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Market Evolution: Predictions for the Future ACI Denmark September 20, 2012 James Sinclair CEO, MarketFactory

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Presentation on theme: "Market Evolution: Predictions for the Future ACI Denmark September 20, 2012 James Sinclair CEO, MarketFactory"— Presentation transcript:

1 Market Evolution: Predictions for the Future ACI Denmark September 20, 2012 James Sinclair CEO, MarketFactory

2 Tonight 1.Why is FX different? 2.Where are we now? 3.Where are we going?


4 Global, Dispersed, Fungible Europe $725bn per day Asia $375bn per day Americas * $400bn per day Chicago $100bn per day * Excludes Chicago

5 Also…. Natural interest: real needs –Cross-border capital markets, FDI, trade Lightly regulated: can differentiate Strong credit model (CLS, Prime Broker) Well established (Biblical references)

6 Resilient 1,039 Banks; 580 Buy-side Banks; 300 Prop Funds; Real Money; Hedge Funds; Corporates euro, mergers consolidation euro, mergers, consolidation

7 Retail Aite Group

8 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


10 CLS FX Spot Volume Flat recently CLS data indexed to July 2010

11 CLS FX Spot vs. US Equities But better than other markets CLS, US Consolidated A, B, C tape

12 CLS FX Spot vs. Europe Equity Similar in Europe CLS, Thomson Reuters Monthly Market Share – all lit, hidden, auction, dark, off order books

13 FX, US Bonds, US Equities Clearly correlated CLS, US Consolidated A, B, C tape, SIFMA primary dealer treasury, corporate>1 yr, agencies

14 Greenwich Associates Playing the Scale Game But is it the only game to play?

15 Customer FX Growth

16 © MarketFactory, Inc Interdealer FX Market in 2011Interdealer FX Market in 2003 Reu EBS CME DB Structure akin to US treasuries: Interdealer: Brokertec, eSpeed; Customer: Bloomberg, Tradeweb Still similar + GovEX. Prop Shop BoAJPM UBS Dres- dner Citi 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

17 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

18 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!

19 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

20 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

21 Major ECNs and CME Trends are converging Major ECNS and CME

22 CLS vs. Established ECNs Established ECNs are losing share CLS, Major ECNS

23 Low Volatility, Low Volumes

24 FX Options BIS Survey; Aite Group

25 FX Options BIS Survey; Aite Group


27 Predictions The Easy Ones Emerging markets (RUB, CNY) New platforms, new exchanges (e.g. CME Europe) Asset managers seek better FX access TCA

28 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

29 Tighter Spreads Equities Market Turned Agency Aite Group

30 Modest Net Consolidation Customers value relationships FINRA

31 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.

32 Many Platforms will Succeed Bring New Segments Enable hedges not economic before Grow market

33 Democratization of Options BIS Survey; Aite Group

34 34 Electronic FX Options Hybrid Broker- backed Order books RFQ Major single bank platforms: UBS, Deutsche Autobahn and BARX

35 CME FX Options A model for options? CME

36 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

37 Algorithmic Trading Trader gets an assist from the computer. Can give it to customer

38 DMA The Agency Model New Participants, More Participants Next Phase of Market Growth

39 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

40 Greenwich Forecast Our best days are ahead


42 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

43 Growth by Geography

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