Privacy Please the attraction of anonymous FX trading.
Harrell SmithManager, Securities and Investments at Celent.
Harrell Smith examines how the inflow of capital into the hedge
fund community will lead to more firms exploring the use of trading
platforms that offer anonymous execution.
Anonymity is one of the main advantages of
electronic execution. A plethora of FX trading platforms today
offer anonymity, helping firms to keep private and
The growth of the global foreign exchange market has been
well-documented, as has been the rise of electronic trading.
According to recent estimates, electronic FX trading currently
accounts for over 60% of spot volume in the inter-dealer community,
and 43% of spot volume in the dealer-client market. Celent predicts
that by the end of 2007, e-trading adoption in the inter-dealer and
dealer-client markets will increase to 90% and 60%, respectively,
driven by greater standardization of technology through industry
initiatives such as the Continuous Linked Settlement (CLS) and FIX.
With execution having long-since become commoditized, firms are now
turning to e-trading as a means to an operational end that is they
are looking for technology with extensive settlement and allocation
functionality, that can help firms deal with an increasingly
challenging regulatory environment.
One of the key benefits to electronic execution: anonymity has been
lost in the shuffle of operational efficiency and regulatory
initiatives. The ability to remain anonymous to one degree or
another has always been a key selling point for electronic trading
across all asset classes. Today, almost all leading FX trading
platforms provide some degree of anonymity, providing cover to
firms who are reluctant to display liquidity, want to avoid market
analysis and keep information leakage to a minimum, and can achieve
cost savings via anonymous, sponsored access to inter-dealer
One of the key benefits to electronic
execution: anonymity has been lost in the shuffle of operational
efficiency and regulatory initiatives.
Who trades anonymously?
Hedge funds are the largest and fastest-growing segment of the
buy-side FX community. More than any other market participant,
hedge funds are known for trading FX speculatively. According to a
recent Greenwich Associates survey, 50 percent of hedge funds trade
FX for alpha returns. Accessing large amounts of liquidity in the
least disruptive way is a key component of their strategies.
Hedge funds have begun creeping into the inter-dealer market on a
sponsored basis. EBS Prime Professional service allows hedge funds
to access inter-dealer liquidity, while remaining anonymous to the
market as a whole. Although dealer liquidity is the main attraction
for hedge funds using EBS new service, the ability to trade
anonymously is an enormous draw as well.
The inter-dealer market has always had a soft spot for anonymous
execution, whether through the use of voice brokers or via
electronic execution. For the most part, inter-dealer electronic
execution operates on the anonymous execution/ disclosed settlement
model, a service offered by both Reuters and EBS.
However, dealer banks have little, if any, incentive to trade on
systems such as eSpeeds FXSpot, which offers not only full
anonymity but the advantage of a centralized counterparty BGC (the
voice brokerage formally known as Cantor Fitzerald voice broking).
Why? Dealers maintain strong trading relationships, and their
credit is universally strong, so there is no advantage from a
pricing standpoint to trade on a platform that offers standardized
pricing to all participants. And while post-trade anonymity is
certainly an advantage to all participants, it is not enough to
dislodge established dealer banks from either EBS or Reuters.
The inter-dealer market, has always had a
soft spot for anonymous execution, whether through the use of voice
brokers or via electronic execution.
Traditional buy-side firms are least interested in anonymous
trading. With FX investment strategies designed primarily around
multi-portfolio hedging, asset managers generally do not trade FX
for alpha. As such, the ability to trade anonymously is generally
of little concern to traditional buy-side firms.
Anonymity and E-Trading Platforms the
Reuters. Reuters Dealing 3000
relies on an RFQ model, with message broadcasting of up to 32
participants. For anonymous execution, Reuters also offers a spot
and forward matching platform, which sits atop Dealing 3000. The
platform is a centralized order book and counterparty information
is given up post-trade.
EBS. EBS, launched by a
partnership of the worlds largest FX market-making banks and a
major presence in the inter-bank spot maker, is the largest
inter-dealer FX trading platform in the world. EBS main product is
EBS Spot, an anonymous inter-dealer execution platform. As with
Reuters, counterparty information is given up post-trade.
E-Trading Platforms the Multi-dealer
FXAll. FXAll, owned by 17 banks,
has a varied customer base, composed of corporations, asset
managers, banks, and hedge funds. Until November 2004, FXAll did
not offer anonymous trading. At that time, FXAll released Altair, a
new version of its trading platform with 20 new features. The
QuickFill feature of Altair provides anonymous trading, although
FXAll claims that few customers use this function; this is most
likely due to the relatively low number of hedge funds using the
FX Connect. State Street-owned FX
Connect uses a pricing mechanism that is strictly RFQ, with no
anonymous trading. State Street asserts that its intended customer
base does not wish to be anonymous because it receives better
prices when banks know with whom they are trading.
As a result, FX Connect has not focused its attention on the hedge
fund community. However, FX Connect does offer a feature called
Quick FX, launched in 2001, that provides directional anonymity for
customers wishing to transact single or block trades with up to
four banks in competition.
Currenex. Like FX Connect,
Currenex does not offer anonymous trading. The firm relies
primarily on both disclosed RFQ and executable streaming price
As the inflow of capital into the hedge
fund community continues, more and more firms will explore the use
of trading platforms that offer anonymous execution.
Hotspot FXi. Hotspot FXi offers
the best environment for institutional firms and banks by bringing
liquidity in two forms: banks stream executable prices into the
system, and buy-side clients submit market and limit orders. All
quotes and orders are displayed anonymously in a central order
book. Counterparty information is given up to the prime broker
after execution. Hotspot FXi is perhaps most attractive to the
hedge fund community, who are comfortable trading in a central
order book environment.
LavaFX. Citigroup-owned LavaFX
seeks basically the same customer base as Hotspot, focusing on
hedge funds and CTAs. LavaFX supports 24 currency pairs and offers
the same degree of anonymity as Hotspot, with counterparty identity
being disclosed to prime brokers after execution.
eSpeed. While almost all
electronic forex trading platforms offer some degree of anonymity,
eSpeeds FXSpot is the most comprehensive in this regard. BGC (the
entity formally known as Cantor Fitzgerald voice brokerage) is the
counterparty to every trade. eSpeed refers to this as
principal-to-principal trading the buyer and seller never know each
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