Automating FX Give-Ups in an Electronic Age
Prime Brokerage is now an established, mature product in the global
foreign exchange market. Two or three years ago FXPB was a emerging
business, with ad-hoc services being offered to a handful of
clients. Now the leading Prime Brokerage firms are offering their
services to dozens of firms, with the largest having close to one
hundred clients and processing several thousands of FX transactions
Prime Brokerage a mature business
The essential offerings and benefits of Foreign Exchange Prime
Brokerage are clear. At its core it allows a fund to trade with a
much wider variety of counterparties, without the need to set up
lines and collateral with each trading partner. This facilitates
best execution across a range of currencies and products.
Furthermore a Prime Broker will take care of the clearing,
settlement and bookkeeping, allowing the fund to focus its
energies, and capital, on trading strategies. Finally the Prime
Brokerage relationship offers a reduction in settlement risk
through the netting of payments through a single counterparty.
Unprecedented increase in trade
The number of clients and the volume of trades have grown
dramatically and will continue to do so. Firstly hand institutional
investors have increased their allocations to currency funds.
Active currency management by skilled investors is seen as an
attractive source of alpha. Secondly the adoption of electronic
trading, the proliferation of ECNs, and the adoption of automated
trade processing systems by banks has dramatically reduced the
costs associated with trading. Per trade fees have dropped, and it
has become profitable to trade in much smaller lot sizes.
With the Bank of International Settlements sizing the daily
turnover of the FX market at $1.9Trn, and with Hedge Funds
accounting for 20% to 25% of this business, one can size the FXPB
market at $380Bn to $475Bn daily turnover. An average trade size of
$5MM to $10MM this would represent a low water mark of 40,000
trades a day up to 100,000 trades a day.
The reduction in trade size to $1M, afforded by ECNs, drives up
that potential volume to 500,000 trades a day.
More participants, more assets under management, lower trade sizes,
more channels, equals greater number of trades. Without the
appropriate controls and automation, however, growth will bring
increased risk and prohibitive costs. These heretofore unseen
volumes can only effectively be processed using automated
solutions. Automation not only Prime Brokers operation, but of the
bank to bank communications, allowing executing banks and ECNs to
electronically route Give-Up trades to Prime Brokers. Traianas
Harmony has become the de facto industry standard to support this
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