Efficiently Sourcing FX Block-Trade Liquidity without Information Leakage or Market Impact

New electronic solutions for FX block trading are emerging as this last bastion of voice trading is being reshaped by increased regulatory capital requirements, tighter internal credit standards and fallout from the fixing quagmire.

This article discusses the Full Order Execution (FOX) block trading mechanism offered by Advanced Markets, which operates a low latency, direct market access (DMA) liquidity pool in which liquidity is streamed by 10 leading FX banks.

FOX grew out of discussions with Advanced Markets’ bank liquidity providers around a common set of problems including market fragmentation, the so-called winner’s curse and phantom liquidity phenomena, which arose as the firm’s market microstructure attracted participation from hedge funds and asset managers.

FOX is a true block trading mechanism enabling institutional foreign exchange market participants to transact in block quantities anonymously with no market impact, pre or post-trade information leakage. FOX provides best execution advantages to fund managers and other buy-side market participants that are not available through existing voice or electronic FX trading models.

A new liquidity protocol is at the heart of FOX. Banks stream liquidity at discrete volume tiers enabling orders to be executed for their full quantity. The protocol differs significantly from other block mechanisms, which bundle existing bids or offers together to price block size quantities.

FOX enables buy-side market participants to execute large trades anonymously, on aggregated multibank liquidity, in a single full-amount transaction with a single bank liquidity provider.

The buy-side trader’s interest in the trade is in no way signaled to sell-side liquidity providers in advance of the trade. Only the single bank liquidity provider that “wins” the trade knows it occurred. Both buy and sell-side counterparties benefit by this phenomenon.

Because only the bank liquidity provider that has taken the other side of the trade is aware the trade was in the market, the transaction has virtually no market impact.

FOX’s block liquidity paradigm is a powerful driver for buy and sell-side traders to concentrate block trading activity via the facility. As such, it drives a virtuous cycle that enhances block foreign exchange liquidity.

Currently, FOX is in its early stage of development. Banks are streaming tiers of 10 and 20 million currency units. The model is scalable. A 50-million unit tier will be added next and the banks are committed to increasing quantities based on market demand.

Advanced Markets is working on further enhancements of the FOX mechanism to provide greater utility to buy and sell-side market participants. Our team is open to discussing the mechanism with market participants to provide greater detail as well as to get a broader range of perspectives on sourcing institutional FX liquidity.

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