Dynamic panel structuring is key to maintaining trading efficiency

The TRADE sits down with Joseph Forde, FX trader at Brown Brothers Harriman (BBH), to unpack the best approach to panels, highlighting the key factors when it comes to analysing bank performance, the importance of a flexible structure, and what should be front of mind to maintain effective, long-lasting relationships with liquidity providers.

What factors do you use to analyse bank performance and set panels?

We consider a variety of factors, but pricing quality is first and foremost and cannot be overlooked. Under this idea is a multitude of factors including a constant assessment of bid ask spreads, counting rejects in terms of both absence of pricing and trade rejection, historical performance in terms of currency, size of trades, and importantly, the measure of bank availability in ‘crisis’ i.e. how reliable our liquidity providers are in difficult trading times. When the market is functioning well, spreads are tidy, liquidity is abundant, and quality pricing is easier to find. In those 5% of times when the market is under stress, that’s when we need to know where to look.

Fill ratios and hit rates are also important factors when considering bank performance.

How do you structure your panels?

Our process for LP selection is dynamic, meaning we can adjust our LP panels easily and there is no real lag between analysis and panel adjustment. This flexibility helps us respond quickly to changes and to maintain trading efficiency. We can segment our flow into specific currency buckets based on several characteristics such as currency, groups of currencies, and size. We then decide what tier the trade or groups of trades fit into in terms of difficulty.

Underneath this, we also consider market conditions or the desired outcome for a particular trade. While we have an idea for the number of banks a trade would ideally have, we don’t believe that throwing as many LPs as possible into an aggregator will allow us to achieve an efficient spread.  I think the market now agrees too.

How can you move into the position of ‘preferred customer’ and what benefits can this bring?

We see our relationships with our liquidity providers as partnerships, and we take a strategic approach that emphasises mutual value and long-term partnership. We don’t want or expect our LPs to be the best at everything. We value transparent communication – if you aren’t going to be efficient with GBPUSD but you are going to add value somewhere else, then let’s have a conversation and we can structure our panel accordingly.

As I’ve mentioned before, we place a lot of value on reliability and consistency in both good and bad times. All of this helps to create a more efficient environment. Moreover, the benefit of this mutual understanding is that it fosters the creation of long-term successful relationships and a well-functioning market.

How do you leverage bank relationships to get the best pricing?

We use a combination of engagement and transparent communication to leverage bank relationships to obtain quality pricing. When you reach a point in the relationship where you have regular dialogue, consistent trading volume, and productive use of technology in terms of analytics and execution, then you have a good base for building lasting relationships that support your competitiveness in the market.

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