Better FX pricing through diverse order flow

Published on 10 December 2021

Institutional traders need to think about how their FX liquidity providers can offer better pricing through unique order flow, from a combination of underlying trading across diverse institutional and retail traders.

If liquidity diversity is not supported, that creates very unpredictable trading costs in volatile markets and ultimately hurts investors. Artur Deliergiev, quantitative trading manager at CMC, explains how CMC Markets Direct delivers diversity through smart management of diverse order flows and risk management, and the risks of trading against non-diverse liquidity.

Dan Barnes: Welcome to Trader TV – your insight into trading for professional investors. I’m Dan Barnes.

FX traders can get better execution if they can access more diverse flow of liquidity. To understand how I’m speaking with Artur Deliergiev, Quantitative Trading Manager at CMC.

Artur, welcome to the show.

Artur Deliergiev: Thank you.

Dan Barnes: What are the challenges that your clients face and then what are the challenges that you face as a liquidity provider in trying to access less homogenous FX trading flows?

Artur Deliergiev: To run their strategy we’re obviously trying to look for diversity in terms of liquidity. So we can be assured that during different market conditions, we will have a good set of liquidity providers that we can extend those flow to. As a liquidity provider the challenges we face is effectively monetization of the risk we inherit on our books.

So questions we would have to normally answer is, do we have enough capital to run a certain amount of risk? Do we have a strategy and alpha to be able to monetize that type of risk? And if not, who do we externalize that risk to? Do we face tier one banks? Do we face non-banks or do we go to our primary venues?

The challenges with externalizing flow is minimizing the market impact and information leakage, because you want to remain invisible when you trade in the market. Those questions come with quite a lot of data crunching. So at CMC, we have a team of quant traders, quants and data scientists working on those challenges and problems on a daily basis.

Dan Barnes: Can a liquidity provider actually help then in accessing different types of liquidity and more diverse flows?

Artur Deliergiev: Certainly. As long as the liquidity provider actually publishes a unique type of liquidity. There’s quite a few players offering recycled liquidity, so not being genuine liquidity. I would take liquidity from a tier one bank or on LPB and effectively repackage it and sell it to their clients.

The problem with that is when the client is looking to minimize the cost of execution and optimize their aggregates effectively. We have aggregating prices from multiple liquidity providers. Not having a diverse set of LPs could translate to unpredictable costs in volatile markets. So what are you effectively looking for is diversity? We believe at CMC Markets Connect, we can offer diverse pricing to our clients, and that is built upon the inventory from our retail client base.

Dan Barnes: What appetite do you think there is among institutional firms for accessing retail liquidity?

Artur Deliergiev: In 2020 we’ve done a survey reaching out to our institutional traders to inquire if they believe that adding retail flow into a price construction for institutional investors would add value, and over 80% responded positively, thinking that it would generate a value add. And that’s why we believe in positioning CMC Markets Connect uniquely when it comes to providing liquidity in institutional space.

Dan Barnes: Are there any other elements that you think institutional traders and investors need to be considering in the FX space which you haven’t covered?

Artur Deliergiev: Initially, when you’re onboard with specific LP, things you can see straight away is obviously the prices they’re sending you, the spreads they’re quoting. But in terms of longevity of that relationship, you start measuring cost of rejection. If LP rejects the trade, cost of a market impact effectively, if I’m trading with LPA, and their market impact is high, but I’ve also got other LPs in the pool, they’re going to start treating my flow differently because it’s going to be a less profitable type of flow from them, because we’re seeing a high margin impact because I’m effectively leaking information through one of my LPs. So this big amount of data you need to consider to make the decision in terms of yes, tis LP is genuine liquidity, it’s not recycled liqudity.

Dan Barnes: That’s really interesting, so tell me what has CMC developed?

Artur Deliergiev: We’ve been in the space for a number of years now, but as we are now trying to grow, we’ve rebranded as CMC Markets Connect, responsible purely for the institutional side of a business, alongside of revamping our trading stack and covering over basics like moving into OTF, getting the cross-connect.

We’ve also partnered externally whereby we’re utilizing, well, commoditized components within the industry. We’ve got a big development team in-house, which we utilize for quite a lot of our stuff. Things like fx SOR doesn’t really make sense for us to spend next five years developing. So we partner with someone to get best in breed in the industry which allows us to optimize in areas where there’s no point of us spending our own development efforts.

Dan Barnes: And then how can institutional investors engage with you so that they can access better liquidity today?

Artur Deliergiev: We’ve already onboarded with a number of connectivity providers, as well as multi-dealer platforms. We are currently onboarding with a number of ECMs, so you’re going to be able to face or access our liquidity in a semi-disclosed or non-disclosed, anonymous fashion via a traditional CMS basically? And you can also access via direct API.

Dan Barnes: I’d like to thank Artur for his insights today, and of course, you for watching. To catch up on our other shows or to subscribe to our newsletter, go to TRADERTV.NET.