Peer-to-peer liquidity is one solution to the increasingly fragmented foreign exchange landscape, a market structure panel at TradeTech FX has found.
However, peer-to-peer cannot be used to fix the problem alone, with several panellists noting the importance of relationships and even voice trading during the volatility seen within the last few years.
The fragmentation of liquidity is a key market structure theme that has been identified at TradeTech FX, with the range of liquidity channels available in the market now broader than ever.
“The primary markets were the place where the bigger banks would source liquidity,” said Simon Bevan, global head of eFX trading at ING. “But primary markets do not always have the best liquidity or price, market impact is guaranteed and you can show in bigger size elsewhere.”
Among the growing options to grip the FX market are peer-to-peer pools, that allow buy and sell-side institutions to provide liquidity to one another directly. The topic has been brought to the stage at TradeTech FX for several years now and alongside those that sing its praises there remain participants that express concern over the pools’ reliability – and not knowing who is operating within them.
“If you’re more active you need liquidity, and all-to-all can’t guarantee that,” added Bevan. “Liquidity providers guarantee it but it might not be the best price.”
All panellists speaking at the 2022 event noted peer-to-peer was an essential tool as part of a wider toolkit. Founder and chief executive of peer-to-peer pool FX HedgePool, Jay Moore, said that unlike bilateral markets, peer-to-peer could reduce fragmentation by preventing a firm’s flow from being split up by broker, among other benefits.
The potential for an uptake in peer-to-peer trading begs the question: what could the future role of FX counterparties look like if it were to reach critical mass. The process of electronification has significantly reduced desk size globally, particularly in the spot markets; however, ongoing market volatility has sparked a resurgence in the importance of personal relationships and even, in some cases, voice trading.
In times of volatility, panellists noted peer-to-peer could be used for passive flow to free up the time and attention of traders.
“Constant feedback is needed on what’s driving pricing during market volatility,” said BlackRock’s head of FX trading, David Turner.
“It’s important to get trader input on the macro side and strategy. You need to keep all avenues open. It’s about having all of the tools in the toolkit,” concluded Turner.