currently the only exchange in the<br />
region to offer a range of currency futures contracts.<br />
The exchange offers four currency pairs against the<br />
US dollar: euro, sterling, Indian rupee and Japanese<br />
yen.<br />
DGCX currency futures have shown strong volume<br />
growth and interest from market participants, year to<br />
date. Currency futures have seen volume growth of 88<br />
per cent this year <strong>com</strong>pared with 2008. YTD volume,<br />
as of the end of October 2009, is 440,000 contracts,<br />
valued at US $29.4 billion.<br />
In June 2007, DGCX launched the world’s first<br />
Indian rupee/dollar futures contract, aimed at<br />
enabling individuals and <strong>com</strong>panies to hedge their<br />
Indian rupee risk on a transparent trading platform.<br />
At that time, the only market available to hedge rupee<br />
risk was the non-deliverable forward (NDF) interbank<br />
market, which is unregulated, not transparent<br />
and not accessible to all participants.<br />
Continuing innovation in exchange-based currency trading >>><br />
Ben Craig<br />
“For FX traders who chose exchange-traded<br />
currency futures, the increased value proposition is the<br />
removal of counterparty risk...”<br />
The volatility of the Indian rupee also demonstrated<br />
the need for an efficient risk management (hedging)<br />
tool for the currency. DGCX rupee futures recorded a<br />
month-on-month growth of 52 per cent in October<br />
2009 and 533 per cent growth in year to date<br />
volumes. DGCX is only exchange outside of India to<br />
offer a rupee/dollar futures contract, making it<br />
available for trading to international participants.<br />
Eric Hasham, CEO of DGCX says: “DGCX was the<br />
world’s first exchange to offer Indian rupee/dollar<br />
futures contracts. Our Indian rupee contract was<br />
enhanced a year ago making it cash settled, enabling a<br />
wider number of participants to take advantage of its<br />
benefits.<br />
Settlement is based on the US dollar reference rate<br />
published by the Reserve Bank of India on the last<br />
day of trading. This facilitates the settlement process<br />
for both local and international market participants,<br />
as well as providing transparency and alignment with<br />
the domestic rate.”<br />
“Future initiatives and our product development<br />
strategy are based on customer-driven demand and<br />
january 2010 e-FOREX | 49
FEATURES<br />
feedback. There is significant potential<br />
to grow our contracts further and<br />
launch new products at the right time<br />
by accessing regional liquidity pools in<br />
Middle East and Asia.”<br />
Hasham says the key benefits for<br />
market participants of trading currency<br />
futures on DGCX is that all<br />
transactions take place and are settled<br />
within the advantageous tax regime and<br />
regulatory environment of the United<br />
Arab Emirates.<br />
Settlement is also guaranteed via the<br />
Dubai Commodities Clearing<br />
Corporation, reducing the counterparty<br />
risk inherent when trades are transacted<br />
bi-laterally over-the-counter. In<br />
addition, he says, trading on-exchange ensures best<br />
price discovery as market makers provide aggregated<br />
liquidity pools rather than offering one price as per<br />
the currency spot markets.<br />
The DGCX trading platform incorporates a<br />
sophisticated and automated risk management system.<br />
Hasham says: “We continually review and upgrade<br />
our technology infrastructure to integrate advanced<br />
features, in order to meet the growing needs of<br />
members and market participants. Recently, we<br />
50 | january 2010 e-FOREX<br />
offered an onsite co-location service to support our<br />
market markers and liquidity providers.”<br />
Hasham believes that high levels of volatility in<br />
exchange rates coupled with the need to manage<br />
counterparty risk have strengthened the value<br />
proposition of FX futures trading and encouraged<br />
participants to transact on a regulated exchange such<br />
as DGCX, as an essential means for hedging price<br />
risk. DGCX currency futures also offer many<br />
arbitrage trading opportunities with other<br />
international markets.<br />
He says: “As forex is seen as an<br />
attractive alternative asset class<br />
and with an estimated daily<br />
turnover of $2.5 trillion, it is<br />
seeing interest from all<br />
participants, institutions and<br />
retail investors. This trend is also<br />
underlined in the Middle East by<br />
significant growth in the volume<br />
of DGCX currency contracts in<br />
2009.”<br />
So long as the futures exchanges<br />
continue to innovate and create<br />
FX products, it seems very likely<br />
that they will benefit from the<br />
current regulatory pressure and<br />
the recent flight to quality<br />
amongst the banks.
FEATURES<br />
Navigating the<br />
<strong>com</strong>munications minefield:<br />
High performance connectivity for High Frequency FX trading<br />
Joe Hilt<br />
52 | january 2010 e-FOREX<br />
The Capital Markets landscape consists of a <strong>com</strong>plete<br />
multi-asset, multi-partnered and multi-regional<br />
infrastructure in order to be profitable in today’s market<br />
conditions. Trading execution venues, their participants<br />
and technology vendors must now all be at the front of<br />
technology advancements. However, the need to be in<br />
as many markets and to <strong>com</strong>municate to as many<br />
clients and partners as possible has made connectivity<br />
to market access a “mine field” of obstacles. In the<br />
second in our series on high frequency FX trading, Joe<br />
Hilt, VP of Sales, North America, Hibernia Atlantic,<br />
outlines some of the key issues facing FX trading firms<br />
who are planning how best to link their trading<br />
infrastructures to trading venues and what lessons they<br />
can take from latency, networking and trading<br />
connectivity developments in other markets.
In the previous decade, the capital<br />
markets trading infrastructure<br />
looked very different. Trading<br />
floors existed on exchanges, where the<br />
buy and selling of stocks, bonds, options<br />
and futures were negotiated for best prices.<br />
Having a high performance <strong>com</strong>munication<br />
system meant having extremely fast and<br />
legible note takers along with a few loud<br />
voices.<br />
In today’s global marketplace, floor trading has<br />
be<strong>com</strong>e obsolete due to the demanding volume from<br />
the electronic trading era. High-speed, automated and<br />
algorithmic trading have set the next generation<br />
standard in finding best prices and executing better<br />
strategies across dozens of market centres. The<br />
various market centres of Exchanges, ECNs, Dark<br />
Pools, Crossing Networks and the 10,000+<br />
institutions that trade them, must continue to be fast<br />
and always faster in the processing of trillions of<br />
requests to buy and sell stocks, options, futures and<br />
currency contracts.<br />
Due to major economic turbulence and anomalies, the<br />
global capital markets <strong>com</strong>munity has begun to <strong>com</strong>e<br />
closer together. Trading in the FX market for example,<br />
has increasingly be<strong>com</strong>e a leading asset class strategy for<br />
many firms who traditionally only traded stocks or<br />
>>><br />
options. As a result, rapid expansion of new Electronic<br />
Communications Networks (ECNs) and high frequency<br />
trading across all asset classes have pushed the demand<br />
to Ultra-Low Latency connectivity solutions.<br />
Connecting to equities markets have begun to drive the<br />
Ultra-Low latency race. However, in the next generation<br />
multi-asset class world, trading firms now have to also<br />
connect to securities, securities options, futures and FX<br />
nationally and internationally, processing data, sending<br />
orders and <strong>com</strong>municating with thousands of clients.<br />
Proximity vs. Latency<br />
According to the Bank for International Settlements,<br />
average daily turnover in global foreign exchange<br />
markets is estimated at $3.98 trillion. The US stock<br />
market place of about $50 trillion in assets consists of<br />
fifty Exchanges, ECNs, Crossing Networks, Dark<br />
Pools and other Bidding platforms. There are over<br />
5,000 active trading firms of these markets with a race<br />
to be the fastest and most efficient in <strong>com</strong>pleting a<br />
trade. Firms are constantly faced with the same basic<br />
principals: being close to the market and getting in<br />
and out as fast as possible!<br />
Proximity has been used for the Market Enters to be<br />
closer to the participant similar to how the floors were<br />
being operated a decade ago. Proximity is measured<br />
between the trading venue and the trader and is<br />
highly dependent on the physical network talking to<br />
the market systems, i.e.: Market Data or Order<br />
Execution. Latency is the round-trip measurement in<br />
speed on how fast a packet or a message runs over a<br />
network and through the various trading systems.<br />
Miles to Microseconds<br />
It started with the exchanges, when the New York<br />
Stock Exchange <strong>com</strong>pany SIAC opened up a<br />
colocation service to its members, vendors and their<br />
customers. Within the first year over 400 <strong>com</strong>panies<br />
purchased colocated services right next to exchanges’<br />
market data. As a result, trading servers created a<br />
within “proximity” Ultra-Low latency standard.<br />
Today, Nasdaq OMX, the London Stock Exchange<br />
(LSE), the Chicago Mercantile Exchange (CME) and<br />
every leading market centre around the world offer a<br />
similar service allowing for sub-microseconds of<br />
network latency to their venues.<br />
Several <strong>com</strong>panies today provide the leading market<br />
place colocation facility for exchanges and their firms to<br />
build their proximity trading infrastructures. In addition<br />
to private exchange-owned colocation centres. data<br />
january 2010 e-FOREX | 53
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centre providers such as Equinix are leading suppliers<br />
who provide space, power and connectivity both in and<br />
out of their data centre facilities, as well as among<br />
tenants housed or colocated within their facilities.<br />
Recently, other <strong>com</strong>panies specializing in capital<br />
markets centered proximity services have <strong>com</strong>e to the<br />
market, such as Telx. Similar to Equinix, Telx offers<br />
financial <strong>com</strong>panies and their networks access to a<br />
variety <strong>com</strong>munications and exchange platforms<br />
located within their colocation centres.<br />
Equinix and Telx along with the exchanges and many<br />
other venues, tout their advantages of proximity as it<br />
relates to the lower latency they can provide from a<br />
wide variety of network providers. However, this is<br />
where navigating the mine field could make a<br />
tremendous difference for trading firms of all types.<br />
Going the distance<br />
Proximity to financial exchange platforms is of<br />
ultimate importance when measuring latency in<br />
capital markets. It’s the simple rule of physics that<br />
dictate distance equals latency, and in capital markets<br />
latency equals loss. Eliminating latency is core, so<br />
eliminating distance is the first step. If we took out a<br />
yard stick to measure network latency, no doubt the<br />
shortest path would win and in capital markets, that<br />
could equate to millions of dollars.<br />
For many years, the global tele<strong>com</strong>munications<br />
industry has been measuring its network latency and<br />
selling Service Level Assurances (SLAs) on the<br />
differences based on these numbers. Most networks<br />
measure latency capability based on bandwidth,<br />
which is simply the maximum rate of data that can<br />
flow through a specific media type.<br />
Lighting the Way<br />
Once a path has been determined and latency in<br />
distance agreed upon, the network must be “lit” with<br />
network services. So let’s talk capacity first. Pure<br />
bandwidth is the actual ‘size of the pipe.’ Companies<br />
can simply calculate how many data bytes and<br />
messages can cross a line. The calculations are based<br />
on the size of the market data and order message rates<br />
for example; Nasdaq, NYSE, BATS, Direct Edge and<br />
all the US Equities exchanges in the US are about 1<br />
million messages per second.<br />
If there was no distance from the source to the<br />
consumer server, than a 1 Gig pipe would be 1<br />
microsecond. The more information on the pipe, the<br />
54 | january 2010 e-FOREX<br />
>>><br />
larger the pipe needs to be in order to be as fast. The<br />
further the distance, the larger the “lit” pipe to<br />
ac<strong>com</strong>modate packet and message rates divided by<br />
distance to show the lowest possible latency.<br />
Gearing Up<br />
With microseconds driving all decisions for financial<br />
institutions, choosing which network equipment and<br />
which provider to deploy are often million dollar<br />
decisions. Often, it’s the technology situated in the<br />
various network Points of Presence (PoPs) that can<br />
reduce or increase network latency and more money can<br />
be spent at solving unrelated problems. Equipment,<br />
technology, switches, routers and ensuring redundancy<br />
and security among these key IT network <strong>com</strong>ponents<br />
can be the differentiating factors behind a network’s<br />
viability in supporting proximity trading solutions.<br />
Living in a connected world<br />
Most financial networks require interconnectivity in a<br />
number of locations in order to leverage proximity<br />
trading with the Financial Exchanges. Many of the<br />
key locations are within major cities such as Chicago,<br />
New York, London, Paris and Frankfurt. For<br />
example, the Chi-X Europe Platform connects<br />
<strong>com</strong>panies to multiple financial trading platforms. As<br />
of today, Chi-X has over 100 trading participants<br />
with access to over 1000 of the most liquid stocks,<br />
ETFs and ETCs across 14 European markets.<br />
Companies colocated within close proximity to the<br />
Chi-X have measured a mean latency of 0.4<br />
milliseconds to access other participant networks on<br />
the platform. This type of speed is hard to beat, as<br />
transactions are seemingly <strong>com</strong>pleted in real-time.<br />
Security through diversity<br />
With increased trends toward high frequency and<br />
algorithmic trading, proximity and interconnectivity<br />
to only one trading venue will not provide the<br />
financial gain required to stay ahead. Companies<br />
must connect to multiple financial trading exchanges<br />
in multiple markets – which mean finding a secure<br />
and diverse network provider that can quickly and<br />
efficiently construct and implement custom network<br />
solutions, bringing <strong>com</strong>panies to the ‘safe’ zone in the<br />
mine field.<br />
For example, Hibernia Atlantic is the largest privately<br />
held, US-owned, diverse Transatlantic submarine<br />
provider. Hibernia is dedicated to what it calls<br />
‘Security though Diversity‘ on its network. Realizing<br />
that most networks enter North America and Europe
FEATURES<br />
through only a couple of landing stations (namely<br />
around London and New York waterways), the<br />
<strong>com</strong>pany sought to be sure that its cable would be<br />
better protected by having a unique network<br />
footprint, crossing the Atlantic in a more northern<br />
route than traditional carriers, leaving North America<br />
via Nova Scotia, Canada and entering Europe through<br />
Ireland. The <strong>com</strong>pany also has diverse routes that can<br />
bypass main traffic arteries, if necessary, such as its<br />
terrestrial metro networks in and around New York<br />
City and London.<br />
Hibernia’s cable system is engineered to provide<br />
diversity and security (by offering alternative routes<br />
from other providers) as well as fast connections, with<br />
the lowest latency routing, such as 10.0 milliseconds<br />
round trip from Chicago to Toronto and 66.1<br />
milliseconds round trip from NY/NJ to Slough, UK.<br />
Integration and Deployment<br />
Ok so how does everyone play nicely together so my<br />
network can be integrated securely and efficiently, with<br />
fast, easy deployment? The good news is that there is<br />
a small group of effective providers currently in the<br />
marketplace who are <strong>com</strong>mitted to global financial<br />
trading networks. As such, these pioneers are actively<br />
working together to ensure best-of-breed services for<br />
the key financial houses. Most are already connected<br />
in the top exchange and data centre locations in the<br />
most prominent financial cities in the world.<br />
If you are searching for a network partner that<br />
considers your proximity, latency, bandwidth, quality<br />
and diversity needs, you may not need to cross that<br />
minefield all alone. Many of these providers have<br />
already invented this wheel for you—you just need to<br />
56 | january 2010 e-FOREX<br />
climb into the driver’s seat. By asking the right<br />
questions, you can be assured that their services are<br />
right for your network considerations.<br />
All the right questions<br />
So what are the key factors to consider when<br />
analysing your <strong>com</strong>munication network performance?<br />
Here’s a list of questions to ask internally and as you<br />
shop around:<br />
1. How important is speed (or notably, lowest<br />
latency) in relation to the type of trades that<br />
we will need to process?<br />
2. Where are our key network points, such as our<br />
financial exchanges where the trades will be<br />
processed?<br />
3. Are these trading points accessible?<br />
4. Which networks provide interconnectivity into<br />
these transaction points?<br />
5. How are these networks designed to<br />
interconnect with these transaction points?<br />
6. How quick can the network provider provision<br />
service and provide us with the speed to<br />
market?<br />
7. Can the provider guarantee fast turn up and<br />
lowest latency?<br />
8. What technology and/or equipment are<br />
utilized on these networks to assist in reducing<br />
my latency?<br />
All of these questions are vital to a financial trading<br />
<strong>com</strong>pany’s ability to transact trades quickly, efficiently<br />
and securely.
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Tracking new developments in<br />
currency derivatives processing<br />
Increasing numbers of banks, asset managers,<br />
pension funds, hedge funds, and corporates are<br />
looking to ramp up their use of currency<br />
derivatives, both for hedging purposes as well as<br />
a <strong>com</strong>ponent of their fund and investment<br />
management strategies. Although great strides<br />
have been made in automating much of the<br />
processing and workflow associated with Over<br />
The Counter derivatives, much still remains to be<br />
done, particularly with regard to cost savings<br />
and risk management.<br />
Much has been achieved in attaining straight<br />
through processing for vanilla FX products<br />
and options, and now with volumes increasing<br />
the focus is one cost efficiency, and cost per trade, and<br />
58 | january 2010 e-FOREX<br />
By Frances Maguire<br />
the smooth operations of processing so that exceptions<br />
are managed efficiently. The recent crisis has not only<br />
made banks focus on the operation risk of failed trades,<br />
but also reputational risk, where failed trades can impact<br />
credit and counterparty risk management.<br />
Messaging<br />
The world’s leading financial market messaging<br />
standards organisations have been collaborating since<br />
2008 to create a financial messaging Investment<br />
Roadmap. This collaboration – by Financial Products<br />
Markup Language/International Swaps and<br />
Derivatives Association, (FpML/ISDA), FIX Protocol<br />
Ltd (FPL), the International Securities Association for<br />
Institutional Trade Communication (ISITC) and<br />
Swift – lays the groundwork to establish one<br />
<strong>com</strong>mon financial messaging standard, ISO 20022,<br />
while maintaining the existing independent protocols.
Earlier this year, ISDA announced the launch of a<br />
new Financial Products Markup Language (FpML)<br />
working group, which will focus on reporting of OTC<br />
derivative positions and regulatory reporting.<br />
Building on existing work carried out for portfolio<br />
reconciliation and pricing and risk management, the<br />
group’s initial focus will be to extend the current<br />
FpML standard in order to define data elements for<br />
the reporting of OTC derivative positions, both to<br />
regulators and among market participants.<br />
According to Niall Kennedy, director of product<br />
management at Wall Street Systems, the increased<br />
focus on FX as an asset class is bringing more and<br />
more participants, and therefore more volume, to the<br />
market.<br />
Focus on costs<br />
Due to the investment required to enter the FX<br />
market, where spreads are so tight and there are many<br />
players in the market, there is an increased focus on<br />
cost, and cost per trade. Kennedy says that new<br />
entrants cannot survive without greater automation.<br />
He says: “Reduction in cost per trade is therefore very<br />
important as there is increased liquidity in the market.<br />
Automation is helping to drive down operational risk.<br />
Handling large volumes of exceptions not only<br />
increases firms’ costs but can negatively impact<br />
reputation in the market – this can be a key<br />
differentiator.”<br />
Accurate and timely market data current and<br />
historical is essential for risk management purposes<br />
and Kennedy says that even before a single transaction<br />
is booked firms need to have static data, such as<br />
customer settlement instructions and confirmation<br />
preferences, in place to achieve STP. To this end, there<br />
have been advances within the industry in terms of a<br />
greater number of data sources, an increased number<br />
of solutions enabling price discovery for over the<br />
counter instruments, as well as a great improvement<br />
in standard messaging used between counterparties to<br />
enable firms to achieve higher STP rates for vanilla<br />
derivatives.<br />
According to Kennedy, Industry Standard Protocols,<br />
such as FIX and FpML, for intra-vendor<br />
<strong>com</strong>munication is helping to improve the STP for<br />
exotic products. He says progress has been made in<br />
the tags and descriptions of over the counter<br />
instruments between counterparties, but the issue<br />
now is how the transactions are <strong>com</strong>municated across<br />
networks and agreeing formats for the confirmations.<br />
Niall Kennedy<br />
“Handling large volumes of exceptions not only<br />
increases firms’ costs but can negatively impact<br />
reputation in the market”<br />
>>><br />
“Standards are now starting to be developed around<br />
FIX and FpML for FX and FX derivatives. The<br />
equities market has managed to over<strong>com</strong>e these<br />
problems over the years, and a central clearing<br />
counterparty, where there would be one standard to<br />
adhere to, would benefit the over the counter market.”<br />
Growing demand for FX Options<br />
But Emmanuel Nusimovici, senior solution manager,<br />
Misys Summit says that FX options is a mature<br />
market and can be used by investors in other asset<br />
classes to cover FX risk or corporate treasuries to<br />
cover the FX exposure of their balance sheet. “We are<br />
seeing growing demand for FX options, as well as<br />
treasury or plain equity trading systems. This is part<br />
of the back to basics trend in the market.<br />
Additionally, there is expansion in emerging markets<br />
operations and this too is feeding this growth firstly in<br />
FX and then FX options.”<br />
He adds that the STP weakness in FX options has<br />
actually been on the pre-trade side and in<br />
confirmations, rather than the trade settlements and<br />
life-cycle, due to the fact it is a voice market, which<br />
creates operational hazards and ambiguities. This<br />
ambiguity, pre-confirmation, is the biggest choke<br />
point facing the FX options industry today.<br />
Nusimovici says: “Attempts at moving FX options to<br />
january 2010 e-FOREX | 59
FEATURES<br />
Emmanuel Nusimovici<br />
“Attempts at moving FX options to electronic trading have not<br />
been successful yet because most trades in the interbank<br />
market are volatility trades and difficult to automate as they<br />
are not traded as a single ticket…”.<br />
electronic trading have not been successful yet because<br />
most trades in the interbank market are volatility<br />
trades and difficult to automate as they are not traded<br />
as a single ticket, but as hedged strategy, unlike any<br />
other asset class.”<br />
Greater standardisation is enabling volatility to be<br />
managed electronically, but it is still a very small part<br />
of the market, he says. Although the instruments<br />
themselves are standardised, the method of bilaterally<br />
trading them, and the <strong>com</strong>munication between banks,<br />
is not, which still gives rise to operational risk.<br />
According to Nusimovici, STP rates are much higher<br />
post-trade, even though they are often manually<br />
exercised, particularity with FX options. Using a<br />
system like Summit, these options can be sorted by<br />
strike so that the system alerts traders to whether they<br />
are in-the-money or out-of-the-money. “The<br />
technology is enabling banks to manage higher<br />
volumes. The volumes traded in FX options today<br />
would not be possible without the systems we have<br />
today,” he says. Despite the fact volumes are smaller,<br />
the more <strong>com</strong>plex exotic structures need to be<br />
monitored and the Misys solution enables users to<br />
monitor transactions, and model any kind of pay-off<br />
using pricing algorithms.<br />
60 | january 2010 e-FOREX<br />
>>><br />
Convergence of FIX and FpML<br />
One development that would impact the processing<br />
of FX options and currency derivatives is the possible<br />
convergence of the FIX protocol and FpML. In terms<br />
of standardisation of the trading systems, there are<br />
greater moves towards trading systems for hedged<br />
options strategies, as opposed to straight options. For<br />
sell-side customers, a high STP rate is essential to<br />
survival. For buy-side customers, it is about<br />
transparency and security. They have to be able to<br />
prove the conditions of investment and need the<br />
systems to track this.<br />
Les Gosling, head of EMEA at TwoFour, says the<br />
TwoFour System is a workflow product which offers<br />
better integration of solutions used for transaction<br />
management. It provides warnings and notifications,<br />
and alerts to any bottlenecks in the trade’s lifecycle, all<br />
the way through to the back office and settlement, to<br />
remove risk and ultimately drive down the cost per<br />
transaction.<br />
For Gosling the key issues, or ‘choke points’, for<br />
customers reside in confirmation, novation and<br />
settlement processing in the back office, and the focus<br />
as an application provider is to smooth this process by<br />
Les Gosling<br />
“Firms are looking to cope with known growth, and the<br />
scalability to cope with unpredicted future growth, and<br />
equate that back to cost per trade calculations...”
FEATURES >>><br />
providing as much forewarning as possible of<br />
potential bottlenecks. “Another way we have been<br />
addressing these choke points in the STP model is by<br />
using standard protocols, such as FIX and FpML, as<br />
much as possible, both in the interaction with third<br />
parties and trading locations and within the<br />
application, to process the flow of transactions.”<br />
Gosling says that the endgame is to be able to process<br />
increased volumes with no increase in processing cost,<br />
or in an ideal world, to reduce these costs. Therefore the<br />
focus is on removing cost from the lifecycle of over the<br />
counter instruments and typically a lot of the cost still<br />
resides in the middle and back office. “Firms are looking<br />
to cope with known growth, and the scalability to cope<br />
with unpredicted future growth, and equate that back<br />
to cost per trade calculations so there is a clear case to<br />
management for return on investment,” he says.<br />
Improvements to STP<br />
Paul Hodgson, product manager, Front Arena SunGard,<br />
says that big improvements have been made in the use<br />
of the single confirmation of trades between customer<br />
and bank for the more vanilla derivatives enabling<br />
traders to negotiate more exotic trades individually.<br />
However, he adds, the most significant improvements in<br />
relation to STP efficiency has been in the front-end<br />
systems, as these ensure consistency of data from the<br />
point of negation by getting data entry from the<br />
customer/counterparty. Hodgson says this is the single<br />
most effective tool in the reduction of 'fails' and the<br />
improvement in STP rates.<br />
“Many technological advances have helped here.<br />
However they have not <strong>com</strong>pletely alleviated the<br />
situation, there are still many <strong>com</strong>ponents of the pricing<br />
process which involve data that is protected or restricted<br />
in its distribution to the broader market. Particularly in<br />
relation to OTC derivatives where the more <strong>com</strong>plex<br />
models may need data derived from very sophisticated<br />
analyses in what many consider proprietary systems that<br />
are their ‘market edge’,” he says.<br />
Hodgson believes that ‘choke-points' will always exist<br />
in any trading environment but as long as the number<br />
of variables used in the trade increase gradually, and<br />
systems provide an STP framework whilst also allowing<br />
new instruments to be rapidly exposed to the end<br />
investor, it will ease the processes from its initiation.<br />
However, he says that as increased volumes drive<br />
down spreads, and make it more viable for more<br />
dynamic hedging of derivative trades for traders and<br />
62 | january 2010 e-FOREX<br />
Paul Hodgson<br />
“The pressure to reduce costs is only sustainable if<br />
organisations can rely on processing solutions that deliver in<br />
a consistent and scalable way implementing STP and<br />
exception-based processing concepts.”<br />
investors alike, the systems supporting the activity<br />
have to improve STP to reduce the cost per ticket to<br />
ensure that increased overall transaction fees do not<br />
consume savings in the market spreads.<br />
Processing solutions<br />
Hodgson says: “The pressure to reduce costs is only<br />
sustainable if organisations can rely on processing<br />
solutions that deliver in a consistent and scalable way<br />
implementing STP and exception-based processing<br />
concepts.”<br />
Paul Moffat, operations product manager, Front Arena<br />
SunGard adds that the key to this is to ensure that the<br />
modelling of vanilla, and new, more structured products,<br />
follows a paradigm that allows for powerful extensibility,<br />
without ‘breaking’ existing processes or products.<br />
He says: “In the processing area, technology is key to<br />
ensuring that the <strong>com</strong>plex models mentioned above<br />
can be ‘broken down’ into their processing <strong>com</strong>ponents<br />
– settlement, confirmation, and accounting – for both<br />
the original transaction, and the ongoing lifecycle<br />
events that will occur. Systems that deliver processes<br />
that can handle these events in a generic way will<br />
deliver significant cost savings and risk reductions.”
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FEATURES<br />
Paul Moffat<br />
“Regardless of the <strong>com</strong>plexity of the exotic structure,<br />
settlement relates to the cash flows generated. Our<br />
solutions recognise this simplicity that resides within the<br />
<strong>com</strong>plexity of the overall structure, and addresses the<br />
settlement issue by simply focusing on cash flows.”<br />
Tools such as SunGard Intelli-suite of products can<br />
aid in the reconciliation of positions, and fails and<br />
break management processes that allow users to focus<br />
on the trades that are problematic. Systems that<br />
provide exception based processing significantly<br />
reduce risk, and enhance processing flexibility.<br />
Complex and exotic structures represent some<br />
challenges, all the way from instrument and trade<br />
creation, through risk management and further<br />
processing. Moffat believes the key to addressing these<br />
challenges is to deliver software and processes that are<br />
able to recognise both the uniqueness of the overall<br />
products, whilst also finding the <strong>com</strong>monality of the<br />
underlying structures that allows <strong>com</strong>plexity to be<br />
broken down to allow standard processing.<br />
He says: “Settlement is an excellent example of this<br />
approach. Regardless of the <strong>com</strong>plexity of the exotic<br />
structure, settlement relates to the cash flows<br />
generated. Our solutions recognise this simplicity that<br />
resides within the <strong>com</strong>plexity of the overall structure,<br />
and addresses the settlement issue by simply focusing<br />
on cash flows.”<br />
A maturing market<br />
Maroun Eddé, CEO of Murex, says that markets are<br />
64 | january 2010 e-FOREX<br />
going back to vanilla and simple structured products,<br />
and are maturing fast. New levels of <strong>com</strong>petition<br />
across financial institutions mean that banks want to<br />
improve end-to-end efficiency of transaction<br />
processing including, in one <strong>com</strong>plete value chain,<br />
quoting, execution, live risk management, processing<br />
and various connections with market-place services.<br />
This end-to-end efficiency needs to apply to vanilla<br />
and structured products similarly.<br />
The Murex structuring tool enables clients to<br />
“productize” new structures on the fly. You simply<br />
<strong>com</strong>bine multi leg or multi product structures into a<br />
single product that you can then publish to a predetermined<br />
group of users. Once published, a structure<br />
be<strong>com</strong>es “native” and can be processed with the same<br />
levels of automation as vanilla products. MX.3’s<br />
processing model also supports organisational<br />
<strong>com</strong>plexity, as it automatically mirrors and processes<br />
any type of sales/traders back-to-back, inter-entity, or<br />
micro-hedge <strong>com</strong>binations.”<br />
Maroun Edde<br />
“Financial institutions need to demonstrate that<br />
they have an extremely reliable infrastructure able<br />
to process massive volumes...”
