The Merits of Peer to Peer Trading in FX
- In the EM space there might be more value as spreads are wider. Although, firms will all be wanting to trade the same side so it will be a race to the bottom.
- Peer to peer is an additional liquidity pool that is an ‘add-on’ rather than an ‘instead-of’ that can best be accessed by algos.
Challenges faced with the current offerings in the market
- Finding the same dates is the biggest challenge.
- Spreads are already tight on the EUR USD so how much extra value would that bring?
- More expensive around certain currency pairs.
- Vendors seem a bit clunky at the moment. Having to post interest 2 days ahead of schedule doesn’t work for most firms.
- Managing the flow for larger trades. Not only cost, but the time and the logistics involved as firms look to roll this out on a recurring basis are huge.
- Big concerns are showing market leakage, matching trades, or residual leakage.
- Wanting to manage risk not assume it.
- Hard to trade on a platform that isn’t integrated in our own.
- Firms should be aware of toxic flow that might leak into pools if the uptake isn’t growing as fast as vendors first perceived.
Development areas and Ideas from the market
- If there was a matching session from 9am to 11am on these swaps where we would be assured that our information is not getting leaked, that is something we would definitely be interested in.
- Until it has more liquidity and can be traded on broken dates we won’t be able to partake.
- If banks stepped in and charged $1 per million to sit in the middle, it would be more cost efficient for the buy side. Although, many flows would be the same way so it’s not a reliable pool.
- Banks could be the facilitator and conduit for peer to peer trading. Firms currently are locked into credit intermediaries and the banks could take this role and identify where there is scope to be able to find a $20bn trade off each month and month end. They could charge more and firms would happily pay for that.
- Being able to drop algos into peer to peer platforms would be more beneficial but they are not there yet.
- IMM business and a larger uptake in FX Clearing could develop a market where firms can have each other as a counterparty. Although, the logistics around the arbitrarily agreed market mid, regulatory considerations, authorised market participation are logistical nightmares for the buy side.
- You need an intermediary in order for this to work. It has to be a platform that you can openly ask, legally, to try and find the best way to execute tickets.