e-Forex July 22

Electronification and Automation: Unlocking the full potential of Emerging Market FX trading
SPECIAL REPORT
“Uncontrolled taking can rapidly ruin any good pool of
liquidity. The volatile nature of EM trading makes it all
the more important to ensure that takers and makers are
matched off appropriately in a compatible way.”
Clinton Norton
liquidity is thin, takers want to rely on
the expertise of the physical trader to
get done with limited market impact
and tighter spreads. Technology is
increasingly allowing traders to supplant
the manual process. At Euronext FX
for example, where over 20% of our
trading is emerging market, we provide
a safe environment for niche currency
players to offload risk undetected.”
Other ways to achieve best execution
through electronification is to utilise
the same tools developed for the
more liquid pairs and adapt them to
the specificities of emerging market
currency trading, says Norton.
“Uncontrolled taking can rapidly
ruin any good pool of liquidity. The
volatile nature of EM trading makes
it all the more important to ensure
that takers and makers are matched
off appropriately in a compatible
way. Our liquidity management team
at Euronext FX manages bespoke
liquidity pools for each client based
on trading needs and trading style.
In a way, the manual intervention
happens up stream, ahead of trading,
and is informed by transparency,
communication and data analysis.”
Although remote niche LPs can
supply very competitive prices,
they often lack the tools to check
and monitor the quality of takers
to ensure they match their pricing
model appropriately, says Norton.
“Again, our LM team can step in
to create, manage and monitor
interactions in a systematic and
automated way with a range of
automated tools and analytics.”
When it comes to maximising access
to liquidity, FX platforms need to
be connected to the best emerging
market market-makers possible, says
Norton. “They are typically not the
traditional tier1 banks but rather the
few tier 2 banks and local broker
dealers that specialise in trading their
specific set of currency pairs derived
from natural local interest.”
“Tight prices are derived from
informed market-makers that
have access to local markets and
uncorrelated flow. FX platforms
need to find a way to connect these
sometimes remote liquidity providers
and create a safe and easy access
for makers and takers of emerging
market liquidity to interact. This
means finding these potential makers
and then using technology to adapt
to their needs that are typically
unconventional,” says Norton. “Since
these special makers often lack credit
to the street and the capability to
widely distribute their liquidity, they
will rely on the FX platform partner
for access and connectivity.”
ELECTRONIC NDF MARKET
In 2020 Euronext FX launched NDF
trading out of Singapore, through
the RMO license approved by the
MAS and operated by Euronext
Markets Singapore Pte Ltd. The
electrification of the NDFs market is
a natural extension of this trend, says
Norton. “Technology has allowed for
the faster and wider connectivity of
makers and takers to the point where
it is blurring the lines of conventional
buy and sell side interactions. The
proliferation of venues complying
with the various interpretations of
global regulations has increased
access to NDF trading which is now
reaching mainstream. Both liquidity
providers and takers have had time
to adjust to this peculiar market and
now better understand the rules set
by regulators such as Dodd Frank and
MiFID around trading and reporting
and are better able to decide on the
best way to access NDF trading.
While electronic platforms can help
to reduce operational risks that are
more pronounced in the EM universe,
it is still important to tread carefully
says Norton. “What works for G10
currencies does not automatically
transfer to EM where liquidity can
be thin and markets volatile. It’s
important to be able to adapt trading
to the quickly changing environment
of NDF trading. Our local liquidity
management teams understand this,
and use automated analytical tools
that are quick to detect anomalies
in the market that could impact our
clients’ trading. Thinner liquidity and
greater volatility in EM mean that
traders should adhere to a stricter
trading protocol than in G10 so as to
not harm participants.”
ELECTRONIC PRODUCT
INNOVATION
Electronic product innovation in the
EM FX trading space is an ongoing
process. For example, Euronext
FX has introduced its ‘LSP 0’
functionality (Leak Sweep Protection
with 0 hold time) which performs the
price check on behalf of the taker
34 JULY 2022 e-FOREX