“We invested quite a bit with our clients to improve<br />
automated processes for risk allocation, sales margin<br />
recognition and allocation, and on the fly risk<br />
calculation and margin calling. The purpose is to allow<br />
our clients to increase their market penetration and<br />
aggressively pursue new clients in an environment with<br />
substantially reduced TCO and operational risk.”<br />
Eddé adds: “As a fundamental consequence, financial<br />
institutions need also to demonstrate that they have a<br />
fully reliable infrastructure able to process massive<br />
volumes. Their infrastructure needs to be robust to<br />
sustain extreme conditions, fast, to provide analysis in<br />
real time and flexible, to implement at low cost evolving<br />
methodologies as standards are shifting in this domain.”<br />
In 2009, Murex leveraged the key features of its<br />
technology to address trends identified over the past<br />
year for banks and asset managers, which had to learn<br />
to work in a more efficient way in a market which is<br />
maturing fast and reinvent a different business model<br />
adapted to new circumstances (less <strong>com</strong>plex<br />
structures, higher capital requirements, lower appetite<br />
for heavy leveraging, etc).<br />
Edde says: “MX.3’s trade modelling allows you to<br />
process any product, whatever its financial <strong>com</strong>plexity,<br />
by considering it as a single processing object. MX.3’s<br />
processing model also supports organisational<br />
<strong>com</strong>plexity, as it automatically mirrors and processes<br />
any type of sales/ traders back-to-back, inter-entity, or<br />
micro-hedge <strong>com</strong>binations.”<br />
“We also invested quite a bit with our client to<br />
improve automated processes for risk allocation,<br />
margin recognition and allocation, and on the fly risk<br />
calculation and margin calling. The purpose is to<br />
allow our clients to increase their market penetration<br />
and aggressively pursue clients in an environment with<br />
substantially reduced TCO and operational risk.”<br />
SaaS<br />
Jiro Okochi, CEO and co-founder of derivative risk<br />
management and hedge accounting solutions provider,<br />
Reval, believes the tools and technologies have been<br />
ahead of the marketplace and end-users are beginning<br />
to finally take better advantage of what already exists.<br />
“For example, Software-as-a-Service (SaaS) has been<br />
available from the FX trading platforms like FXall and<br />
360T and risk vendors like Reval have had thin-client<br />
internet tools for post-trade FX management for<br />
almost a decade,” he says. “This has enabled remote<br />
business units and subsidiaries to enter their exposures<br />
Tracking new developments in currency derivatives processing<br />
Jiro Okochi<br />
“SaaS offerings allow vendors to work more closely together<br />
as well as the ability to use more user-friendly web services.”<br />
for a consolidated view by central treasury for hedging.<br />
Reval also offers scrubbed and integrated market data<br />
that allows for independent pre-trade pricing.”<br />
He says that the biggest choke points arise from<br />
manual processes that are still relied upon, instead of<br />
leveraging the existing technology. “There are still<br />
<strong>com</strong>panies that utilise FX trading platforms for price<br />
discovery but end up still executing over-the-counter<br />
with the dealers,” he adds.<br />
According to Okochi, <strong>com</strong>panies need to use and trust<br />
the newer technologies, like web services, that allow<br />
for more efficient maintenance of interfaces. “As there<br />
is no one-stop service between FX execution,<br />
matching, risk and accounting, there is no choice but<br />
to rely on interfaces, and unfortunately end-users have<br />
had bad experiences with interfaces due to different<br />
technologies that lie on the client side. SaaS offerings<br />
allow vendors to work more closely together as well as<br />
the ability to use more user-friendly web services.”<br />
Okochi says that, in theory, while higher volumes<br />
should drive down processing costs, the current<br />
economic environment is not conducive towards<br />
allowing new entrants into the marketplace that can<br />
increase <strong>com</strong>petition. In addition, potential OTC<br />
derivative reforms will probably drive costs higher for<br />
end-users, either through margining or clearing or<br />
other fees, and the jury is still out on what the<br />
regulators will decide for FX derivatives.<br />
january 2010 e-FOREX | 65
FEATURES<br />
Sourcing and integration<br />
of historical pricing data<br />
for FX applications<br />
Roger Aitken<br />
The demand for historical FX pricing data shows<br />
little sign of abating, with advances in technology<br />
and algorithmic trading in recent years driving<br />
matters. Roger Aitken canvasses industry opinion<br />
on how this trend is affecting the sourcing and<br />
integration of such data for FX applications.<br />
With trading in the world’s main foreign<br />
exchange markets estimated by a recent<br />
Bank for International Settlements Triennial<br />
survey (December 2007), to be over US$3.2 trillion<br />
(c.€4.5trn) daily, equivalent to 30 times larger than the<br />
NYSE and NASDAQ <strong>com</strong>bined, demand for historical<br />
pricing data would seem assured. This is especially true<br />
given that a tad over US$1trn is accounted by spot FX<br />
transactions alone - largely driven by big institutions<br />
but also fuelled by a rapidly growing online retail FX<br />
trading market. Developing a mechanical FX trading<br />
system requires back testing. And, backtesting for<br />
66 | january 2010 e-FOREX<br />
systematic and algorithmic traders requires plenty of<br />
high quality FX historical price data from which to<br />
build models and evaluate new trading strategies before<br />
they are unleashed into a live environment. As such,<br />
historical price data that includes tick data, raw and<br />
cleansed data, are therefore absolutely critical elements<br />
for many FX trading end users. Generally speaking,<br />
having local copies of data can lead to faster and<br />
improved back testing. Such data can be used to test<br />
MetaTrader 3.0 and MetaTrader 4.0 Expert Advisors,<br />
as well as other proprietary and bespoke platforms for<br />
mechanical FX trading systems.<br />
Increasing demand<br />
Antoine Kohler, Managing Director, ICAP<br />
Information Services in London, <strong>com</strong>menting on the<br />
drivers fuelling increased demand for accessing<br />
historical FX pricing data, says: “Market participants<br />
are be<strong>com</strong>ing increasingly sophisticated. There’s an<br />
element of algo sophistication – in terms of low<br />
latency and accessing pools of liquidity as fast as<br />
possible. That all fuels the demand.”<br />
Whereas participation in the FX markets used to be<br />
limited to banks and other major institutions, the<br />
Internet has extended the range of traders right the<br />
way down to retail investors. Retail FX, or the socalled<br />
‘off-exchange market’ segment, is now estimated<br />
to be 2% of the total FX market with daily trading<br />
volumes of US$60bn-US$80bn (€85bn-€112bn).<br />
A number of FX historical data providers are available<br />
to the institutional and online FX retail trading<br />
<strong>com</strong>munities. Thomson Reuters, ICAP and<br />
Bloomberg between them have a large share of the<br />
market: Reuters Trading for Foreign Exchange<br />
(RTFX), offers a single point of access to global FX<br />
liquidity and is available on Reuters 3000 Xtra and<br />
Reuters Dealing 3000. RTFX, which provides access<br />
to multiple market makers with a single login, is<br />
based on Reuters Electronic Trading technology, used<br />
by over 100 leading FX banks.
Following its acquisition by ICAP, the EBS platform<br />
was <strong>com</strong>bined with its IDB broker parent’s electronic<br />
broking business to create a single global multiproduct<br />
platform. Thousands of users trade FX over<br />
Bloomberg FX , which is supported by liquidity<br />
from 160 major and regional banks. FXall is also an<br />
important player in the FX data space and has more<br />
than 800 of the world's largest financial institutions<br />
trading billions on its platform and a network of 70<br />
liquidity providers.<br />
Historical data space<br />
A number of providers offer historical FX CSVformatted<br />
data including tick data, which in some<br />
cases can even be downloaded free of charge. ICAP,<br />
the world’s premier inter-dealer broker, which lays<br />
claim to one of the “richest” historical databases due<br />
to the liquidity that EBS has managed to capture in<br />
the FX market over the years, is evolving its service in<br />
the historical data space. For example, back in<br />
November 2008 the firm announced that ICAP’s<br />
historical tick data would be available for the first<br />
time through Thomson Reuters (with the latter<br />
reselling ICAP EBS historical data).<br />
The expanded distribution agreement between the<br />
two firms was in response to market demand as<br />
algorithmic and program trading continued to grow.<br />
Thomson Reuters’ customers have for the past year or<br />
so been able to access ICAP’s historical tick data in<br />
packages that include FX, FX options, as well as<br />
fixed-in<strong>com</strong>e and interest rate derivatives. The<br />
agreement spanned ICAP’s EBS electronic platform<br />
for spot FX. And, ICAP became the first broker to<br />
Antoine Kohler<br />
“Compared to the historical data that we were releasing<br />
just a few years ago, today it’s much deeper and richer.<br />
This is specifically because we’re able to store and tag<br />
[instruments identifiers] to a far more granular level”<br />
>>><br />
add its extensive tick data to Thomson Reuters Tick<br />
History (TRTH), a <strong>com</strong>prehensive, global historical<br />
tick database covering all data distributed over the<br />
Thomson Reuters real-time networks since 1996.<br />
TRTH is a key element within the Thomson Reuters<br />
Quant and Event-Driven Trading product suite,<br />
which offers <strong>com</strong>prehensive regulatory <strong>com</strong>pliance<br />
content and backtesting investment tools.<br />
Emmanuel Doe, Global Business Manager, Tick<br />
Solutions at Thomson Reuters, says: “There’s a<br />
january 2010 e-FOREX | 67
FEATURES<br />
substantial amount of money to be made in the FX<br />
market and that is what is fundamentally driving the<br />
demand for these services at the end of the day.”<br />
“Increasingly market players are interested in FX since<br />
it is market place where there is uncaptured alpha,<br />
depending on the currency pair and what type of<br />
strategy traders are looking at. As such, it continues to<br />
present a lot of untapped opportunities,” notes New<br />
York-based Doe.<br />
From an historical data perspective, traders came to<br />
Thomson Reuters for data to initiate back testing, as<br />
the firm has had a fairly dominant position in the FX<br />
market. He adds: “Tick data is absolutely essential for<br />
back testing and going live [with an algorithmic<br />
strategy], simply because of the high frequency nature<br />
of FX trading.”<br />
Kohler says in relation to recent ICAP enhancements<br />
to the quality and breadth of data being offered:<br />
“We’re undertaking this on an ongoing basis and<br />
continually investing in the area. Compared to the<br />
historical data that we were releasing just a few years<br />
ago, today it’s much deeper and richer. This is<br />
specifically because we’re able to store and tag<br />
[instruments identifiers] to a far more granular level.”<br />
ICAP also lay claim to offering probably the “most<br />
granular” real-time data output through their ‘Live’<br />
feed. A year ago, ‘Live’ was providing four updates per<br />
second, but since before summer 2009, the frequency<br />
Emmanuel Doe<br />
“Tick data is absolutely essential for back testing and<br />
going live [with an algorithmic strategy], simply because<br />
of the high frequency nature of FX trading”<br />
68 | january 2010 e-FOREX<br />
>>><br />
was increased to 10 updates per second. (The move<br />
reflects developments in the market data feeds for the<br />
EBS FX platform).<br />
Usage<br />
Historical tick data is used primarily for program<br />
and/or automated trading, portfolio management and<br />
valuations. It also plays a vital role in supporting the<br />
<strong>com</strong>pliance, accounting and audit functions of<br />
financial institutions.<br />
Philip Brittan, global business manager for FX at<br />
Bloomberg, confirms that the need for algorithmic FX<br />
trading strategies, FX Quant research, regulatory<br />
<strong>com</strong>pliance/ trade validation requirements are all “valid<br />
reasons” driving more usage of historical FX data.<br />
“High-frequency algorithmic trading is the only driver<br />
that truly requires tick-by-tick data, so that<br />
undoubtedly accounts for the largest volume of FX<br />
data being consumed these days,” he says.<br />
Jim Foster, Global Head of Product Strategy, FXall says<br />
in addition to algo traders wanting historical tick data<br />
to build and back-test models, it can also be required<br />
for benchmarking purposes.“Occasionally highfrequency<br />
algo traders want our historical market data<br />
to benchmark the system speed to monitor how fast we<br />
receive and distribute movements in the market in<br />
<strong>com</strong>parison to other data they are monitoring,” he says.<br />
Furthermore, institutional investors can need the ability<br />
to benchmark pricing for control and <strong>com</strong>pliance<br />
purposes. Foster indicates that more and more clients<br />
are asking for “sophisticated reporting” to understand<br />
exactly where the market was at the time of execution<br />
to ensure they were benchmarked properly.<br />
For institutional asset managers who have a need to<br />
analyse execution quality, FXall timestamps trades to the<br />
millisecond when they receive the requirement - at the<br />
time it is placed into the market - on each quote<br />
provided by the selected banks.<br />
“On execution,” he explains. “We allow a firm to<br />
analyse the execution rate versus both external<br />
benchmarks, and FXall prices. And, the availability of<br />
historical data includes similarly rigorous timestamps on<br />
each quote.”<br />
Sourcing and storage issues<br />
In terms of the issues that FX trading firms need to<br />
consider with regard to sourcing and storing of<br />
historical FX data, ICAP’s Kohler notes that in terms<br />
of infrastructure, hardware and architecture, many
FEATURES >>><br />
Jim Foster<br />
“Occasionally high-frequency algo traders want our historical<br />
market data to benchmark the system speed to monitor how<br />
fast we receive and distribute movements in the market in<br />
<strong>com</strong>parison to other data they are monitoring”<br />
participants that are handling significant volumes of<br />
such data are “quite savvy” in being able to<br />
manipulate databases. “You couldn’t exactly give this<br />
to a total neophyte [a beginner] as they would not<br />
know what to do with it. Algo traders and those who<br />
have super sophisticated strategies typically know<br />
what to do with this type of data. And, these are the<br />
drivers for the offering.”<br />
Minor Huffman, CTO at FXall, explains that are a<br />
number of items that need to be considered in this<br />
regard, including: (1) Data quality, (2) Data coverage,<br />
(3) Analytical tools; and, (4) Hierarchical or other<br />
customised data models.<br />
Data quality <strong>com</strong>es in to play in respect of the number<br />
of contributing banks or other rate sources, tradable<br />
versus indicative data, as well as error correction<br />
techniques used to cleanse erroneous or off-market data<br />
from the set. Data coverage revolves around currency<br />
pairs, spot prices and forward tenors, bid/offer rates<br />
versus mid rates, time intervals and historical coverage.<br />
Huffman says with regard to analytical tools required<br />
for modelling will create specific requirements for<br />
data availability (e.g. operating system, data format).<br />
“Many clients will want access in order to verify and<br />
back test algorithms, which may drive the choice of<br />
technology used to maintain the data sets. Traditional<br />
relational database models don’t handle time-series<br />
data efficiently,” he adds.<br />
70 | january 2010 e-FOREX<br />
In terms of hierarchical or other customised data<br />
models, the key issues are the tradability of the data<br />
and time stamps. “If a system has a high miss rate for<br />
trading, then the value of its data is reduced, both for<br />
back testing of models and measuring a system,”<br />
notes Huffman.<br />
And, in order for the data to be meaningful it has to<br />
represent tradable data. For example, is the data time<br />
stamped at receipt by the platform, in the matching<br />
engine, or at distribution? “Models will require<br />
improvements in data access speed and increases in<br />
data storage,” he says.<br />
Thomson Reuters’ Doe says that in terms of storing<br />
or sourcing the data, often when firms store it<br />
themselves they can encounter issues around “gaps” in<br />
the data. And, the problem is not just isolated to a<br />
few firms. Largely it is due down to the firms’ own<br />
collection mechanisms and where they are storing it,<br />
he explains. That is why firms <strong>com</strong>e to a source to<br />
obtain this data (e.g. Thomson Reuters).<br />
Cleanliness<br />
Bloomberg’s Brittan assets that data cleanliness is the<br />
“most important factor” in this regard and is pertinent<br />
to all types of users. The questions here are:<br />
• Is the data free from ‘spikes’?; and,<br />
• Is the frequency of updates acceptable?<br />
Minor Huffman<br />
“If a system has a high miss rate for trading, then the<br />
value of its data is reduced, both for back testing of<br />
models and measuring a system”
FEATURES<br />
Next is whether the data truly represents executable<br />
bids and offers available at the time.<br />
“This is critical for algo modellers and for users<br />
looking to do trade validation,” Brittan points out.<br />
“For users storing tick-by-tick data, managing the<br />
sheer volume of data can be a challenge and requires<br />
special consideration in itself. That said, the cost of<br />
mass storage has plummeted in recent years.”<br />
There are also many issues in terms of data rights,<br />
licences to actually store the data and use the data in an<br />
historical environment or even a real-time environment.<br />
In terms of handling, managing and processing huge<br />
volumes of data, Doe points out: “Simple queries in<br />
that scenario can take an extremely long time as you<br />
are dealing with a certain amount of <strong>com</strong>puting<br />
power. And, when trying to calculate terabytes of<br />
data, high performance engines are required to<br />
calculate this type of analysis if you are looking at a<br />
year of data, let alone a decade or more of data.”<br />
In this regard, Thomson Reuter’s acquisition of Vhayu<br />
in August 2009, will help in fulfilling client needs.<br />
Vhayu provides a high-performance engine for clients<br />
to store, analyse and process this data, as well as<br />
undertake real-time analysis of Thomson Reuters’ feed<br />
and send real-time messages to trade upon. Doe<br />
confirms that the firm is “investing heavily” in their<br />
historical Quant business and the FX space in<br />
particular. They view it as a growth area and also want<br />
to stay ahead of the curve.<br />
Streamlining access<br />
On efforts that providers are making to streamline the<br />
process of accessing historical FX price data, ICAP’s<br />
Kohler says: “As with all our offerings we’re trying to<br />
make it as painless as possible for our customers to use<br />
our [FX] data as well as offering them the best possible<br />
service.” The reduction in time slicing on the EBS<br />
platform to 10x/second is illustrative of the improvement<br />
in their service. He adds: “People know how to write to<br />
it. And, every single market participant who is present in<br />
the FX space is reading a market data element from<br />
ICAP EBS, whether real time or historical.” Further<br />
enhancements - as yet undisclosed - are in the pipeline to<br />
improve the quality of data quality for ICAP EBS feeds<br />
as well as the real-time element, Kohler reveals.<br />
FXall’s Huffman says: “We make an effort to give our<br />
clients access to the data they are looking for. For<br />
example, our customer savings reports have market<br />
data built directly into it and included with the<br />
analysis, such as the rates at the time of trades.”<br />
72 | january 2010 e-FOREX<br />
Philip Brittan<br />
“For users storing tick-by-tick data, managing the<br />
sheer volume of data can be a challenge and requires<br />
special consideration in itself. That said, the cost of<br />
mass storage has plummeted in recent years”<br />
At Bloomberg, Brittan explains that they are making<br />
it easier for users to find the vendor’s data through<br />
functions like ‘FXTF’. They also offer an evergrowing<br />
range of tools to undertake data analysis right<br />
within the terminal, including functions like ‘VOLC’,<br />
‘XCRV’, ‘XDSH’, ‘FXFM’, and ‘CIX,’ as well as a<br />
whole suite of charting functions. “This all means<br />
that users don’t have to deal with exporting, storing,<br />
and providing their own analysis tools, for a wide<br />
range of analytical applications,” Brittan says.<br />
Distribution formats<br />
Turning to the kinds of data distribution formats that<br />
are available and what factors may influence how<br />
firms choose to integrate data into their research and<br />
FX trading infrastructures, FXall’s Foster says: “For<br />
live market data, FXall offers a proprietary format<br />
(Accelorate), using very <strong>com</strong>pact messages to keep the<br />
transmission and processing time on the client side<br />
extremely low” For historical data, the firm offers a<br />
format, which is claimed “can easily be imported into<br />
client systems.”<br />
Bloomberg offers several enterprise-level data<br />
products, but also makes it easy for individual users<br />
carry out ‘desktop analysis’ via their Excel API.<br />
ICAP’s Kohler notes here: “I’ve found in this<br />
particular space, that even if it is extremely
<strong>com</strong>plicated to integrate, if you have the granularity<br />
of data, market participants will go miles to read your<br />
data. As such, we make every possible effort to<br />
facilitate the integration and reading/usage of our data<br />
- presenting it in a way that is at least user friendly<br />
and industry standard.”<br />
The firm has had examples where clients require a<br />
type of format that they would not ac<strong>com</strong>modate in<br />
the normal course of business, and not in a format<br />
that is usually presented to people consuming data.<br />
Kohler says: “They’ve still been happy to take the data<br />
in any format that we could provide.”<br />
Thomson Reuters’ Doe speaking on formats reveals that<br />
the firm does <strong>com</strong>e across a lot of different<br />
infrastructures. “This accounts for why we provide it in<br />
pretty much a <strong>com</strong>mon CSV format, which is the<br />
standard format loaded into any database<br />
infrastructure,” he says. “However, we do try to be as<br />
open as possible and always ac<strong>com</strong>modate client needs.”<br />
Cleaning and customisation<br />
In relation to FX data services and solutions available<br />
to help sort, clean and customise FX data,<br />
Bloomberg, ICAP (EBS) and Reuters Dealing are<br />
among the leaders in the expertise they can offer<br />
clients. With the FX market very well split, each of<br />
these players has their respective segments.<br />
ICAP’s solutions are usually pre-packaged depending<br />
on what sort of package the client orders, with<br />
different levels of service available to be purchased.<br />
Sourcing and integration of historical pricing data for FX applications<br />
Kohler adds: “If you buy real-time services from us,<br />
these are graded under three levels, while the<br />
historical data package is graded to five levels.”<br />
According to Brittan, one of the advantages that<br />
Bloomberg data has is that since the organisation<br />
spend a great deal of effort on quality controlling and<br />
cleaning the data, clients can avoid this task.<br />
By contrast, Doe says that many of Thomson Reuters’<br />
clients - particularly FX proprietary trading clients -<br />
are often obsessive and “very particular” about how<br />
and what they want to clean in terms of data.<br />
He adds: “If we clean the data for them it may be<br />
wiping out a potential source of alpha for them, as a<br />
result of the way in which we cleanse. And, many of<br />
our clients are keen to only clean it [data] themselves<br />
so that they can ensure what has been cleansed.” For<br />
these players receiving raw, unadjusted or unsorted<br />
data is critical in not harming their ability to make<br />
serious money.<br />
Bloomberg publishes many derivative time series,<br />
including realised volatility, skewness, and kurtosis<br />
[from the Greek meaning a measure of the<br />
‘peakedness’ of the probability distribution of a realvalued<br />
random variable], GARCH volatility, fixings,<br />
analyst forecasts, currency strength indices, PPP parity<br />
levels, and total/carry return indices, alongside raw<br />
market data. Adds Brittan: “This provides our users a<br />
tremendous depth of available tools for their analysis.<br />
Bloomberg's CIX function is an additional very<br />
powerful tool for creating custom indices.”<br />
FXall’s Foster says: “Internally we have our own<br />
proprietary algorithms for cleaning data in real time.<br />
We believe it’s critical to have a robust methodology<br />
to determine unbiased prices that clients find reliable<br />
and use as many rate sources as possible, removing<br />
outliers to produce a consistently usable data set.”<br />
Conclusion<br />
Guessing may be fatal in FX trading. Sophisticated<br />
traders and trading desks cannot disregard<br />
fundamental and technical data analysis to ultimately<br />
secure their investments and retain a stable level of<br />
profit. At the same time there is no sense trusting<br />
money to a trading system without total thorough<br />
testing of it with a wide and full range of historical<br />
data. This is why reliable and error-free historical data<br />
are essential for an adequate technical analysis and<br />
successfully verifying trading strategies. The data<br />
cannot and should not be full of spikes or gaps.<br />
january 2010 e-FOREX | 73
VIEWPOINT<br />
Mark Biezup<br />
Mark Biezup, FX product Manager – SunGard<br />
Sierra, outlines why recent and projected<br />
regulatory changes along with a focus on risk<br />
management will have significant implications<br />
for FX brokers.<br />
Regulatory<br />
measures and realtime<br />
FX margining<br />
The FX market has endured the financial crisis<br />
significantly better than most other asset<br />
classes. Nevertheless it has not escaped the eye<br />
of regulators. Previously FX firms have not faced many<br />
restrictions on either margining or leverage, but the FX<br />
market has grown enormously in a short time thanks<br />
to the adoption of electronic trading. Regulators are<br />
keen to ensure that adequate protection measures exist,<br />
from the day trader up to larger firms, as the market<br />
continues to grow. These changes also attempt to<br />
prevent systemic risk from seeping outside of the FX<br />
market and, by domino effect, affecting any underlying<br />
<strong>com</strong>panies or retail investors.<br />
New requirements<br />
Many of these new requirements <strong>com</strong>e from the US<br />
and the National Futures Association (NFA), which<br />
regulates the FX industry in the US. The NFA has<br />
proposed some specific measures regarding margining<br />
and leverage, so that both customers and brokers can<br />
reduce the risks created by rapid market fluctuations
and potential liquidations. FX firms will now have<br />
to collect a minimum 1% margin on the G7<br />
currencies and 4% on minor currencies. Meanwhile<br />
leverage will be capped at 100:1. Another recent<br />
regulation, enforcement of First In First Out<br />
(FIFO) position management, will prevent hedging<br />
strategies in the same trading account.<br />
These regulatory measures will have a direct and<br />
significant effect on margining techniques, forcing<br />
them to be both more flexible and granular. The<br />
move from static to variable methodologies, such as<br />
from flat rate margining to variable currency<br />
margining, has already started to branch into<br />
product, tenor, volume, concentration and<br />
customer type margining capabilities. Another such<br />
trend will likely involve customer configuration,<br />
both a narrowing towards multiple sub-accounts,<br />
which would allow users to hedge across accounts,<br />
and an expansion of customer groupings for higher<br />
level monitoring of risk.<br />
Benefit to margining<br />
The benefit of these changes to margining will be<br />
more than simply <strong>com</strong>pliance. Trading firms can<br />
also reduce their own market and credit risk on a<br />
global scale. More granular margining, by product<br />
and across products, will enable firms to expand<br />
their product offerings with increasingly<br />
sophisticated FX instruments, as they can better<br />
manage the risk associated with those products<br />
without affecting their vanilla FX margining.<br />
For FX options, risk managers have traditionally<br />
relied on delta notional margining. This is a good<br />
starting place, but in the current environment<br />
where both investors and regulators are focusing<br />
more on risk management, this may not be<br />
enough. Firms will have to go further by taking<br />
more <strong>com</strong>plex pricing and revaluation models and<br />
applying this sophistication to the margining<br />
calculations.<br />
At the same time that firms expand the <strong>com</strong>plexity<br />
of their product offerings and with algorithmic<br />
trading be<strong>com</strong>ing increasingly popular in the FX<br />
market, margining systems must be able to both<br />
manage the risks associated with <strong>com</strong>plex algodriven<br />
strategies and the higher trade volumes<br />
without sacrificing the speed of execution and the<br />
speed of margining calculations.<br />
More flexibility<br />
Faced with a future of increased regulation and ever<br />
increasing trade volumes, margin systems must be<br />
VIEWPOINT<br />
able to handle both of these trends without<br />
<strong>com</strong>promising risk management or performance.<br />
More flexible margining configurations allow<br />
broker/dealers to <strong>com</strong>ply with regulations out of<br />
the box, while allowing them to better manage<br />
their own risk. SunGard anticipates the effects that<br />
new regulations will have upon the margining<br />
sphere, and is proactive in enhancing its Sierra<br />
Advanced Margining solution to meet these new<br />
requirements. www.sungard.<strong>com</strong>/sierrafx
ALGORITHMIC FX TRADING<br />
The next wave of<br />
FX Algorithms<br />
taking order execution<br />
strategies to another level<br />
76 | january 2010 e-FOREX
Nicholas Pratt<br />
What will be the next wave of FX<br />
algorithms? Nicholas Pratt charts the<br />
development efforts of the leading algo<br />
providers to examine how execution<br />
strategies in FX can be taken to<br />
another level.<br />
>>><br />
It may have not been the greatest year for growth in<br />
the capital markets but there have been pockets of<br />
positive progress, not least in the FX market and<br />
particularly so in terms of algorithmic trading. “FX<br />
algorithms have certainly <strong>com</strong>e on in the last few years.<br />
Electronic trading in FX has increased, through both<br />
multi-bank portals and single bank offerings, and<br />
algorithmic trading has been widely adopted, as it has<br />
in other asset classes,” says Giles Nelson, senior director<br />
of strategy and evangelism at Progress Software, a<br />
provider of application infrastructure software. There<br />
are, of course, a number of different ways that<br />
algorithmic trading is used. The classic execution<br />
strategy is where traders look to split their order into<br />
several smaller trades that are then carried out over a<br />
period of time rather than executing all at once – the<br />
idea being that any market impact is minimised. “But,<br />
of course, the FX market does not have the same<br />
market impact issues as in equities because of the excess<br />
liquidity and the OTC structure,” says Nelson. “In FX<br />
it is more about achieving a weighted price than<br />
chopping an order into small parts.”<br />
Finding liquidity<br />
Another reason for using algorithms is to find liquidity<br />
– something which has be<strong>com</strong>e far easier for FX traders<br />
thanks to the advancements in aggregation. Traders are<br />
now able to replace their multi-screen set-up with a<br />
single interface that shows all available prices and can<br />
also execute on an automated basis, thus freeing up<br />
traders and sales staff to focus on more quality tasks or<br />
more <strong>com</strong>plex trades. Aggregation, however, is not<br />
universally popular among the banks, says Nelson.<br />
“They feel that it diminishes their relationship with the<br />
dealers. But if they want them to use their single bank<br />
offerings, they’ll have to be far more innovative and up<br />
their game because traders just want the best price.”<br />
One way for banks to reclaim the relationship with<br />
their customers is to embrace multi-asset trading. Not<br />
only will such a move attract the increasing number of<br />
buy-side firms using the same platform for all asset<br />
classes, it will also reflect the evolution of algorithmic<br />
trading. In terms of the next generation of FX<br />
algorithms much of the current interest is around the<br />
continued growth of multi-asset trading, as Nelson<br />
explains. “If you want to buy or sell an equity in dollars<br />
but are based in London, you will want to pay in<br />
sterling. This means that the best time to trade will be<br />
somewhat dependant on the exchange rate. You do not<br />
want to think you have a good price for the asset and<br />
then find the FX rate has changed. Instead you want to<br />
wrap that trade all up in one so the exchange rate does<br />
january 2010 e-FOREX | 77
ALGORITHMIC FX TRADING<br />
Giles Nelson<br />
“In FX it is more about achieving a weighted price than<br />
chopping an order into small parts.”<br />
not be<strong>com</strong>e an unhelpful variable in the execution.<br />
Multi-asset trading is still an emerging area,” says<br />
Nelson. “Many brokers are still very siloed when it<br />
<strong>com</strong>es to different asset classes, however we are seeing<br />
some of the barriers <strong>com</strong>ing down, particularly when it<br />
<strong>com</strong>es to equities and derivatives.”<br />
Second-mover advantage<br />
In many ways, the FX market is just following what<br />
has already taken off in other asset classes but this<br />
slower pace of development does have its benefits<br />
when it <strong>com</strong>es to implementing algorithmic trading<br />
tools – a kind of second –mover advantage, says<br />
Nelson. “Electronic trading has only really be<strong>com</strong>e<br />
popular in the last few years so this means that there<br />
are not the legacy systems that exist in equities. FX<br />
firms trading electronically and looking at adding<br />
algorithmic trading capability can adopt the latest<br />
technology and implement it much quicker.”<br />
Nelson points to the example of aggregation where<br />
multiple liquidity pools are displayed on one screen.<br />
“Aggregation is possible because there are these<br />
different venues that are all easily accessed through<br />
electronic trading. But in equities there are all of these<br />
different alternative venues like Turquoise and Chi-X<br />
which are all different. You may not get the same range<br />
of choice in FX but in aggregation terms, it has a more<br />
modern infrastructure and is a less <strong>com</strong>plex product.”<br />
While FX is undoubtedly a less <strong>com</strong>plex product, there<br />
are nonetheless drawbacks in applying algorithms to<br />
the emerging currencies which are far less liquid than<br />
78 | january 2010 e-FOREX<br />
>>><br />
their G7 counterparts. However, says Nelson, these<br />
obstacles can be over<strong>com</strong>e through the use of synthetic<br />
currency pairs. “For example, if you wanted to pair the<br />
Serbian dinar with the Brazilian real, you would be<br />
hard pressed to find a bank willing to arrange that<br />
currency pair. But if you were to trade both currencies<br />
against the dollar, you would then have two liquid<br />
trades rather than one illiquid trade and you simply tell<br />
the algorithm that it is a dinar/real trade. All of this can<br />
be done through new software and it makes it easier to<br />
get a good price for this currency pair.”<br />
What is beyond doubt, says Nelson, is that black box<br />
algorithms should be a thing of the past. “A lot of firms<br />
may start with a black box but eventually they will<br />
want to do something different and change the way<br />
their orders are traded. Being able to alter the<br />
algorithms is such an important feature. As the<br />
industry matures and be<strong>com</strong>es more accustomed to<br />
using algorithms, it will be easier to make money if you<br />
don’t have the same algorithms as everybody else. There<br />
are broker-supplied algorithms that traders may get for<br />
free and are easy to set up but they are the same as<br />
everyone else’s. You really need an algorithmic trading<br />
set up that enables you to create your own algorithms.”<br />
Work in progress<br />
Despite the great progress made in the development of<br />
FX algorithms, the majority that are used are still works<br />
in progress, says David Hastings, global head of FX sales<br />
at FlexTrade, a broker-neutral provider of algorithms for<br />
multiple asset classes. “There are still the two camps in<br />
terms of algo users – those who are using them to add<br />
alpha and those who are using them to trade more<br />
opportunistically. More recently we are seeing a greater<br />
interest in the latter, although overall we are not seeing<br />
any developments that are to dramatic.”<br />
The development of the algorithms is also dependant<br />
somewhat on how the various liquidity providers in the<br />
market have set themselves up, says Hastings,<br />
particularly if they have embraced aggregation rather<br />
than remaining opposed to the idea of consolidated<br />
displays of prices. “Some of the larger banks are more<br />
particular about how their flow is displayed. But<br />
ultimately the decision of whether to open the bank’s<br />
flow to aggregation will be driven by clients rather than<br />
the banks themselves. Eventually I think most banks<br />
will have to embrace aggregation.”<br />
One of the banks’ concerns with the rise of aggregated,<br />
electronic pricing is that customers will now be guided<br />
solely by price and will be unconcerned by the identity<br />
of the sell-side counterpart in a currency trade, thus<br />
threatening the ‘relationship’ aspect that has
ALGORITHMIC FX TRADING<br />
underpinned the FX market for decades. But Hastings<br />
believes the claims that relationship banking will cease to<br />
exist is wide of the mark. “The prices in the FX market<br />
are heavily <strong>com</strong>moditised at the moment and I think<br />
those relationships still exist.” If anything, the rise of<br />
electronic and algorithmic trading could well strengthen<br />
the relationship between sell-side banks and brokers and<br />
their buy-side customers. “All e-<strong>com</strong>merce has ever done<br />
is allow the sales staff to focus on doing what they are<br />
good at, which is about talking to their customers.”<br />
David Hastings<br />
“There are still the two camps in terms of algo users – those<br />
who are using them to add alpha and those who are using<br />
them to trade more opportunistically.”<br />
Algorithmic trading has of course been around in the<br />
equities market for longer than it has been in FX and<br />
while many aspects of the algorithms are easily translated<br />
from one asset class to another, this is not the case for all<br />
of them. For example, stealth algorithms have be<strong>com</strong>e<br />
more popular in equities due to the need for traders to<br />
reduce their market impact and restrict any unhelpful<br />
price movements that may result from making their<br />
trading intentions known. Equally in demand in the<br />
equities space are algorithms for discovering hidden or<br />
dark liquidity as off-exchange liquidity and dark pools<br />
continue to thrive in the post-MiFID era.<br />
However the OTC nature of the FX market and the<br />
relatively huge levels of liquidity means that market<br />
impact and hidden liquidity are minor issues for FX<br />
traders. Nevertheless, says Hastings, these are some<br />
developments in these areas. “There has always been a<br />
fear among all traders when it <strong>com</strong>es to executing their<br />
trades and they want to keep their cards close to their<br />
80 | january 2010 e-FOREX<br />
>>><br />
chest. But it will take longer for stealth algorithms to<br />
make an impact in the FX market.” Right now it is the<br />
multi-asset trading firms that are using FX as an alphagenerating<br />
asset class that will have most interest in<br />
stealth algorithms. The algos they are currently using are<br />
more juvenile and immature and are based on simple<br />
VWAP or TWAP strategies but the more the multi-asset<br />
traders get involved in the FX market, the more<br />
sophisticated the algorithms will be<strong>com</strong>e.<br />
“We do have a stealth algorithm that is available and we<br />
are seeing some interest from FX traders but it is more<br />
interest than active adoption. I think everyone wants to<br />
wait and see how it pans out. For all of these trading<br />
strategies that have <strong>com</strong>e from the equities world, it<br />
takes some time for them to be adapted to the FX<br />
market. You cannot simply flick a switch and make<br />
equities algorithms work in the FX market. There is a lot<br />
more manipulation of the order that needs to be done.<br />
You are able to slice and dice an FX order far more than<br />
in the relative restricted equities world. The algorithms<br />
may be on the same baseline but I think there will be far<br />
more modifications and adaptations for FX algorithms.”<br />
More exotic strategies<br />
Another growing area in FX trading involves emerging<br />
currencies and alternative FX order types, such as FX<br />
options. Will FX algorithms also be able to cater for<br />
these more exotic trading strategies as well as the vanilla<br />
side of the business? “I find it hard to believe that<br />
liquidity providers will <strong>com</strong>pletely embrace the practice<br />
of streaming a price in large quantity for some of the<br />
emerging currency pairs out there. If I was trading an<br />
emerging currency pair, I wouldn’t want a price for a<br />
large amount accessable for a long period of time. The<br />
ability to manage or hedge that risk be<strong>com</strong>es more<br />
<strong>com</strong>plex because of the lack of liquidity around these<br />
currencies,” says Hastings.<br />
As for FX options, these have been a holy grail for any<br />
multi-bank offering, says Hastings. “There is a lot of<br />
dialogue and negotiation between counterparties<br />
needed for an option and streaming volatility does not<br />
answer all the idiosyncrasies associated with these<br />
instruments. I think they will be incorporated into the<br />
FX algorithms world but we are not there yet.”<br />
Many of the latest generation of algorithms have more<br />
of an emphasis on highly technical trading rather than<br />
just the fundamentals, says Joey Horowitz, chief<br />
technology officer at Aegisoft a provider of global<br />
trading solutions, software and professional services<br />
Similarly the algos have also be<strong>com</strong>e much more<br />
market aware. "As more venues have <strong>com</strong>e onto the<br />
market, it is important that the algos reflect the
ALGORITHMIC FX TRADING<br />
differences between each venue. The key is to keep the<br />
reject rate low and not be fooled by misleading market<br />
data that can cause you to leak out your trading<br />
intentions to the market. Algorithms have be<strong>com</strong>e<br />
better and smarter at recognizing this."<br />
When traders <strong>com</strong>plain that they are not getting a high<br />
enough fill rate, it is up to the technologists to solve<br />
that problem, says Horowitz. So they have to look into<br />
why the fill rates are often low and then change the<br />
logic of the algorithms to make them more effective.<br />
"Sometimes it is down to the speed of the technology<br />
but other times it is down to the fact that the market<br />
data is not consistent with the dealable liquidity, this is<br />
especially true when execution venues are not sending<br />
the market data quick enough. This was not always<br />
evident in the equities and fixed in<strong>com</strong>e markets but it<br />
soon became clear in FX. The fastest algo is not always<br />
the best in FX because it's frequently more important<br />
to handle the different characteristics of the various<br />
trading venues."<br />
Again, this point demonstrates that an algorithm that<br />
works in one asset class cannot simply be dumped into<br />
the FX market and be expected to perform to the same<br />
level. "FX algos have to be smart and much more<br />
intelligent than other performance-based algorithms,"<br />
says Horowitz. Similarly the popularity of dark and<br />
hidden liquidity algos in equities has not crossed over to<br />
the FX market yet but, says Horowitz, there is an<br />
increasing interest from FX traders on including and<br />
aggregating more direct bank venues in order to draw<br />
on more liquidity. Consequently Aegisoft has developed<br />
new technology to aggregate the full liquidity from all<br />
single-bank venue platforms, regardless of how they<br />
stream them, and to enable banks to stream a second set<br />
of prices that, if dealt, will prevent the trader from<br />
trading at another venue for an agreed amount of time.<br />
"This feature frees the banks to offer large quantities at<br />
better prices and with less risk to the bank; the bank<br />
receives the whole deal and the bank's client can't move<br />
the market at the same time," says Horowitz.<br />
82 | january 2010 e-FOREX<br />
>>><br />
Synthetics<br />
When it <strong>com</strong>es to the issue of using FX algos in the<br />
pursuit of less <strong>com</strong>moditised currency products, such as<br />
FX options or emerging market pairs, Horowitz is far<br />
more bullish than others. "Algos are being used heavily<br />
for these types of products. The ability to run synthetic<br />
currency crosses is a big deal for our clients and this is<br />
why they have driven us to provide this capability on<br />
an out-of-box basis." Aegisoft also provides for crossasset<br />
trading where the algos run on both the outright<br />
and the synthetic - taking an FX future and converting<br />
it into a spot equivalent. For example, "if I'm trading a<br />
Euro/Yen currency cross, I could trade that outright,<br />
synthetically or through a series of FX futures. Bringing<br />
in all these possibilities, analysing them and presenting<br />
them on a graphical front end for traders to use and via<br />
an API for algos to use is what we are all about."<br />
Joey Horowitz<br />
“It’s much easier to deal with algorithms than orders.<br />
Algorithms remove a lot of the manual drudgery, so traders<br />
can focus on the goal, and less so the mechanics.”
