e-Forex July 22

Bringing more transparency and efficiency to the FX Liquidity Management process
TRADING OPERATIONS
“Relationships really do matter. They should be based on
trust because you want liquidity partners not providers. But
the technology allows for trust with verification.”
John Stead
automatically and look for and notify
the bank of any interesting correlations
and patterns automatically.
The FX Global Code has also had
an impact in encouraging more
transparency and better behaviour.
And finally, there is more awareness
and sophistication in terms of the link
between behaviour and the causes of
liquidity issues.”
In essence, market participants care
more about liquidity management
than ever before and there are more
tools available to help them do
something about it.
An important development on the
technology side has been the use of
artificial intelligence and machine
learning to produce predictive
analytics, says Stead. For liquidity
providers, this is helping them to
identify trading patterns amongst
their clients, to anticipate future flow
and segment their clients accordingly.
“Segmentation has become more
and more important as LPs seek to
optimise their relationships with clients
and to understand their underlying
trading patterns. There will always be
clients that are sharper than others,
but now it is easier to spot them and
LPs care more about it now. If you
combine smartTrade AI Analytics and
our AlgoBox module then you can
automatically spot certain behaviour
patterns and then automatically assign
clients to appropriate pricing and
hedging groups reflecting their impact
and market behaviour.”
The question is the level of automation
that firms are willing to use, says
Stead. For example, to what extent can
automation truly support the trading
and sales team to add more value,
automation for automation’s sake
is not an efficient goal. There is also
more regulatory scrutiny on the use
of artificial intelligence and an onus
on firms to explain how algorithms
have made certain decisions – a
development that is still in its infancy.
But has the use of more advanced
technology and third-party liquidity
managers actually changed the
behaviour of either liquidity providers
and liquidity takers? According to
Stead, there have been changes on
both sides of the liquidity process.
“When it comes to liquidity takers and
the assembly of a panel of liquidity
providers, it was previously thought
that the more liquidity providers, the
better. Now people realise that less can
be more and are moving beyond that
stance,” says Stead.
“The pandemic and the resultant
market volatility of the last two years
have also played a role in this change.
It is during times of crisis that you
find out who your real friends are.
And those LPs that continued to
price during the height of the market
volatility, have been retained and now
form the bedrock of firms’ LP panels.
Then you may have another group of
LPs that will get switched in and out
based on performance,” says Stead.
However, as important as technology
is, there is still a relationship element
to good liquidity management. Stead
says that a greater focus on liquidity
management should encourage
more conversation between liquidity
providers and takers. “Talk to your
clients about how they should behave.
There is an education issue there.
Make sure that your clients are not
sweeping you and that you are using
the proper risk controls in terms of
flow, credit checks, transaction size
and other factors.”
In this space it is during times of crisis that you fi nd out who your real friends are
Technology definitely informs, but
pricing and trading decisions are
often based on a wider context – such
as the other business that may be
done between liquidity providers and
takers. “Relationships really do matter
24 JULY 2022 e-FOREX