LoopFX Moves Forward with Launch on FX Connect
Posted by Colin Lambert. Last updated: September 13, 2023
With The Full FX View
LoopFX has taken a big step forward, entering a collaboration with State Street’s FX Connect to deploy its functionality – Loop’s first major integration into an FX trading platform. Under the arrangement, users of FX Connect will be able to select the LoopFX pool to send their spot or outright forward FX trades of $10 million or more, thus minimising information leakage.
“For more than 20 years, FX Connect has shown its willingness to adopt new approaches and work with distinctive new services we are confident will benefit our customers,” says Kate Lowe, head of GlobalLink FX for State Street. “LoopFX fits well with our philosophy and we look forward to begin seamlessly integrating the Loop FX platform into existing FX Connect workflows later this year.”
LoopFX was unveiled late in 2022, when it introduced the peer-to-peer-to-bank matching concept, whereby matches between firm orders from buy side participants are prioritised, followed by a match with bank interest or a bank algo. “Currently asset managers have two ways to lay-off their risk, neither of which is optimal,” observes Blair Hawthorne, founder and CEO of LoopFX. “They can put their trades into competition on a platform, or they can use their historical TCA and then ask a specific dealer or dealers for a price or use an algo.
“LoopFX offers a third option, one that takes place before the other two – the manager can put their trades into the pool to check if anyone is axed, or if there is a natural match,” he continues. “This takes out information leakage, which can be so damaging for execution quality, all they need to do is enter how much they want to trade, who they can match with, and then how long the trade is available for in the pool.”
The Full FX View
This is likely to be the first of several stages of evolution for LoopFX, but FX Connect is an important starting point, being the platform of choice for so many asset managers.
Many of these managers have started looking at their execution quality in FX and the sense is they are very open to a solution, such as that offered by LoopFX, that doesn’t change their all-important workflows, but does allow them to be more sophisticated in how they hedge – all while not endangering their equally-important banking relationships.
The emphasis on matching by interest, rather than price, is also a concept gaining more currency in the industry, as highlighted by the popularity of BGC’s Mid Book amongst banks.
This means the ‘buzz’ on LoopFX is largely positive, probably helped by the fact that founder and CEO Blair Hawthorne, until recently, sat in the trading chair of a big asset manager and has approached this business idea with an open mind and open hand – the firm is clearly open to collaboration.
From a participant perspective, asset managers see an opportunity for smarter execution; banks see an extension of their internalisation programmes (which are all about minimising information leakage) and a place to offload their own large risk; and platforms, in this case FX Connect, an opportunity to offer a different execution channel.
The dark pool concept will not come to dominate FX trading – my feeling is it will remain largely a bilateral industry – but that does not mean there is no room for it. Hawthorne makes a good point when he observes, “Everyone is bespoke, so a matching engine that suits everyone does not, and probably will not, exist,” and therefore this effective launch should be viewed through that prism – it is aimed at improving one part of the FX ecosystem.
Every new platform has a small window of opportunity when it is front of mind for a lot of participants and has goodwill – LoopFX is probably in that window now. It’s openness to working with all sides of the industry will be important in keeping that window open, but for now, it has taken a big step forward.
Ultimately, however, it is for those market participants who like the idea, to prove it is workable by actually using it. By doing so, they will be able to help evolve the model and ensure that the next stages of development continue that ecosystem improvement.
Hawthorne, who co-founded Loop FX after several years as a senior FX trader at Abrdn, believes providing an intelligent match, based upon data, is a key differentiator for the firm. “In my trading days the problem was I didn’t know who the best counterparty to trade with was. It was frustrating to think I spent an hour working a trade with one, taking large market risk, when another player was already actively executing complementary trades. My thought was there has to be a better way to discover that liquidity and achieve that match.
“As a trader myself, I know what a valuable platform FX Connect is for practitioners and it’s great that we have been able to respond to customer demand and create this relationship.”
Hawthorne stresses that LoopFX is not about changing workflows – access to the LoopFX pool will be a function available on participants’ existing FX Connect screens and trades will be processed on that platform – rather it is about improving the ecosystem by matching on a counterparty availability basis, rather than on price, in a dark environment. “We think it is as important to say what we are not doing, as much as what we are,” he observes. “We are not changing workflow, we are not a platform, we are not a CCP, we are not changing the legal documentation and we are not alienating the LPs.
“What we are offering is a safe mechanism to access liquidity and approach the market, based upon data that can help the manager decide when the best time to enter the market is,” he explains. “It is not about price – all trades are executed at an independently-sourced mid-rate – it is about improving execution by removing information leakage when discovering liquidity, and at the same time providing a pool for LPs to get paid to offload their large risk.”