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This isn’ t unique to foreign exchange, but, given the size and the speed of these markets and their susceptibility to volatility, this becomes ever more important in this sphere.
“ You can ' t put all your eggs in one basket. Banks may have their own internal restrictions or issues going on,” he says.
“ If a bank is constantly streaming pricing and it stays the same if volatility goes up or down, then that is absolutely fantastic. But they will most likely alter their pricing accordingly to what volatility does. They will also alter their pricing potentially depending on regulation issues. With Basel III and risk weighted assets( RWA), banks that have large balance sheet restrictions may not price as aggressively as someone with less restrictions.”
Given that the foreign exchange markets are still largely bilateral in their nature, pricing is less consistent for the buy-side, in particular during times of volatility as Baker notes, but moves are being made to introduce a more central limit order
“ Rather than just talking about things, we need to be able to kick the tyres.” book( CLOB) like structure for some instruments.
“ The 360Ts of the world have got some really forwardthinking products out there where effectively they ' re trying to build a central limit order book for swaps,” explains Baker.“ That could be really good. There is another question however, as to whether banks want to show all of their liquidity on an open forum or do they like to keep some for certain clients?”
More and more, the buy-side are relying on transaction cost analysis( TCA) and analytics to help determine their counterparty selection processes. This is particularly prominent in asset classes like foreign exchange where relationships tend to be more bilateral.
“ Our job as buy-side traders is to sheriff the pricing we get back from our counterparties. As long as it ' s all in a nice tight
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