ALGORITHMIC FX TRADING<br />
In terms of how algorithms can help FX trading firms<br />
meet their different execution timeframe and visibility<br />
preferences, Horowitz says he is seeing much more<br />
use of 'synthetic' algorithms that can only be executed<br />
over an FX aggregating platform, such as synthetic<br />
icebergs. "We also see that traders prefer not to watch<br />
orders as much as algorithms. They want to make a<br />
decision, fire off an algorithm and be alerted when it<br />
trades or other changes happen. It's much easier to<br />
deal with algorithms than orders. Algorithms remove<br />
a lot of the manual drudgery, so traders can focus on<br />
the goal, and less so the mechanics." Horowitz adds<br />
to really understand the phenomenon of advanced FX<br />
algorithms being deployed by major sell-side banks<br />
and broker dealers one should speak with several of<br />
Aegisoft's premier customers such as Citi, which has<br />
its Silent Partner and Ripple Algorithms.<br />
One recent phenomenon in the world of FX<br />
algorithms has been the development work taking place<br />
at the major sell-side banks and broker dealers.<br />
According to Mark Sykes, director, Foreign Exchange<br />
at Citi, we are now seeing second and third generation<br />
algorithms that are able to operate opportunistically so<br />
as to more efficiently match implementation strategies<br />
with the investment objectives of the users.<br />
“The primary objective of the execution strategy is<br />
always to ensure that the balance of the speed of<br />
execution versus the risks of showing the flow to the<br />
84 | january 2010 e-FOREX<br />
>>><br />
external market is perfectly balanced,” says Sykes.<br />
“Attempts to get an execution done faster inevitably<br />
lead to adverse price movements as your intentions<br />
be<strong>com</strong>e exposed; this is particularly true of more<br />
illiquid currency pairs in the emerging market space<br />
which demonstrate a very high signal to noise ratio in<br />
their price action. Second and third generation<br />
execution algorithms have had immense amounts of<br />
intellectual capital embedded within them, massive<br />
investments in quantitative analysis, all with the aim<br />
of ensuring that this balance is perfectly achieved.<br />
Looking forward, I would expect more sophistication<br />
in this area, particularly in the way that short term<br />
price and flow patterns are recognised by the<br />
execution algos, and subsequently acted upon.”<br />
As with any market innovation, says Sykes, some<br />
speculators will attempt to use it to their advantage in<br />
order to generate alpha and FX algorithms are no<br />
different. “For every execution methodology, be it by<br />
a manual spot trader or a black box, there are many,<br />
many systemic trading houses monitoring market<br />
data, attempting to detect patterns, and subsequently<br />
act upon them. The easiest flow to detect and<br />
monetise is of course that of the manual trader.<br />
Throughout history, mankind has demonstrated a<br />
wonderful disregard for history and simply repeated<br />
the same mistakes time after time. This trait is the<br />
mainstay of algorithmic houses,” says Sykes.<br />
James Dalton<br />
“As a general rule the more aggressive strategies will suit the<br />
active intra-day traders and the passive strategies are more<br />
about providing ‘best execution’ to those who look to enter<br />
positions that are held for a day or longer.”
ALGORITHMIC FX TRADING<br />
Consequently, says Sykes, there is a legitimate demand<br />
for the ‘stealth’ algorithms that have been so prevalent<br />
in the equities market as a means of defence against<br />
the above mentioned traits. “Automated execution<br />
brings its own set of patterns and behaviours, which<br />
again, other algorithms are attempting to model and<br />
trade off. The prevalence and important of the stealth<br />
algorithm within this context cannot be overstated.<br />
Citi has already released Ripple and Silent Partner,<br />
specifically to provide an effective defence against these<br />
market characteristics, and a further two are due to be<br />
launched in the near future.”<br />
There is no ‘one-size-fits-all-strategies’ principle that<br />
can be applied to FX algorithms, says James Dalton,<br />
director, FX algorithmic Execution at Citi. For<br />
example, those looking to take 10-20 pips profit on a<br />
position over a number of minutes will find limited<br />
use in a simple liquidity seeking algo, however there<br />
are those on the market that are designed to be more<br />
opportunistic in nature and more relevant for an<br />
active trader working during the peak liquidity hours,<br />
Kim Bang<br />
“..the ability to set time-queued orders and specific<br />
start and end conditions for specific algorithms has enhanced<br />
the ability of the FX <strong>com</strong>munity to seek better executions<br />
and execute orders throughout the day.”<br />
says Dalton. “As a general rule the more aggressive<br />
strategies will suit the active intra-day traders and the<br />
passive strategies are more about providing ‘best<br />
execution’ to those who look to enter positions that<br />
are held for a day or longer. For passive execution<br />
where you may be adjusting a hedge position or<br />
shifting funds to settle fixed in<strong>com</strong>e or equity trades,<br />
86 | january 2010 e-FOREX<br />
it is all about minimising your transaction costs over a<br />
portfolio of trades.”<br />
Future developments<br />
As for future developments, Dalton believes that current<br />
efforts to extend the applications of algorithms to less<br />
<strong>com</strong>moditised currency products, such as FX options<br />
and emerging market pairs, will eventually bear fruit.<br />
“This will happen over time but the reality is that right<br />
now many of the products have insufficient liquidity<br />
available in electronic venues to be able to match the<br />
service that voice brokers can offer.” And despite the<br />
obvious differences between the FX market and other<br />
asset classes, Dalton still feels there are lessons that can<br />
be learned and applied to FX from the continuing<br />
development of algos in other markets. “There is plenty<br />
to be taken from the other markets in terms of<br />
connectivity to multiple venues and smart order<br />
routing, order placement strategy and cloaking<br />
techniques. However, with FX the range of different<br />
market participants and the presence of large global<br />
players who are almost exchanges unto themselves,<br />
brings a unique set of challenges to the table.”<br />
Another provider of algorithms for multiple asset<br />
classes is Bloomberg Tradebook which operates on an<br />
agency brokerage basis. According to president and<br />
chief executive Kim Bang, Tradebook is increasingly<br />
offering execution strategies based on the ability to<br />
handle large institutional block orders that source<br />
from multiple liquidity venues – lit, dark and neutral<br />
– and opportunistically chase available blocks or<br />
otherwise work smaller orders for spread capture.<br />
“More than ever institutional investors are searching<br />
for ways to minimise execution costs and to overlay<br />
alpha generating FX programs. By employing an<br />
anonymous electronic agency broker with direct<br />
market access (DMA) and algorithmic strategies it is<br />
possible to reduce implementation costs significantly<br />
when <strong>com</strong>pared to traditional execution providers.”<br />
Today’s algorithms are also better able to help FX<br />
trading firms to meet their different execution<br />
timeframe and visibility preferences, says Bang. “The<br />
key with the algos developed today is the level of<br />
control, flexibility and customisation they provide<br />
traders. Depending on the currency pair, there are<br />
known periods of the day that they are most active<br />
and an FX trader is likely to find the deepest liquidity.<br />
These times may not be ideal based on that specific<br />
trader’s region or time zone. So the ability to set timequeued<br />
orders and specific start and end conditions<br />
for specific algorithms has enhanced the ability of the<br />
FX <strong>com</strong>munity to seek better executions and execute<br />
orders throughout the day.”
e-FOREX : INTERVIEW<br />
RBS<br />
leading the way<br />
with integrated<br />
electronic<br />
FX solutions<br />
e-<strong>Forex</strong> talks with Michelle Neal, Global Head of Electronic Markets at The Royal Bank of<br />
Scotland about the consolidation of the banks' electronic platforms and the continuing<br />
development of its best of breed FX e-<strong>com</strong>merce solutions and e-trading tools.<br />
Michelle, RBSMarketplace, which was launched in<br />
2008, is the Royal Bank of Scotland’s portal giving<br />
customers access to all of RBS Global Banking &<br />
Markets electronic solutions in one place. In what<br />
ways has your own role evolved and changed with the<br />
development of this new portal?<br />
eCommerce has always been an integral part of the<br />
trading and distribution strategy at RBS with strong<br />
business engagement and consistent investment. In<br />
early 2008, we merged the Debt and FX eCommerce<br />
teams into an Electronic Markets function to leverage<br />
our <strong>com</strong>bined strengths and benefit from the associated<br />
synergies. I particularly wanted to move away from the<br />
word “eCommerce” and onto something more accurate<br />
and descriptive of eCommerce in a financial markets<br />
business and so Electronic Markets was born. Around<br />
this same time, we launched RBSMarketplace<br />
(“RBSM”), a platform with <strong>com</strong>mon architecture for<br />
RBS to leverage and build upon <strong>com</strong>pounding<br />
successes within the business. The line between the<br />
Electronic Markets business and our traditional<br />
businesses are more blurred as customers use electronic<br />
services and execution tools to <strong>com</strong>pliment their<br />
relationships with RBS.<br />
88 | january 2010 e-FOREX<br />
In addition, our touch points with the business have<br />
increased as clearing, credit risk, latency, and capacity<br />
are all factors that face both traditional and electronic<br />
businesses and need to be managed using better<br />
technology. We are a major conduit and centre of<br />
excellence within RBS for realising these synergies.<br />
My team has traditionally also been responsible for<br />
market structure initiatives and strategic investments<br />
within RBS. Combined with a delivery capability<br />
such as Electronic Markets, you get a powerful and<br />
highly coordinated continuum of activity spanning<br />
strategic alignment in our core markets, product<br />
development and delivery and distribution channels.<br />
So far, the progress made by Electronic Markets has<br />
been encouraging and RBSM has be<strong>com</strong>e a<br />
household name within RBS, The bank as a whole<br />
has tried to leverage the cross product nature of our<br />
product offering and client base to achieve<br />
coordination in servicing our customers and<br />
efficiencies in technology spend and delivery. Even<br />
the physical layout of our new offices in Stamford<br />
Connecticut is meant to create better<br />
<strong>com</strong>munications and smarter uses of internally and<br />
externally facing electronic markets products.
What prompted the decision to integrate your esolutions<br />
to create RBSMarketplace, given that each<br />
of the platforms were already successful in their own<br />
right?<br />
You are correct, we had a series of strong electronic<br />
products across both FX and Fixed In<strong>com</strong>e of a<br />
proprietary nature as well as the liquidity that we<br />
provide via third party platforms…but let’s go back to<br />
the concept of <strong>com</strong>pounding success, and it’s just like<br />
<strong>com</strong>pounding returns in investing. If others can<br />
build upon <strong>com</strong>ponents in your electronic markets<br />
offering, like strategy, research, quant, execution and<br />
post-trade services, and PB you can move forward<br />
from the constant silo based mentality that hinders<br />
growth and is inefficient in utilising the bank’s<br />
resources. Working together and providing that<br />
platform for visibility and transparency of success<br />
allows for ideas to evolve. Research and strategy,<br />
electronic execution and post-trade services tend to be<br />
a <strong>com</strong>mon denominator in all businesses.<br />
Were customers already trying to create a single<br />
window internally to bring together the different<br />
trading platforms they trade on?<br />
Many customers have either bought or built some<br />
form of electronic consolidation product for their<br />
execution needs. Sometimes it is a cross product<br />
bleed from an existing equities or futures application,<br />
a strategic Order Management platform allowing for<br />
tighter integration from the point of the investment<br />
decision through to execution and post-trade or<br />
simply an in-house effort to make their workflow<br />
more efficient. Whatever the need or underlying<br />
business, we try to provide scalable products and<br />
solutions that <strong>com</strong>pliment that need and allow clients<br />
to leverage our services. We bring more than just tools<br />
but a wealth of knowledge and a concept of a trading<br />
<strong>com</strong>munity.<br />
What instruments can now be traded on<br />
RBSMarketplace and what services are available?<br />
FX and Fixed in<strong>com</strong>e services such as strategy,<br />
research, and quant tools, <strong>com</strong>pliment our execution<br />
services on both our proprietary and 3rd party<br />
platforms as it is crucial that clients can access the<br />
liquidity and <strong>com</strong>munity of RBSM via the channel of<br />
their choice. Proprietary FX Options, Streaming<br />
rates, Benchmark trading, and Direct Market Access<br />
(FX DMA) continue to evolve and gain market share.<br />
We also provide access to Futures execution and<br />
clearing and one of our newest additions to RBSM is<br />
Investor Products. Our SmartPrime product is also a<br />
great example of giving clients access to hybrid<br />
product models and services.<br />
How quickly can you get new users live on<br />
RBSMarketplace and has it broadened the range of<br />
instruments existing clients can trade through the<br />
bank – i.e. can existing clients from one platform<br />
automatically gain access to other products?<br />
Cross product connectivity and speed to market is key<br />
to keeping your customers interested and satisfied and<br />
giving you a deserved place on the customer desktop.<br />
As stated before Electronic Markets tends to be the<br />
<strong>com</strong>mon denominator for many clients who trade<br />
multiple products with RBS. RBS has made great<br />
efforts to make a global model of client services and<br />
staff it with knowledgeable people who understand<br />
not only the business needs of the client, but also the<br />
technology needs. By working with the existing sales<br />
force as well as clients directly, the client services team<br />
can help the sales force fully understand the client’s<br />
cross product footprint to build a better relationship.<br />
What feedback have your e-<strong>com</strong>merce teams had<br />
from clients about RBSMarketplace and what<br />
applications do you think particularly add value for<br />
customers and differentiate the portal?<br />
>>><br />
“Whatever the need or underlying business,<br />
we try to provide scalable products and<br />
solutions that <strong>com</strong>pliment that need and<br />
allow clients to leverage our services.”<br />
We have had positive feedback from both our clients<br />
and internally from our Sales force but ultimately, it<br />
depends on the client base as we aim to serve up the<br />
right mix of product and services depending on client<br />
segment, user profile and even geographical location.<br />
For the Real Money accounts the interest is in<br />
automation and providing transparency. This is our<br />
RBS FX Benchmark product which can be integrated<br />
into upstream and downstream systems at the client,<br />
adding value but streamlining processes that need<br />
accountability and an audit trail.<br />
In the Retail and Partnership arena, it’s defiantly our<br />
FXMicropay business that’s consistently winning<br />
market accolades and allowing our client to realize FX<br />
january 2010 e-FOREX | 89
e-FOREX : INTERVIEW<br />
revenue that was previously being lost in the simple<br />
cross border nature of their business.<br />
In the Hedge fund and CTA space it is our<br />
SmartPrime product that leverages our existing<br />
market connectivity to give funds access to the ECN<br />
Direct Market for Foreign exchange while leveraging a<br />
top rated FX PrimeBrokerage and risk taking team,<br />
<strong>com</strong>bined with automated services for rolls and<br />
position management for a new level of<br />
differentiation.<br />
To what extent can users customise their<br />
RBSMarketplace platform?<br />
Dashboards and montages are overused terms. But<br />
RBSM is a montage of <strong>com</strong>ponent applications that<br />
can be configured based on your access level and<br />
business need. RBSM.<strong>com</strong>, the portal side of our<br />
offering provides customisation and other<br />
personalised capabilities such as subscriptions.<br />
Over the last few years e-<strong>Forex</strong> has been reporting on<br />
the continuing growth of Algorithmic FX trading and<br />
many larger banks are moving into this space to give<br />
clients access to this powerful method of trade<br />
execution. Is RBS looking to join them?<br />
90 | january 2010 e-FOREX<br />
The visible growth in algo trading is <strong>com</strong>ing from the<br />
high frequency shops that are contributing record<br />
amounts of turnover in the FX markets. RBS has<br />
supported many of these players with a highly scalable<br />
PB offering and more recently algo (instructional<br />
execution) via its SmartPrime offering. SmartPrime<br />
leverages our own experiences in optimising execution<br />
techniques and allow clients to tailor their execution<br />
to their own needs, choosing strategies that help<br />
minimise slippage, transfer risk or keep their<br />
anonymity. We will continue to grow these<br />
products with our own risk taking capabilities to help<br />
customers lower costs and build electronic<br />
partnerships with RBS.<br />
Given the increasing interest in Algorithmic trading,<br />
many <strong>com</strong>mentators expect to see rising customer<br />
demand for Research and Analytical (R&A)<br />
applications across all asset classes. What steps has<br />
RBS been taking to cater for this and offer new client<br />
interfaces for both pre-and post trade R&A?<br />
RBS has a deep team of quantitative experts that have<br />
used the framework of RBSM to build research tools,<br />
bespoke query analytics and more recently its own<br />
models to help define optimistic execution strategies<br />
and entry points. Combined with regional quant<br />
specialists to answer specific question or help conduct<br />
TCA, we feel we have a winning formula for the<br />
future of a data driven world.<br />
Are post-trade services, middle and back office<br />
processing and clearing systems all<br />
integrated into RBSMarketplace and how<br />
can the platform help users improve their<br />
straight-through-processing?<br />
I think people realize that Post<br />
trade services are important for<br />
efficiency purposes and<br />
controlling costs, but<br />
of Lehman it is<br />
important to<br />
realise it is an
integral part of controlling risk. Real time reporting<br />
and controls for clearing are a fundamental part of the<br />
equation.<br />
By offering clients multiple ways of managing their<br />
trades, confirming their risk and margin is an integral<br />
part of the RBSM strategy. Staying aware of trends<br />
and being involved with market structure initiatives<br />
helps RBS to stay sharp and focused so we can pass<br />
that benefit to our customers. Our customers value<br />
an advisory service about how changes in market<br />
structure can affect them and what they should <strong>com</strong>e<br />
to expect from their bank relationships.<br />
Prime brokerage services have also been included in<br />
RBSMarketplace. What key functionality does your<br />
Smartprime module offer to clients and how do you<br />
see the FX prime brokerage model evolving, postcrisis?<br />
Having a PB (or multiple PBs<br />
in the new world order) is a<br />
vital relationship service<br />
providing access to liquidity<br />
and risk management and<br />
increasingly to services like<br />
OTC clearing. This<br />
relationship has to go beyond<br />
standard services like trade giveup<br />
and extend into areas of<br />
added value such as legal,<br />
credit, technology, back office<br />
services and direct sales services<br />
and execution. Most<br />
importantly providing a packaged approach to these<br />
services helps customers to grow their own business,<br />
the ability to expand to other asset classes while using<br />
capital efficiently by optimising margin across their<br />
portfolios. RBS SmartPrime is just one tool that<br />
helps with the hassle of building or buying an<br />
execution platform to access ECN and RBS bank<br />
liquidity while also aiding in traditionally time<br />
consuming processes like rolling positions.<br />
RBS has always had a very innovative and successful<br />
electronic FX option franchise. Do you expect to see<br />
the use of FX options continue to grow amongst<br />
currency traders and investors and in what ways are<br />
you looking to further automate FX options trading?<br />
Absolutely. It is a major focus for the risk<br />
management and sales businesses at RBS as well as for<br />
Electronic Markets. Earlier this year, our FX spot and<br />
RBS - leading the way with integrated electronic FX solutions<br />
Currency Options businesses merged under the<br />
leadership of Mark Barnes on the trading side and<br />
Chris Leuschke on the sales side. This new<br />
organisational structure is enabling us to take a more<br />
strategic approach to all elements of FX and treat<br />
them as an asset class from a risk management<br />
perspective while providing a more integrated solution<br />
based service to our client which will obviously<br />
extend to our provision of FX services via RBSM.<br />
Over the <strong>com</strong>ing months, what work will your e<strong>com</strong>merce<br />
teams be doing to further enhance<br />
RBSMarketplace to move it even closer towards the<br />
<strong>com</strong>plete one-stop shop?<br />
We will be focused on product coverage, workflow<br />
and the integrated provision of services to ensure our<br />
products continue to be best in class but accessible in<br />
a multi-product environment that considers the entire<br />
trade lifecycle and the changing<br />
market environment.<br />
Like many large financial<br />
institutions, RBS has been<br />
dealing with difficult business<br />
issues arising from the global<br />
financial crisis of last year.<br />
Looking to the future, how<br />
<strong>com</strong>mitted is the bank to<br />
continue making the necessary<br />
investment required to maintain<br />
and further develop your world<br />
class suite of e-<strong>com</strong>merce<br />
solutions?<br />
Its been said before but <strong>com</strong>panies that are successful<br />
treat their investment in Electronic Markets as a<br />
strategic asset and not a liability or cost that needs to<br />
be assessed constantly based on market moods or<br />
modes. Sure there is always an element of cost:<br />
benefit analysis but you have to look at it on a holistic<br />
basis, rather than on a stand alone one – it is a core<br />
part of the franchise business and not a business in its<br />
own right. One thing is clear - the market will<br />
continue to evolve and those who optimise their<br />
spend in ways that leverage the existing talent will be<br />
the ones who will gain market share, be<strong>com</strong>e more<br />
profitable, have better client relationships and in<br />
general succeed.<br />
As we said before, it’s not an optional business if you<br />
are a top liquidity provider. It is an integral part of the<br />
approach to risk management and customer work flow.<br />
january 2010 e-FOREX | 91
FOCUS<br />
DMA - an increasingly<br />
attractive toolset for<br />
the FX buy-side<br />
The concept of ‘Direct Market Access’ (DMA) is a<br />
simple one and is yet another example of an<br />
invention that started out in the equities market<br />
and is now being adopted in the FX market.<br />
Nicholas Pratt examines the evolution of DMA<br />
and what it means for FX traders<br />
In equities DMA emerged over the last decade<br />
as a way of providing buy-side firms with an<br />
undiluted means of access to the exchanges<br />
and other execution venues. Up till this point the<br />
only way that an asset manager, hedge fund or<br />
corporate could access the market was via a<br />
broker. However as electronic trading began to<br />
thrive, leading to more advanced strategies such as<br />
algorithmic trading and facilitating the growth of<br />
high frequency trading hedge funds, the<br />
conventional broker-based means of execution<br />
began to feel insufficient to these new breed of<br />
buy-side traders.<br />
92 | january 2010 e-FOREX<br />
The advantages of DMA were threefold. Firstly it<br />
offered the quickest route to market with little<br />
latency being a sole connection between buy-side<br />
firm and execution venue.<br />
Secondly it offered lower transaction costs because<br />
of the absence of a broker. And thirdly it gives<br />
buy-side firms greater control over their own<br />
trading - something that has be<strong>com</strong>e more and<br />
more important as shown by the various regulatory<br />
initiatives such as <strong>com</strong>mission unbundling and the<br />
Markets in Financial Instruments Directive<br />
(MiFID) – both of which were aimed at<br />
deconstructing the role of the broker and its<br />
relationship with buy-side traders.<br />
DMA in FX<br />
As we have seen with electronic and algorithmic<br />
trading, what starts off in the equities market<br />
usually finds its way to the FX market and the<br />
same has happened with DMA, however there are<br />
some noticeable differences, not least because<br />
there is not the same exchange-based structure to<br />
the FX market.<br />
“DMA in the FX market did not really start until<br />
there was the market structure to allow it,” says<br />
Chip Lowry, chief operating officer at Currenex,<br />
which along with Hotspot FX, was one of the first<br />
venues to bring an exchange-based model to the<br />
FX market in the early stages of the century. “Not<br />
only did we have an exchange-based model but we<br />
also had executable streaming prices which helped<br />
create the order book.”
