Equities and FX Market Structures are Inverted Equities –Millions 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 –Millions msgs per day –20 pairs; 66% of FX in 6 pairs –Real-time custom snapshots –Max 100 orders per second –Globally fragmented venues –Light – 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
WHERE ARE WE NOW?
CLS FX Spot Volume Flat recently CLS data indexed to July 2010
CLS FX Spot vs. US Equities But better than other markets CLS, US Consolidated A, B, C tape
CLS FX Spot vs. Europe Equity Similar in Europe CLS, Thomson Reuters Monthly Market Share – all lit, hidden, auction, dark, off order books
FX, US Bonds, US Equities Clearly correlated CLS, US Consolidated A, B, C tape, SIFMA primary dealer treasury, corporate>1 yr, agencies
Greenwich Associates Playing the Scale Game But is it the only game to play?
The HFT Riddle Their liquidity lowers costs for users They make millions of dollars How do they do both at once? Some hold for μsecs; have no customers
Pragma: They may raise costs June 29, 2012 market. Red dot indicates 10% with longest queue length. HFT and the Hidden Cost of Liquidity, Pragma Securities, July The highest volume US stocks are the most expensive to trade!
Pipping: 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
An Opinion HFT additive if: Always there in many pairs; Use info from other asset classes; or Hold positions for material time But can we choose? A slippery slope
Major ECNs and CME Trends are converging Major ECNS and CME
CLS vs. Established ECNs Established ECNs are losing share CLS, Major ECNS
Low Volatility, Low Volumes
FX Options BIS Survey; Aite Group
FX Options BIS Survey; Aite Group
SO, WHERE ARE WE GOING?
Predictions The Easy Ones Emerging markets (RUB, CNY) New platforms, new exchanges (e.g. CME Europe) Asset managers seek better FX access TCA
Predictions The Harder Ones Volume Fragmentation / Consolidation Which products? How traded? Retail US elections; fiscal cliff; eurozone economy Basle III, MIFID II, Dodd-Frank, EMIR
Tighter Spreads Equities Market Turned Agency Aite Group
Modest Net Consolidation Customers value relationships FINRA
Fragmentation US cash equities: 13 exchanges; 50 dark pools; plus broker-dealers European equities: 28 lit books; 2 hidden; 20 auction markets; 13 dark books.
Many Platforms will Succeed Bring New Segments Enable hedges not economic before Grow market
Democratization of Options BIS Survey; Aite Group
34 Electronic FX Options Hybrid Broker- backed Order books RFQ Major single bank platforms: UBS, Deutsche Autobahn and BARX
CME FX Options A model for options? CME
How Will Traders Execute? Revival of direct market? Fragmented platform market Block trading – four ways to trade: – Transfer risk to a Bank – Algorithmic Trading (chop it up) – Dark Pools/Order Types (akin ITG Posit, Liquidnet) – Shop through a Voice Broker
Algorithmic Trading Trader gets an assist from the computer. Can give it to customer
DMA The Agency Model New Participants, More Participants Next Phase of Market Growth
In Summary FX is special: real need; global; dispersed Increasing fragmentation. Modest net consolidation Emerging markets, options. Regulation helps Banks have customer relationships. Scale is a strategy, but not the only one Banks increasingly empower their customers: algorithmic trading, DMA
Greenwich Forecast Our best days are ahead
APPENDIX IN CASE OF QUESTIONS ON THESE TOPICS
High-Frequency Trading Choose your definition: 1.Systematic; Quant; <1 day holding 2.High volume; Low inventory 3.CFTC (US govt) defn. 25% of volume, but highly visible Irene Aldridge – Estimating Proportion of High Frequency Traders, July 10, 2012