In the pursuit of methods to optimise liquidity mix, panellists at the TradeTech FX US conference in Miami agreed that fostering good and consistent dialogue between liquidity providers (LP) and liquidity consumers is key.
Christopher Connolly, business strategist at Cubic Systemic Strategies, explained that there are two key stages when looking to work in this space – initial set up when first engaging with LPs in order to find a liquidity mix, and the subsequent adjustment period once trading has begun.
“It really starts with honest conversations with each vendor and LP, stating what your strategy is, what currency you’re going to trade in, which hours you’re going to trade, holding periods etc,” he said. “I’ve really found that the more honest you are, the more valid your feedback is.”
Panellists acknowledged that there is a cost associated with not only the setting up of a new relationship, but also the adjustment period following. They unanimously agreed that acting on the results of important dialogues between actors enhance performance on both sides.
Michael Babic, head of eFICC sales, Bank of America further asserted that compared to the past where there were less two-way conversations, the hunt for optimal liquidity mix is now no longer “a set it and forget it process,” but rather a continual assessment of how to improve as a provider.
“We’ve seen this really significant shift since 2020 or perhaps even beforehand where vendors are being more critical on their side as to how many people they want in their pool […] I think both the sell- and buy-side are converging with mutually beneficial dialogue which at the end of the day presents a really good outcome,” said Babic.
When asked how many LPs are optimal, the panel seemingly agreed that there is no one size fits all answer for an optimum liquidity pool.
“It depends on what the drivers are for clients in terms of what they’re looking for,” said Srichakri Adhikarapatti, global head of FX and cash equities principal quant trading at UBS.
Phil Weisberg, EVP strategic planning and partnerships at OneZero confirmed that approaches are changing and thus the optimal number has evolved with the market: “The way we think about it is that it isn’t just one pool, it’s pools.
“There’s a variety of different strategies being executed and different trade types. If you take a step back and understand your own flow better, you find that different flows are better suited to different pools and the tools do exist now to analyse this.”
Speakers also delved into what data is looked at when making these decisions. Connolly explained that general overviews include rankings and volumes by currency and certain times of day, highlighting that a particularly good metric is what percentage of the day a participant is on one side or the other, as well as what the performance is short-term after the trade.
Adhikarapatti added: “Where LPs can differentiate themselves to an extent is how much skew they’re showing and how much we are actually internalising […] the conversation in the past used to be all about execution costs, but now it’s a lot more about the market impact.”
Also speaking to the importance of data, Eugene Markman, chief operating officer at ION FX, said that though it’s hard to make generalisations from the data perspective as solutions are different based on client profiles, in all cases good and clean data remains the most important thing.
However, the speakers were in agreement that overall, paramount is understanding what’s important to each individual participant and understanding what the data is actually saying.