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direct access to multiple trading venues.
“ It could be exchanges, ECNs, bank and non-bank liquidity providers with matching servers located across multiple datacentres around the world. What makes it even more complicated is that FX trading is primarily latency sensitive, that’ s why reliable and low latency connectivity to multiple venues globally is a key challenge,” she says.
Global FX markets face shrinking bank balance sheets and an increasing amount of venues with varying trading protocols, meaning institutions must process literally tens of thousands of pieces of data every second. Liquidity conditions are obviously challenging in this environment and tight spreads in FX require fast execution. The speed of accessing and processing market data, and quick order routing are fast becoming key differentiators for large banks but finding the right balance for both connectivity and liquidity can lead to complications.
“ The optimal use of connectivity and liquidity is a complex problem,” says Alexei Jiltsov, co-founder of data science firm Tradefeedr.“ It requires the trader to collect the quote and order data, and quantify market impact and how selection affects liquidity providers in the stack. A trade-off between adverse selection and spread compression gives the optimal composition of liquidity providers. It is also unique to each trader’ s flow.”
“ Obviously, a major challenge is to capture and analyse every data point in a fast processing environment. Just as connectivity was solved by specialised technology
“ Just as connectivity was solved by specialised technology players, market data management and intelligence has a high fixed cost which can be more optimally managed by specialised players.”
ALEXEI JILTSOV, CO-FOUNDER, TRADEFEEDR
players, market data management and intelligence has a high fixed cost which can be more optimally managed by specialised players. Big institutions are starting to use common infrastructures to solve their specific problems just like in the case of connectivity.”
Looking ahead, it’ s a safe bet that the volume of data, connections and venues will only increase. For institutions in FX, technology and trading systems will play a substantial role as to who winds up as the winners and losers in this space. Large banks have big decisions to make in terms of technology and systems, and those decisions must be made alongside considerable risk. But, as in the case of Standard Bank, taking that risk has certainly paid off for some.
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