May 25, 2012
Getting to grips with FX
A new multilateral trading facility (MTF) for FX
derivatives will help to reshape the currency markets to a more efficient, more
transparent model, says Evgeni Mitkov, CEO, SURFACExchange.
FX has traditionally been seen as a
secondary consideration for many traditional asset managers. But legal disputes
between buy-side firms and custodians have helped draw attention to how best
execution can be achieved in the asset class. SURFACE has been building up its
pre-trade analysis capabilities, a central order book, and a range of
exchange-traded products. The upshot, according to Mitkov, is that buy-side firms
need no longer rely on custodian banks for their FX execution.
Investor
choice
“FX is a market in which phone trading has
left buy-side firms and end-investors the prisoner of the top five big banks,”
says Mitkov. “Banks have been able to set a 'my way or the highway' pricing
policy, to the disadvantage of asset managers. But we are offering a platform
that users can connect to via the Internet, that gives investors real choices
and control over their execution.”
Active in Europe and the US, SURFACExchange
launched in August 2011 with G10 currency pairs and crosses listed in the form
of OTC forwards and options. It now encompasses both vanilla and customised
volatility products across G10 options and forwards. Its stated aim is to
provide a level playing field to market participants, with open price
transparency and an anonymous trading system for OTC FX derivatives. SURFACExchange
currently has 30 market participants; Citigroup is acting as the platform’s
central counterparty (CCP). Price on the exchange are determined by the participant firms dealing with each as there are not specific market making firms on the platform.
Other electronic platforms already exist in
FX. These include interdealer broker platforms, aggregated liquidity pools,
multi-bank trading platforms, and electronic communications networks. But
Mitkov insists that SURFACExchange opens up a new front for investors.
“SURFACExchange operates an exchange-type
model for the OTC contracts that have been traded on the phone previously,” he
says. “On our platform, you can access a central limit order book for that product
on a completely anonymous basis. Our platform provides depth of book
information, automated execution and anonymity with the minimum of hassle – it’s
like going from a donkey to a Ferrari.”
Automated
solutions
SURFACExchange offers users several
automated order types, such as icebergs, as well as the ability to sweep the
book in search of liquidity. It is also grandfathered into the Dodd-Frank
regime, avoiding the danger of any incompatibility with new regulations for the
central clearing of OTC derivatives.
In addition, the MTF also devoted
considerable resources making the expiry process electronic. The reduction of
expiration risk helps to make the buy-side comfortable on the platform,
according to Mitkov. While some observers have warned that front-running could
still be a problem in FX, due in part to the predictable, scheduled nature of
some trade participants’ execution strategies, he sees the anonymity provided
by the MTF as a useful tool to help buy-side firms trade safely and efficiently
in FX.
“Some firms had previously abstained from
developing systematic trading strategies in FX, because you could be worked out
very quickly,” he says. “But the MTF is anonymous, so it’s possible to deploy valuable
advanced automated strategies without people reading you.”
Buy-side market participants are fuelling a
rise in FX volumes and liquidity through their increasing use of currency
instruments to hedge equity exposures. In the US, many asset managers are either
hiring separate managers for their currency exposure or have started hiring
traders themselves. The fact that volatility is generally lower in FX than in
equities makes FX an ideal hedging tool, says Mitkov.
“Global FX is a huge market,” he says. “Banks
have dominated this space for years, concentrating flows for their own
advantage. But investors lacked innovative electronic solutions. SURFACExchange
is building a more efficient, more transparent market that can benefit all
market participants to achieve best execution in FX.”
Elliott Holley
+44 (0)20 7397 3820
elliott.holley@information-partners.com