There are two primary factors driving
development and investment in FX Order Management (FXOM): business
process and added value. With regard to business process, banks are
vying to provide more functionality as a means of attracting more
customer business. Automating the process also reduces the sales
and administrative costs of managing that business. In terms of
added value, most banks believe that the information contained in
the order book can be used to better understand individual client
behavior as well as general industry trends. Evidence of this
growing interest can be seen in the proliferation of research in
the area of Microstructure pricing.
FOCUS : FX Order Management: Let the games begin!
Yaacov HeidingsfeldCOO of TraderTools LLC
Yaacov Heidingsfeld looks at why institutions looking to grow
transaction volumes and profitability should examine the benefits
of a commercially-available FX Global Order Book.
Participants in the FX markets, especially the larger banks and
brokerage houses, are now looking to extract value out of order
flow. Many of these organizations have grown through mergers and
acquisitions, and have therefore inherited disparate business
practices and systems resulting in fragmentation of liquidity. Time
differences between their international dealing centers only add to
this fragmentation and loss of centralized control. Therefore such
institutions are now looking for ways to view their order flow
across their organization. Lastly, buy-side institutions are
becoming more demanding, and there is pressure to reduce the
overall cost of trading, clearing and settlement.
In order to support and grow the overall number of clients served,
an institution requires an always-available workflow processing
engine that automates all aspects of the electronic dealing
process. FX transaction costs are at least partially determined by
the difference in the bid/ask spread, corresponding to the loss
incurred by simultaneous Buy and Sell transactions.
The most cost-effective way of executing trades for a market-making
institution, is to cross them internally while still achieving best
execution. [See figure 1 below.] Apart from saving on transaction
fees, internal crossing minimizes the impact and opportunity costs
of trades, while maintaining available credit. Liquidity can also
be enhanced by directing organization-wide order flow into the
internal marketplace, provisioning features like market-making,
auto-quoting from inventory and providing a single order book that
follows the markets across the globe.
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