Platform Diversity and the Evolution of FX

9 June 2011
James Sinclair, CEO of MarketFactory, speaks on the topic of Platform Diversity and the Evolution of FX at the P&L Forex Network on June 9, 2011 in New York. The following is a 3 minute video excerpt and the complete, narrated powerpoint presentation is available for streaming below:


MarketFactory: Platform Diversity and FX Market Evolution

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James Sinclair CEO, MarketFactory Platform Diversity and FX Market EvolutionSlide 2

Today’s Discussion Why is FX Different? Where Have We Been (Recently)? 3. Where are We Going? MarketFactory, Inc. (c) 2011

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Why is FX Different?

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Less Regulation Nasdaq BATS NYSE Nasdaq OMX PSX CHX CBSX NSX Nasdaq OMX BX NYSE Amex NYSE ARCA EDGX ISE RegNMS: Plus dark pools (<15%) FX ECNs are not constrained and have freedom to differentiate themselves. MarketFactory, Inc. (c) 2011

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Platforms are All Different Different : Location(s) Price distribution frequencies Depth of book: and indicators of depth Info about the quotes that make up a price level Tick size Info about deals and amounts done in the market Some have Last Look Upgrades are frequent Different platforms for different currencies, purposes Understanding of each platform required MarketFactory, Inc. (c) 2011

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Global and Fungible London $725bn per day Asia $375bn per day New York $400bn per day Chicago $100bn per day MarketFactory, Inc. (c) 2011

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And Also… Credit instrument Substantially a principal market Natural interest arises from non-FX activities: Cross-border capital market activity, FDI, trade Doesn’t fall in value (you’re just on the wrong side) MarketFactory, Inc. (c) 2011

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Complexities in Equities and FX are Inverted High technology needs vs. high market structure knowledge needs Equities 1million msgs per second Thousands Real-time broadcast Tick by tick – every tick! Thousands / second Centralized markets Heavy – e.g. Reg NMS Standardized NBBO Established; low difficulty Full depth of book None b/c of CCP Order routing from point of order submission Complex Easier Attribute Throughput Symbols MD Frequency Order Submission Fragmentation Regulation Market Structure Price Discovery TCA Transparency Price Filtering Order Routing OTC FX 1 million msg per day 20 pairs; 66% of FX in 6 pairs Real-time custom snapshots Max 100 orders per second Globally fragmented venues Unregulated – isolated venues All non-standard; all bespoke Venue specific Difficult – lack volume info 1-3 levels of depth common Heavy b/c of bilateral credit Complex decision process Complex Easier MarketFactory, Inc. (c) 2011

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Where have we been?

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Interdealer FX Market in 2011 Interdealer FX Market in 2003 Reu EBS CME DB Structure akin to US treasuries: Interdealer: Brokertec, eSpeed; Customer: Bloomberg, Tradeweb Still similar + GovEX. Prop Shop BoA JPM UBS Dres-dner Citi Prop Shop Prop Shop Prop Shop Prop Shop HS Real Money, Corporates CX FXall CX Integral Execution through ECNs, banks and some funds Not shown: Futures brokers Retail Com-merz FXall Barx MarketFactory, Inc. (c) 2011

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Recent Platform Changes Decimals More transparency Faster feeds More ticks More visible depth Faster matching engines More venues NDFs new pairs, new futures contracts New order types MarketFactory, Inc. (c) 2011

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So, where are we going?

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Decimalization… A Very Well-Rehearsed Story Source: Tick Size Regulation, Intermarket Competition and Sub-Penny Trading. Sabrina Buti, Plus options: SEC Penny Pilot 2007 & Ongoing MarketFactory, Inc. (c) 2011

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Message Rates Increase… MarketFactory, Inc. (c) 2011

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Spreads Contract… 16ths Decimalization Source: NYSE Factbook NYSE -84%! MarketFactory, Inc. (c) 2011

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But Unevenly So Before and after moving to 1/8ths. Source: NYSE, Eighths, Sixteenths. Michael A. Goldstein, Univeristy of Boulder MarketFactory, Inc. (c) 2011

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Source: Aite Group Many Orders already at Major FX Platform minimum But: Order Size Falls… in FX it
Cannot MarketFactory, Inc. (c) 2011

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Similarly in Options “It wasn’t introduced in a responsible and conservative fashion… Pennies made sense for options that were trading under a dollar. But as you went above that, pennies didn’t make sense. We said there would be a loss of liquidity and that’s exactly what we saw.” [ Not for all options: “…Pennies made sense for options that were trading under a dollar. ..We said there would be a loss of liquidity and that’s exactly what we saw.” Gary Katz, ISE Shrinking size: “With nickel and dime increments, you might have had 1,000 contracts… often [now] you’ll only see 10 or 15 contracts.” Andy Nybo, Tabb Group Volatility: “… In pennies, you move to the next trading increment much more often.” Ed Tilly, CBOE Quoted in Financial Times, November 3, 2010 MarketFactory, Inc. (c) 2011

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Pipping in FX: Repeat of Sub-Pennies in Equities Source: Tick Size Regulation, Intermarket Competition and Sub-Penny Trading Fig 1. Sabrina Buti, University of Toronto, et. al. June 1, 2011 MarketFactory, Inc. (c) 2011

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Rebate Trading Example: BATS Options pricing $0.50 rebate if you set a new NBBO (in size) $0.20 to $0.40 rebate as maker $0.30 to $0.40 cost as taker See MarketFactory, Inc. (c) 2011

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Rebate Trading Why not in FX today? There is high risk replicating across platforms: Major platforms don’t send tick-by-tick market data High minimum size Tick size still on the larger side If that changes… MarketFactory, Inc. (c) 2011

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Rebate Trading

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Execution New Venues – But they are additive Liquidity only moves to detriment of venues in smaller markets, e.g. TBAs, TIPS, when venues lack differentiation, e.g. European MTFs, or a change on scale of voice-electronic Block trading – four ways to trade: Transfer risk to a Bank Algorithmic Trading (chop it up) Dark Pools/Order Types (akin Pipeline, ITG Posit, Liquidnet) Shop through a Voice Broker And most significantly… MarketFactory, Inc. (c) 2011

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Spot DMA New Participants, More Participants Next Phase of Market Growth Movement in that direction. For example… MarketFactory, Inc. (c) 2011

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Enter FCMs Stage Left …

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… and Stage Right

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Each Model a Little Different …

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… Most Provide Margin

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Some Provide Access …

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And Different Target Markets …

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Retail Platforms CitiFX Pro FXCM Pro Gain GTX Alpari Direct Pro Saxo Others… MarketFactory, Inc. (c) 2011

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In Summary If major platforms reduce minimum size: Tighter spreads in liquid ccys Higher message rates If market goes tick-by-tick: Rebate Trading And Waiting Like a Coiled Spring… DMA in Spot Dark Pools Algos MarketFactory, Inc. (c) 2011

Source: Forex Network