FX Fifty Five: delivering low latency access to FX liquidity pools

e-Forex talks with Adil Soyfoo and Nathan Halfon, co-founders of FX Fifty Five, a specialist e-FX execution venue.

First Published: e-Forex Magazine 46 / Tradertalk / January, 2012

Nathan Halfon
Nathan Halfon

Nathan, when did FX Fifty Five commence operations and why did Kyte Group’s Market Securities division decide to launch this new e-FX offering?

FX Fifty Five commenced its FX Agency operation in March 2011 co founded by Adil Soyfoo and myself. Market Securities KYTE GROUP decided to launch an e-FX offering in order to diversify the activity which is already well developed in other asset classes. The e-FX execution offering started with FX spot on G7, followed by G12 and emerging currency pairs, FX options and the launch in January 2012 of Forwards, Swaps, NDFs and precious metals.

What trading and brokerage services does your group provide?

Market Securities Kyte Group is a global independent intermediary specialising in a broad range of financial products including Cash Equity, Equity Derivatives, Foreign Exchange, Futures & Options, Fixed Income, Structured Products and Commodities markets.

Market Securities offers to its customers large natural execution flows on various asset classes as well as designated research and technical analysis. The international offices are located in London, Paris and Geneva. Market Securities acts as an Appointed Representative of the Kyte Group, a leading UK based investment service provider.

Who are the key people involved in your trading unit and what are their main day to day responsibilities?

Our Execution unit is composed of different departments and division servicing customers globally and covering Spot, Options, Forwards, Swaps, NDFs and precious metals.

The team is international and every individual is heading a division that will grow under his or her management and our supervision. We have a multilingual sales and support team including English, French, Italian, German, Arabic, Chinese, Japanese and Russian.

The e-FX spot and Forward department is divided into 4 divisions: Banks, Hedge Funds, Retail brokers and Corporates. The banks division services regional and private banks, the  retail brokers unit offers liquidity to retail broker via a bridge to MT4. The voice FX Options desk services customers across the board, providing ideas and structures on demand.The precious metals desk will start trading this January offering Gold, Silver.

FX Fifty Five:  delivering low latency access to FX liquidity pools

What sorts of clients are using your trading services and what are their main objectives?

We have a very broad client base with very specific needs. They can have speculative, hedging or client servicing objectives. Their trade size varies from tiny retail amounts to large institutional amounts. The frequency of client trades also varies from 1 trade  per 10 seconds to 4 trades per day. Two objectives which they all have in common are best execution and flexible service. Some of them look for anonymity others look for low latency or for special GUI functionalities that we get to develop on a client per client basis.

We aim to become one of the best FX boutiques, focusing not on the mass market but on bespoke, “a la carte” e-FX services, catering for STP solutions, for dedicated communication lines or for cross connect solutions.

All of our clients working with us place a great deal of trust in our ability to do our core job which is managing liquidity and making sure the right customer is on the right stream with the right order type in order to protect banks. We never deviate from a customer’s main objectives and put our best efforts to achieve it with acumen, imagination and dedication.

What do you consider to be the key strengths and operational advantages associated with the FX agency brokerage model?

It is a business decision for us to remain an agency broker as we want to be on the side of the largest liquidity providers who are the top tier banks.. The agency model gives a very transparent  e-FX service as it avoids any conflict of interest and provides total anonymity to the buy-side. It is also a risk mitigation for our operation, our clientele and the banks offering lines. The liquidity providers only face the bank acting as the central counterparty.

This differentiates us from brokers that act as principal to the trades and therefore internalise the best portion of the flow and pass the rest to the banks. We are passing all the flow to the banks with no intervention in order to achieve a better relationship with them. Passing all the trades straight through demands a thorough policing of the flow. The challenge is ensuring that we are distributing the right liquidity to the right customers. We manage it using direct APIs with the banks to cross connect to their servers and publishing anonymous identifiers in order to be able to communicate with the bank and place the right identifiers with the right streams. This way we gain the trust of the banks and they provide us with better pricing. The Know Your Customer (KYC) due diligence process is therefore crucial in order to know what kind of trading style the end-customer uses. Once a thorough KYC process is undertaken, we can then connect the customers and offer them a competitive price that also protects the liquidity providers. So I see  four key strengths of the FX agency brokerage model - Low risk,  No conflict of interest, Low operational cost and the clarity of the revenue stream. These 4 strengths combined assure the scalability and sustainability of the business.

FX Fifty Five:  delivering low latency access to FX liquidity pools

What steps have you taken and what tools are you using to ensure you manage your trade flows as efficiently as possible and are distributing the right liquidity to the right customers?

We are using liquidity management tools which are designed to offer liquidity on a customer per customer basis mixed with a strong KYC process. We do not have a pool for several customers as each customer has its own pool of liquidity selected by us.

We choose different streams from different banks and blend it especially for a particular customer. The system permits us to send anonymous identifiers requesting banks  for a change of stream or for it to be turned off for a specific id.

