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Sunday, June 22, 2008

Apama's Fit in the Future of FX

Posted by John Doherty

It seems like only yesterday that Atriax (2002) died leaving FXall and FXConnect the only multibank portals offering the Buy Side “competitive” FX prices via RFQ pricing from the banks.


In the past few years we’ve seen exponential growth in the number of FX trading venues and the services that they offer. No longer are those venues which provide streaming prices and anonymous matching exclusive to the banks, with even the electronic FX trading duopoly of the 80’s & 90’s forced to allow Buy Side participants a seat at the table (via Prime Brokerage) because of the competition.


The changes have blurred the roles between the Buy & Sell Sides, primarily benefiting the Buy Side through greater transparency, enhanced prices and real-time market access. To the Sell Side, ECN may no longer be a term that evokes hatred but it’s difficult for them not to remember the “good ole days” before paper thin spreads and anonymity.


In today’s ever fragmenting environment Complex Event Processing (CEP) has already solved many problems for both the Buy & Sell Side. We have customers who’ve automated a variety tasks, produced both Trading and Execution Algorithms and claim that they’re doing twenty times the number of trades with the same number of dealers.


In the past year FX Aggregation has been “the flavour of the month.” I particularly liked it when a senior executive who saw our system and simply said “There is no fragmentation. With this system my dealers can access the whole market through just one screen.”  (learn more)


The May Edition of Profit and Loss (P&L) contained an article called the “Shifting Landscape: DMA, BANKS AND ECNS” which said “many refer to today as the Golden Age of ECNs.” It pointed out how the “Credit Crisis” and the events of last August forced many in the Buy Side to rethink the importance of having a relationship with banks to ensure access to the liquidity banks is maintained when other pools start drying up. 


Although P&L doesn’t see the death of ECN’s, the article made a number of observations and predictions on how the banks shall reassert themselves in the ever changing landscape of FX. I’m writing to comment about CEP’s role in what’s being predicted.


The cornerstone to P&L’s future lies in banks offering Direct Market Access (DMA) to their customers to guarantee transparency and best execution. DMA in FX of course will have its own intricacies, but this is an evolution not a revolution as DMA has been part of the Equity, Futures and Options markets for years.

Through FX Aggregators banks are already merging the fragmented FX market to guarantee their own access to best prices and deeper liquidity. The extension of this to their customers for DMA is relatively straight forward in much the same way that the Sell Side currently offers DMA via Smart Order Routers in the Equity space.


The next prediction is that banks will add their own liquidity to the aggregated pool and, when adequate numbers of customers are connected, to allow them to transact with each other. This sounds very much like a Crossing Network and a perfect home for a very fast CEP engine that can evaluate streams or orders, looking for matches.


Finally, P&L sees the banks interconnecting their systems to extend the liquidity pool, thus becoming ECN’s in their own right. Will this lead to the Buy Side then Aggregating the Aggregators?

Sprinkle in a few trading, execution and liquidity seeking algorithms and what P&L is predicting makes a lot of sense.


So what does this mean and what problems does it pose? It means that trading banks must be capable to quickly produce and deploy new services and be proficient in adapting these to address ever evolving requirements from the market (i.e. be swift & agile). The problem is many organisations aren’t particularly good at rapid development and deployment.  Those who are shall hold a real competitive advantage going forward.


Complex Event Processing fits the infrastructural needs for DMA, Aggregation & Crossing Networks well, but it’s not good enough to simply have a very fast engine. The engine must readily connect to a disparate world, provide tools for rapid development and back testing facilities to ensure successful deployments.

Apama fits all these requirements as it’s not only a very, very fast engine but has graphical tools that enable both business and IT staff to collaborate and rapidly produce solutions, back testing facilities to mitigate deployment risk and an open integration framework that includes many existing “off the shelf” adaptors.


It’ll be five years before my 20/20 hindsight enables me to recall what our future was. For now the only thing that I can say with certainty is Complex Event Processing and Apama will be playing a major role in whatever the future of FX holds.

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