The early users were not the typical FX traders<br />
looking to smooth out currency transactions or hedge<br />
their positions, says Lowry. “They were hedge funds<br />
trading FX as an asset class and this was only possible<br />
because there was the technology to allow it and the<br />
prime brokers to provide the credit line they needed.<br />
All of this created an environment within FX for<br />
DMA.”<br />
The advantages of using DMA has not changed much<br />
over the years but, says Lowry, what is needed to be a<br />
successful user or provider of DMA has changed.<br />
“Low latency is now critical for high frequency traders<br />
– how quickly does the matching engine work? How<br />
quick is the network? How close to the execution<br />
venue are you?”<br />
Of course the natural conclusion for this march<br />
towards low latency nirvana is that everyone ends up<br />
at the same point where the matching engine can go<br />
no faster and co-location can get no nearer. “We’re<br />
getting very close to that point,” says Lowry who adds<br />
Chip Lowry<br />
“DMA in the FX market did not really start until there<br />
was the market structure to allow it,”<br />
>>><br />
january 2010 e-FOREX | 93
FOCUS<br />
that the next stage of development is making sure the<br />
code is faster by putting it directly onto the chip<br />
rather than the memory of the <strong>com</strong>puter, thus<br />
shaving vital microseconds off the trading time.<br />
Another provider of DMA services for the FX market<br />
is US-based Advanced Markets. “The key advantage<br />
to our FX DMA model is that it enables trading on<br />
highly <strong>com</strong>petitive prices from more than 10 leading<br />
banks on a fully transparent, anonymous, low latency<br />
platform,” says Anthony Brocco, chief executive at<br />
Advanced Markets. “Further, DMA goes beyond the<br />
STP model in that all rates are directly from banks<br />
with fully transparent market and revenue models”.<br />
“In practical terms this means trades are done on<br />
excellent prices for the full ticket amount because<br />
banks are refreshing their prices several times per<br />
second. Partial fills almost never occur and platform<br />
rejection rates are significantly less than one per cent.<br />
Our clients report this high success rate, in terms of<br />
full amount trade executions, stands in stark contrast<br />
to ECNs and other multilateral platforms.”<br />
Main users<br />
Brocco says that the main users of the DMA service<br />
range from hedge funds to experienced individuals<br />
“who want to trade on tight, neutral prices that are<br />
not spread or skewed in any way”. He is also seeing<br />
strong demand from large banks and brokers. “These<br />
Anthony Brocco<br />
“DMA goes beyond the STP model in that all<br />
rates are directly from banks with fully transparent<br />
market and revenue models”.<br />
94 | january 2010 e-FOREX<br />
>>><br />
institutions are seeking the best possible FX model to<br />
offer their clients in terms of transparency, pricing,<br />
liquidity, low latency trading capabilities. “In terms<br />
of traders, the interest is from those market<br />
participants who are concerned with optimizing their<br />
trade execution performance.<br />
Of late, model traders are be<strong>com</strong>ing significant users<br />
too. They tend to value the pristine, robust neutral,<br />
realtime market data that our DMA platform<br />
generates to power their trading models. The appeal<br />
of anonymous access to institutional grade pricing is<br />
attractive to our clients. Bear in mind, that many FX<br />
DMA platforms are not anonymous either because<br />
the client is disclosed or because the broker offering<br />
the platform is a market maker on it.” Technology is<br />
one of the main ways in which providers of DMA<br />
services are looking to differentiate their offerings as<br />
well as widening access and broadening the<br />
distribution of these services. “From an IT<br />
standpoint, our DMA model is relatively simple to<br />
support because it provides equal access to all<br />
participants to the same liquidity pool of prices,” says<br />
Brocco. “As such, our technology partners have been<br />
able to ramp up execution speeds and market data<br />
dissemination impressively in short order to name<br />
two of a host of other ongoing technology<br />
refinements.<br />
“We are also looking to differentiate our offering by<br />
constantly refining our model to provide the most<br />
straightforward, purest expression of centralized order<br />
book DMA we can,” says Brocco. “That’s what our<br />
clients want.<br />
Raising standards<br />
As DMA grows in popularity, it will place pressure<br />
on the various FX execution venues to improve their<br />
technology standards and execution quality as these<br />
properties be<strong>com</strong>e more conspicuous to trading<br />
firms. “DMA is an enabling market structure in<br />
terms of efficient liquidity access and market<br />
transparency,” says Brocco. “So to the extent that it<br />
raises standards in terms of execution quality,<br />
meaningful trading cost analysis and higher quality<br />
market data, other venues could feel pressures to<br />
adjust their models.”<br />
Overall Brocco says that DMA will evolve and grow<br />
as market participants add it to their array of FX<br />
liquidity access venues. “We are seeing the seeds of<br />
this growth now as bellwether fund managers adopt<br />
this method of market access to support <strong>com</strong>patible
FOCUS<br />
Harpal Sandhu<br />
“We’ve always believed that DMA existed in the market<br />
but it was always manual so the first task was to put all<br />
of these ideas from a trader’s head into a <strong>com</strong>puter.”<br />
trading strategies and tactics. On the retail side, we<br />
see DMA as be<strong>com</strong>ing the market structure of choice<br />
among experienced individual traders as well as<br />
brokers and banks globally that are looking to offer<br />
the best possible FX product to clients.”<br />
“We first brought DMA to the FX market over five<br />
years ago,” says Harpal Sandhu, chief executive of<br />
Integral. “We were very focused on transparency and<br />
OTC trading connections between liquidity takers and<br />
liquidity providers. We’ve always believed that the<br />
fundamentals of FX trading is based on (OTC)<br />
relationships but without a DMA facility, it would take<br />
the participants a long time to setup their own<br />
electronic connectivity to their providers or customers.”<br />
DMA has since evolved into something far beyond<br />
simple point-point networks, says Sandhu, citing the<br />
array of business services that run on top of the<br />
network. This development has added a <strong>com</strong>plexity<br />
to the design of a DMA service that Sandhu believes<br />
is beyond the majority of trading firms that are<br />
considering developing such a service in-house.<br />
“For people building their own connectivity, there are<br />
things that they do not even know that they don’t<br />
know. For example, you have to work out your price<br />
discovery, so you can convert apples to apples. All of<br />
these liquidity sources have their own formats which<br />
have to be normalised so there is an aggregation<br />
aspect, there is credit line management, netting,<br />
96 | january 2010 e-FOREX<br />
>>><br />
straight-through-processing (STP) for pre and post<br />
trade processes, verification of execution and the<br />
monitoring of connectivity and rejection rates. These<br />
are all key aspects of any DMA offering. It is all about<br />
the services that run on top of the infrastructure.”<br />
Building DMA models<br />
One firm that has developed its own DMA model is<br />
Rockshore Partners, which also boasts an in house<br />
proprietary fund with Rockshore Funds. Rockshore<br />
Partners provides the black box-type trading<br />
application for the fund. "Rockshore Funds is our inhouse<br />
fund which licenses the software that we<br />
developed" says Nick Pittarelli, a quantitative analyst<br />
with Rockshore Partners. We have several FIX-based<br />
API’s that connect us to portals such as Hotspot,<br />
Integral, Currenex and others.<br />
We designed it purely for passive arbitrage. We colocate<br />
and are within half a millisecond from all of our<br />
counterparty connections, and trade identification is a<br />
mere 12 microseconds. It might not be the fastest, but<br />
it is extremely quick. When we developed it, we kept<br />
in mind that we wanted to use it through a prime<br />
broker service tailored to high frequency algorithmic<br />
trading <strong>com</strong>panies. We obtain our service through a<br />
top tier global bank in conjunction with our funding<br />
partners at Graceland Capital. By building this for<br />
DMA we eliminate the interfacing directly with the<br />
broker and we reduce latency while maintaining<br />
<strong>com</strong>pletely transparent pricing. To Rockshore, DMA is<br />
the only way to deal as our platform is built for ultra<br />
high frequency trade opportunities in retail and<br />
institutional FX market," says Pittarelli.<br />
"We trade arbitrage passively, with linear, triangular, and<br />
market making strategies so our application handles<br />
<strong>com</strong>plex event processes through this DMA access. Our<br />
market making interface conducts a vast amount of<br />
high frequency autodealing price <strong>com</strong>putations and<br />
incorporates a multitude of proprietary methodologies.<br />
Much of this is material a typical institutional prop shop<br />
would not have because of the <strong>com</strong>plex programming<br />
involved. It is a sophisticated system that took us two<br />
plus years to build. We started in early 2006 and it is a<br />
constant work in progress. We have the ability to make<br />
markets in a traditional manual fashion or with<br />
<strong>com</strong>plete automation. Its capacity is measured to stream<br />
more than 5 million quotes per day to all of our trading<br />
venues. This is what we deem as buy-side paradise."<br />
states Pittarelli.<br />
In terms of the using APIs for DMA, Pittarelli says<br />
that FIX connectivity has been a key <strong>com</strong>ponent due
FOCUS<br />
Nick Pittarelli<br />
"We passively create linear and triangular<br />
arbitrage opportunities through our DMA via our<br />
Autodealing Model, DMA is crucial."<br />
to the fact that the protocol has developed at a<br />
reasonable pace and all of its various formats are<br />
backwards-<strong>com</strong>patible. "So from the very start of<br />
putting the APIs into use we have not had to change<br />
anything or modify the core architecture. Our<br />
trading style is quite vanilla, the only technical<br />
resource we <strong>com</strong>pute for forecasting is depth of book<br />
globally. It’s all about the prices as they are now, and<br />
can we do anything with them? There is hidden<br />
magic in the raw and executable quotes, and our<br />
entire operation is based on the DMA to these<br />
hosted venues. We built our own aggregation into the<br />
platform, which gives us the best of both worlds and<br />
is much of the magic behind the software."<br />
While Pittarelli has put considerable effort into<br />
assuring that his system has as low latency as<br />
possible, he is also reliant on the liquidity venues he<br />
connects to being equally <strong>com</strong>petent at reducing<br />
latency. "We have to do some minimal measurement<br />
on latency to <strong>com</strong>pute the time it takes each venue to<br />
respond. If it consumes considerable time to receive<br />
an acknowledgement, it begins to eat into our<br />
profitability. Therefore, it is a case of marrying the<br />
best price with the latency <strong>com</strong>putation integrated in<br />
the response time. We are pretty quick from our end,<br />
each order is sent out in microseconds but we have to<br />
provide some leeway to mitigate against any venue<br />
latency. The venues themselves with increased DMA<br />
traders will have to be able to handle an increasing<br />
number of bids and offers. We are quite capable of<br />
98 | january 2010 e-FOREX<br />
streaming a significant number of bids and offers,<br />
and we are just one entity using DMA. The numbers<br />
are mind-boggling as to how many quotes are going<br />
to these venues given the increase in this trading<br />
activity."<br />
Self-build versus off-the-shelf<br />
Pittarelli and the Rockshore team are in fairly rarefied<br />
<strong>com</strong>pany when it <strong>com</strong>es to building their own DMA<br />
system. So why exactly did they decide to go down the<br />
self-build route? "Some of it is the number-crunching<br />
background of the team and some of it is the desire to<br />
maintain proprietary methods and strategies from<br />
outside influences and in their confidential state. We<br />
knew that we could build something extremely fast<br />
and we wanted to make sure that if our <strong>com</strong>petitor<br />
wanted a similar application, they could not acquire a<br />
duplicate off-the-shelf. The cost of the production was<br />
relatively equal to what we would have invested for an<br />
off-the-shelf system. With our own design and<br />
development, we kept confidentiality and secured<br />
ourselves as the only entity utilizing our aptitude for<br />
alpha. We have some modules that we are willing to<br />
white label and other applications that we build for<br />
customers from scratch. Our software entity in<br />
Rockshore Partners manages third party development,<br />
data center hosting and sales.<br />
Despite these reasons, Pittarelli believes that the<br />
majority of FX participants will instead opt for an<br />
off-the-shelf DMA product. "But if a firm has deep<br />
pockets or is specifically looking at high frequency or<br />
proprietary trading, then the most effective approach<br />
is to build your own. Everyday there is a new<br />
programming language that purports to be better and<br />
faster. We are constantly investigating new<br />
technologies in low level programming. DMA<br />
provides the avenue to <strong>com</strong>bine the features a
customer needs with fastest programming available,<br />
serving both the buy side customers and in the case of<br />
Rockshore, market efficiency as well.<br />
Regardless of whether participants choose to buy or<br />
build, Pittarelli is clear that DMA will continue to grow<br />
in FX and it will have a key influence on how the<br />
market itself develops. "I think it will continue to open<br />
up and traditional brokers will reluctantly be<strong>com</strong>e<br />
increasingly passive in terms of the services that they<br />
provide, making it a parallel to the utilization of a prime<br />
broker for the retail environment and offer lower<br />
<strong>com</strong>mission structures to institutional firms as well. In<br />
terms of off-the-shelf products I think there will be an<br />
accepted standard. We believe the market itself will<br />
be<strong>com</strong>e more efficient due to the <strong>com</strong>petition in high<br />
frequency trading and open knowledge of DMA. Any<br />
<strong>com</strong>panies that do not have the correct adaptive resources<br />
to operate in the <strong>com</strong>bination of low latency and DMA<br />
market segment will realize substantial customer attrition<br />
to those service providers that offer a cost effective and<br />
responsive low latency framework."<br />
DMA - an increasingly attractive toolset for the FX buy-side<br />
Michael Markarian<br />
“There are four clear benefits to DMA in FX –<br />
transparency, efficient execution, standardised<br />
pricing and anonymous trading.”<br />
>>>
FOCUS<br />
Benefits of DMA<br />
Most of the providers of DMA services are in<br />
agreement when it <strong>com</strong>es to describing the benefits<br />
of DMA. According to Michael Markarian, president<br />
of Divisa Capital, a New Zealand based investment<br />
house and Currenex partner that offers Spot FX and<br />
Metal trading services, there are four clear benefits to<br />
DMA in FX – transparency, efficient execution,<br />
standardised pricing and anonymous trading. “The<br />
issue of transparency is resolved as the DMA broker<br />
is acting purely in an agency capacity. DMA orders<br />
are based on two variables – the price and the time<br />
the order is placed so the result is a far more efficient<br />
execution. DMA pricing is based on institutional<br />
standards of 1/10 of a PIP. And anonymity provides<br />
traders with a level playing field.”<br />
John Miesner<br />
“The advantage of DMA in FX is that enables clients to<br />
aggressively buy and sell but also passively bid and offer,”<br />
“The advantage of DMA in FX is that it enables<br />
clients to aggressively buy and sell in addition to<br />
passively bidding and offering,” adds John Miesner,<br />
Head of Global Sales for Knight’s Hotspot FX<br />
platform. “They are not being subjected to a specific<br />
spread by one provider – it is about accessibility to a<br />
pool of liquidity.” In addition to the aforementioned<br />
advantages of anonymity and accessibility, Miesner<br />
also highlights the benefits of low latency execution<br />
and the provision of multiple order types such as<br />
market and limit orders. “Traditionally these have<br />
been important features for any FX trader however,<br />
the low latency demands have be<strong>com</strong>e more<br />
100 | january 2010 e-FOREX<br />
pronounced due to the influx of high frequency<br />
traders into the FX market.”<br />
Regulatory perspectives<br />
As with any new trading model, there is always the<br />
concern that changes to the regulatory environment<br />
will either render certain aspects redundant or add<br />
unhelpful <strong>com</strong>plexity to the current market structure.<br />
Will the development of DMA be threatened or even<br />
enhanced by the arrival of new legislation? In the US<br />
the NFA is looking to regulate the retail FX market<br />
for those trading FX as an asset class while in the EU<br />
many of the principles associated with MiFID may<br />
be extended to cover the FX market. But perhaps<br />
most important will be the possibility of central<br />
clearing for some FX instruments, particularly swaps,<br />
says Lowry of Currenex.<br />
“There are clearinghouses like CME and ICE saying<br />
that they will clear FX which in turn may make it<br />
possible for non-traditional DMA users such as<br />
institutional money managers to trade in the FX<br />
using anonymous or aggregated liquidity pools,” says<br />
Lowry. “On the one hand it will make clearing easier<br />
but on the other hand it will introduce the need for<br />
collateral management.”<br />
Others, like Divisa Capital’s Markarian, hope that<br />
DMA users will benefit from the efficiency execution<br />
provided by the model when it <strong>com</strong>es to measures<br />
such as capital requirements. “We would hope to see<br />
the various regulatory bodies recognize and make<br />
concessions to firms that use the DMA model with<br />
regards to their capital position. There are already<br />
some regulators that have lowered capital<br />
requirements for DMA brokers since these firms do<br />
not act as the counterparty to their clients’ trades.<br />
These regulators recognize that this eliminates<br />
counterparty trading risk and the need for the<br />
increased net capital requirements (i.e. NFA<br />
minimum net capital is $20M USD). We also see a<br />
benefit with the transparency that DMA trading<br />
brings to the industry and hope this may usher in<br />
regulation standards around the world.”<br />
In Europe the regulatory landscape has been<br />
dominated by MiFID, the EU directive which aims<br />
to harmonise Europe’s securities market and<br />
promotes best execution. If the same initiative is<br />
aimed at the FX market, says Hotspot FX’s Miesner,<br />
then the vast majority of buy-side firms – traditional<br />
asst managers as well as the hedge funds - will want<br />
to trade on a platform with multiple participants
ather than being subjected to single bank offerings<br />
with their limited pools of liquidity.<br />
Transaction Cost Analysis<br />
Such a development would also increase the demand<br />
for transaction cost analysis (TCA), a vital element in<br />
achieving best execution by showing the cost of each<br />
trade. These TCA services have be<strong>com</strong>e much indemand<br />
in the equities market and we are starting to<br />
see the same in the FX space, says Miesner. “TCA is<br />
be<strong>com</strong>ing more of a buzzword in FX although I’m<br />
not sure I’ve <strong>com</strong>e across anyone who has successfully<br />
implemented a TCA offering Going forward it is<br />
going to be a big area of interest particularly for the<br />
traditional asset managers that require it. These<br />
traditional asset managers will most likely just be<br />
accessing one or two venues and those<br />
venues will have to provide TCA,<br />
however the biggest stumbling block<br />
is that there are only a handful of<br />
venues that publish their<br />
volumes. When this barrier is<br />
broken down, then it will be a<br />
lot easier for TCA to flourish in<br />
the FX market.”<br />
Despite the mature status of<br />
DMA in other asset classes,<br />
notably equities, Integral’s Sandhu<br />
believes it is still in its relative<br />
infancy in terms of the FX market. “I<br />
don’t think most people in the FX market<br />
even use the DMA term. Although the equities<br />
market is fragmented, most trading is done at the<br />
major order-book venues, of which there are a<br />
limited number. These exchanges or ECNs and they<br />
all have central order books.<br />
They are generally homogenous in the way they offer<br />
execution. But in FX they are order books and OTC<br />
liquidity providers, lots of prices and lots of venues that<br />
are unregulated and all behave differently. It is DMA in<br />
an OTC world and to build an effective DMA tool you<br />
have to solve all of these issues. This is not to say that<br />
these equity-type services have not added something to<br />
the FX market but you cannot just transplant a service<br />
from one asset class into another.”<br />
Other major issues<br />
One of the major issues with DMA in the equities<br />
market is its state of independence. One of the early<br />
heralded benefits of DMA was the fact that it offered<br />
DMA - an increasingly attractive toolset for the FX buy-side<br />
a means to execution through an agency broker that<br />
bypassed the principal brokers. However when<br />
investment banks then offered their own DMA<br />
services or else bought out the independent<br />
providers, the waters were muddied somewhat as to<br />
what constitutes a true DMA service. According to<br />
Sandhu these same issues are now relevant in the FX<br />
market. “There are also those services that started off<br />
as a DMA provider – such as Currenex – that have<br />
now be<strong>com</strong>e venues in their own right with their<br />
own order book and their own liquidity pools rather<br />
than simply the plumbing to get to a host of<br />
independent sources. They are now <strong>com</strong>peting with<br />
Reuters, Hotspot FX and EBS.<br />
There are also banks now claiming that they are<br />
DMA providers, pretending to be agency<br />
brokers and offering to execute your<br />
orders. In an OTC market like FX,<br />
where there is no exchange, the<br />
banks are ultimately the primary<br />
sources of liquidity. It is not that<br />
the buy-side wants to avoid<br />
using the banks but they want<br />
to be able to access them all on<br />
an equal footing. Banks want<br />
their customers exclusively so<br />
they are offering DMA in the<br />
hope that some buy-side firms will<br />
just be looking to tick a box to say<br />
that they have a DMA tool without<br />
really knowing what a true DMA offering<br />
should be. As liquidity providers, banks won’t act as<br />
facilitator of DMA services. In fact, it would be<br />
unreasonable to assume for liquidity providers to<br />
provide DMA that would facilitate their customers’<br />
best execution efforts. As far as I’m concerned you<br />
can either be a principal or an agent but you cannot<br />
be both and a DMA offering can only be so if it<br />
<strong>com</strong>es from an agent. All those banks offering DMA<br />
that are not agency brokers are misrepresenting their<br />
goals to customers.”<br />
Nevertheless Sandhu is confident that the evolution of<br />
DMA will bring with it <strong>com</strong>plete transparency, truly<br />
aggregated pricing and clean trading and will be<strong>com</strong>e<br />
the normal means of execution for the interbank<br />
market at least. “This will mean that FX will start to<br />
look a lot like other asset classes and there will be<br />
three main participants – the banks; the agency<br />
service providers (true agency brokers); and customers<br />
who will learn to expect to be treated fairly.”<br />
january 2010 e-FOREX | 101
RETAIL e-FX PROVIDER<br />
Achieving more effective<br />
Risk Management in Retail<br />
FX platform operations<br />
Faced with a need for more effective risk<br />
management of their Retail FX customer<br />
positions, banks and brokerage firms in the FX<br />
space are being challenged by ballooning small<br />
ticket items, varying customer credit limits, risk<br />
mitigation issues as well strains on their back<br />
office processing capabilities. Roger Aitken<br />
talks to leading industry players to explore the<br />
key issues involved.<br />
ARetail FX customer base is very different<br />
from the traditional corporate and<br />
institutional client base of a bank or large<br />
brokerage firm. For a start client numbers are<br />
generally far greater and the pressures of servicing<br />
these customers who produce a greater percentage of<br />
small ticket FX trades, places an extraordinary load on<br />
102 | january 2010 e-FOREX<br />
the bank/broker systems, staff and processes.<br />
Whilst the credit crunch has forced firms to improve<br />
their risk management operations, the beauty of<br />
margin trading is that there are no credit lines, with<br />
clients posting collateral upfront with their broker or<br />
bank, and trading a multiple based on that figure. This<br />
multiple will depend on a number of factors,<br />
including the quality of the client, what FX products<br />
they wish to trade - from straight forward spot FX, FX<br />
forwards through to vanilla and exotic FX options.<br />
Automation is key<br />
Clearly to remain <strong>com</strong>petitive and avoid potential<br />
blow-ups, firms need to step up to the plate and deploy<br />
cutting-edge technology in their risk management and<br />
FX margining systems. Having fast systems in place to<br />
calculate real-time position and further calls on clients,<br />
if positions deteriorate, is essential.
“Automation is key in revaluing customer<br />
positions in a timely and accurate manner,”<br />
notes Sean O’Donnell, Director of Technology<br />
at Cognotec based in London. “As each<br />
customer’s credit limit can be different - typically<br />
with different leverage ratios - a slower revaluation<br />
process means there is a risk that market price<br />
movements may be missed, thereby leaving the bank<br />
or broker with exposure from a customer’s position.”<br />
There are also historical and technological reasons<br />
why banks and brokers are facing a need for more<br />
effective risk management of their Retail FX customer<br />
positions. Traditionally bank systems were designed<br />
for institutional clients. And, these clients normally<br />
depend on their own reporting software to determine<br />
outstanding risk and deal confirmation. “In the Retail<br />
world, where a system such as FX Bridge’s ProTrader<br />
Plus platform is best suited, the burden is shifted<br />
to the broker,” states Joe Cunningham, President of<br />
FXBridge. “This is why we’ve implemented a robust<br />
and <strong>com</strong>prehensive reporting system. We simplify the<br />
<strong>com</strong>plexity of the information to make it easily<br />
understandable by a less experienced client base.”<br />
In addition, with a large number of Retail clients<br />
under management, FX Bridge’s ability to<br />
automatically manage client exposure and “auto-cut”<br />
clients to prevent a negative equity position is critical.<br />
Finally, the firm’s robust implementation of straight<br />
through processing (STP), from reporting to<br />
confirmation to risk management, is the “icing on the<br />
cake” asserts Cunningham.<br />
Risk management<br />
Denis Borisovsky, CEO of leading platform provider,<br />
PFSoft, based in the Ukraine, believes risk management<br />
is and should be “the most important part” of a<br />
brokerage business. “The most successful brokers we’ve<br />
seen have very sophisticated risk management models,”<br />
he says. “Usually they have extremely smart hedging<br />
strategies, and in some cases are ready to take risks -<br />
be<strong>com</strong>ing accurate market makers.”<br />
In order to minimise risks many brokers today are<br />
connecting to more than one liquidity provider, in FX<br />
as well as across other asset classes. Sometimes they<br />
even create their own ECNs, which allows for fairly<br />
<strong>com</strong>plex rule-based risk management and price<br />
aggregation. Consequently this requires agile risk<br />
systems to be in place. Borisovsky adds: “Ideally risk<br />
management depends on both the behaviour of a<br />
particular customer and market conditions. Only by<br />
>>><br />
Denis Borisovsky<br />
“Only by having flexible models in situ is a broker able to<br />
provide the best conditions for their clients and with<br />
sufficient risk management.”<br />
having flexible models in situ is a broker able to<br />
provide the best conditions for their clients and with<br />
sufficient risk management.”<br />
Plethora of available solutions<br />
There are a host of <strong>com</strong>panies providing margining<br />
and real-time risk management technologies for Retail<br />
FX trading activities. SS&C Technologies (SS&C), is<br />
one which delivers investment and financial<br />
management software. By virtue of its acquisition of<br />
MarginMan, the firm now offers collateralised<br />
trading software to many of the leading global players<br />
in the FX marketplace. MarginMan fully supports<br />
collateralised FX trading, precious metals trading and<br />
over-the-counter FX options trading. In terms of<br />
solutions catering specifically to the Retail end of the<br />
market, there are plenty of products available, says<br />
Peter Kelleher, Product Manager for MarginMan,<br />
who deals solely with the margin trading business at<br />
the firm. “However, by and large they [solution<br />
providers] have typically just offered a very simple 5%<br />
or 10% leverage calculation,” notes Kelleher. “And,<br />
clients are seeking more information and on a realtime<br />
basis, more aggressive netting and lower<br />
calculations in terms of the margin requirement.”<br />
The USP of MarginMan is that it is highly scalable,<br />
rich in functionality and flexible in terms of the rules<br />
in calculating client exposure. But this should hold<br />
true for all robust FX risk management and<br />
margining systems.<br />
january 2010 e-FOREX | 103
RETAIL e-FX PROVIDER<br />
Peter Kelleher<br />
“Clients are seeking more information and on a real-time<br />
basis, more aggressive netting and lower calculations in<br />
terms of the margin requirement.”<br />
Traditionally MarginMan was developed for banks<br />
who are catering for a private client base. Kelleher<br />
says that more recently they have <strong>com</strong>e to look at the<br />
Retail FX market and hedge fund side of the business<br />
in terms of prime brokerage or give-up trading - the<br />
market place that has evolved into high volume-type<br />
transactions - in conjunction with on-line capability.<br />
Exploding volumes<br />
Another top provider is SunGard, with its Sierra<br />
product line for FX Retail margining. Jim Dennelly,<br />
senior vice president at SunGard’s Sierra business unit<br />
based in Philadelphia, says that currently FX Retail<br />
margining and FX STP is the number one business<br />
currently for the Sierra product, a solution for FX<br />
trading. He notes there has been a major shift in<br />
margining over recent years. “The challenges facing<br />
clients are unique with exploding volumes and having<br />
to handle the tremendous growth in FX margining,”<br />
he remarks. Go back a decade and margining was<br />
something that was performed at the end of the day,<br />
with a report produced that revealed what was owed<br />
the next day. Limits were typically intra-day and there<br />
were no real valuations.<br />
“Today, the whole paradigm has shifted,” says<br />
Dennelly. “Now even the smallest players are<br />
distributing their services out across multiple platforms.<br />
So, you could be a start-up and end up having two or<br />
three electronic platforms right out of the gate.”<br />
Sungard also have bigger firms who are connecting to<br />
104 | january 2010 e-FOREX<br />
>>><br />
around ten electronic platforms using Sierra, which<br />
incorporates a margin trading and collateral<br />
management module that monitors and analyses<br />
client positions and risk in real-time. The solution<br />
also incorporates a customer white-label module that<br />
helps banks provide clients with easy access to<br />
streaming rate dealing, position management, deal<br />
status check and current market quotes.<br />
Co-branding tools<br />
David Lucas, managing director, Business<br />
Development, Fortex Inc. in Chicago, says: “For us<br />
the risk management tools that we put in place are<br />
appropriate for any client, whether they be an<br />
individual or an institution that is trading someone<br />
else’s money. The firm, which has FX brokers as<br />
customers rather than traders, has a preference to cobrand<br />
its risk management and margining tools.<br />
Recently their offering went live with FC Stone, a<br />
large Chicago-based FX broker.<br />
One thing that differentiates Fortex from a number of<br />
risk management <strong>com</strong>petitors is that the firm monitors<br />
risk on the front end as well as the back end. “A<br />
broker could have a risk warning on the back end that<br />
would necessitate a reaction within the firm,” notes<br />
Lucas. “Yet since we incorporate the trading and risk<br />
management, we can automate the response to a risk<br />
event.” Lucas notes in relation to the many parties that<br />
have a vested interest in risk management issues, that:<br />
“The broker certainly has a great interest in self<br />
preservation. They don’t want to see a blow-up among<br />
Jim Dennelly<br />
“Now even the smallest players are distributing their<br />
services out across multiple platforms.”
RETAIL e-FX PROVIDER<br />
their client base. Also, many assumptions [in this risk<br />
area] that were made in the past have obviously been<br />
proven to be incorrect.” While there have been<br />
infrequent negative events in the FX markets - usually<br />
due to the liquidity of certain currency pairs having<br />
dried up - brokers giving out credit (leverage) to their<br />
customers are keen to preserve their capital.<br />
Margin calculations<br />
In terms of the elements usually required for<br />
calculating a customers’ available FX margin in the<br />
Retail space, the core elements are the opening cash<br />
balance, customer foreign exchange positions, the<br />
leverage ratio per instrument and a particular<br />
customer’s call and close-out values.<br />
Cognotec’s O’Donnell says here: “Next generation<br />
platforms greatly assist the process of determining a<br />
customer’s available margin by tracking changes to all<br />
of this data, with the best of these systems<br />
undertaking this in real-time.”<br />
Lucas says Fortex has gone “a step further” when it<br />
<strong>com</strong>es to calculation of the margin calculations for its<br />
clients (the brokers) and added an extra layer of risk<br />
<strong>com</strong>fort. In addition to the brokers setting initial<br />
margin requirements, maintenance requirements and<br />
liquidation requirements for a trading client, by utilising<br />
Fortex technology, maximum position limits per<br />
currency pair can be set, as well as limits per orders and<br />
Sean O'Donnell<br />
“Next generation platforms greatly assist the process of<br />
determining a customer’s available margin by tracking<br />
changes to all of this data, with the best of these systems<br />
undertaking this in real-time.”<br />
106 | january 2010 e-FOREX<br />
>>><br />
number of orders. It can even be applied to customers<br />
trading more than one account. (Critically though the<br />
customer can never override the broker’s limit).<br />
He adds: “What we’ve done is to develop tools that can<br />
set limits that are more restrictive depending on the<br />
currency in question. For all those margin requirements<br />
mentioned, if a trader hits the maintenance level, we<br />
will generate real-time emails for all the relevant<br />
constituents involved.” With cash deposits made in<br />
brokerage accounts by clients usually receiving the full<br />
margin calculation (i.e. no market risk), posting<br />
securities into that same account will likely be subject<br />
to a margin ‘haircut’ (i.e. to offset the market risk).<br />
Fortex’s extra layer takes into consideration differing<br />
margin requirements on different currency pairs. For<br />
example, traders probably have a good idea of what<br />
the margin required is when trading a G8 currency<br />
(US$, Yen, etc.), and that the requirement is close to<br />
the actual risk. But when it <strong>com</strong>es to a more exotic<br />
currency, the margin requirement could well be<br />
higher to reflect the potentially greater risk.<br />
Also, if a trader trading on margin decides to say<br />
initiate an FX position, they might have to post a 2%<br />
margin. By making a $100,000 deposit, this would<br />
provide the potential to have a US$5m position (i.e.<br />
leverage of 50x). If the maintenance requirement level<br />
is set at 1% (US$50,000) and the trader’s equity falls<br />
below that figure, Fortex would again generate an<br />
email alert to all parties involved. This would include<br />
the customer (Retail trader), the broker’s risk<br />
department as well as an introducing broker - if used.<br />
Scalable and multi-dimensional<br />
Dennelly at SunGard Sierra says crucially “Whatever<br />
solution is going to be purchased, one needs to make<br />
sure that it can handle all types of [FX] products that<br />
clients are going to need to use. On top of that the<br />
margining calculation engines need to be extremely<br />
flexible and scalable.” Presently in Sierra, there are over<br />
68 different margining algorithms. They also provide<br />
an open API, so that if the customer has something<br />
that is unique and proprietary to them, they can “plug<br />
that in” and use it. The Sierra platform is “expected to<br />
be margining plus limits”, Dennelly says.<br />
FX margin calculations could also take a lesson from<br />
using a SPAN ® approach from FXBridge, a global<br />
provider of innovative software solutions to<br />
<strong>com</strong>panies operating in the high-volume/low latency<br />
FX. “Look at the entire product portfolio, assess risk,<br />
and then determine margin,” says Joe Cunningham,<br />
head of FX at FXBridge, based in Atlanta, Georgia.
