MarketFactory on Platform Diversity: FX, Equities, and Fixed Income.

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James Sinclair, CEO of MarketFactory, speaks on the topic of Platform Diversity at the Profit & Loss and Trading Cross Connects event on February 10th, 2011 in NYC.

James Sinclair, CEO of MarketFactory, speaks on the topic of Platform Diversity at the Profit & Loss and Trading Cross Connects event on February 10th, 2011 in NYC.

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  • 1. James Sinclair
    CEO, MarketFactory
    jsinclair@marketfactory.com
    Platform Diversity: FX, Equities and Fixed Income
  • 2. Today’s Discussion
    Issues we don’t have in FX
    Opportunities specific to FX
    What does this mean for the platforms?
  • 3. Issues we don’t have in FX
  • 4. Throughput Not As Acute
    Source: International Securities Exchange Penny Pilot Analysis 9, Dec 2010
  • 5. Symbology Not As Broad
    Source: BIS 2010 Triennial FX survey; Google Finance equities volumes Sep 2010
  • 6. Less Regulation
    Nasdaq
    OMX PSX
    RegNMS:
    NYSE
    Amex
    ISE
    NSX
    NYSE
    Nasdaq
    BATS
    CHX
    Nasdaq
    OMX BX
    EDGX
    CBSX
    NYSE
    ARCA
    Plus dark pools (<15%)*
    FX ECNs are not constrained and have incentive to differentiate themselves.
    * Source: Rosenblatt Securities analysis
  • 7. Little Rebate Trading
    Unlike US equities, very little rebate trading
    Perhaps because tick size is large relative to cost of execution (even after EBS upcoming changes)
  • 8. In Addition….
    LOW PROFILE
    For the world’s largest market - we attract little press as the market has self-regulated well
    One exception
  • 9. Opportunities Specific to FX
  • 10. Global and Fungible
    London
    $725bn
    per day
    Asia
    $375bn
    per day
    New York
    $400bn
    per day
    Chicago
    $100bn
    per day
    Source: MarketFactory analysis based on BIS Triennial FX Survey
  • 11. Fungible also in Instrument Construction
    Unlike securities markets, but like other cash markets, synthetic instruments are identical to their traded counterpartse.g. cross currencies: EUR/JPY
    EUR/USD
    USD/JPY
    EUR/JPY
  • 12. Other Key Notes
    Credit instrument
    Natural interest arises from non-FX activities. Ultimately, sustained exchange rate moves are because of:
    Cross-border capital market activity, FDI, trade
    Substantially a principal market (and likely to stay that way as the banks facilitate the natural interest)
    Doesn’t fall in value (you’re just on the wrong side)
    High growth in retail sector
  • 13. So, what does this mean for the platforms?
  • 14. They’re All Different
    Different :
    Location(s)
    Price distribution frequencies
    Depth of book and indicators of depth
    Info about the quotes that make up a price level
    Tick size
    Info about deals and amounts done in the market
    Some have Last Look
    Upgrades are frequent
    Different platforms for different currencies, purposes
    Understanding of each platform required
    Opportunity
  • 15. Contrast with European Equities
    Source: Federation of European Securities Exchanges
  • 16. Interdealer FX Market in 2003
    CME
    EBS
    Reu
    DB
    Citi
    Prop Shop
    Prop Shop
    Prop Shop
    Prop Shop
    BoA
    JPM
    Prop Shop
    HS
    UBS
    Dres-dner
    FXall
    CX
    Real Money, Corporates
    Structure akin to US treasuries: Interdealer: Brokertec, eSpeed;
    Customer: Bloomberg, Tradeweb
    Still similar + GovEX.
  • 17. Interdealer FX Market in 2011
    Prop Shop
    Prop Shop
    Prop Shop
    Not shown:
    Futures brokers
    Retail
    Prop Shop
    EBS
    CME
    DB
    Reu
    Citi
    Barx
    Prop Shop
    HS
    Integral
    BoA
    CX
    FXall
    JPM
    UBS
    FXall
    Com-merz
    CX
    Execution through ECNs, banks and some funds
    Real Money, Corporates
  • 18. But Note…
    They are additive. New platforms in FX are not identical. They attract new participants & new strategies are launched. Market share no longer as relevant.
    Liquidity rarely moves away from an ECN in absolute terms (exceptions: small markets, TIPS, TBAs)
  • 19. Bringing It All Together
  • 20. Complexities in Equities and FX are Inverted
    High technology needs vs. high market structure knowledge needs
    Equities
    2 million msgsper 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
    Attribute
    Throughput
    Symbols
    MD Frequency
    Order Submission
    Fragmentation
    Regulation
    Market Structure
    Price Discovery
    TCA
    Transparency
    Price Filtering
    Order Routing
    OTC FX
    2 million msgper 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
    Easier
    Complex