e-Forex July 22

TRADING OPERATIONS
Bringing more transparency and efficiency to the FX Liquidity Management process
“Over the last five to ten years we’ve seen an increase in the
level of detail in liquidity management reports. It is so much
more complex because of the amount of data.”
Geoff Jones
because of the volume of data. People
are not only using more liquidity
providers but the market data also
changes faster.”
The profile of liquidity providers has
also moved beyond those early days
when there was a difference between
bank and non-bank liquidity. “It is no
longer a fair statement to say banks
are good or execute one way or nonbanks
are not and execute in others.
Many non-banks are genuine liquidity
providers,” says Jones.
“There was a period when a number
of third parties were building
platforms that enabled takers to
bypass measures designed to protect
liquidity providers and maintain good
liquidity. So whilst the focus of the
industry has been on liquidity provider
behaviour, there is a responsibility
on platforms and clients to ensure
good market practice. Some of this
technology was imported from other
asset classes with centralised rather
than over-the-counter trading. In OTC
markets is not just about technology
but also about relationships,” says
Jones. “As a liquidity manager, we
have the ability to see everything
which means we can facilitate
effective conversations between
liquidity providers and takers.
Good liquidity providers set out
their expectations and good clients
understand what is expected of them.
Not all firms have access to the data to
support these conversations but there
are a lot of independent firms out
there that can support smaller firms.
Clients and liquidity providers are
doing themselves a disservice by not
using this data.”
“Markout data plays the biggest role,
it gives you an idea of how both sides
behave. Transaction cost analysis (TCA)
and peer analysis is also powerful.
The data and analytics help support
conversations that should be taking
place” says Jones.
“Liquidity management can be done
without independent providers but
the question is ‘what do I not know?’.
That peer analysis cannot be done on
a bilateral basis. That level of analysis
really lends itself to providers like
Refintiv supporting the FX liquidity
management process. It can help the
Liquidity Provider realise when they are
an anomaly,” he says.
GREAT RESPONSIBILITY
When it comes to the evolution
of liquidity management, one of
the biggest changes has been a
much greater awareness by market
participants of their responsibilities
when they engage with their liquidity
providers.
“Liquidity managers at tier 2 banks
are cognisant that they are part of a
wider ecosystem and that to get the
best pricing from the best liquidity
providers, you have to take more
responsibility for your flow,” says John
Stead, Global Head of Pre-Sales at
smartTrade. “If you are just smashing
the market, you will get wide spreads
or just cut off.”
An important development on the technology side has been the use of artifi cial intelligence and machine learning
to produce predictive analytics
There are a number of drivers that
have accelerated the evolution of
liquidity management, says Stead.
“Firstly, there is less ‘fat’ in the
industry as a whole. Tier 1 banks
are facing ever tighter margins and
are looking more closely at liquidity
and the trading patterns of their
counterparties. Secondly, there is also
more technology available to liquidity
providers to identify bad behaviour
from underlying price takers. For
example, technology such as
smartTrade’s AI Analytics allows banks
to analyse clients’ trading patterns
22 JULY 2022 e-FOREX