RETAIL e-FX PROVIDER<br />
“At FX Bridge, we evaluate a currency pair, such as<br />
EUR/US$, by looking at the total <strong>com</strong>bination of<br />
long and short spot positions, calls, and puts. Then<br />
we evaluate the risk assessment of the portfolio by<br />
changing the underlying asset up and down as well as<br />
the volatility.” By looking at a portfolio in this multidimensional<br />
way, the firm assigns a margin<br />
requirement that is said to ac<strong>com</strong>plish two goals.<br />
“Firstly, it protects the dealer with a sufficient margin<br />
requirement. Secondly, it only encumbers the margin<br />
capital for the risk, thus leaving the remaining margin<br />
available to continue trading,” Cunningham explains.<br />
Real time considerations<br />
A big issue in terms of risk exposure for traders in<br />
years gone by was that the prevailing trading platforms<br />
would only calculate margin based on the position<br />
amount, not taking into consideration a position’s<br />
market value (in real time). This exposed traders and<br />
brokers to potentially significant levels of risk from<br />
intra-day volatility and sudden jumps in FX rates.<br />
These less sophisticated models were only capable of<br />
handling a limited number of calculations and often it<br />
was a case of a batch process at the end of the trading<br />
day, with all the risk consequences that came with it.<br />
Platforms nowadays, originally designed for the high<br />
volatility and algorithmic FX market, provide far more<br />
<strong>com</strong>plex margining models. These are based on the<br />
current value of a certain position and move in real time.<br />
Borisovsky says: “This requires the recalculation of<br />
margin requirements for all clients’ positions on each<br />
new quote, which can sometimes mean that hundreds<br />
of quotes per second/ per each instrument are<br />
required.” He also points out that it is sometimes<br />
necessary and critical to block the margin required for<br />
orders, depending on stop limits, the order execution<br />
and/or destination within a brokerage platform or in an<br />
external liquidity provider platform. Whilst not great<br />
for traders, it can limit risks faced by brokers as they<br />
can be confident that when an order is executed their<br />
clients always will have margin required. Borisovsky<br />
believes that this is area where improvements have to be<br />
made “by extending standard STP interfaces using the<br />
next generation of FIX.”<br />
Tailored solutions<br />
Turning to what technology solutions are now<br />
available to help Retail FX platform operators address<br />
their specific margining requirements, Cognotec’s<br />
O’Donnell says there are two key attributes that<br />
solutions for an “enterprise class” margin trading<br />
system need to have. “The solution firstly needs to be<br />
flexible enough to support the wide variety of margin<br />
rules that operators apply,” he explains. “These rules<br />
108 | january 2010 e-FOREX<br />
>>><br />
David Lucas<br />
“What we’ve done is to develop tools that can set limits that<br />
are more restrictive depending on the currency in question.”<br />
can change based on how a bank/broker wants to<br />
track a customer’s credit - by currency, by currency<br />
pair, by volume traded, tenor, as well as differences in<br />
regional regulatory requirements.” He adds:<br />
“Secondly, it needs to extremely fast and robust,<br />
which is why Cognotec has chosen to base our<br />
platforms architecture on the Java Enterprise Edition<br />
(JEE) standards.” JEE is widely regarded as the<br />
leading technology architecture for highly flexible,<br />
performant and scalable solutions that can handle the<br />
load of large Retail customer based systems.<br />
Recognising the huge challenge from dealing with the<br />
sheer volume of small volume FX tickets, Fortex has<br />
built a ‘warehouse’ specifically for such trades from<br />
their clients. “Clients can warehouse such FX trades<br />
until they be<strong>com</strong>e of a marketable sized amount,”<br />
explains Lucas. “We can set up exactly when these<br />
trades be<strong>com</strong>e auto hedged when the broker goes to<br />
market, either by size of the exposure or by what has<br />
happened in the market since they started taking on<br />
this exposure.” This saves costs for everyone, since<br />
passing trades to liquidity providers incurs costs, as a<br />
market maker has to clear and settle the trade as well<br />
as the broker. In respect of PFSoft’s ProTrader, which<br />
the firm dubs the ‘One Trading Platform’, six<br />
different margin models are provided to customers.<br />
These cover all kinds of margin requirements faced on<br />
various different markets and by different market<br />
participants. Furthermore, it has a highly<br />
customisable scripting interface to enable new margin<br />
models to be added in order to reflect any specific risk<br />
management in future.”
RETAIL e-FX PROVIDER<br />
Joe Cunningham<br />
“At FX Bridge, we evaluate a currency pair, such as EUR/US$,<br />
by looking at the total <strong>com</strong>bination of long and short spot<br />
positions, calls, and puts. Then we evaluate the risk<br />
assessment of the portfolio by changing the underlying asset<br />
up and down as well as the volatility.”<br />
Client benefits<br />
As to why more effective real-time risk management<br />
leads to more accurate margining and what benefits<br />
Retail FX brokers can pass onto clients by having an<br />
improved margining and risk management capability<br />
on their trading platforms, Cognotec’s O’Donnell<br />
says: “All risk management systems operate by acting<br />
on events that either raise or lower the risk to the<br />
participants involved - in this case the bank/broker<br />
and the customer.”<br />
By having a real-time risk management system, the<br />
bank/broker can react to changing events (market<br />
prices, customers positions, leverage ratios, etc.), thus<br />
reducing the risk to both parties. This can enable<br />
higher leverage and more attractive credit lines to be<br />
provided to clients. O’Donnell adds: “For example, if<br />
a risk management system of a bank/broker is being<br />
supplied with prices once every second (and not in<br />
real-time), then they will have to lower the leverage<br />
per instrument as there is a possibility that a price<br />
change will occur within the one second interval that<br />
could cause a customer to be closed out.”<br />
By its very nature failure to provide real-time risk<br />
management creates risk. “Gaps in time create gaps in<br />
market coverage,” Cunningham adds. “And, in order<br />
to be <strong>com</strong>fortable offering aggressive leverage to<br />
clients, the broker needs a high degree of certainty in<br />
closing out clients prior to a negative equity<br />
110 | january 2010 e-FOREX<br />
situation.” The closer to “real-time risk management”<br />
in conjunction with auto margin management, the<br />
greater the leverage a broker can offer clients without<br />
be<strong>com</strong>ing subject to undue market risk.<br />
Competitive advantages<br />
As to the new business opportunities and <strong>com</strong>petitive<br />
advantages banks/brokers can obtain by ramping up<br />
their risk and margining infrastructures, the events of<br />
the past year highlight that they must understand<br />
their own exposure along with their customers’ credit<br />
exposure if they want to run effective businesses.<br />
As O’Donnell puts it: “Those operators who can<br />
manage their risk with real-time margining platforms<br />
will be able to ensure that they are able to handle the<br />
volatility of the markets, support very large numbers<br />
of customers whilst still offering leverage/credit terms<br />
that are aggressive - without <strong>com</strong>promising risk.” As a<br />
pointer to future opportunities and enhancements,<br />
SunGard Sierra’s Dennelly notes in relation to FX<br />
margining more and more clients are wanting to FX<br />
margin FX options. Retail clients usually start off<br />
trading spot FX, might follow that up with a move<br />
into forward market and eventually embrace the<br />
options market. Again this underscores the need for<br />
choosing a solution that can cope with all types of FX<br />
products.<br />
Despite certain legal restrictions currently in place,<br />
Dennelly suggests that the next big trend in the<br />
market could be well be “cross margining” FX<br />
products, whereby integrated statements are produced<br />
for clients showing their cash margin positions,<br />
futures positions and the overall consolidated picture.<br />
FXBridge’s Cunningham says that banks and brokers<br />
open a new world of product and revenue<br />
opportunities by offering trading accounts with<br />
<strong>com</strong>bined spot and options margining. “First, the<br />
account holder can implement trading strategies for<br />
volatile and non-volatile markets that can rise, fall or<br />
remain range bound,” he explains. “Second, the<br />
account holder can implement risk management<br />
strategies that simple stop and limit orders cannot<br />
provide.” He adds: “By keeping an active account<br />
holder longer, the dealer not only derives more<br />
opportunity for revenue, but reduces one of the most<br />
significant costs, namely that of customer<br />
acquisition.”<br />
Critically though, as Fortex’s David Lucas says:<br />
“Everyone in the foreign exchange market food chain<br />
has an interest in managing their risk effectively,<br />
because no one can make money from a customer<br />
who goes out of business.”
RETAIL e-FX PROVIDER<br />
Taking steps to prepare<br />
for Disaster Recovery<br />
By Eric Burgener, Senior VP of Marketing InMage<br />
In today’s climate, most enterprises maintain some<br />
form of business continuity plan. Business continuity<br />
plans provide a way for an enterprise to continue<br />
functioning in the event of a catastrophic disaster that<br />
shuts down business operations at one or more<br />
primary locations. Business continuity plans<br />
cover information technology (IT)<br />
infrastructure recovery, human capital<br />
issues that arise when business<br />
operations must be restarted at<br />
a remote location, and physical<br />
infrastructure issues, such as<br />
re-establishing <strong>com</strong>munications,<br />
ensuring physical security, and<br />
providing appropriate work areas at<br />
remote locations. IT infrastructure<br />
recovery, sometimes referred to as<br />
disaster recovery (DR), addresses the issues<br />
involved with recovering <strong>com</strong>puting<br />
equipment (servers, storage, etc.), data, and<br />
application services. DR provides a necessary<br />
foundation for business continuity plans but is not<br />
a substitute for them. An effective DR plan is<br />
especially important for online foreign exchange (FX)<br />
brokers, whose trade servers are absolutely essential<br />
to their businesses.<br />
Any downtime events, such as a server failure, virus or<br />
natural disaster, significantly affects a broker’s ability<br />
to <strong>com</strong>plete transactions, generate revenue and service<br />
its customers. FX brokers also operate in an<br />
increasingly strict regulatory environment. The National<br />
Futures Association (NFA) requires all members to<br />
adopt a disaster recovery (DR) plan reasonably<br />
designed to enable them to continue operating, reestablish<br />
operations, or transfer their business to other<br />
members with minimal disruption to their customers,<br />
other members, and the <strong>com</strong>modity futures markets.<br />
Additionally, all downtime events must be reported.<br />
This article will focus on the key elements of creating<br />
an effective DR plan, and then provide a short case<br />
study of how a leading provider of foreign exchange<br />
trading services, Interbank FX, implemented an<br />
updated DR plan to meet their requirements.<br />
112 | january 2010 e-FOREX
Eric Burgener<br />
Market Forces Driving Change<br />
The conventional approach to DR was to periodically<br />
ship copies of backup tapes to remote locations, where<br />
they were often stored for years, to ensure data<br />
recovery in the event of catastrophic disasters which<br />
may shut down primary sites. In the world of DR,<br />
two key metrics govern recovery capabilities: recovery<br />
point objective (RPO) and recovery time objective<br />
(RTO). RPO defines the minimum acceptable level<br />
of data loss (e.g. no more than 24 hours, no more<br />
than 4 hours, etc.) per recovery event, while RTO<br />
defines the maximum acceptable time to recovery<br />
(e.g. data and/or applications restored and running<br />
within 8 hours, etc.).<br />
Remote recoveries from tape generally exhibit lax<br />
RPO and RTO. By the time tapes are stored at<br />
a remote location, the data may already be<br />
several days to a week old, and recovery can<br />
easily require several days to a week. Data is<br />
growing at unprecedented rates, and evolving<br />
business and regulatory mandates are driving<br />
ever more stringent recovery requirements.<br />
For most critical application environments,<br />
a tape-based DR approach just can’t meet<br />
these requirements, putting businesses at<br />
risk for lost revenue, poor customer service,<br />
and, in certain extreme cases, overall<br />
business viability. These market forces<br />
are driving many FX brokers to reevaluate<br />
how they plan for DR.<br />
>>><br />
Planning for Effective DR<br />
There are four critical planning steps that FX brokers<br />
must take in either setting up a DR plan for the first<br />
time or re-evaluating their pre-existing plans:<br />
Step 1: Understand business priorities<br />
While FX brokers have a number of business<br />
processes, certain ones are more critical than others.<br />
Generally, any business processes that are directly<br />
related to revenue generation or customer support are<br />
deemed critical. To focus in on areas for which a<br />
recovery plan must truly exist, it helps to: 1)<br />
understand the time-sensitivity of recovery and how it<br />
relates to business priorities; and 2) identify the<br />
impacts of failures, quantifying them in terms of<br />
dollar amounts (e.g. revenue lost per hour, etc.) where<br />
possible. Create a prioritized list that includes all<br />
major business process areas, and then map those<br />
business processes to the relevant supporting IT<br />
infrastructure. The end goal of this exercise is to have<br />
a list of applications, servers, and storage that must be<br />
available to support each business process.<br />
Step 2: Assess your recovery requirements<br />
Once major business process areas have been<br />
prioritized in terms of their criticality to the business,<br />
you will know which ones need to be focused on first.<br />
The next step is to determine the business impact of<br />
longer versus shorter recovery times for these key<br />
business processes. Recovery tiering is an approach<br />
that is often used when evaluating the recovery<br />
requirements associated with various business<br />
processes. Instead of evaluating and setting recovery<br />
requirements individually for all major business<br />
process areas, a small number of recovery tiers is<br />
defined. Each tier has a set of recovery performance<br />
metrics (e.g. RPO, RTO) that are associated with all<br />
application environments within that tier. For<br />
example, you may define three tiers: the highest tier<br />
for your most critical business processes without<br />
which you cannot run your business, a middle tier for<br />
applications that are not critical but still important,<br />
and a lower tier for all other applications.<br />
Keep in mind that it’s not just data recovery you’ll<br />
need to focus on. When you have to recover from a<br />
major outage, you’ll likely need to recover both data<br />
and applications. Many enterprises implement a DR<br />
plan for just data, assuming that servers and<br />
application environments will be manually rebuilt and<br />
recovered if they need to be. By relying on manual<br />
january 2010 e-FOREX | 113
RETAIL e-FX PROVIDER<br />
recovery processes for applications, you are putting<br />
your business at additional risk. Automated<br />
application recovery will be more reliable and perform<br />
more predictably because it will not be as dependent<br />
upon the skill of the administrators that are actually<br />
performing the recovery (your best trained<br />
administrators may not always be available when a<br />
real disaster hits).<br />
Step 3: Match the right solutions to your recovery<br />
requirements<br />
Once you’ve determined the key recovery metrics of<br />
RPO and RTO, you’ll need to consider just what type<br />
of IT infrastructure you need to meet them.<br />
Understand the recovery capabilities that various<br />
technologies deliver. Tape has low storage costs, but<br />
supports very lax RPO and RTO and requires a lot of<br />
administrative overhead during recoveries. This,<br />
however, may meet your requirements. If you need<br />
better RPO and RTO performance, you may want to<br />
consider disk. Disk has higher storage costs, but can<br />
support very stringent RPO/RTO, requires<br />
significantly less administrative overhead for<br />
recoveries, and supports access to a variety of next<br />
generation data protection technologies like<br />
continuous data protection (CDP), asynchronous<br />
replication and WAN optimization that solve a lot of<br />
other recovery problems that tape cannot. Finally,<br />
don’t just consider data recovery technologies; look for<br />
technologies that can help automate application<br />
recovery as well for your highest recovery tier<br />
application environments.<br />
114 | january 2010 e-FOREX<br />
Step 4: Test your DR plans<br />
There is a big difference between theory and reality.<br />
We’ve probably all heard the story about the bumblebee.<br />
Scientists evaluating the aerodynamics of the bumblebee,<br />
given what we know about aeronautics, would have to<br />
conclude that it could not fly. And yet it does.<br />
To be sure your DR plan will work as expected, you<br />
have to regularly test it. If you are using some form<br />
of replication to meet stringent DR requirements,<br />
these are <strong>com</strong>plex configurations that can evolve and<br />
degrade over time in unexpected ways. You want no<br />
surprises - your DR plan should work predictably.<br />
Newer technologies like server virtualization and<br />
application failover/failback can help make DR testing<br />
non-disruptive to production environments and much<br />
less expensive than it has been in the past. Regular<br />
testing also helps you fine tune and improve your<br />
recovery capabilities, evolving them over time as your<br />
own recovery requirements evolve.<br />
Illustration of a DR Plan<br />
Headquartered in Salt Lake City, Utah, IBFX is a<br />
leading provider of online foreign exchange trading<br />
services that serves over 35,000 clients across more<br />
than 140 countries. IBFX maintains two data<br />
centers, a main production center in Salt Lake City<br />
that houses all of their business-critical trade servers,<br />
and a remote data center in New York.<br />
With data growth rates skyrocketing, IBFX was<br />
looking to maintain <strong>com</strong>pliance while at the same
time improving their recovery capabilities. The main<br />
production center had a variety of heterogeneous<br />
servers and storage, and IBFX was looking for a<br />
solution that would provide the flexibility to<br />
ac<strong>com</strong>modate all of them. Of particular concern were<br />
minimizing data loss on recovery, shortening recovery<br />
times, and solution scalability.<br />
“We needed technology that would enable us to fully<br />
recover our data center in the event of a catastrophe,<br />
without any gaps,” said Paxton Powers, IT<br />
Infrastructure Manager, IBFX. “Our idea was for a<br />
<strong>com</strong>pletely virtual DR site. Real-time replication from<br />
physical to virtual machines would be the fastest way<br />
to transfer data from the Salt Lake City data center to<br />
the New York DR site.”<br />
After evaluating their requirements, IBFX came to the<br />
conclusion that tape-based infrastructure could not<br />
meet their highest recovery tier requirements, and that<br />
the business impacts of excessive downtime justified<br />
an investment in newer technology. Candidate<br />
technologies to meet IBFX’s recovery requirements<br />
included CDP, asynchronous replication, recovery<br />
automation, and disk-based recovery.<br />
InMage Systems provided a software-based recovery<br />
solution that integrated local (backup) and remote<br />
(DR) recovery capabilities into a single solution<br />
designed to support heterogeneous environments.<br />
InMage’s foundation technologies, which included<br />
CDP, asynchronous replication, application<br />
failover/failback, WAN optimization, and disk-based<br />
IBFX headquarters<br />
Taking steps to prepare for Disaster Recovery<br />
Paxton Powers<br />
“We needed technology that would enable us to<br />
fully recover our data center in the event of a<br />
catastrophe, without any gaps,”<br />
recovery, were a good fit for IBFX’s needs. CDP<br />
helped minimize the impact of data protection<br />
operations on trading servers, helping them to<br />
maintain high performance, and provided options to<br />
minimize data loss on recovery while meeting very<br />
short RTOs. Asynchronous replication, <strong>com</strong>bined<br />
with WAN optimization, allowed IBFX to maintain<br />
very current copies of their production data sets at<br />
their remote data center in New York while keeping<br />
bandwidth costs to a minimum. Application failover<br />
and failback extended the solution’s abilities beyond<br />
just recovering data, helping IBFX to automate<br />
application-level recovery operations to make them<br />
faster and more reliable.<br />
“Our main objective was to be able to recover our<br />
data center and remain operational during downtime<br />
events,” said Powers. “InMage gave us that ability.<br />
We’ve got our production trade servers being<br />
replicated between our two data centers, which is a<br />
huge win. Additionally, we can meet near-zero<br />
recovery time objectives, enabling us to <strong>com</strong>e back<br />
online very quickly after a problem. In the trading<br />
business, time literally is money and every minute of<br />
downtime counts. We have peace of mind now that<br />
we’ve minimized the risk of impacting customers or<br />
revenue due to server downtime, whether it’s a simple<br />
failure or a natural disaster.”<br />
january 2010 e-FOREX | 115
SPONSORED STATEMENT<br />
RETAIL e-FX PROVIDER<br />
360° Consulting:<br />
A leader in business development<br />
services for the Retail FX sector<br />
116 | january 2010 e-FOREX<br />
Costas Constantinides<br />
360° Consulting is a consultancy based in<br />
Limassol, Cyprus (EU), which provides a<br />
variety of consulting services to the Retail<br />
<strong>Forex</strong> / CFD /Commodity investment<br />
services sector. Costas Constantinides,<br />
Director and Chief Consultant of the firm,<br />
highlights some of the key areas where the<br />
consultancy is assisting Retail FX market<br />
participants to develop their establishments<br />
and improve their business practices.<br />
Costas, 360 degrees offers a powerful message.<br />
What is the underlying concept and history that led<br />
to the launch of this consultancy?<br />
The concept stands for servicing our clients with<br />
excellence in all specialized aspects of forex business<br />
where value is sought: Simply, 360 degrees of care<br />
and reach.<br />
The experience stemming from our team’s<br />
professional roles in the sector, led us to realize that<br />
most developing <strong>Forex</strong>/CFD firms & funds around<br />
the world had limited choice in where to seek<br />
regulatory and operational advice relevant to the<br />
nature of their business. Consequently, in a<br />
considerable number of cases, this led to<br />
inconvenience due to delays, inflated and<br />
inconsistent consulting costs, and inadequate results.<br />
360 o Consulting joined together all of the relevant<br />
expertise of each member of our team, dating back<br />
to the development of some leading <strong>Forex</strong> firms in<br />
2005. This included their global license and<br />
operational projects expertise. As a result a unique<br />
and specialized consultancy came about to offer very<br />
needed services to the forex sector. We are proud<br />
that our efforts in the forex sector have left<br />
significant achievements and have helped Cyprus to<br />
be<strong>com</strong>e an attractive forex business hub.<br />
From your experience, what type of forex broker<br />
regulation is of particular interest to the market?<br />
Regulatory and establishment issues focusing on<br />
capital requirements, operating frameworks,<br />
credibility and taxation are of particular interest to<br />
forex brokers. Since beginning of 2008, there has<br />
been strong interest in forex broker establishments<br />
in Cyprus with a CySEC (Cyprus Securities &<br />
Exchange Commission) license, alongside limited<br />
interest in other international licenses.<br />
What services does 360 o Consulting offer that a<br />
forex business can benefit from?
The different types of businesses we are involved with<br />
include: Brokerages, Market Makers, Asset Managers,<br />
and Investment Funds. It is important to structure and<br />
develop a business by taking into consideration these<br />
key factors:<br />
• market penetration<br />
• tax-structure<br />
• regulatory frameworks<br />
• service value<br />
• operational efficiency<br />
• cost<br />
In most such cases it is not necessary to reinvent the<br />
wheel, but merely to get the best design and<br />
<strong>com</strong>ponents in place to make up a robust business<br />
player. Our care and broad support gives rise to trust<br />
and satisfaction. Our clientele then usually involve us<br />
in larger areas of their business operations to save costs,<br />
time and realize higher returns.<br />
The main service categories we provide are:<br />
1. International Licenses for <strong>Forex</strong>/CFD Brokerages,<br />
Market Makers & Asset Managers:<br />
In the case of the most popular CySEC license project,<br />
we consult our clients on the applicable regulation and<br />
corresponding operations, support our clients for their<br />
required initial setup, swiftly prepare and submit the<br />
relevant application, and finally support it up to the<br />
granting of CySEC Cyprus Investment Firm license.<br />
2. Private Investment Vehicles for Fund<br />
Management:<br />
360o Consulting can assist in establishing and<br />
operating licensed private investment vehicles most<br />
suitable for fund management. Within regulated, taxefficient,<br />
and low cost structures, fund managers can<br />
attract and pool their client funds for trading.<br />
3. Ongoing Business Support<br />
Firms choose to appoint 360o Consulting in<br />
managerial and/or consulting roles so as to maintain<br />
ongoing operations in accordance with regulatory<br />
requirements and to transmit operational expertise to<br />
staff. This in turn allows for considerably less “humanresource”<br />
costs and for more focus on the development<br />
side of the business. For business ease, 360o Consulting<br />
makes available, through a consortium, all required<br />
auditing, legal and accounting services.<br />
The best kept secrets are now being<br />
unleashed with 360 o Consulting, the<br />
cornerstone for <strong>Forex</strong> License consulting<br />
and Business Strategy development<br />
4. Branding | Marketing | Sales<br />
360o Consulting offers to existing clients expertise in<br />
business development within the forex market place<br />
specifically for:<br />
• Brand consulting and/or full Brand<br />
implementation;<br />
• Consulting in Sales & Client Relationship<br />
Management processes, to improve retention<br />
performances;<br />
• Consulting in Online/Offline Marketing<br />
processes, to improve targeted parameters (i.e.<br />
cost-per-acquisition);<br />
Given your expertise and activity within the market,<br />
what do you see as currently the most important<br />
challenges facing forex businesses?<br />
The current and future business challenges stem from<br />
increasingly demanding regulatory requirements,<br />
unstable economic recovery, tight credit and liquidity,<br />
growing numbers of market participants, and in some<br />
cases lack of client trust. Hence, there arises the need<br />
to build credibility, differentiate service value and to<br />
optimize the costs & benefits of development. This<br />
need not necessarily mean a barrier to establishing<br />
and/or developing a forex business, as long as good<br />
foundations are put in place. In this respect regulation<br />
and a well-thought out business setup are a great<br />
investment.<br />
Finally and most importantly, how can interested<br />
parties get in touch with 360o Consulting to explore<br />
and realize potential?<br />
We re<strong>com</strong>mend that interested parties meet us in<br />
person to discuss their needs or they can contact us at:<br />
Email 360-consulting@cytanet.<strong>com</strong>.cy<br />
Web www.360-forex.<strong>com</strong><br />
Tel. + 357 99 48 44 40 / Tel. + 357 25 73 55 35<br />
Fax + 357 25 73 63 33<br />
january 2010 e-FOREX | 117
RETAIL e-FX PROVIDER<br />
CFH WebTrader:<br />
looking to re-define the boundaries<br />
in web-based FX trading platforms<br />
CFH Markets, which was founded in 2007,<br />
develops custom-built solutions for clients<br />
looking to operate in the retail FX market. The<br />
<strong>com</strong>pany achieves this is by working with a<br />
variety of technology vendors and liquidity<br />
providers to produce a service matching the<br />
unique objectives of the bank or broker. e-<strong>Forex</strong><br />
talks to the CEO of CFH Markets, Lars Holst,<br />
CFA, about the <strong>com</strong>pany's business model,<br />
services and WebTrader platform.<br />
Lars, brokers or banks that want to offer Retail<br />
FX trading solutions have traditionally had to<br />
either adopt a white-label platform or deploy<br />
one that <strong>com</strong>bines various differing trading<br />
technologies. How does your business model differ<br />
from these?<br />
Correct, so far new entrants have either had to whitelabel<br />
the platform of an existing player in the retail<br />
FX markets and live with all the <strong>com</strong>mercial<br />
challenges and limitations that involves or the new<br />
entrants have had to get involved in major - and upfront<br />
expensive - IT and integration projects and put<br />
together the puzzle themselves.<br />
We have essentially created a new route and we pride<br />
ourselves in providing next-generation customized<br />
white label and retail FX solutions for banks and<br />
other financial institutions.<br />
Our white label model is extremely open and we try<br />
not to put any limitations on our clients and partners.<br />
Within CFH we have assembled a unique world-class<br />
team, taking only the best of the best from the<br />
industry. We benefit from having a team with senior<br />
level understanding of all parts of the value chain that<br />
can give a 360 degree view of the industry as well as<br />
inside industry knowledge. This senior level industry<br />
118 | january 2010 e-FOREX<br />
know-how <strong>com</strong>bined with proprietary cutting edge<br />
technology and partnerships with some of the top<br />
liquidity sources in the world gives our clients<br />
<strong>com</strong>plete flexibility in how they want to work with us<br />
– from the local retail broker and fund manager who<br />
wants to access interbank liquidity and state-of-the-art<br />
trading technology to the large global provider<br />
looking for customized trading solutions and<br />
consultancy in how to structure their online business<br />
through the full value chain.<br />
Unlike many white-label FX providers, CFH Markets<br />
does not target retail clients. What advantages does<br />
this give you?<br />
We try to avoid getting into any situations where<br />
there might be conflicts of interests between us and<br />
our clients and partners. We have white label clients<br />
all over the world today and we believe there is an<br />
inherent conflict of interest between being a white<br />
label provider and targeting retail clients and we<br />
believe that this business model has a limited life time<br />
and is not viable in the long run for any serious player<br />
that wants to make an impact in the market.<br />
Along the same lines we have also decided not to run<br />
a dealing desk to avoid any conflict of interest with<br />
trades or orders. All trades go STP to our interbank<br />
market providers and we have even decided to have a<br />
limited license as matched principal broker where we<br />
simply cannot take risk on our books to assure that<br />
we can act with integrity and without conflicts of<br />
interests at all times with our clients and partners.<br />
CFH Markets has developed a margin-based trading<br />
platform called CFH WebTrader, which is already<br />
being white-labelled. How does the platform help<br />
providers differentiate themselves in the highly<br />
<strong>com</strong>petitive Retail FX market?<br />
The CFH Web Trader provides a very simple, yet<br />
efficient user interface that makes it very easy for retail<br />
clients to trade. Our white label solutions is a lot more
than the actual Web client GUI though, it consists of a<br />
number of <strong>com</strong>ponents and it is this holistic approach<br />
<strong>com</strong>bined with our superior CFH Web Trader that<br />
makes our solution truly unique.<br />
Please describe some of the<br />
advanced trading functionality<br />
that CFH WebTrader offers.<br />
CFH WebTrader<br />
I think it is difficult these days<br />
to say what is really advanced.<br />
What was considered an<br />
advanced trading functionality<br />
not long ago is standard and a<br />
minimum requirement today<br />
and our CFH Web Trader<br />
obviously supports all of this<br />
but we are careful in what we<br />
add as we believe there is a<br />
trend towards simplicity and<br />
away from more and more<br />
<strong>com</strong>plexity and so far all our white<br />
label clients have shared this point of view with us.<br />
In what ways is the platform designed to provide<br />
exceptional flexibility?<br />
The CFH Web Trader provides full flexibility for<br />
clients to configure what they want to see on the<br />
screen. The client can configure multiple workspaces<br />
and tabs as they desire. Everything is customizable on<br />
the fly from the colour of the background of your<br />
charts to the news that you want to subscribe to so<br />
every user can create his own version of the CFH<br />
Web Trader and the created version is persisted and<br />
follows the user on all PCs<br />
used. In a similar way the<br />
white labeller can configure<br />
default workspaces, colours,<br />
stream in-house content and<br />
even build trade buttons for<br />
their clients and differentiate<br />
themselves 100%.<br />
Web-based platforms<br />
sometimes sacrifice<br />
performance, including<br />
speed of execution. How<br />
<strong>com</strong>petitive is CFH<br />
WebTrader with<br />
downloadable platforms?<br />
Speed of execution is really a<br />
server side issue plus a factor of distance from the<br />
client to the server. A web based platform doesn’t<br />
really differ from downloadable platforms on these<br />
parameters so we haven’t experienced any performance<br />
issues wherever we have operated around the globe.<br />
Reconciliation viewer<br />
Product Review >>><br />
What are the usual deployment timeframes for CFH<br />
WebTrader and how are the charges and fees<br />
involved structured?<br />
We do not have an out-of-the-box solution as all our<br />
clients have different needs and requirements but if<br />
the required changes are mostly cosmetic and there is<br />
no major integration work required then we can have<br />
a solution ready within 2 weeks. On the same note we<br />
don’t have any standard charges or fees as each<br />
deployment and solution is different but our main<br />
goal is that our clients and partners can <strong>com</strong>pete with<br />
anybody in the market at all times!<br />
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RETAIL e-FX PROVIDER<br />
CFH Markets also offers CFH<br />
ProTrader. Who is this<br />
professional platform aimed<br />
at and what key features and<br />
functionality does it provide?<br />
CFH Pro is specifically<br />
designed for fund managers<br />
and professional traders. Like<br />
the CFH WebTrader it offers<br />
direct access to interbank<br />
liquidity and the average<br />
execution speed is sub 10<br />
milliseconds from multiple<br />
banks. The professional<br />
trading layout with <strong>com</strong>plete<br />
market depth and price view ensures the user easily<br />
can monitor rapid market movements.<br />
For fund managers and hedge funds we have build an<br />
automated allocation tool with <strong>com</strong>prehensive client<br />
and manager reporting so the fund managers can<br />
focus on the trading side and leave all the<br />
administration to CFH Pro. Both fund managers and<br />
clients are granted real-time access to 24 hour back<br />
office to view account and trading history.<br />
What FIX Protocol versions does CFH Markets<br />
support and how do you deliver your FIX API feed to<br />
clients?<br />
The majority of our clients connect via FIX 4.4 over<br />
public internet using SSL but we also support FIX<br />
protocol versions 4.1, 4.2 and 4.3 and we have a Java<br />
API as well and we can establish dedicated lines if this<br />
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CFH ProTrader<br />
CFH Liquidity Manager<br />
is a requirement from the<br />
client side. Through our FIX<br />
API feed we can stream<br />
quotes directly from our<br />
banks and from the clients<br />
themselves if they are price<br />
makers and our FIX API<br />
supports streaming of quotes,<br />
orders and executions.<br />
A big part of our direct<br />
liquidity distribution goes<br />
into the Metatrader<br />
environment via our MT4<br />
plugin. Through our MT4<br />
plugin we allow our clients<br />
and partners to use CFH<br />
both as a source for price feed<br />
and to hedge their exposure in the interbank market.<br />
The CFH MT4 plug-in can connect MT servers<br />
directly to CFH’s tier one liquidity providers and use<br />
CFH as a second tier prime broker.<br />
CFH Markets is a prime broker to the interbank<br />
market and offers clients direct trading access to its<br />
participants. Where do you source your liquidity?<br />
CFH provides our clients with direct access to tier<br />
one bank liquidity. We don’t use ECNs or secondary<br />
liquidity providers but we only source liquidity from<br />
the top FX banks in the world. We offer margin<br />
trading to our clients and in turn we act as a prime<br />
broker for our clients towards the banks.<br />
If you would like to learn more about our solutions<br />
and services then please visit www.cfhmarkets.<strong>com</strong> or<br />
email us at info@cfhmarkets.<strong>com</strong>
RETAIL e-FX CLIENT<br />
Social networking<br />
helping to get Retail FX traders together<br />
Heather McLean<br />
Social networking has now <strong>com</strong>e of age in the<br />
consumer market, with the likes of Facebook,<br />
