The Full FX Conversation…The Need for Speed – Part Two
Posted by Colin Lambert. Last updated: September 27, 2021
In the second of a series of three articles looking at the benefits of ultra-low latency, David Faulkner, global head of sales and business development, Fluent Trade Technologies talks to The Full FX about how platform speed and efficiency is empowering a broader demographic of FX market players
Colin Lambert: In Part One of this series, we touched upon how technology is levelling the playing field for a wide range of FX market participants – what is the challenge facing these players?
David Faulkner: Too many aspects of the FX technology value chain remain highly inefficient. Slow data flow can result in inaccurate decision making, but the impact of that is significant. For example, we know that last look hold times do factor in technological delays – inefficient tech does not accurately relay real-time data. Similarly, risk checks and resulting trade flow management are also reliant on data. Any data inefficiency can create missed opportunities for LPs, clients, and venues – impact P&L significantly and damage relationships.
Ultra-low latency technology is proven to have significant benefit to the whole value chain for those market participants that embrace it. We consistently see better pricing ability, better reaction times, better fill ratios and a greater certainty of execution for all participants.
In part one we also talked about outsourcing elements of the tech stack, the pipes and connectivity and processing. That really fits well with this segment of the market, doesn’t it?
It does. The ability to compete in an environment of tighter spreads by leveraging technology to improve profitability is game changing. Any venue, LP, broker, and client knows that a stale price in the ecosystem is a risk. Trade attempts on stale pricing often results in missed fills/rejections and can all too easily create tensions in the relationship.
Technology that improves the speed and efficiency of data, the risk check, and transactional flow, has historically been complex and expensive. Not anymore thanks to specialists in ultra-low latency like Fluent.
Our aim is to help commoditise, standardise and eliminate all barriers to entry for the very best technology available. We see that as the best way to improve overall market efficiency and to truly level the playing field for all participants. Access to advanced technology is now at a point where participants don’t even have to do a code integration anymore. Integrations can be very fast, a few weeks.
We’ve seen regional and super-regional LPs supercharge their FX business by embracing ultra-low latency – without exception, it completely transforms the way they look at their FX strategy.
What do you mean by that?
Take a super-regional LP that has a dominance in a core segment of currencies. Over the past decade they may have lost ground to other LPs. Their clients still want to trade with them, however, but not at any cost.
By outsourcing the tech stack, the LP has been able to refocus on its IP, its franchise and specialties. The results are that not only do they price and respond quickly, often quicker than anyone, but they are also winning more business because they offer a greater certainty of execution to the client. Rejections evaporate because hold times reduce, fill ratios climb, all thanks to an accurate and up to date price.
These LPs can re-engage with clients they may have struggled with previously. Using best of breed technology has transformed the way they looked at the business, because they found they could now handle pricing a wider range of clients. The client relationship changes dramatically.
You highlighted the importance of their local clients to regional players there, what happens if the client can’t handle the pace of updates?
Efficient and scalable technology enables you to throttle updates and price submissions to individual clients depending upon their capabilities. If things are working efficiently, whether you’re pricing one-to-one or one to a bucket of clients, you can put a speed bump here, slow a stream down there, and that all happens very quickly – the technology responds to conditions.
In badly designed technology, not only is it difficult to throttle, but bottlenecks emerge which hamper your entire system’s performance and add milliseconds to something that should take low single digit microseconds.
Regional players are also clients of the Tier-1s aren’t they?
They are and that’s where the real benefit of outsourcing the tech stack comes in – they can manage inbound and outbound traffic so much more efficiently. They can have multiple prices coming in and going out, so by delivering an end-to-end roundtrip time, including all risk checks, of about 30–50 microseconds – when you think there are still many LPs that are in the tens of milliseconds – that is phenomenal.
This speed not only ensures they are able to handle more of the important business from their key clients, but importantly also effectively and efficiently manage the resulting risk. This also feeds down to the regional end user clients, who are seeing the benefits of shorter hold times and higher acceptance rates, because of the quality of the regional LP’s pricing.
This gives tremendous confidence to those players outside the top tier that not only can they compete, but they can do so effectively and profitably, without enormous investment in people and technology.
But there are benefits to that relationship from regional players having better technology…
For the original LP? Of course. Data drives every decision, so more efficient order and transactional data provides greater visibility to true real time risk, while flow risk data drives pricing and hedging decisions. Slow data results in every decision being based on what is outdated data – which is of course filled with inherent risk.
There are concerns in the FX industry over the concentration of risk and liquidity in too few hands, it strikes me that if we can enhance the sell-side and buy-side regional players’ technology capabilities, we would go some way to addressing these fears?
We think so yes. A greater choice of buyers and sellers competing on a level playing field, and of course the greater to opportunity to match trading interest – even in the most volatile of markets and busiest of minutes – that is a powerful value proposition for the whole industry.