Historically, flow from retail FX was famed for its relatively benign nature versus institutional flow. Brokers were also traditionally more comfortable with fluctuating risk levels. However, the market is changing.
- Increased capital requirements for running large positions.
- Decreasing spreads from competition between brokers.
- The rise of Expert Advisors & Copy/Signal trading which can become self-fulfilling if enough installations trend together resulting in correlated in-flows of risk.
- Cloud Computing & the rise of cheap VPS. We’re no longer facing off exclusively against “clickers”
- Decreased client leverage from regulation, reducing the frequency of client stop-outs
- LPs have also improved their technology, being more choosy on which clients they want to receive.
- Increasing FX market fragmentation, making actual price discovery harder.
A trading background is essential in a technology provider to understand how to navigate these challenges.
Brokers are aware they need to become more analytical in their approach and have far greater visibility than ever before and there is certainly no shortage of technology available to them.
Risk management is a term routinely used and marketed within the industry, with many tools promising visualisation and sophisticated analytics, but how do you distinguish what is truly useful and what will end up like that ‘highly advanced, must have’ piece of exercise equipment gathering dust in the corner?
Firstly, users must consider the real-time nature of the tools they are using. The instantaneous flow of data is crucial for making decisions as they occur. This means there is no lag between negative behaviour and being able to act on it.
Whilst it is convenient and simple to have data uploaded via CSV, this is far from optimal. You need a product that works in real-time, because you often have to respond in real-time. The market conditions demand it. But it doesn’t stop there. We asked ourselves what are the top features that impact profitability in running eFX at a brokerage and how well existing vendors support that?
For all types of FX participants, STP, A/B, Market makers, good LP relationships are an important factor in running a profitable FX business.
With too few LPs aggregated spreads are wider. As you add more LPs the varying price skews they supply can reduce the aggregated spread.
Too many LPs negative selection occurs or “winner’s curse” where they only receive the flow when their rate is vulnerable. In this case, LPs in turn end up rejecting the flow, resulting in having to replace the order with the dollar cost of rejects driving up the effective spread of the pool.
Curating the optimal set of LPs for your price formation can be challenging and MahiFX ‘s suite of technology can assist with that.
To make LP relationships work you have to have analytical capabilities for tracking the above characteristics and see how they vary by changing conditions.
It should be simple to demonstrate the effect of removing counterparties from the overall shape of the flow you are sending to an LP.
Another key element is automation. Tooling to uncover the sophisticated ways your connections to LPs can be abused, which when this happens you will see it in your future spreads that you receive and show clients.
Checking this behaviour should be automated to reduce the time from identifying a negative change in trading SLAs from your LPs to being able to action that.
Period on period comparison
Not every change in trading SLA may be sufficiently big to generate an alert but it is important to swiftly identify changes in behaviour and track them week to week / month to month.
Understand your clients and respond quickly
Being able to graphically visualise the Top of book to see what the LPs were showing is essential for speeding up operational queries as well as tools that allow mark outs to mid, profit profiles and alerts on negative trading activity.
Empower your sales team
A salesperson will fundamentally want to open an analysis tool up and see an overview of their business, then be able to quickly drill down to see the good news or bad news.
If the news isn’t so good, then be able to see what’s causing it and how it can be fixed. Having this data accessible quickly is key to responding to clients in a timely and informed way.
As a company we’re confident of making a difference which is why we offer a free trial of all our products and provide our services on a subscription, monthly model. A model where you have to be responsive in order to retain long-term client relationships. Echo helps you understand your clients, risk management and LPs via its comprehensive analytics.
“Echo has elevated the level of expertise of the team, taken the guesswork out of Diagnosing problematic flow and has allowed for a more proactive approach to risk and Liquidity management.” - MFX Echo client
Compass is a pricing, risk management and hedging solution that can help you maximise your PnL.
Simulations as a service is a data driven simulation service that helps you answer business critical decisions backed by a data lake of historical data