Twitter, Bebo and LinkedIn all attracting record<br />
numbers of members. Heather McLean explores<br />
how this maturing technology has now given rise<br />
to increasing interest in social networking for<br />
retail FX users, with added trading tools, charts,<br />
news feeds and forums to maximise the benefits<br />
for end users.<br />
Social Networking is suddenly making its presence<br />
felt within the retail FX trading <strong>com</strong>munity<br />
because of a basic human instinct to create<br />
groups and tribes, notes Kellie Durazo, principal,<br />
professional trader and lead instructor at FX V-room<br />
(www.fxvroom.<strong>com</strong>). She <strong>com</strong>ments: “I think there’s<br />
always been a desire within forex trading for a<br />
<strong>com</strong>munity, for a place where you can learn trading<br />
techniques, share information with fellow traders and<br />
learn about what’s happening in the industry.<br />
“With social networking growing on a global scale, and<br />
with Facebook having more than 300 million users<br />
worldwide, we are also no longer handicapped by our<br />
location,” she continues. “Additionally, I think you’ll see<br />
122 | january 2010 e-FOREX<br />
it grow even further with live<br />
group trading, webinars<br />
conducted not only by<br />
experts like ourselves,<br />
but peer to peer and<br />
especially ongoing<br />
education. But just<br />
like a classroom, users<br />
will be able to discuss<br />
amongst themselves<br />
the overall experience. I<br />
think as technology gets<br />
more advanced and<br />
bandwidth gets faster, you’ll<br />
start seeing more and more<br />
social networking through video<br />
too.”<br />
Currensee CEO, Dave Lemont, agrees<br />
that the main reason for the rise for the retail FX<br />
network is that the life of a forex trader can get fairly<br />
lonely and isolated. Traders need a support system of<br />
other traders but don’t know where to find them,<br />
Lemont notes.<br />
The role of networking sites for retail FX traders is in<br />
providing them with somewhere to learn about<br />
different trading techniques, agrees Kyle Cottrell,<br />
managing director at MoneyTec, an informal,<br />
interactive networking environment where members<br />
can exchange information and resources separately or<br />
as a professional group, and debate and discuss related<br />
experiences to enhance the quality of their knowledge<br />
and services. He adds that this is so they can find the<br />
best method for them, so they can adjust to market<br />
changes rapidly, and find new strategies when former<br />
trading techniques fail to be as effective.<br />
Cottrell says: “Social networking is the way to go, and<br />
we’re adding more social networking features to our<br />
site as we move along. Retail FX traders can learn<br />
more from the social networking format, from other<br />
people’s mistakes, successes and different trading<br />
styles; this is opening doors and planting seeds in<br />
people’s minds, and allowing new ideas to get into<br />
their heads and grow.” Some FX retail networking
sites are independent,<br />
supervised by voluntary moderators<br />
and sponsored by various big names in FX, while others<br />
are run by brokers and lead members towards a specific<br />
way of trading. MoneyTec and FX V-room are both<br />
independently run FX networking websites.<br />
Branded <strong>com</strong>munities<br />
However, sponsored <strong>com</strong>munities in FX are beginning<br />
to appear, which are taking the lead from futures and<br />
equities-based sites like Motley Fool, states Hayel Abu-<br />
Hamdan, head of business development at MIG<br />
BANK. “Engaging in a <strong>com</strong>munity is a dialogue,<br />
where much of the content is not actually created by<br />
the <strong>com</strong>munity sponsor. The traditional banking<br />
model struggles with the ceding of control that<br />
successful <strong>com</strong>munities demand.<br />
“However there is no denying the growing popularity<br />
of <strong>com</strong>munities like Facebook, LinkedIn and eBay,<br />
and to stay out of <strong>com</strong>munities is arguably a riskier<br />
option than engaging with them,” continues Abu-<br />
Hamdan, who adds that a branded <strong>com</strong>munity may<br />
be the way to go for many looking at the value of a<br />
retail FX networking site, rather than an<br />
independently-run system.<br />
Kyle Cottrell<br />
“Retail FX traders can learn more from the social<br />
networking format, from other people’s mistakes,<br />
successes and different trading styles...”<br />
>>><br />
“Any branded <strong>com</strong>munity will need to be overseen by<br />
a <strong>com</strong>pany man, and their role will be to stimulate<br />
debate and monitor for negative sentiment and<br />
engage to resolve such sentiment. The value to the<br />
<strong>com</strong>pany of a successful <strong>com</strong>munity is the customer<br />
lock in that this creates because once a customer has<br />
created a network in LinkedIn, it be<strong>com</strong>es hard for<br />
them to move to Plaxo,” he concludes.<br />
Currensee’s Lemont notes: “The forums, such as<br />
<strong>Forex</strong> Factory and FX Street, provide information and<br />
education, but it’s difficult for a trader to know who<br />
to trust. Currensee provides transparency; traders can<br />
see the real trades, performance and strategies of other<br />
traders, connect with traders with similar trade<br />
strategies and learn new ideas through collaboration.<br />
Traders want to understand what makes one trader<br />
more successful than another. This learning can only<br />
be discovered through collaboration via real trades<br />
and performance data,” says Lemont.<br />
Take it to the broker<br />
Lemont says in order to join Currensee, members create<br />
an account that links directly to their brokerage<br />
account. Currensee creates a secure connection to the<br />
broker, so that trades are recorded as they happen and<br />
are shared with the member’s trading friends in real<br />
time. Members can also elect to share their performance<br />
creating reliable transparency in the <strong>com</strong>munity.<br />
Most financial social networks that exist today are in<br />
the forum or discussion board space, or outside of the<br />
january 2010 e-FOREX | 123
RETAIL e-FX CLIENT<br />
forex asset class. Lemont <strong>com</strong>ments: “We see ourselves<br />
very differently from the forums and discussion<br />
boards because of the transparency and the real time<br />
nature of our trade information. Currensee traders<br />
<strong>com</strong>e together to share real trade information with<br />
each other. It might be to share trade strategies,<br />
particular trading ideas and to ask technical questions.<br />
“We’ve found that a forex social network acts very<br />
differently when the members are talking about real<br />
trades. Our vision is to build a platform that is driven<br />
by authenticity and transparency, which means real<br />
traders collaborating on real trades in real time. You<br />
can almost think of it as Facebook meets TripAdvisor<br />
for <strong>Forex</strong> traders,” he states.<br />
Currensee’s goal is to support as many brokers as<br />
possible to give traders the option of joining their<br />
broker of choice. Today, it supports close to 100<br />
different forex brokers, including all MetaTrader4<br />
brokers, and have partnerships with many of them.<br />
Some of the brokers it supports include FXCM, Gain<br />
Capital, MBT Trading, FX Solutions, <strong>Forex</strong>.<strong>com</strong>,<br />
Alpari, FXDD, IBFX, and CMS.<br />
Its research, platform and educational partners<br />
include The Hansen Group, FX Tech Strategies, Ninja<br />
Trader, Candlecharts, NetPicks, Tradesight, Traders<br />
Laboratory, <strong>Forex</strong> Briefings, FX Instructor, Informed<br />
Trades and many more. It also has a relationship with<br />
Thomson Reuters IFR Markets, where Currensee’s<br />
traders can purchase exclusive widgets featuring their<br />
trade and market data.<br />
Educating the masses<br />
Abu-Hamdan <strong>com</strong>ments on how a branded<br />
<strong>com</strong>munity can work well: “In the FX context,<br />
education satisfies the novice broker's immediate need<br />
to learn how to get trading, so it sells itself. More<br />
subtly it places the education provider in a position of<br />
expertise which is a different relationship to the<br />
customer-salesman relationship. Most people question<br />
the motivation of a salesman but are willing to accept<br />
information from someone we see as an expert.<br />
“The trick is to tie the prospect in while they are<br />
happily learning to trade,” continues Abu-Hamdan.<br />
“For instance, engaging them in a <strong>com</strong>munity, or<br />
grabbing their email address so that you can engage<br />
them on a personal level. This interaction should be<br />
considered in the context of the long term relationship.<br />
If done well it will create strong relationships which<br />
can withstand the odd negative experience and ideally<br />
will lead to the client disseminating viral marketing<br />
materials,” states Abu-Hamdan.<br />
124 | january 2010 e-FOREX<br />
>>><br />
David Lemont<br />
“Traders want to understand what makes one trader more<br />
successful than another. This learning can only be discovered<br />
through collaboration via real trades and performance data..”<br />
On education, MoneyTec would like big brand names<br />
to openly discuss issues and subjects with its site<br />
visitors, as long as they add useful content and do not<br />
blatantly spam the <strong>com</strong>munity, yet most have not<br />
learned the proper way to harness the <strong>com</strong>munity<br />
assets to their benefit. Cottrell explains: “I’d like our<br />
site sponsors to <strong>com</strong>e into the site, be transparent<br />
about who they are and even dedicate a team to talking<br />
to people on the site, educating and helping them. But<br />
they don’t see it that way and would rather just put up<br />
banners than have a dialogue with our members.”<br />
Independent minds<br />
Some retail FX networking sites are owned by<br />
brokers, while the likes of MoneyTec and FX V-room<br />
are independent. Cottrell notes: “We have had several<br />
offers from brokers to buy us out, but it’s not the way<br />
we want to go.” On how social networks for retail FX<br />
traders have differing value propositions, Durazo<br />
<strong>com</strong>ments: “You have social networking forums<br />
created by brokerages and although you have a lot of<br />
people on them, the end goal for all these<br />
<strong>com</strong>munities is for you to open up an account with<br />
the controlling brokers. FXCM with its DailyFX, and<br />
Cureensee.<strong>com</strong>, are mostly about guiding users back<br />
to a broker.<br />
“The main point of difference about FX V-room is its<br />
all about the user. We are a neutral party that does<br />
not manipulate the user in anyway. We offer a<br />
platform for peer to peer sharing and connecting. We
RETAIL e-FX CLIENT<br />
Hayel Abu-Hamdan<br />
“There is no denying the growing popularity of <strong>com</strong>munities like<br />
Facebook, LinkedIn and eBay, and to stay out of <strong>com</strong>munities is<br />
arguably a riskier option than engaging with them,”<br />
also offer a great deal of educations and tools for our<br />
<strong>com</strong>munity members who are seeking help in their<br />
trading. This is the biggest difference with us versus<br />
and Facebook or Linkedin,” explains Durazo.<br />
She continues: “Some of the main forex tools and<br />
features these networks provide are for a worldwide<br />
<strong>com</strong>munity of FX trader's from all backgrounds and<br />
all walks of life trading this industry. FX trading is<br />
decentralised and can be done from just about<br />
anywhere these days, so in order for traders to be able<br />
to <strong>com</strong>municate with each other and exchange ideas,<br />
analysis, and tips, these <strong>com</strong>munities function to<br />
facilitate this. Of course, a well rounded, exceptional<br />
network is going to provide much more than this,<br />
including education, analysis by teams of FX experts,<br />
and a way to specifically connect with other trader's<br />
who trade similar to their own style of trading.”<br />
Big boys wel<strong>com</strong>e<br />
As well as retail traders, MoneyTec has a good<br />
number of institutional traders on board. Cottrell says<br />
that while there is a lot less of them than the armies<br />
of retail traders out there, they are getting just as<br />
much out of the networking site as the retail<br />
fraternity, making their own groups and also mixing<br />
in with the retail traders. “I believe networking is a<br />
very useful tool for any kind of trader,” Cottrell states.<br />
“Yet as forex evolves, the rest of the world is really<br />
seeing retail traders falling out of the woodwork,<br />
126 | january 2010 e-FOREX<br />
particularly in Asia and India right now. At the end of<br />
the day, you can put as much software on your site as<br />
you want, but it’s the <strong>com</strong>munity that will make it<br />
evolve.”<br />
While Durazo <strong>com</strong>ments: “Whether you are that<br />
individual trader who trades from their home<br />
<strong>com</strong>puter, or the institutional trader, trading as a<br />
group, everyone should consider joining a network.<br />
The more trading ideas and analysis shared, the better<br />
everyone's trading will be.”<br />
Future<br />
On how social networking is likely to evolve, Durazo<br />
says she believes investment opportunities will begin<br />
to open up worldwide. “There has also been a great<br />
deal of talk about a global currency,” she adds. “I<br />
think social networking is beginning to close the<br />
global gap, and with new amazing translation tools,<br />
we’re beginning to see that language is no longer a<br />
barrier. My belief is that video will begin to have a<br />
stronger presence in social networking sites.”<br />
Lemont adds: “<strong>Forex</strong> trading is a global industry and<br />
we have traders from all corners of the world and<br />
almost every country in the world. We see this trend<br />
continuing. Social networking is evolving into social<br />
trading. The internet and Web 2.0 technology provide<br />
a platform for people to share their experiences and<br />
their real trades from anywhere in the world.”<br />
Kellie Durazo<br />
“Whether you are that individual trader who trades from their<br />
home <strong>com</strong>puter, or the institutional trader, trading as a group,<br />
everyone should consider joining a network.”
BROKER STUDY<br />
Founded in the beginning of 2008, today, Broco<br />
Group has be<strong>com</strong>e an international brokerage<br />
<strong>com</strong>pany providing services in the financial markets,<br />
from <strong>Forex</strong> to stocks to futures. While working with<br />
qualified specialists, and supplying high quality<br />
modern products and services, Broco Group<br />
responds to the needs of the traders and the<br />
investors with various levels of experience, and<br />
provides them with the best environment and<br />
services for their work on the financial markets.<br />
e-<strong>Forex</strong> talks to the <strong>com</strong>pany's CEO, Valeriy Maltsev.<br />
Valeriy - Broco is actually a group of <strong>com</strong>panies<br />
integrated under a <strong>com</strong>mon brand. How is the group<br />
structured?<br />
Our main division, Broco Investments, handles the<br />
financial and investment business and is licensed to<br />
provide brokerage, dealing and investment services on<br />
the <strong>Forex</strong>, stocks and futures markets. We are now<br />
developing our business not only in Russia (where we<br />
have seventeen branches and representative offices) but<br />
also on the international level, we have an established<br />
branch in Cyprus, and partners in several countries<br />
that provide us with the support and the development<br />
128 | january 2010 e-FOREX<br />
Valeriy Maltsev<br />
The Broco Group:<br />
providing solutions created<br />
for traders by traders<br />
of an international network. Another division of the<br />
Broco Group, the Broco Invest, is very attractive for<br />
long-term investments, and it caters exclusively to the<br />
Russian financial market.<br />
What factors have contributed to the significant<br />
growth of the <strong>com</strong>pany over the past 18 months?<br />
I think that the main factor is the people. First of all<br />
our clients are very important and precious to us<br />
because they don't let us relax. Our motto is “Made by<br />
traders for traders”, and since we are traders we know<br />
which products and services would be in demand for<br />
our customers. Thus, we continuously add to our<br />
products: it's hard to believe that a year ago we were<br />
offering only two trading platforms whereas now we<br />
offer nine. Not to mention a number of additional<br />
services that have been introduced in the past few<br />
months. And I would also like to mention the<br />
members of our team, their interest in our business<br />
and their fantastic working motivation makes every<br />
day full of new stories and events.<br />
And of course we should not forget our principles in<br />
business, keep in mind that we are not magicians, we<br />
are brokers, nonetheless sometimes we provide our<br />
clients with some exclusive services such as the Broco
Trader’s Platform or the fixing of the spread before the<br />
New Year holidays. We also spend millions of dollars in<br />
developing innovative ideas that are useful for the<br />
traders; this is our job and our mission.<br />
What FX trading platforms does Broco provide and<br />
what types of trader are they designed to cater for?<br />
We offer three platforms specialised in currency trading:<br />
Meta Trader 4, which is the most popular among<br />
traders, it offers a wide range of trading instruments<br />
while keeping a low cost of entrance to the market.<br />
The Currenex platform, which provides an access to the<br />
largest ECN area in the world, providing the best<br />
quotations and the opportunity to work with sound<br />
liquid instruments by applying hi-tech solutions. The<br />
third platform, Strategy Runner, has many popular<br />
features, and more, but mainly enables traders to<br />
automate trading if they wish to do so.<br />
And in the near future, one more platform will be<br />
available for our customers, the world famous Ninja<br />
Trader, which reminds us of the light e-signal and the<br />
familiar Meta Trader 4, but it also integrates a DOM<br />
along with many useful additional features for trading.<br />
What new products and services have you recently<br />
implemented or are going to implement?<br />
In addition to the Ninja Trader platform we are going<br />
to offer to our customers the CQG platform developed<br />
by the CQG <strong>com</strong>pany in the USA. This platform is<br />
designed for futures trading. On top of that our<br />
<strong>com</strong>pany is the exclusive representative of Volfix and its<br />
innovative product the Volfix platform which gives the<br />
user unlimited possibilities of visualization and<br />
structural processing for futures, stocks, options and<br />
<strong>Forex</strong>. This platform is based on the famous Market<br />
Profile trading platform, and the traders using Volfix<br />
are able to understand the market deeply and this helps<br />
them to trade more effectively. This is a unique<br />
mechanism for forecasting the market situation, for<br />
confirming the analytic information, and for getting<br />
the optimal entry and exit points.<br />
You provide an asset management services called<br />
PAMM accounts for your customers. What is it and<br />
how does it work?<br />
We provide the facility for asset management in the<br />
form of PAMM (Percentage Allocation Management<br />
Module) account. It means that investor can choose a<br />
manager for their funds – as a rule, it is a professional<br />
trader with a great trading experience. All the<br />
remaining procedures - starting from the contracts<br />
conclusion and loss risks minimization, and ending<br />
with dividends payout, is up to the chosen manager.<br />
The Broco Group provides the managers (and therefore<br />
the investors) with an access to the world financial<br />
markets and with the ability to trade, with the support<br />
of the PAMM account, with trading platforms, advisors<br />
and a technical support of all services provided.<br />
You have also created an innovative internet<br />
broadcasting solution called BrocoPulse. What<br />
information does this provide and how popular has<br />
this exciting initiative been to users?<br />
The BrocoPulse is an internet radio which was created<br />
for learning: we create and broadcast learning programs<br />
for the traders who receive valuable resources for free,<br />
useful information, which as you know is very<br />
important and will indirectly help traders to earn profit<br />
while trading. The BrocoPulse includes the author's<br />
programs about the financial markets and their<br />
specifics, the hourly news blocks, the <strong>com</strong>plex of<br />
learning programs oriented for uses with various skills.<br />
What partnership programs does Broco offer and<br />
how can <strong>com</strong>panies register for one?<br />
More than 500 partners all over the world are working<br />
with the Broco Group, and we still wel<strong>com</strong>e more.<br />
Our partnership programs guarantees to our partners<br />
the maximum of advantages and the maximum of<br />
<strong>com</strong>missions based on their clients' trading. Besides<br />
our “Regional Agent” and “White Label” partnerships<br />
programs, there is the IB-partner that can participate<br />
in our business with a minimum effort. According to<br />
the partnership program in Broco Group the partner's<br />
profit is a part of the spread in <strong>Forex</strong> instruments and<br />
part of the <strong>com</strong>mission for every CFD and indices<br />
contract closed.<br />
What plans do you have for growing the client base<br />
of Broco and extending the <strong>com</strong>pany's geographical<br />
footprint in the future?<br />
We have ac<strong>com</strong>plished a great deal, yet we are still in<br />
the beginning of our development, and we still have a<br />
lot to do for the traders. For example, the <strong>com</strong>pany’s<br />
top-management is now working on the Quality<br />
Standards project which should make our customers'<br />
work more <strong>com</strong>fortable. As for our geographic<br />
expansion, we have a great plan in store; let’s just say<br />
that we will open new offices in many different<br />
countries. And we keep on encouraging people to<br />
participate and benefit from the potentially profitable<br />
financial markets, all the while we do all we can to<br />
facilitate their working needs and requirements.<br />
january 2010 e-FOREX | 129
RETAIL e-FX CLIENT<br />
Regional Retail FX Perpectives on<br />
Central &<br />
Eastern Europe<br />
By Larry Levy<br />
The CEE generally refers to the group of<br />
"Central and Eastern European" countries,<br />
formerly called the Eastern Bloc during the<br />
Cold War. These include Albania, Bosnia and<br />
Herzegovinia, Bulgaria, Croatia, Czech Republic,<br />
Estonia, Hungary, Latvia, Lithuania, Macedonia,<br />
Montenegro, Poland, Romania, Slovakia,<br />
Slovenia, Serbia and, though it was never in<br />
the <strong>com</strong>munist Eastern Block as such, Turkey.<br />
Recently, e<strong>Forex</strong> interviewed Karol Piovarcsy,<br />
head of the newly opened Saxo Bank branch<br />
office in Prague and Vladimir Kisyov, Head of<br />
Business Development at Deltastock in Sofia,<br />
Bulgaria about the growth prospects for Retail<br />
FX in this region.<br />
130 | january 2010 e-FOREX<br />
Local Presence<br />
Saxo Bank is clearly looking to take advantage of newly<br />
created wealth and disposable in<strong>com</strong>e in the CEE<br />
region, and it's obvious that having a local office<br />
enhances business development in that country and<br />
surrounding countries. Deltastock, with its head office in<br />
a CEE country (Bulgaria) looks naturally to business in<br />
the region and now also elsewhere, having also opened<br />
offices in Romania, Spain and the United Kingdom.<br />
Of the various CEE countries, both confirm that<br />
Poland is the biggest country in terms of customers.<br />
This is due to is relative wealth, population size and a<br />
relatively high disposable in<strong>com</strong>e. Also surprisingly<br />
highlighted was Romania as a major market, which<br />
Piovarsky mentioned as a growth area and where<br />
Deltastock has opened a branch office.<br />
Based in Prague, Piovarcsy highlights the local Czech<br />
Republic and Slovak Republic markets as customer<br />
sources (formerly Czechoslovakia). Both also<br />
mentioned the relative wealth of neighbouring<br />
Hungary as a valuable source of customers. Deltastock,<br />
based in Bulgaria is also in a good place to harness<br />
more South Eastern European countries such as<br />
Bulgaria itself as well as interest from Turkey. However,<br />
the republics of the former Yugoslavia and other<br />
countries in the CEE appear to have generated fewer
Regional Retail<br />
FX Perspectives<br />
customers. If anything the interviews highlighted just<br />
how regionally biased customers can be, and that<br />
having a regional office and language support can<br />
prove attractive to customers rather than having to<br />
deal with a team far away, despite the internet.<br />
"The relative size of CEE markets should be kept in<br />
perspective, as the size of the Polish market dwarfs the<br />
size, for example of the Russian market, though this<br />
market is mainly covered from our Copenhagen<br />
office," stresses Piovarcy. He adds: "Of the smaller<br />
countries, Bulgaria is up and <strong>com</strong>ing for us. Albania is<br />
a problem due to the unstable political situation.<br />
Croatia, Serbia and Montenegro have huge future<br />
potential however with some of those countries there<br />
are still regulatory problems as they don´t offer free<br />
transfers abroad so its difficult from those countries to<br />
actually open an account."<br />
Customer Profile<br />
"The general demographic of the retail FX trader in<br />
the CEE is male age 20-24 to 53-55. Mostly they<br />
start with around $2000, even though they can open<br />
an account for as little as $100," according to<br />
Karol Piovarcsy<br />
>>><br />
Deltastock´s Kisyov. He also states that the customer<br />
will often open a smaller account and then put more<br />
and more resource into the trading account, so that<br />
the customer account experience is a "process", with<br />
the customer learning more and more as time goes on<br />
to take advantage of opportunities offered. This<br />
contradicts with the view that customers <strong>com</strong>e in, lose<br />
some money and necessarily terminate their accounts.<br />
Individual vs Corporate<br />
Both Piovarcsy and Kisyov confirm that most<br />
transaction volume takes place as their bespoke forex<br />
operations provide a viable alternative to dealing with<br />
local banks, and that a significant part of their<br />
turnover now takes place not just from individuals,<br />
but from small to medium size businesses looking to<br />
conduct forex trading for hedging or other purposes<br />
in their local crosses or other currencies. The number<br />
of customers is still 70% retail, according to Kisyov,<br />
and the retail customer makes up more overall volume<br />
than the non-retail.<br />
In Saxo´s case, retail individuals make up only 60%<br />
of client content, and the fact that Saxo offer options<br />
january 2010 e-FOREX | 131
RETAIL e-FX CLIENT<br />
Vladimir Kisyov<br />
and forward rates makes it more attractive for<br />
corporate hedging, for example, that a brokerage<br />
offering only spot fx.<br />
"Besides Spanish, English, Russian, Bulgarian and<br />
Romanian, we do also provide language support in<br />
French, Chinese and Japanese," notes Deltastock´s<br />
Kisyov, highlighting how this CEE broker has reached<br />
beyond their region.<br />
Impact of Recession on Growth and Turnover<br />
The negative overall impact of the downturn has been<br />
countermanded by more interest in currencies due to<br />
the downturn in previously popular local equity<br />
markets. Saxo Bank increased its business in the CEE<br />
region by 212% in 2008 <strong>com</strong>pared to 2007. Growth<br />
in net customer numbers is still 30% higher in 2009<br />
for Deltastock than in previous years even though<br />
transaction volume in the second half of the year has<br />
been lower due to lack of volatility. In the face of<br />
tumbling equity prices both Kisyov and Piovarcsy have<br />
observed that forex is now seen as a relatively "safe<br />
haven", as currency movements are relatively recession<br />
proof.<br />
Saxo supports its own platforms, which include<br />
mobile web access. An automated trading platform is<br />
currently in development. Minimum account size is<br />
US$ 10,000 and Saxo offers over 145 crosses,<br />
including Russian Rouble, Polish Zloty, Slovak<br />
Koruna, Czech Koruna, Turkish Lira, Estonian<br />
Kroon, Hungarian Forint, Croatian Kuna, Latvian<br />
132 | january 2010 e-FOREX<br />
Lati and Romanian Leu. At the moment Saxo only<br />
supports the fixed spread model. Minimum size is<br />
half a mini lot ($5000) subject to a surcharge under<br />
$100,000.<br />
Deltastock supports its own platform, Delta Trading<br />
as well as the MetaTrader 4 platform. Deltastock also<br />
supports either ECN style or fixed spread models<br />
from the same platform. Minimum account size is<br />
US$ 100 and accounts can be funded by credit/debit<br />
card, wire transfer or Moneybookers. Crosses include<br />
Russian Rouble, Polish Zloty, Turkish Lira, Hungarian<br />
Forint, Bulgarian Lev, Romanian Leu and Czech<br />
Koruna. Minimum trading size is one micro lot<br />
($1000).<br />
Security of Funds<br />
It is clear that EU regulation has made it far easier to<br />
sell forex across borders, and that customers can more<br />
easily trust EU client state regulated entities. "Provided<br />
we are a MIFID regulated investment <strong>com</strong>pany, we do<br />
offer security. Clients funds are guaranteed by the<br />
investors <strong>com</strong>pensation fund so in the case of any kind<br />
of liquidly problems with Deltastock <strong>com</strong>pensation is<br />
offered for up to 90% of receivables," notes Kisyov.<br />
Deltastock is primarily regulated by The Financial<br />
Supervision Commission of Bulgaria.<br />
For Saxo the advantage and claim to a regulated bank<br />
is clear. In fact, notes Piovarcsy, all clients of the<br />
Prague office are actually technically clients of the<br />
Saxo head office in Copenhagen, and, despite initial<br />
bureaucratic hurdles, authority to transact business<br />
can be "passported" from one EU state to another<br />
such as in the case with the new Saxo Prague<br />
operation.<br />
Conclusion<br />
The CEE region is clearly growing as a highly<br />
educated population with increasing disposable<br />
in<strong>com</strong>e, high speed internet and European integration<br />
make forex a clear choice for traders wishing to<br />
speculate. However, the market is clearly still small<br />
<strong>com</strong>pared with several of the western European<br />
markets. The variety of local currencies not part of the<br />
Euro zone has also attracted a number of <strong>com</strong>panies,<br />
which means that small to medium enterprises in the<br />
CEE are increasingly using <strong>com</strong>panies like Saxo and<br />
Deltastock for their currency trading. This significant<br />
niche market looks set for continued growth,<br />
especially as more of the SE European countries<br />
deregulate and more local markets open up.
RETAIL e-FX CLIENT<br />
e-<strong>Forex</strong> talks with Mariusz Potaczala, CEO of<br />
Dom Maklerski TMS Brokers S.A. (TMS) one<br />
of the first financial advisory and brokerage<br />
institutions in Poland to specialise in currency<br />
and money market operations.<br />
Mariusz how would you describe the mission of<br />
TMS?<br />
We were the first financial advisory institution on<br />
the Polish market, specializing in brokerage<br />
operations in the currency and money markets.<br />
We have existed since 1997 although the<br />
<strong>com</strong>pany's roots go back to France. Our mission<br />
is to ensure that market participants have all that<br />
they need for action: re<strong>com</strong>mendations,<br />
information, trading tools and capital allocation<br />
strategies. Additionally, our mission is to provide<br />
knowledge by educating investors at all stages of<br />
their activities. We underpin our offerings with<br />
134 | january 2010 e-FOREX<br />
Regional Retail<br />
FX Perspectives<br />
on Central and<br />
Eastern Europe<br />
TMS Brokers:<br />
Offering a high class service coupled with proven technology<br />
Offering a high class service coupled with proven technology<br />
three high quality financial products which all<br />
utilize the latest technologies.<br />
TMS was a pioneer in providing currency risk<br />
management solutions for your domestic<br />
market. How important has technology been in<br />
helping your <strong>com</strong>pany deliver the extensive<br />
range of services it now offers?<br />
The advantages that TMS has in the<br />
Polish market are information<br />
resources and technology.<br />
Modern IT solutions,<br />
generated by our own<br />
IT team, allow us to<br />
effectively and quickly<br />
share the knowledge<br />
about the market and<br />
for ten years our clients<br />
have been able to contact<br />
us online.
Mariusz Potaczala<br />
Regional Broker Review<br />
>>><br />
However these are not our most important attributes.<br />
The people who make up the TMS team are the greatest<br />
strength of the <strong>com</strong>pany. We focus on people, as they<br />
are the way to the success of both customers and the<br />
<strong>com</strong>pany. I personally choose people for our crew and<br />
not only the knowledge they possess but personality is of<br />
a great importance. We are like a big family, where the<br />
atmosphere is building a strong morale.<br />
TMS was the first Polish FX brokerage <strong>com</strong>pany to<br />
be regulated by the Polish Securities and Exchange<br />
Commission. Do you believe being properly<br />
regulated is now a key requirement for all<br />
successful FX brokers and does it provide TMS with<br />
any <strong>com</strong>petitive advantages?<br />
We obtained a permit to conduct a brokerage business<br />
in 2004, be<strong>com</strong>ing the first licensed brokerage house<br />
for the FX market in Poland. Our business activity is<br />
in the custody of the Financial Supervision<br />
Commission (KNF), which assures the high standard<br />
of our services. By entrusting us with their money,<br />
customers can be sure that we won’t disappear from<br />
the market, because all of our activity is regulated by<br />
law, which excludes such a likelihood.<br />
Our professionalism and <strong>com</strong>pliance with the EU<br />
standards give our customers a sense of <strong>com</strong>fort and<br />
security. I believe that every broker should be monitored<br />
and regulated by law. It should not be a <strong>com</strong>petitive<br />
advantage, only the obligation of each institution<br />
involved with customers assets entrusted to them.<br />
What key financial services does TMS offer and what<br />
types of clients are you currently working with and<br />
seeking to attract?<br />
We are responding to new challenges within the global<br />
business environment and the key factors influencing<br />
our services in Poland are trends effecting most of the<br />
developed worldwide markets. The most important<br />
products and services within our offerings are:<br />
• Consulting advice on the risk management<br />
of Exchange rates<br />
• TMS Direct transaction platform<br />
• GO4X transaction platform<br />
• Financial information system<br />
Each of these products is targeted to a different<br />
audience.<br />
january 2010 e-FOREX | 135
RETAIL e-FX CLIENT<br />
GO4X was introduced quite recently. What<br />
influenced the decision to include this offering?<br />
Yes, this is our youngest child. We introduced<br />
GO4X in November 2009. GO4X is a platform<br />
for those who are starting out on their journey<br />
with <strong>Forex</strong>. After analyzing the market we<br />
decided to separate the needs of novice investors.<br />
For them, the most important thing is<br />
educational support and the intuitiveness of the<br />
tools they use with platforms like GO4X. We<br />
have planned a series of training seminars<br />
throughout Poland, which are designed to<br />
familiarize novice investors with possible strategies,<br />
general knowledge about the forex market and<br />
technical analysis.<br />
In addition, the GO4X platform provides the GO4X<br />
News Reader which allows customers to receive up to<br />
date market information from TMS Brokers analysts.<br />
Furthermore, customers may also attach selected RSS<br />
feeds by themselves, such as Bloomberg, CNN or<br />
Polish information services.<br />
GO4X is focused on knowledge and training. What<br />
about your TMS Direct platform?<br />
TMS Direct is a product for more sophisticated<br />
investors who already have knowledge and experience.<br />
This platform distinguish itself with larger quantities<br />
of financial instruments, currently there are over 10<br />
000. Besides the instruments, client receive very<br />
individual brokerage care, re<strong>com</strong>mendations, analysis<br />
and forecasts prepared by the TMS Brokers analysts.<br />
I can proudly say that our currency forecasts gain the<br />
136 | january 2010 e-FOREX<br />
highest ranking accuracy of the forecasts<br />
organized by FX Week. (In 2009, we<br />
achieved first place 7 times in the historical<br />
one month FX Week rankings and 26 times<br />
achieved first place in the historical three<br />
month rankings. We also achieved a first<br />
place in the historical twelve month FX<br />
Week rankings). These good forecasts attract<br />
major polish players which is why our<br />
volumes have increased very strongly. This<br />
fact was recognized by our major partner<br />
Saxo Bank who awarded the prize “FX<br />
Champion” for 2009 to TMS. We are<br />
proud to say that we are the biggest partner<br />
in Europe in terms of volume for this Bank and much<br />
bigger than other Polish <strong>com</strong>petitors.<br />
TMS also offers a platform called TMS WebDirect<br />
and TMS MobiDirect. How do these differ from TMS<br />
Direct and how popular is mobile trading be<strong>com</strong>ing<br />
amongst your clients?<br />
Both of these products provide an ideal supplement to<br />
the TMS Direct platform. TMS WebDirect is based<br />
on the user interface platform transactional Web site<br />
for investors and provides full and secure access to<br />
financial markets via the worldwide Internet.<br />
TMS MobiDirect allows clients to invest anytime and<br />
anywhere by using a mobile phone with an Internet<br />
connection. One login and one password is needed to<br />
be able to manage positions, use the interactive chat<br />
or monitor the condition of the account, whatever the<br />
time and place. Mobile investing is very popular<br />
among our customers. With this solution they don’t<br />
lose any opportunities to invest.