We also offer a whole amount trading order which assures the banks to get the full trading amount for larger orders. In the case of larger orders from 5M and above, it is inefficient to allow a customer to sweep a stack in the book, it is preferable to have the amount available from a few LPs so none of them become the tail end of the trade. I believe we are the first FX agency to offer this a present. As I already mentioned our KYC process is extremely rigorous and has so far prevailed. This process is of course all about asking the right questions about frequency, average size of trades, currency traded and time zones etc but also knowing the market and the names of the usual suspects!

FX Fifty Five:  delivering low latency access to FX liquidity pools

How do you manage and optimise connectivity to your liquidity sources to ensure low latency and to avoid trading on old prices?

We do not use the internet or even VPN but a real collocation with our liquidity sources. This means our servers are hosted in the same place as our liquidity providers connecting with us through a cable plugged server to server. This eliminates latency, cancelling the possibility of trading on a stale price which will result in a rejection.

We have hosted our platform in Equinix LD4 where most of the banks can cross connect with us instead of connecting with us via other media. The cross connect eliminates totally the latency between us and the banks. Most of our clients connect with us through the internet with no problems, if they are in countries where latency is an issue we look at dedicated lines between them and us and put them in place.

What e-trading platforms does FX Fifty Five currently use and what factors influenced that choice?

FX Fifty Five currently uses a White Label platform from Flextrade which has been upgraded several times in order to fulfil our clients needs. We have chosen Flextrade as it had all the right building blocks to create and run a serious agency business. The platform allows to build bespoke liquidity pools with a flexible management. We preferred to work with a flexible company which is listening to our broking experience and ready to make the necessary changes in order to accommodate our business. In some ways it demands more effort than working with an off the shelf solution but it allows our operation to achieve the goals we fixed and differentiates us from many competitors.

How did you go about building your trading desk IT infrastructure and what steps have you taken to ensure that  you offer minimal downtime and guaranteed continuity of services?

As an FX agency we do not have a trading desk but a support desk. We have built a 24h customer service desk covering all IT issues and liaising closely with our technology provider Flextrade. We also make sure we have the right server capacity and bandwidth in place at all times.

In what ways are FX algorithms helping you to achieve more effective implementation of your trading strategies and minimal market disclosure?

We use FX algorithms and offer special solutions to our customers which allow us to slice their orders and time them in multiple different ways. 

The FX algorithms offer a logic allowing our customers to get more efficient execution when needed. The market disclosure is next to nil anyway as we have a sustained flow composed of our various clients with various styles of trading. All orders come from our Central Counterparty which ensures client anonymity.

What factors are likely to influence what sort of order routing system you may ultimately decide to use to pre-allocate trades for clients like large asset managers, corporates and real money managers?

Our first step was to have a partnership with Thomson Reuters Trade Notification in order to STP the orders into our clients back office. We are currently assessing what will be the most efficient order routing system to use in order to pre-allocate trades for clients like large asset managers, corporates and real money managers. We hope to deliver this from the second quarter of  2012. The challenge is to choose the right solution and then to successfully implement it to our environment.

What do you see as the main challenges facing agency brokerage firms like FX Fifty Five who are always seeking to gain the trust of banks whilst at the same time avoid conflicts of interest and provide total anonymity for the buy-side?

It has been an immense challenge to build an FX agency in the 2011 environment. Some of the previous FX agencies have damaged the reputation of the concept by not respecting the banks and on-boarding predatory customers. We decided from inception that we are on the side of the banks as there is to us, no other way. We are not the customer of the banks and consider them as our customer. They are instrumental in our business and our partnership with them is built upon finding the right solutions and creating trust. The anonymity of our setup is a  major responsibility as it is our name that will suffer if we don’t protect our LPs.

FX Fifty Five:  delivering low latency access to FX liquidity pools

What steps is your team planning on taking during 2012 to optimize your risk management operations, trading technology architectures and execution pathways?

Our risk is very limited due to our agency model. We have put in place a support team of  professionals which we have trained to manage any situation whether it is a hung trade or an emergency recovery procedure. All the messages between the platform and the banks are handled automatically. We plan to double this team in 2012.

How do you see the institutional electronic FX marketplace evolving over the next few years and do you predict any significant changes in the way most trading firms will elect to be connected to their clients and trading venues?

The electronic FX marketplace has seen exponential sustained growth in volumes in the last decade with the added participation from the retail market, the high frequency arena. FX is also gaining in status as an asset class amongst institutional fund managers mainly during the Lehman brothers crisis. 

Trading firms are now looking into aggregated pools of liquidity to provide them with better price transparency and connectivity. 

The main evolution foreseen is the competition emanating from non-bank price makers providing pricing in the same way that traditional EFX banks would and the reverberations it would cause. The role of EBS/Reuters as a market place and the active impact of high frequency traders have with the traditional EBS users. 

The way buy sides/sell side fims connect to clients and trading venues will not drastically change but with the advent of new technologies we are sure to have more centralised hubs of trading globally for all client segments.