Aggregators: the rise & fall
Over the last 20 years, the landscape of the e-FX market has undergone significant changes. From massive technology advancements to improvements in charting and automation, the industry has completely transformed in almost all aspects.
One such important change has been that of the rise of the FX Aggregator. Offering impressive benefits including smart order routing and a seemingly endless supply of liquidity with a large stack of LPs competing to become top of book, it appeared to be a no-brainer. However, the reality does not quite live up to these initial impressions.
Decreased efficiency
Continuing to add liquidity providers to the market data order book will eventually take its toll. Price formation will update at the rate of the slowest LP, therefore you’re at risk of being behind, trading on a rate that has moved without your knowledge.
Latency lags
When over-aggregation occurs, the same liquidity can be repeated multiple times. Furthermore, lags in latency will mean that quotes that have been forwarded to clients may also never be actualised, and the bank ends up taking a commission on what client’s could be consuming directly.
Lack of control
Increasing the number of LPs included in the aggregator does not necessarily equate to lower transaction costs. The reality is that LPs alter their spreads depending on how they perceive the liquidity environment to be at any given point in time. In addition to this, you’re unable to take control of spreads and trading SLAs for clients.
Increased transaction costs
Stack-sweep execution in an aggregator with participating LPs keen to externalise is detrimental to transaction costs for an uninformed trader. This is a combined effect of last look and dollar cost of rejects as LPs also look to externalise their risk in the period between receiving a reject and the client replacing the order.
Significant unnecessary costs
A large number of LPs may be undesirable and inconsistent, with costly relationship management, reduced economic incentives for LPs, and less trader reliance on individual LPs. There are also per-LP costs associated with connectivity, which will become increasingly more significant as the bank increases.
What’s the alternative? Take control of your price formation and work with a manageable amount of strong LP relationships to ensure success. MFX Echo offers these benefits and more, including managing liquidity costs, automating policing flow, maintaining a constant view of market depth, and understanding clients so you can respond in real-time.
To find out more about MFX Echo and how we can help you, visit our website