What exactly is the "Academy of Investment"<br />
and how does the TMS training system work?<br />
The training system of TMS is very large and<br />
depends on the products and targeted groups.<br />
We provide online training (webinary) as well<br />
as stationary in selected cities. Stationary<br />
training is organized under the brand GO4X<br />
and it’s designed for those who are taking the<br />
first steps into the forex market. Training is a prelude<br />
to investing and it shows how to use a platform.<br />
Coaches discuss all of the financial instruments, and<br />
various situations on the market for participants to be<br />
able to better select the appropriate order. They teach<br />
the fundamentals of Technical Analysis and what<br />
aspects are most important about charts.<br />
The Academy of TMS Direct investment is training<br />
for advanced players. The topic range here is much<br />
more <strong>com</strong>plex. The platform itself is <strong>com</strong>plicated and<br />
therefore a large part of training is devoted to using it.<br />
Both classes – Technical Analysis and Financial<br />
instruments are also taught on this advanced level.<br />
We also organize seminars for Financial Institutions.<br />
TMS offers a Data Sharing programme. How does<br />
this work?<br />
We have developed a system for the distribution of<br />
data specific to the currency market. This system<br />
allows us to provide <strong>com</strong>ments, analysis and reports<br />
for the Polish media and most of our online applets<br />
with quote rates are available on many portals in<br />
Poland. Entirety is based on barter contracts, which<br />
govern the entire legal process for data transmission.<br />
What benefits do your partners get from it?<br />
We cooperate with journalists from radio, television,<br />
newspapers and the Internet and we have our own TV<br />
studio. Providing them with knowledge, <strong>com</strong>ments<br />
and our analysis, we help them to work. We take part<br />
in radio and television programs, <strong>com</strong>menting on<br />
current market situations, and also have own blogs.<br />
One blog is from our chief analyst, the other blog is a<br />
result of the collective work of the Advisory<br />
Department. Additionally, online applets containing<br />
quote rates, every day help medium and small<br />
businesses in conducting their currency exchange<br />
activities.<br />
In what ways has the extensive experience of TMS<br />
in the Polish market helped you to attract a wider<br />
range of corporate and individual clients?<br />
Building trust in business is not a simple thing. It<br />
cannot be achieved in a single day. We are always<br />
looking for new ways to reach customers and to show<br />
them that TMS is a professional <strong>com</strong>pany with strong<br />
roots. We try to be innovative in the way we reach<br />
customers. Apart of standard media - radio, television,<br />
press and well-known Internet portals we also use<br />
<strong>com</strong>munications channels such as the social<br />
networking sites of Facebook, or Twister<br />
mikroblog and it’s Polish counterpart Blip.<br />
The Polish Financial market is new and in my<br />
industry, I can honestly say that we are a<br />
pioneer from whom the <strong>com</strong>petition is<br />
copying ideas.<br />
Looking ahead, what plans do you have for<br />
expanding the regional footprint of TMS to<br />
take advantage of new business<br />
opportunities elsewhere?<br />
We have been considering expanding TMS<br />
beyond Poland for some time. Having a<br />
strong and well enough established position<br />
in our own region gives us the freedom to<br />
look further afield. This is one of the projects<br />
on which we are working now, but I would<br />
not like to share the details of this just yet.<br />
january 2010 e-FOREX | 137
RETAIL e-FX CLIENT<br />
DeltaStock<br />
helping clients to expand their<br />
trading and investment horizons<br />
Vladimir Kisyov<br />
DeltaStock AD is a Global <strong>Forex</strong> and CFD<br />
Broker with its head office in Sofia Bulgaria,<br />
and branches in the United Kingdom, Spain<br />
and Romania. The <strong>com</strong>pany was founded in<br />
1998 and since then has been providing high<br />
quality online trading services for a wide<br />
variety of clients. Vladimir Kisyov, Head of<br />
Business Development at the firm, tells<br />
e-<strong>Forex</strong> more about the <strong>com</strong>pany’s trading<br />
platforms and plans for the future.<br />
Vladimir, Delta Trading is the firm’s in-house<br />
developed trading platform. In what<br />
particular ways does it broaden trading and<br />
investment horizons for your clients?<br />
Delta Trading is Deltastock’s core platform for online<br />
trading in over 1000 financial instruments <strong>com</strong>prising<br />
<strong>Forex</strong>, Precious Metals, CFDs on Stocks, Indices,<br />
ETFs and Commodity Futures.<br />
138 | january 2010 e-FOREX<br />
The <strong>com</strong>petitive edge of <strong>com</strong>pany’s service offering is<br />
evaluated by the extensive range of unique trading<br />
tools as well as bespoke terms and conditions to<br />
traders and investors. Delta Trading major distinct<br />
advantages <strong>com</strong>prise:<br />
1. Guaranteed fixed dealing spreads and true<br />
ECN/STP environment – both trading models<br />
available in one platform, through one trading<br />
account;<br />
Put in other words, through its online platform<br />
Deltastock provides both Dealing Desk and No<br />
Dealing Desk (ECN+STP) trading. Clients can open a<br />
position by placing a trade at the fixed dealing spread<br />
and later on close that same position by choosing to<br />
have their order executed through the ECN/STP (Level<br />
2) panel of Delta Trading. So it is the trader who<br />
decides whether and when to deal at the fixed <strong>Forex</strong><br />
spreads or/and through the ECN/STP module of Delta<br />
Trading. This process has been further streamlined for<br />
the convenience of clients. They do not have to meet<br />
any additional requirements or criteria whatsoever to<br />
freely cross-use trading at fixed spreads and dealing at<br />
ECN variable spreads as low as 0.1 pips on FX majors.<br />
It is worth noting that Deltastock’s fixed dealing<br />
spreads remain fixed at all times. Unlike other<br />
brokers, the <strong>com</strong>pany does not freeze nor does it<br />
widen its FX spreads during macroeconomic news<br />
releases. The fixed spread for EUR/USD is 2 pips<br />
2. Platform’s integration with MT4. Deltastock<br />
Meta Trader 4;<br />
Meta Trader 4 is probably the most popular Retail FX<br />
trading platform. Deltastock integrated MT4 with<br />
Delta Trading and released Deltastock Meta Trader 4.<br />
Combining the simplified and convenient for many<br />
Retail FX traders interface of MT4 with the ample<br />
functionality of Delta Trading valuable to advanced<br />
and professional traders, has predetermined the market<br />
success of the synergy between the two platforms.
Regional Broker Spotlight<br />
The orders clients place in Deltastock Meta Trader 4<br />
are executed in the <strong>com</strong>pany’s platform – Delta<br />
Trading, as market orders with no re-quotes. This is<br />
an automated process using a bridge interface to<br />
MT4, called Meta-Delta. Meta-Delta MQL script<br />
synchronizes the positions in MT4 and Delta Trading<br />
platforms. Both Meta Trader 4 and Delta Trading<br />
share the same price feed.<br />
Deltastock Meta Trader 4 enables the execution of<br />
MT4 Expert Advisors in Delta Trading.<br />
Very important from a client perspective is the<br />
difference between the Deltastock Meta Trader 4<br />
offering and that of other MT4 brokers. In<br />
Deltastock Meta Trader 4, there is no quote freezing<br />
as well as no dealer intervention. The benefits of<br />
Deltastock MT4 can be summarized in the table<br />
below:<br />
Benefits<br />
>>><br />
Regional Retail<br />
FX Perspectives<br />
on Central and<br />
Eastern Europe<br />
Deltastock Other MT4<br />
MT4 Brokers<br />
Margin on<br />
Hedge Positions<br />
NO YES<br />
Rollover fee on<br />
Hedge Positions<br />
NO YES<br />
Requoting NO YES<br />
A major difference in money terms is that when<br />
trading with Deltastock MT4, margin is withheld<br />
only on the net <strong>Forex</strong> position. Moreover a Rollover<br />
fee is applied only to the net position held overnight.<br />
3. Financial Instrument Diversification – access to<br />
multiple markets;<br />
Offering diverse asset classes for trading through<br />
<strong>com</strong>pany’s in-house developed platform, among<br />
others, has proved crucial for Deltastock’s market<br />
growth. Currently the Company offers online trading<br />
in <strong>Forex</strong>, Precious Metals and over 1000 CFDs on<br />
Shares, Indices, ETFs, Crude Oil Futures as well as<br />
other <strong>com</strong>modity futures.<br />
Among the currencies available for trading are some<br />
exotics, such as HKD, SGD, ILS, MXN, TRY, PLN,<br />
CZK, HUF, RUB, BGN, RON etc. With Delta<br />
Trading clients gain access to online CFD trading in all<br />
major US, European and Asia/Pacific Stocks, as well as<br />
Index-tracking CFDs that follow major global indices.<br />
4. API – Application Programming Interface;<br />
Deltastock offers a proprietary API <strong>com</strong>patible with<br />
Delta Trading. The API allows the integration of<br />
automated systems for online trading.<br />
5. Master Account for Money Managers;<br />
Deltastock’s Master Account (Percentage Allocation<br />
Management Module) is a front end solution<br />
designed for money managers to trade multiple sub-<br />
january 2010 e-FOREX | 139
RETAIL e-FX CLIENT<br />
accounts via one single interface. Order execution is<br />
allocated to sub-accounts by their pre-set percentage<br />
weight.<br />
6. Virtual Portfolio;<br />
Delta Trading enables structuring and configuration<br />
of virtual portfolios of customized groups of financial<br />
instruments.<br />
Any trading strategy can be back-tested in the Virtual<br />
Portfolio Module, risk-free. Moreover any virtual<br />
portfolio or part of it can be promptly converted into<br />
a Live one by placing a basket order. The convenience<br />
to monitor and analyze performance of any of the<br />
Virtual or Live Portfolios is ensured by the ROI<br />
(Return On Investment), P/L (Profit/Loss) and Index<br />
Live Charts available in the Virtual Portfolio module<br />
of Delta Trading.<br />
The number of ECN/STP<br />
<strong>Forex</strong> Brokers increased<br />
tremendously in the last year or two. In that respect,<br />
what makes you different from the others?<br />
Well, I totally agree this particular segment of the<br />
Retail e-FX sector has seen a vigorous growth recently.<br />
Deltastock offers a pure ECN/STP environment.<br />
Our Delta Trading L2 module integrates the price<br />
feeds and liquidity of a number of Liquidity providers<br />
– Banks, Market Makers, FX Brokerages.<br />
In fact, Deltastock is one of the first <strong>Forex</strong> brokers to<br />
offer a true ECN, where clients can not only see and<br />
choose a certain liquidity provider for the execution of<br />
their trades through STP (Straight Through Processing),<br />
but they are also able to track with which Liquidity<br />
Provider their order has been executed.<br />
The Delta Trading L2 module enables Client-to-Client<br />
order execution with no dealer intervention as well as<br />
trader’s direct access to the Interbank FX market by<br />
dealing with Deltastock Partners through STP.<br />
140 | january 2010 e-FOREX<br />
I should clarify that Deltastock is still a counterparty to<br />
client trades, nonetheless the <strong>com</strong>pany acts as a broker.<br />
This is the so-called Agency Execution Model – trade<br />
orders are routed to the respective Liquidity Provider or<br />
client on behalf of Deltastock. At the same time, for<br />
the purposes of ensuring full transparency of the<br />
ECN/STP trading, L2 module shows the names of the<br />
Liquidity Providers next to their live price feeds, which<br />
generate the liquidity pool and build market depth.<br />
Clients can either choose with which Liquidity<br />
provider to trade or place orders under the SMART<br />
Routing Regime – dealing at the best BID/ASK price<br />
of the market depth.<br />
The Delta Trading L2 module ensures the <strong>com</strong>petition<br />
among the FX quote feeds of the Liquidity Providers<br />
that translates into tight spreads for Deltastock Clients.<br />
Another very important advantage of L2 (ECN/STP)<br />
module is the ability for traders to open<br />
positions with one Broker, Bank or Market<br />
Maker and close them with another Liquidity<br />
Provider:<br />
• no need to open separate trading accounts<br />
• no losses from paying the spread;<br />
• no need to wire transfer funds for margin to<br />
different bank accounts<br />
• no different margin requirements<br />
• no swap for holding opposite positions<br />
Do you offer any additional services for<br />
novice or inexperienced traders?<br />
Clients less knowledgeable about FX Margin Trading<br />
as well as investors who pursue it to supplement their<br />
existing portfolio without having to learn a<br />
<strong>com</strong>pletely new market, are offered our <strong>com</strong>pany’s<br />
Managed <strong>Forex</strong> Account service. It follows the latest<br />
trends on the FX market and clients are offered a<br />
number of trading strategies to choose from. These<br />
strategies are provided by the <strong>com</strong>pany or third party<br />
experts and are automatically executed by Deltastock.<br />
Unlike other Managed <strong>Forex</strong> Service providers,<br />
Deltastock publishes only live performance data and<br />
no back-test results on its website.<br />
What are your <strong>com</strong>pany’s plans for future<br />
development?<br />
We plan to keep our business line of international<br />
market expansion by opening more branches across<br />
EU countries in the next couple of years. Our next<br />
stop is very likely to be Frankfurt, Germany, as the<br />
most probable home of the up<strong>com</strong>ing set-up of a<br />
Single European Financial Services Regulator.
RETAIL e-FX CLIENT<br />
Ivo Seizov<br />
Bulbrokers (www.bulbrokers.bg) is a nonbanking<br />
financial and investment intermediary<br />
<strong>com</strong>pany which was founded in 1996. It is a<br />
leader in providing brokerage services both for<br />
the Bulgarian and regional markets. e-<strong>Forex</strong> talks<br />
to Ivo Seizov, Executive Director running the FX<br />
and Retail trading operations of the <strong>com</strong>pany.<br />
142 | january 2010 e-FOREX<br />
Regional Retail<br />
FX Perspectives<br />
on Central and<br />
Eastern Europe<br />
Bulbrokers:<br />
meeting the needs of all types of investor<br />
Ivo, you were one of the founders of STS Finance<br />
(www.stsfinance.bg) a leading electronic<br />
brokerage firm which merged with the leading<br />
investment boutique Bulbrokers at the end of 2008.<br />
What benefits for clients have resulted from the<br />
creation of this new enlarged <strong>com</strong>pany?<br />
The process of STS Finance's merging with<br />
Bulbrokers has already been successfully concluded.<br />
Our main objective of the merger has been to offer<br />
high-quality servicing both to institutional and<br />
individual customers through high standards of<br />
coverage in all aspects of investment intermediary.<br />
Optimum synergy and optimization while retaining<br />
<strong>com</strong>plete continuity in the activities of both<br />
<strong>com</strong>panies has been attained.<br />
Bulbrokers is proving popular with increasing<br />
numbers of retail FX traders and investors. What do<br />
they particularly like about the way your <strong>com</strong>pany<br />
does business?<br />
Our business model is based on building long-term<br />
relationships with our clients, in that way we are a<br />
reliable partner. Our clients know we offer one of the
est trading platforms in the world and further more<br />
our trading conditions are <strong>com</strong>petitive not only in<br />
Bulgaria but on a regional level as well.<br />
What type of clients is Bulbrokers looking to attract<br />
with your brokerage and investment services?<br />
We have a very diversified portfolio of services<br />
designed to meet not only retail level client needs but<br />
also to attract institutional business and professional<br />
customers which have much higher requirements with<br />
Regional Broker Profile<br />
regard to execution and<br />
quote flows.<br />
>>><br />
Do you separate customers<br />
funds from those of<br />
Bulbrokers and what protection<br />
and guarantees regarding<br />
funds and accounts do you<br />
provide?<br />
Separating clients’ funds is<br />
prerequisite to establishing a<br />
successful brokerage and<br />
investment service. Bulbrokers is<br />
regulated by the Bulgarian National Bank and<br />
Financial Supervision Commission. As a licensed<br />
investment intermediary according to Bulgarian<br />
legislation we are obligated to contribute to the<br />
Investors Protection Fund. We allocate clients funds<br />
only to top rated local and international financial<br />
institutions.<br />
What forex trading systems does Bulbrokers offer?<br />
Bulbrokers offers the MetaTrader 4 platform which is<br />
january 2010 e-FOREX | 143
RETAIL e-FX CLIENT<br />
our flagship product for<br />
both OTC and<br />
exchange trading<br />
instruments. In<br />
addition, we have a<br />
trading and clearing<br />
agreement with<br />
Interactive Brokers LLC<br />
USA, which is the<br />
global leader with its<br />
Trader Workstation<br />
software. In this way we<br />
offer to our customers<br />
access to more than 80<br />
stock and derivatives<br />
exchanges worldwide<br />
via one account and<br />
multiple currency bases.<br />
How many currency pairs do you quote<br />
on and what are the key products and<br />
functionality available to customers<br />
using your MetaTrader 4 platform?<br />
Currently we trade 26 currency pairs and<br />
several hundred CFDs on stocks indexes<br />
and <strong>com</strong>modities. Over the years MT4<br />
has proved itself as one of the most<br />
successful products designed for retail<br />
customers to trade. Top level charting<br />
package, fast execution, an easily<br />
designed and customizable workspace,<br />
custom indicators, facilities for back<br />
testing of indicators and strategies and<br />
most of all MT4 is a leader of automatic<br />
trading activities with Expert Advisors.<br />
144 | january 2010 e-FOREX<br />
Do you offer Mobile FX trading<br />
services and if so what key<br />
features are available to traders?<br />
Bulbrokers was one of the first to<br />
offer mobile trading via PDAs and<br />
smart phones with the MT4 Mobile<br />
product. MT4 Mobile is easily<br />
customisable and offers most of the<br />
regular version functionality<br />
features. We are proud to point out<br />
that Bulbrokers was the first<br />
intermediary offering mobile trading<br />
at the Bulgarian Stock Exchange<br />
and soon also to be available at the<br />
Macedonia Stock Exchange.
Together with Tradency and via its<br />
services and support, you offer<br />
auto trading with the Bulbrokers<br />
System Selector trading account.<br />
What facilities are available on<br />
this account?<br />
Trading in the global marketplace<br />
especially in the Foreign Exchange<br />
markets requires tremendous<br />
efforts and time to keep up with<br />
all the fundamental and technical<br />
developments. In addition,<br />
sufficient level of expertise is<br />
required in order to develop<br />
winning trading strategies.<br />
Bulbrokers System Selector is a<br />
tool designed to save time. Various systems are offered<br />
to individual clients which are implemented and<br />
supported by Tradency experts and partners.<br />
Do you expect to see increased interest from clients<br />
in automated trade execution?<br />
Moving towards automated signal generators and even<br />
automated trading is now a proven trend in the FX<br />
market. Clients slowly accept some or most of the<br />
advantages provided by automated systems. Looking<br />
forward we expect significant volume migration to<br />
this type of trading activity.<br />
Your Trader Workstation system offers direct market<br />
access to stocks, options, futures, bonds and funds<br />
to over 80 market destinations worldwide. What FX<br />
trading tools are available on this system?<br />
TWS offers access to Electronic Crossing Network<br />
and interbank volume and quotes flow through our<br />
FX Traders module. This feature is designed to meet<br />
requirements of medium and high level investors who<br />
require fast execution, unlimited liquidity and tight<br />
spreads, but on the other hand are also willing to<br />
sacrifice some of the advantages of retail platforms<br />
like fixed spreads, high leverage and order execution.<br />
What solutions does Bulbrokers provide for<br />
investment professionals needing to manage<br />
multiple accounts?<br />
What we offer is software, which is part of<br />
MetaTrader 4, called MetaTrader 4 Multiterminal. It<br />
allows working with any amounts of accounts,<br />
receiving quotes for any symbols, placing all types of<br />
orders, and viewing history for all accounts.<br />
Bulbrokers: meeting the needs of all types of investor<br />
Moreover, within this application financial news can<br />
be delivered in real-time mode. This terminal<br />
successfully <strong>com</strong>bines great functionalities that allow<br />
effective trading with many accounts and with<br />
exceptional usability. The program interface is similar<br />
to that of the MetaTrader 4 client terminal. It is very<br />
simple, any trader using the MetaTrader 4 can easily<br />
get acquainted with this new program within a few<br />
minutes.<br />
Over the <strong>com</strong>ing year, where will Bulbrokers be<br />
looking to add to the already extensive range of<br />
electronic FX trading tools you offer to your FX<br />
clients?<br />
We are on course to add more exchange trading<br />
instruments primary from regional stocks exchanges<br />
which is a part of our strategy to diversify trading<br />
activities beyond the Bulgarian market.<br />
Bulbrokers has over 25,000 customers. In what<br />
ways are you looking to grow the business and<br />
expand your regional and international presence?<br />
We are currently entering the Macedonian market via<br />
Eurobroker which a leading local investment<br />
intermediary and a member of the big family of<br />
Financia Group which Bulbrokers is also part of. We<br />
are going to expand our regional presence by offering<br />
the first trading platform in the Macedonian market.<br />
We are working on creating a wide range of<br />
introducing brokers, white label partners and sales<br />
agents in the region. We are also opening a branch in<br />
Romania. For Bulgarian investors we will provide<br />
regional cross border online trading via Meta Trader<br />
at low <strong>com</strong>missions levels and faster execution speeds.<br />
january 2010 e-FOREX | 145
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146 | january 2010 e-FOREX<br />
Service, innovation and security are the three<br />
key areas for winning the hearts and minds of<br />
retail traders. But what do these smaller traders<br />
really want from their platform providers?<br />
Heather McLean sets out to explore what leading<br />
brokers are doing to improve the FX trading<br />
experience for the armies of retail traders<br />
spilling out of the woodwork across the globe.
What retail traders want<br />
The key features and functionality that retail traders<br />
are looking for from FX trading platform providers<br />
are, according to Interbank FX vice president of<br />
customer experience, Marilyn McDonald: broker<br />
integrity; execution; and spreads. This is the trifecta of<br />
must haves, she claims, adding: “One without the<br />
others is ok, but the retail trader should look for a<br />
<strong>com</strong>pany that provides all three. For instance, a<br />
broker can supply the lowest spreads. However,<br />
without good execution then spreads don’t really<br />
mean much. Slippage could eat up more than the<br />
trader would have ‘paid’ to enter the trade with a<br />
broker that had slightly higher spreads.”<br />
First and foremost, retail clients want consistency, says<br />
Greg Michalowski, FXDD’s vice president and chief<br />
currency analyst. He states that if spreads remain<br />
consistent, and if the executions are consistent, the<br />
client is happy. Additionally, if support is<br />
knowledgeable and reliable, and if the trading<br />
platform allows the client to act freely, the client<br />
remains content.<br />
Michalowski adds: “I believe the mobile experience<br />
has the potential to be the next major advancement in<br />
Retail FX. There are still connectivity issues that<br />
continue to hold the advancement back, but with<br />
improved wireless infrastructure, the potential for<br />
growth is definitely there.”<br />
Yet most retail traders are looking for simplicity and<br />
immediate understanding of the platform itself, says<br />
Mario Persichino, head trader at leading Italian broker<br />
Cfx Intermediazioni, so they can understand how to<br />
place an order without any help. “Programming<br />
courses offered by brokers are a very helpful<br />
>>><br />
Service, innovation<br />
and security:<br />
taking key steps to improve the<br />
Retail FX trading experience<br />
instrument of learning for end users. At the same time,<br />
clients are looking for all of the information they need<br />
about economics news and about the forex market.<br />
But the most important thing required by users is a<br />
very liquid market; they need to see all prices in real<br />
time and want their orders executed fast,” he notes.<br />
Be <strong>com</strong>petitive or lose out<br />
Retail FX brokers are ramping up their platforms and<br />
technology infrastructures to take their service<br />
provision to the next level, by expanding functionality<br />
beyond the realm of what off the shelf platforms<br />
deliver, according to Hayel Abu-Hamdan, head of<br />
business development at MIG BANK. He says in a<br />
world of vanilla offerings, platform differentiation is<br />
key. This includes improvements in the desktop<br />
feature set as well as truly usable mobile connectivity<br />
on smart phones. MIG BANK is working on a new<br />
proprietary platform that it expects to launch shortly.<br />
Also, Abu-Hamdan points to new functionality of<br />
solid API offerings as another area being ramped up<br />
by retail FX brokers. “As retail customers are<br />
be<strong>com</strong>ing more sophisticated, certain client segments<br />
are branching out and writing their black boxes to<br />
automate their dealing strategies. Having a solid, easy<br />
to integrate API is a must have offering to address this<br />
growing demand,” he notes. “Value added post trade<br />
services for enhanced reporting and analysis tools for<br />
post trade strategy and trade performance evaluation<br />
could draw client interest as well.”<br />
Retail FX brokers are definitely raising their games,<br />
claims McDonald. She says Interbank FX is very<br />
concerned with server up time, for the speed of<br />
execution. “Milliseconds count, no matter where the<br />
january 2010 e-FOREX | 147
RETAIL e-FX CLIENT<br />
Marilyn Mcdonald<br />
“broker integrity, execution and spreads is the<br />
trifecta of must haves..”<br />
customer is in the world. The tolerance for server<br />
outages or platforms that lack basic functionality has<br />
dropped. The customers are demanding higher and<br />
higher levels of service and infrastructure from the<br />
brokers.”<br />
On the key features and functionality that retail<br />
traders need from FX trading platform providers,<br />
Patrick Meier, vice president at Dukascopy, notes: “It’s<br />
all about choices. Clients sometimes would like to be<br />
able to trade with a platform of their choice, which<br />
may differ from the platforms the broker offers; in the<br />
future brokers will need to be more flexible. With<br />
automation being in the midst of a tremendous<br />
growth phase, brokers need to provide an API in<br />
order for the client to connect external black boxes<br />
and robots to the feed of the broker. Many brokers<br />
still don’t provide clients with the API’s needed in<br />
order to connect such trading programs.<br />
Programming functions could be available directly<br />
inside the platforms in the future, removing the need<br />
for external programs altogether.”<br />
He adds: “FX is all about liquidity and it will be<strong>com</strong>e<br />
increasingly difficult for brokers to only quote prices<br />
without showing the liquidity as well; showing the<br />
market depth will be<strong>com</strong>e indispensable. Imagine an<br />
equities broker offering trading on the Nasdaq Market<br />
without providing Level 2 quotation; they almost<br />
certainly wouldn’t have many clients. “Brokers are<br />
moving towards instalment and development of<br />
148 | january 2010 e-FOREX<br />
>>><br />
proprietary infrastructures. Rented and third party<br />
platform licensees are struggling to keep clients if they<br />
cannot solve technical challenges in-house,” concludes<br />
Meier.<br />
Improve the experience<br />
Abu-Hamdan says the most important steps that can<br />
be taken by online brokers to improve the overall<br />
trading experience for retail FX clients is perfecting<br />
platform stability and fault tolerance, which he adds is<br />
an obvious point, but critical nonetheless. “Nothing is<br />
more frustrating to the client than to experience a<br />
service interruption while they are in the midst of<br />
trading. At MIG BANK, we are building out our<br />
infrastructure to be truly redundant and fault tolerant<br />
with the ability to cope with minor service<br />
interruptions and disaster scenarios alike,” he explains.<br />
“The FX market is such a congested, <strong>com</strong>petitive<br />
market place. Spreads and account offerings are<br />
practically the same at all houses. It is the trading<br />
experience that is the critical success factor. Retail<br />
customers will not tolerate the interruptions caused to<br />
their trading from platform instability. The closer one<br />
can get to a streamlined account opening process and<br />
a stable fault free platform the more likely one is to<br />
gain the trust of the retail client and an increased<br />
market share,” Abu-Hamdan continues.<br />
Michalowski believes that the market has made great<br />
strides in providing interbank forex price transparency<br />
to various groups of people. As a result, market makers<br />
Greg Michalowski<br />
“I believe the mobile experience has the potential to be the<br />
next major advancement in Retail FX…”
RETAIL e-FX CLIENT<br />
in the retail forex world need to be <strong>com</strong>petitive or lose<br />
traders to the next forex dealer.<br />
However, the one aspect of trading that retail traders<br />
will never have is access to the interbank flows that can<br />
affect intraday movements, Michalowski adds. He says<br />
this is the advantage that the bank trader will always<br />
have, and deserves, by virtue of the customers they<br />
cater to on a daily basis for real currency transactions.<br />
“If there is an M & A flow into the Canadian dollar or<br />
British Pound, bank traders will be the first to know.<br />
Additionally, if a central bank is buying the EURUSD,<br />
or if there is a big repatriation of funds back to the US<br />
from a multi-national, the bank traders will also be the<br />
first to know,” states Michalowski.<br />
He continues: “However, all is not lost for the retail<br />
trader because he can still rely on the technical price<br />
action to tell customers what they don’t know. If the<br />
price moves above a shorter term moving average, retail<br />
traders don’t necessarily need to ask why; they just need<br />
their platform to give them a clue from the chart.”<br />
While Meier states: “Today small clients are often at a<br />
disadvantage. It is not unusual that retail clients trade<br />
with a price feed that is not always optimal, and can<br />
sometimes vary substantially from client to client.<br />
There is a need for more transparency and more<br />
uniform pricing. All traders should be able to trade<br />
on the best possible price, no matter what their<br />
trading style. As long as there is no ‘time and sales’<br />
available, as is the case with exchange traded products,<br />
clients will continue to depend on the level of<br />
transparency their broker provides in this respect.<br />
“The industry will need to provide their clients with<br />
more choices in general,” continues Meier. “These<br />
choices should not be limited to just providing a<br />
selection of different platforms, but should also provide<br />
added options in regards to account funding. Today for<br />
example, the client still has too limited choices<br />
regarding posting of collateral to their account. Few<br />
brokers accept bank guarantees or provide solutions for<br />
segregation or the use of external bank deposits.<br />
Increasing demand from retail investors for broker<br />
innovation and transparency can no longer be ignored.”<br />
Flexible to fit all<br />
McDonald states: “I think we, as brokers, are entering<br />
a new age of enabling traders. Retail traders don’t<br />
really want to be told Buy or Sell. They want to<br />
understand the market and make their own educated<br />
decisions. Retail traders have a thirst for knowledge<br />
and don’t always want to be led like sheep. I think<br />
150 | january 2010 e-FOREX<br />
Mario Persichino<br />
“the most important thing required by users is a<br />
very liquid market; they need to see all prices in real<br />
time and want their orders executed fast,”<br />
that the brokers that respect that and offer their<br />
customers the tools they need to make their own<br />
decisions will ultimate have better and happier<br />
traders.”<br />
In terms of flexible accounts, Interbank FX offers<br />
Standard accounts (where one lot = a $100,000<br />
contract) and Mini Accounts (where one lot = a<br />
$10,000 contract). However, traders can opt to trade<br />
0.01 of a contract. On a mini account this equates to<br />
a $100 notional value trade. McDonald <strong>com</strong>ments:<br />
“Our customers can also be set at our standard<br />
leverage (100:1) or choose a different level by<br />
requesting this at the account opening stage. We have<br />
traders at 20:1, 50:1 or a number of other different<br />
leverage levels. By allowing traders to choose a<br />
leverage level and then give them options on the trade<br />
size, our traders are able to really fine tune their<br />
trading strategy to suit their risk tolerance,” she adds.<br />
On flexible accounts, Michalowski states: “Our first<br />
tier is for new traders. This is our Mini Account. The<br />
contract size is 10,000 of the base currency. The value<br />
of a pip is $1 on a standard lot for the EURUSD. It is<br />
a great way for new traders to hone their skills<br />
without trading a demo, which, for some, does not<br />
give them enough incentive to trade seriously.<br />
“The next tier is our Standard Account which is for<br />
traders who opt for a contract size of 100,000 of the<br />
base currency which corresponds to $10 a pip on the<br />
EURUSD. In addition to the existing account types,
Service, innovation and security: taking key steps to improve the Retail FX trading experience<br />
we also have different platforms with different<br />
benefits and costs,” he notes.<br />
According to Michalowski, the main trading platform<br />
for retail traders is MetaTrader 4. “This platform is our<br />
most popular platform because it is stable, has excellent<br />
charting capabilities and a programmable scripting<br />
language. An alternative to MetaTrader 4 is the<br />
MTXtreme platform. This option has all the benefits of<br />
the Metatrader 4 platform, with the benefit of access to<br />
the best bid/ask price from the pool of FXDD<br />
interbank liquidity providers. The minimum account<br />
size is $10,000 for this particular account, as well as a<br />
small <strong>com</strong>mission. The spreads on pairs is often more<br />
narrow.” However, Michalowski believes that they can<br />
have a tendency of fluctuating and being wider at times.<br />
While Persichino states: “There are many types of<br />
account offered to all kind of trader; from accounts<br />
with little cash required to enter that use a great<br />
leverage, to accounts with little leverage that require a<br />
larger amount of money to start. For example, Cfx<br />
Intermediazioni offers a retail account that uses a<br />
leverage of 500 and requires just €200 to start. This<br />
particular kind of account is similar to a demo<br />
account and offers to every kind of user the possibility<br />
to try the market with a minimum amount.<br />
Traditional accounts let users have a maximum<br />
leverage of 200, but require at least €1000 to start.”<br />
Hayel Abu-Hamdan<br />
“The FX market is such a congested, <strong>com</strong>petitive<br />
market place. Spreads and account offerings are<br />
practically the same at all houses. It is the trading<br />
experience that is the critical success factor.”<br />
>>><br />
On flexible account<br />
types, Meier <strong>com</strong>ments<br />
that it is possible even for the<br />
small or novice investor to trade<br />
on interbank liquidity through an<br />
electronic network (ECN). He says<br />
this will provide a more level, uniform<br />
playing field for all. “It will also serve to<br />
reduce many <strong>com</strong>mon problems the small<br />
investor sometimes has to deal with,” Meier<br />
adds. “Order stipulation possibilities have<br />
be<strong>com</strong>e broader, and are offering more<br />
choices to the trader. It’s possible to set<br />
multiple various dormant open orders in order<br />
to enter and exit the markets under various<br />
conditions. The largest ECN’s that provide the<br />
possibility to absorb hundreds of millions per ticket<br />
with low latency, and find ways to allow the smaller<br />
trader also to benefit from their network, might<br />
benefit from a general trend toward ECN trading.”<br />
With the ascent in popularity of automated trading,<br />
which is predominantly based on technical parameters,<br />
the provision of quality historical data is be<strong>com</strong>ing<br />
more important than ever, claims Meier. Such data is<br />
often not <strong>com</strong>plete and mediocre, however, he warns.<br />
“Some brokers offer tick-by-tick data for free to<br />
anyone interested. Without <strong>com</strong>plete data it is not<br />
possible to back test efficiently nor to develop strategy<br />
which can be used under real market conditions.”<br />
Differentiate or die<br />
Brokers looking to differentiate their offerings and<br />
strengthen their value proposition must focus on the<br />
idea that everything has to fit, claims Meier. Brokers<br />
who provide a good price feed but lack in liquidity<br />
will be surpassed by the ones who provide both, he<br />
says. A front end platform which is designed well and<br />
is practical, but is not connected to an ECN, will be<br />
limited, he adds. “The customer has be<strong>com</strong>e much<br />
more informed and demanding over the years. Today<br />
it’s a much more crowded space than, let’s say three to<br />
four years ago. Brokers must provide good trading<br />
technology, much more liquidity, more transparency,<br />
and again more client focused solutions in general.”<br />
The retail FX industry is starting to mature, states<br />
McDonald. “In my mind, this means that there is a<br />
tier of brokers at the top. These brokers all offer<br />
basically the same products at the same ‘price’. When<br />
an industry reaches this point in its lifecycle the<br />
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RETAIL e-FX CLIENT<br />
Patrick Meier<br />
“FX is all about liquidity and it will be<strong>com</strong>e<br />
increasingly difficult for brokers to only quote prices<br />
without showing the liquidity as well; showing the<br />
market depth will be<strong>com</strong>e indispensable.”<br />
differentiators be<strong>com</strong>e harder for the broker but<br />
much more meaningful for the customer. I am talking<br />
about brokers creating long term strategies for<br />
bringing the customer the best possible experience.<br />
“This isn’t just customer service, I am talking about<br />
every interaction that a person has with the <strong>com</strong>pany,<br />
including defining the <strong>com</strong>pany’s products and<br />
services around customer requirements. This concept<br />
isn’t original to FX trading, it crosses all industries.<br />
Customers want to have a good experience with a<br />
<strong>com</strong>pany. I think that this desire will drive the next<br />
rounds of evolution in this industry,” she continues.<br />
In this highly <strong>com</strong>petitive market, Michalowski agrees<br />
that brokers can differentiate their offerings and<br />
strengthen their value proposition by initially looking<br />
at service. “If you are not customer focused, you have<br />
nothing to offer,” he notes. “If you have a support<br />
team that is readily accessible, and is able to answer<br />
questions that <strong>com</strong>e with opening<br />
an account, you will attract a<br />
solid customer.<br />
152 | january 2010 e-FOREX<br />
“Additionally, if you provide<br />
<strong>com</strong>petitive bid/ask spreads, and<br />
are as consistent as possible with<br />
the spreads, you will retain those customers. The bell<br />
curve of trading knowledge for retail traders is wide,<br />
so you must be able to connect and educate both the<br />
novice and the more advanced trader,” he continues.<br />
There are several approaches to strengthening brokers’<br />
value propositions, Abu-Hamdan says. He notes some<br />
focus on driving down cost, while others are offering<br />
value added services. On operational efficiency, he says:<br />
“The first option is to not differentiate the offering at<br />
all, but to focus on the lowest prices possible with<br />
operational efficiency. This is not necessarily an easy or<br />
cheap thing to achieve as it places emphasis on highly<br />
automated processes and large numbers of low margin<br />
trades. Some brokers have adopted this approach,<br />
offering accounts from $200.<br />
“Of those who are differentiating, some are choosing<br />
to place their offering as an aspirational brand; the<br />
Gucci approach. Rather like a concierge service that<br />
promises to get you tables at exclusive events. Others<br />
are attempting to demystify FX by presenting very<br />
simple trade platforms. The approach owes a lot to<br />
the online poker sites that have exploded in the last<br />
five years,” continues Abu-Hamdan.<br />
Persichino says: “Brokers are trying to cover all kind<br />
of clients, with different types of account, so that a<br />
more diverse group of users can approach the FX<br />
market. They can differentiate accounts by changing<br />
the leverage or the amount of money required to<br />
enter, or by letting the user decide what kind of<br />
parameters they want,” he continues.<br />
Benchmark winners<br />
Regarding the concept of benchmarking, Michalowski<br />
adds: “We are all benchmarked now. There are<br />
winners and losers in every business segment. The<br />
acceptance only <strong>com</strong>es from hard work, smart<br />
decisions, and, at a minimum, hitting the benchmarks<br />
prevalent in the market. New benchmarks will evolve<br />
as mobile technology evolves, and manners in which<br />
we educate customers will progress. Social media<br />
avenues seem to be a direction that headline<br />
knowledge can be distributed through in an effort to<br />
attract a new audience,” Michalowski concludes.<br />
While Meier states that brokers likely to be<br />
benchmarked in the future on: available liquidity;<br />
quality of execution; choices on front end options;<br />
platform functionality; support efficiency (how inquiries<br />
handled and resolved); added free trading resources; and<br />
last but not least, level of transparency. “The brokers<br />
that will rank highly in all categories might have a very<br />
promising future indeed,” he sums up.
