Foreign currency market continues to remain non-centralized and fragmented. While the collective daily volume in spot, forward and swap foreign exchange market is around 3 trillion, lack of transparent price discovery and liquidity amongst numerous institutional Forex dealing platforms still remains a prime concern due to the fragmented nature of Forex market. Given the increasing interest in online foreign exchange dealings, new and improved trading venues are becoming available.
Due to the decentralized, segmented and over-the-counter nature of Forex market, liquidity has always been dispersed. However, in the last ten years the number of sources from where liquidity can be sourced has increased enormously. Forex Liquidity Aggregators are tools that enable market participants to view all of the various sources of liquidity on one screen. Following are some of the advantages of Forex Aggregators:
Virtual Forex Exchange
A Liquidity Aggregator acts as a centralized trading portal by accepting and normalizing several data feeds, feeding that data into algorithmic engines and receiving orders and routing them into the market. By presenting the liquidity in a single and consolidated order book, Aggregators act as a ‘Virtual Forex Exchange’ for buy-side traders. Traders can get a complete picture of available liquidity in a single trading environment, which enables them to have maximum control over their order flow by easily sorting, analyzing and making profitable decisions.
Limiting Transaction Costs
By accessing multiple sources of liquidity, Forex Aggregators put back the market together for buy-side traders. Besides lowering transaction costs and time spent for searching liquidity, they also limit the potential risks involved by placing all execution orders in one order ticket. The cost of aggregation services will be offset as traders spend less time searching for the best price.
Increasing Trading Efficiency
By employing Aggregators, traders will no longer require to subscribe to multiple portals on their desktops. By aggregating the functionality, pricing and liquidity under one portal, traders can save on the cost of staff and infrastructure which they would have otherwise employed for managing various portal connections under traditional execution system. A major challenge faced by traders using traditional execution process is the ‘last look provision’. Bank portals have a waiting period of several hundred milliseconds to several seconds before a deal is executed. Seconds can make a huge impact on profitability especially for algorithmic trading system. However, by aggregating various liquidity sources, last look provisions can be minimized, thereby increasing trading efficiency.
Better Price Discovery
Forex Aggregators internally match trade orders between all buy-side traders and liquidity providers thus providing better price discovery, greater liquidity. This further improves the response time and order confirmations for the users.
Buy-side firms prefer maintaining anonymity while trading in Forex marketplace as they do not prefer reveal their trading strategies. Forex Aggregators enable them to execute daily currency flows without revealing their position or identity.
Smart Order Routing
Forex Aggregators also allow for ‘smart order routing’, wherein buy-side firms can continuously observe all the liquidity sources to determine where the best market opportunities lie. After an order is executed, the Aggregator automatically decides where to route, how much of the total amount to send to which venue and what orders to send. Also, users can refer to only one screen instead of referring to several single or multi-screen portals at the same time, thus saving on cost of employing systems for each trading venue. Besides delivering efficiency gains, this technology also enables market players to retain more trading value. Forex players are therefore giving increasing services that deliver a single point of access to market liquidity, combined with a common trading record.