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Streams: The Path to Better, Customized FX Liquidity

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By Phil Weisberg, EVP Strategic Planning & Partnerships at oneZero

How liquidity is discussed in foreign exchange is shifting in response to the evolving structure of the market. As banks no longer hold large volumes on their books, the responsibility is completely on brokers to source adequate liquidity across the entirety of a market that sees $4 trillion per day. 

It is a herculean task, one not helped by an ever-evolving thicket of global regulation and the complicated nature of FX infrastructure and trading. 

The traditional way of looking at how to provide the necessary liquidity has been through the following: add a set number of connections between participants and then make additions when there is significant client demand. A third party can help, but it can also act as an information barrier that leads to an incomplete picture and a mischaracterization of overall liquidity.

We believe that is a myopic lens, one too focused on imposing narrow solutions on a complex market. For the market to function better, and for all participants to recognize better economies of scale, we believe there needs to be an entirely new approach, one that starts with a wholesale re-examination of this market’s structure. 

It starts with what we refer to as streams. 

What is a stream

Streams are individual connections in the market. We see them as the fundamental unit in this market, the quantum upon which everything else is built. The first step in assembling an effective network is assembling a large number of these connections. Streams are specific to each client and details are confidential, but these streams are divided by the type of flow they are designed to accommodate. This encompasses size, geography and the type of overall flow, although multi-factor groupings can also be deployed for easier organization. Different streams for soft and sharp trading, and for full-amount and sweeping are common.

With such a large pool of connections, it is possible to provide the right offering for individual brokers, giving exceptional choice. For some multi-asset traders this can mean working with several hundred streams, although experience shows most brokers find a couple of dozen to be a more appropriate number.  Each stream is unique to you as a sell-side broker and is curated by a liquidity provider based on its understanding of execution statistics.  

Streams and the associated analytics can give brokers the critical edge in the highly competitive FX environment, allowing a sell-side broker to segment its client base to maximise returns, build customer stickiness and secure volumes. This is vital as quantitative investors are making large strides in developing ever more sophisticated strategies to maximize returns. The right client segmentation for a broker, through its streams, gets the right prices to each of its clients and maximises its revenues. The wrong streams, bringing inadequate client segmentation, can mean missing trades, losing clients, failing to maximise returns as a broker and harming liquidity provider relationships. Each broker chooses its streams, but analytics and expertise provided from an expert can help with optimisation.   

From streams comes liquidity 

The key to better service is an offering specifically tailored to meet the needs of individual brokers (who in turn provide a service to their clients), who typically are seeking to segment their volumes in line with their unique business strategy. In foreign exchange that means providing access to a large number of executable quote streams, allowing brokers to select the right ones and organize them in customisable ways that maximize their potential for their business. 

This isn’t the end of what can be done. Soon tools will be available to help brokers quantitatively characterize part or all of their flow, so it can be securely shared (if a broker chooses) with current and new liquidity providers as part of an effort to foster the best possible relationships with each other. Through proactive suggestions and nudges, technology can help spawn new relationships with other liquidity providers and provide additional benefits. 

Building a better mousetrap

This approach is vital to keep pace with this innovation through new products and support, ensuring customers’ capabilities match the imaginations of their smartest minds. Simply waiting for a planned update or for a gap in connectivity to be so noticeable that it requires action isn’t an acceptable response in today’s market. Rather brokers need to be able to switch liquidity providers seamlessly and create customized liquidity for an ever-changing torrent of market events. Streams represent the wave of the future, and we expect more people to see their promise over the course of this year and the decade to come.