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Ltd. about how the <strong>com</strong>pany is deploying<br />
technology and achieving its vision of<br />
providing the best forex products and<br />
services for its clients.<br />
Fienex DMCC, a 100% subsidiary of Fienex Group is<br />
currently regulated in Dubai. How stringent are the<br />
regulatory requirements for online brokers in<br />
Dubai?<br />
Brokerage services fall under the broad category of<br />
“Financial Services”. UAE central bank through<br />
Securities and Commodities Authority of UAE<br />
(SCA) regulates the brokerage services within the<br />
boundaries of UAE. ESCA, a member of the<br />
International Organization of Securities<br />
Commissions (IOSCO) ensures that members<br />
maintain strict adherence to SCA approved DGCX<br />
By-Laws. Furthermore, brokers are required to<br />
conduct their business with clients in accordance<br />
with the international 'best' code of practice and<br />
standards observed on other major exchanges around<br />
the world.<br />
FXCBS has chosen to be<strong>com</strong>e MIFID <strong>com</strong>pliant.<br />
What implications does this have for you<br />
operationally?<br />
154 | january 2010 e-FOREX<br />
We are gladly willing to <strong>com</strong>ply with MIFID<br />
regulations as we believe that they ensure the best<br />
code of practice for <strong>Forex</strong> Brokers. This step goes<br />
hand in hand with our efforts to raise the sense of<br />
security for our clients and to apply the highest<br />
standards of operations. Be<strong>com</strong>ing a MIFID<br />
<strong>com</strong>pliant broker will open the doors wider to a<br />
global presence for FXCBS.<br />
In what ways does the culture you have created<br />
within FXCBS benefit your clients and help you<br />
cultivate your business?<br />
Our business model was meant to eliminate any<br />
conflict of interest and to reach the perfect win/win<br />
situation for our clients as traders and for us as a<br />
broker. Our clients are always encouraged to apply<br />
any trading style of their preference with no<br />
restrictions. We always wel<strong>com</strong>e winners, and at the<br />
same time we benefit from the volume generated by<br />
our clients' trading activities.<br />
Unlike traditional spread-trading platforms, FXCBS<br />
operates an ECN (Electronic Communication<br />
Network). How does your ECN forex trading model<br />
work?<br />
The ECN model of FXCBS gives the <strong>Forex</strong> traders<br />
direct access to the inter-bank market where they<br />
can benefit from the best prices and execution<br />
available in the market. This process has two sides;<br />
1. Pricing: as our aggregation engine retrieves live<br />
prices from multi inter-bank liquidity providers
FXCBS Aggregation system and Bridge: A unique innovation<br />
>>><br />
and aggregates these prices by selecting the best<br />
Bid and the best Ask at every quote resulting in<br />
the lowest Spread, and then it posts the selected<br />
prices to the client terminal of MetaTrader4.<br />
2. Execution: traders carry on their trading activities<br />
on the most popular trading platform<br />
MetaTrader4, where every single trade gets<br />
executed at one of our inter-bank liquidity<br />
providers.<br />
What advantages does ECN style trading have for<br />
Retail FX traders and investors?<br />
First of all, anonymity; which no other style can<br />
provide, due to the fact that ECN trading gives the<br />
trader access to MULTI inter-bank liquidity<br />
providers, and 90% of the time the trades are<br />
opened at one counterparty and closed at another.<br />
As a result, ECN style gives traders the freedom to<br />
apply any trading method with no restrictions unlike<br />
Market Maker style which has been denominating<br />
the FX retail market for long time and where the<br />
Market Maker is the only counterparty that takes the<br />
other side of each trade resulting in a big conflict of<br />
interest between the broker and traders. Low spread<br />
is one of the main advantages of our ECN style.<br />
Since we aggregate multi inter-bank prices, the<br />
spreads reach 0 pip level often.<br />
january 2010 e-FOREX | 155
RETAIL e-FX CLIENT<br />
How do you fulfil smaller orders via your ECN<br />
system given that many banks demand a half lot size<br />
minimum?<br />
Banks have the ability to execute smaller trades of 0.1 lot,<br />
but they usually demand high trade size because they as<br />
well benefit from the trading volume. Therefore, we have<br />
reached an agreement with our liquidity providers to pass<br />
smaller trades through their trading systems as we<br />
generate high volume of total trading activities.<br />
FXCBS offers two state-of-theart<br />
trading platforms: Central<br />
Station and the MetaTrader4<br />
platform. What key functionality<br />
do these provide and who are<br />
they designed for?<br />
Central Station is specially<br />
developed to work in ECN<br />
environment; it contains the<br />
Aggregation Engine for pricing<br />
and the STP technology for<br />
execution and it is a FIX Protocol<br />
<strong>com</strong>pliant platform. FIX<br />
(Financial Information Exchange)<br />
is the protocol recognized by<br />
banks and exchanges to pass prices<br />
and trades between different<br />
terminals. We provide this platform for our institutional<br />
clients upon request.<br />
MetaTrader 4 has the most popular client terminal for<br />
FX traders, although it was not designed to work in<br />
ECN environment. But for the first time with 100%<br />
success rate, we created the needed connection between<br />
MetaTrader4 and Central Station to make ECN<br />
functionalities available for FX traders through<br />
MetaTrader 4.<br />
156 | january 2010 e-FOREX<br />
What Mobile FX trading platforms does FXCBS provide<br />
and what important features are available on them?<br />
FXCBS provides MetaTrader4 Mobile platform which<br />
gives the traders full access to financial markets and<br />
making deals from anywhere of the world. Moreover,<br />
technical analysis and graphical visualization of<br />
financial instruments are available (including off-line<br />
mode - without connecting to server). Trade dealing is<br />
done with careful observation of confidentiality and is<br />
absolutely safe. If required, you always have the history<br />
of <strong>com</strong>pleted trade deals.<br />
What facilities and software<br />
solutions do you offer for Money<br />
Managers?<br />
FXCBS offers Money Managers<br />
special rebates according to the<br />
traded volume they achieve. We<br />
also provide Money Managers<br />
with PAMM & MAM trade<br />
allocation software so they trade<br />
on behalf of their clients using<br />
one client terminal. Furthermore,<br />
our Finance department provides<br />
assistance in profit allocation for<br />
Money Managers.<br />
You have a minimum account size<br />
of $3000, which is relatively high in the retail space<br />
today? Why have you set this relatively high?<br />
As stated earlier, we wel<strong>com</strong>e winners, and we would<br />
gladly do anything to help our clients achieve higher<br />
profitability levels. We set the minimum deposit to its<br />
current level due to the fact that lower deposit<br />
amounts would expose the trading account to higher<br />
risk of liquidation, which some traders may overlook<br />
and find themselves losing the entire deposit and<br />
losing the chance of a recovery.
What services and solutions does FXCBS offer to<br />
Institutional Clients?<br />
We offer a wide range of services for institutional<br />
clients including White Label and IB partnership. We<br />
also offer coverage solutions for operating Market<br />
Makers that are looking for risk-free coverage solutions<br />
to handle some or all trading activities of their clients<br />
including Scalping and Expert Advisor trading.<br />
FXCBS also provides a range of easy to use "robot"<br />
trading systems called FXCBS Autotrader. Systems are<br />
provided via Tradency and the remuneration is<br />
<strong>com</strong>mission based. How successful and popular has<br />
this facility been and do you expect to see continued<br />
growth in the use of robotic trading?<br />
Our clients have shown interest in FXCBS AutoTrader<br />
platform with high level of satisfaction. We believe that<br />
automated trading is an expanding segment in the FX<br />
Market for two reasons; it eliminates the emotional<br />
factor of trading, and because most of the FX Traders<br />
are not full-time traders so they tend to employ an<br />
Automated Trading software.<br />
Does FXCBS offer White Label partnerships and if so,<br />
what services do you provide and what fees are<br />
involved?<br />
FXCBS - Placing the needs of clients first<br />
Yes, we offer White<br />
Label partnership for<br />
start-up and<br />
operating brokers<br />
where they can give<br />
their clients the<br />
opportunity to trade<br />
on our ECN and<br />
benefit from all its<br />
features. Our White<br />
Label partners are<br />
provided a 24/5<br />
support by our<br />
institutional desk. So<br />
they can mainly focus<br />
on the branding and<br />
sales activities.<br />
Looking ahead,<br />
would you consider<br />
moving to the new<br />
MetaTrader 5<br />
platform?<br />
We are always open to<br />
new technologies and<br />
we will consider<br />
offering MetaTrader 5<br />
side by side with MetaTrader 4 once we have tested and<br />
evaluated the functionalities and the market demand of<br />
MetaTrader 5.<br />
Over the <strong>com</strong>ing year where will FXCBS be focusing<br />
efforts to enhance your existing suite of online FX<br />
trading products and services?<br />
We believe that the <strong>Forex</strong> Market is still being<br />
developed and we would like to play a major role in<br />
improving this market. Everyday we take the feedback<br />
of the day before, we analyse it, and adjust our actions<br />
according to that.<br />
We will be focusing our efforts on providing <strong>com</strong>plete<br />
solutions that suit larger institutional clients, including<br />
local banks, financial institutions, and brokers around<br />
the globe. And since technology plays a major role in<br />
the FX Market, we will be developing and<br />
implementing new technologies that help us and our<br />
clients achieve the<br />
ultimate <strong>com</strong>mon<br />
goals. New<br />
products will be<br />
added to our<br />
portfolio as well.<br />
january 2010 e-FOREX | 157
TRADERTALK<br />
Ian, you began advising clients<br />
over 17 years ago and<br />
established Naismith Capital<br />
Strategies in 1996. With this<br />
substantial experience behind<br />
you what have you discovered<br />
about the skill-sets required to<br />
be<strong>com</strong>e a successful money<br />
manager?<br />
Know how to act disciplined when<br />
a trade is not going your way. No<br />
matter if you are trading stocks,<br />
bonds, <strong>com</strong>modities, real estate,<br />
currencies, etc. - begin with a<br />
predisposed plan of action when<br />
the trade is moving against your<br />
desired out<strong>com</strong>e. There are really<br />
effective ways of ac<strong>com</strong>plishing<br />
this discipline – whether it be<br />
hedging techniques, trailing stop<br />
loss orders, selling at predisposed<br />
profit targets, etc. These all are<br />
logical and practical, but the<br />
meaningful part is pushing the<br />
button once a confirmation has<br />
sounded. In addition, when the<br />
markets are too volatile for trading,<br />
simply sit aside and watch.<br />
You formed Sarasota Capital<br />
Strategies with your business<br />
partner Anthony Welch, in 2002.<br />
What prompted you to set up the<br />
<strong>com</strong>pany?<br />
It happened due to a turning point<br />
in philosophy and strategy for both<br />
of us after the roaring 1990’s. In<br />
the 1990’s, Tony and I bought and<br />
sold individual stocks – which was<br />
quite easy, given the market<br />
158 | january 2010 e-FOREX<br />
TraderTalk<br />
With Ian Naismith, co-Principal at Sarasota and co-Manager<br />
of The Currency Strategies Fund (Ticker: FOREX)<br />
conditions. When I mention<br />
“bought,” I do mean we bought on<br />
the dips, and when sells occurred,<br />
it is because a stock was not “going<br />
up fast enough.” When 2000<br />
came and delivered a bear market<br />
for the previous years’ high flyers,<br />
buying on dips did not work.<br />
Thus, in the latter part of 2000,<br />
and especially starting in the early<br />
parts of 2001 and lasting into 2003<br />
– judicious allocations and stop<br />
orders became the norm. During<br />
that period, Tony and I decided to<br />
concentrate on trading indexes<br />
employing technical analysis using<br />
relatively new items called ETFs.<br />
We had known each other well<br />
since 1992, and since we were in<br />
concert with our thoughts, we<br />
decided to <strong>com</strong>bine forces. It is<br />
hard to believe the roaring 1990’s<br />
was more than a decade ago.<br />
What type of investment style<br />
does the firm undertake?<br />
We are an absolute return style<br />
firm that primarily uses technical<br />
analysis with <strong>com</strong>mon sense<br />
overlays. Once in a while,<br />
unusual occurrences happen that<br />
provide opportunities that cannot<br />
be possibly measured by a rigid<br />
technical model. A great example,<br />
recently the Powershares DB US<br />
Dollar Bull ETF (UUP) could not<br />
issue new shares. Within minutes,<br />
demand overtook supply and the<br />
ETF was trading up 2% while the<br />
US Dollar Index was flat. In less<br />
than 2 minutes after this anomaly,<br />
we started selling the majority of<br />
our 21% position of the ETF to<br />
realize a nice gain; that, in a<br />
perfect technical world – could<br />
not have happened. By the end of<br />
the day, we replaced the sold<br />
shares for another fund that was<br />
tracking the US Dollar efficiently<br />
and wrote covered calls on the<br />
small amount of remaining shares<br />
of UUP. On the flipside, fourth<br />
quarter of last year, our firm<br />
simply hedged<br />
through
most of the mayhem. Because of<br />
unprecedented volatility,<br />
momentum and/or contrarian<br />
models did not work, so we chose<br />
the boredom of neutrality. It<br />
worked beautifully.<br />
Sarasota is the investment advisor<br />
for The Currency Strategies Fund,<br />
a series of the Northern Lights<br />
Fund Trust. What are the<br />
investment objectives of this fund?<br />
The main objective is to realize<br />
consistent total return with an<br />
emphasis on keeping the draw down<br />
and volatility to a minimum<br />
<strong>com</strong>pared to individual currencies<br />
and other asset classes. Regularly,<br />
Ian Naismith<br />
advisors who have invested in the<br />
fund tell us “we don’t have to worry<br />
about your fund in our portfolios.”<br />
This is what we’re all about.<br />
Keeping the fund consistently<br />
performing is a balancing act<br />
between the simultaneous use of<br />
non-US Dollar currencies and the<br />
US Dollar Index. We believe using<br />
those opposing currency groupings<br />
help smooth out the return of the<br />
fund. Historically, in times where<br />
non-US Dollar currencies are<br />
showing strong trends, we tend to<br />
correlate with the trend – and when<br />
the US Dollar Index shows a strong<br />
trend, we tend to correlate with the<br />
trend. The <strong>com</strong>bination of<br />
capturing ranges of return when<br />
non-US Dollar<br />
currencies are strong,<br />
and capturing ranges<br />
of return when the<br />
US Dollar is strong<br />
– gives us<br />
consistency.<br />
>>><br />
What are your main day-to day<br />
responsibilities in managing the<br />
fund?<br />
We make sure the fund is adhering<br />
to the models that were created and<br />
keeping our eyes on opportunities<br />
that cannot be measured in a<br />
technical system. I’m a system<br />
driven person and Tony is an<br />
opportunity person – it works out<br />
very well. Early each morning, we<br />
know exactly where our exit or<br />
entry prices are on a currency by<br />
currency basis. If either limit is<br />
breached, we take action. Once<br />
trading begins, we look for intraday<br />
irregularities that might be<strong>com</strong>e<br />
opportunities. We also make sure<br />
that the trades are fairly priced<br />
<strong>com</strong>pared to the intrinsic value of<br />
the items we are trading. Besides<br />
the trading and monitoring, we do<br />
the normal mutual fund type<br />
january 2010 e-FOREX | 159
TRADERTALK<br />
things like prepare written reports,<br />
approve expenses, marketing, etc.<br />
Joe Garbade, our operations<br />
person, does an incredible job<br />
with day to day reporting and<br />
<strong>com</strong>pliance.<br />
The Currency Strategies Fund<br />
invests primarily in exchange<br />
traded products and/or mutual<br />
funds, the value of which are tied<br />
to currency prices What do you<br />
like about exchange traded<br />
products and what advantages<br />
do they offer for investors?<br />
The vast majority of the mutual<br />
fund clients and audience to the<br />
fund are advisors and regional<br />
brokers. Right now, we believe<br />
that a fund of funds makes sense<br />
because the items we choose to<br />
trade do consistently track the<br />
prices of the currencies they are<br />
designed to replicate. It is easy for<br />
advisors and other professionals to<br />
use our fund because most<br />
understand how ETFs or mutual<br />
funds work, and it is simple for<br />
them to track as well. They can<br />
explain the fund it to their clients.<br />
As the fund grows, we will be<br />
160 | january 2010 e-FOREX<br />
integrating other tools for trading<br />
that will <strong>com</strong>plement our ETF<br />
trading, but at the same time, give<br />
us more choices, liquidity, and at<br />
the same time will reduce overall<br />
expenses of the fund. In other<br />
words, we want to use tools that<br />
will get us to our goal – and<br />
sometimes ETFs are the way to<br />
go, and sometimes they are not.<br />
You use proprietary technical<br />
analysis to determine which<br />
currencies you believe will<br />
outperform the U.S. Dollar. What<br />
tools do you use to assist you<br />
with this and what momentum<br />
characteristics is the analysis<br />
based on?<br />
We are looking for out<br />
performance from either side of<br />
the pair, whether the winner is the<br />
US Dollar or not. Primarily, we<br />
have used Tradestation for<br />
building our unusual indicators<br />
and auditing of the code is verified<br />
by good old-fashioned Microsoft<br />
Excel. Momentum is measured<br />
on the ascension on consistency of<br />
price, but, we do receive<br />
contrarian sells when consistency<br />
>>><br />
Anthony Welch<br />
is <strong>com</strong>promised and contrarian<br />
buys when consistency is reestablished.<br />
One beauty of<br />
Tradestation is that you can view<br />
your indicators in a columnar<br />
format that is sortable. This<br />
eliminates the need for 6 different<br />
video monitors in the workspace.<br />
We can see more actionable<br />
information for trading on one<br />
21” screen than we’ve seen on<br />
multiple screens in other offices.<br />
We like it simple. The hard work<br />
has already been done developing<br />
the models, thus, the trading<br />
signals derived from that hard<br />
work is clear and simply displayed<br />
for action.<br />
What measures determine what<br />
initial allocation to a currency<br />
you may make and then whether<br />
to increase or decrease it?<br />
This is not mandated by<br />
prospectus, but, we use equal<br />
weighting due to the<br />
overwhelming history that equal<br />
weighting enhances performance<br />
starting around 3 year rolling<br />
period and improves dramatically<br />
in longer timeframes. Equal
TRADERTALK<br />
weighting also smooths out<br />
volatility in portfolios. Thus, we<br />
have imposed investment limits on<br />
a currency by currency basis.<br />
Currently, the maximum<br />
investment limit we have for each<br />
G-10 currency ex-US Dollar is 7%<br />
and 4% for each emerging market<br />
currency. By prospectus, gold has<br />
a 10% investment limit.<br />
However, by prospectus, the US<br />
Dollar index can receive 100%<br />
allocation if it is in a raging bull<br />
market or is having a sharp rally<br />
because we would like to<br />
participate in those events as<br />
much as possible. It would be rare<br />
for us to be <strong>com</strong>pletely out of the<br />
US Dollar Index or 100% in the<br />
US Dollar Index. We can also<br />
expose the fund to 100% short<br />
term safe havens in times that<br />
excess volatility is occurring. The<br />
increasing or decreasing of each<br />
position happens when we receive<br />
a signal from our model. The<br />
adjustments are incremental to<br />
reduce the amount of noise<br />
trading when volatility is<br />
occurring.<br />
What key steps do you take to<br />
mitigate the various types of risk<br />
associated with your investment<br />
style?<br />
By nature, the inclusion of all<br />
types of currencies including the<br />
G-10, emerging markets, gold,<br />
and US Dollar Index gives us an<br />
actively managed single solution<br />
palette that advisors cannot find in<br />
the United States right now. The<br />
fact that we are not strictly an<br />
anti-US Dollar play only helps<br />
mitigate risk. In addition to the<br />
currency choices, the allocation<br />
limits, predisposed stop loss<br />
triggers, hedging techniques,<br />
covered call writing, and the<br />
ability to retreat to 100% safe<br />
havens gives us many levels of<br />
insulation in nasty markets.<br />
162 | january 2010 e-FOREX<br />
Do you expect to see significant<br />
growth in currencies being<br />
packaged in the form of new<br />
exchange traded products and<br />
what shape might these take?<br />
Well, we don’t see much more<br />
need for duplication of single G-<br />
10 or really liquid single emerging<br />
market currencies. However, we<br />
believe the market may see many<br />
baskets of various currencies.<br />
Wisdomtree has many currency<br />
baskets that have been in<br />
registration for quite some time.<br />
Of course, it will take demand<br />
from advisors and investors to<br />
make currency ETFs successful.<br />
What's the average length of time<br />
that you hold your positions for?<br />
We don’t limit ourselves to time<br />
holding periods. When we receive<br />
a signal or see an opportunity –<br />
we act. Some of the biggest<br />
mistakes made by advisors are<br />
adhering to a predisposed time<br />
period.<br />
>>><br />
What advisors should be adhering<br />
to are price periods – meaning, if<br />
the price of an item reflects a trade<br />
that is capturing positive return<br />
with acceptable amounts of<br />
volatility, then it makes sense to<br />
participate whether the time is a<br />
week, month, or year. In volatile<br />
markets, our holding periods are<br />
<strong>com</strong>pressed. In streamlined<br />
markets, our holding periods are<br />
extended. We would rather have<br />
more turnover with less volatility<br />
and draw down, than little<br />
turnover with more volatility and<br />
draw down.<br />
Risk Management, design and<br />
back testing of strategies and<br />
optimising trade execution are<br />
just some of the areas where<br />
trading tools and technology are<br />
now making a significant impact<br />
on how many firms trade<br />
currencies. How important is<br />
trading technology to your own<br />
team and in what ways does it<br />
help you maximise trading<br />
operations?<br />
Joe Garbade<br />
(<strong>com</strong>pliance/operations)
TRADERTALK<br />
Trading technology is everything to<br />
us. It is imperative that we<br />
understand the past before starting<br />
a trading system using real money,<br />
so, we make as many mistakes as<br />
possible in the backtesting world.<br />
It requires numerous hours of<br />
studying what algorithms – based<br />
on history - increase chances for<br />
consistent, repeatable results and at<br />
the same time, we defer that the<br />
future may be a totally different<br />
road than the past. With that said,<br />
having smart trading habits<br />
improve total return. This means<br />
finding patterns intraday for buying<br />
or selling to improve overall cost. It<br />
also means not overpaying or<br />
underselling in relationship to<br />
intrinsic value. We have the<br />
technology to monitor these items<br />
in real time. However, technology<br />
means nothing if you do not<br />
translate the technology into action.<br />
The amount of money saved due to<br />
our trading diligence is astounding.<br />
Is your trading technology<br />
infrastructure built in-house or<br />
provided by specialist vendors?<br />
The trading technology is<br />
provided by specialist vendors.<br />
For real time tracking of intrinsic<br />
value, volume and bid-ask<br />
spreads/sizes, we use Tradestation.<br />
The intraday trading algorithms<br />
were also built in Tradestation.<br />
We use HydraTrade for<br />
executing the trades. So<br />
we have Tradestation on<br />
one screen and<br />
HydraTrade on the<br />
other. It is very<br />
simple. In<br />
addition, all of this<br />
is easily portable.<br />
When Tony and<br />
I travel, it is almost<br />
seamless to trade.<br />
As a backup, we<br />
can call the head<br />
trader at our<br />
164 | january 2010 e-FOREX<br />
clearing firm, Ceros Financial<br />
Services, for trading purposes. We<br />
have a long term relationship with<br />
the folks at Ceros, and we know<br />
we can count on them. If we need<br />
to search for liquidity for buying<br />
or selling ETFs with shallow<br />
volume and/or large bid-ask<br />
spreads, we can rely on<br />
WallachBeth to find the liquidity.<br />
So, a <strong>com</strong>bination of machine and<br />
human resources is the way to go.<br />
Do you plan on utilising any<br />
algorithmic trading techniques or<br />
are you already applying them?<br />
We are already applying<br />
algorithmic techniques – however,<br />
the trades are being done by<br />
humans, not automated <strong>com</strong>puter<br />
only trades. It is algorithms that<br />
dictate what currencies we’re in,<br />
the allocation of each, and how we<br />
trade in and out of the currencies<br />
intraday.<br />
In the future, where are you<br />
going to be looking to grow your<br />
business and search for new and<br />
innovative ways to utilize your<br />
investing expertise?<br />
Much like we have already. A).<br />
Identify gaps in the investment<br />
landscape; B). do homework and<br />
build intelligent models that<br />
advisors can use and not lose<br />
sleep; C). create and launch the<br />
product; D). educate and<br />
convince the advisory <strong>com</strong>munity<br />
to fill the gaps that exists in their<br />
portfolios. The beauty of this job<br />
is that there are still many<br />
opportunities in the investment<br />
landscape and we would like to<br />
have a stable of products that fill<br />
those gaps. They may <strong>com</strong>e in a<br />
number of forms, but the intent is<br />
to provide value to the investor.