David Mercer

Together the firms will offer a broader suite of solutions, including expertise in the FX swaps and forwards market, and spot FX and non-FX asset classes expertise. 

“We believe that with the acquisition of FX HedgePool, our combined client base will benefit from access to a wider suite of products and increased global distribution,” said David Mercer, chief executive, LMAX Group.  

“Following this acquisition and that of Cürex last year, we now have a compelling proposition for asset managers and other buy-side participants in addition to serving our core bank, broker and proprietary trading firm segments.” 

LMAX Group and FX HedgePool are focused on providing greater transparency, efficiency and fairness across the FX ecosystem while providing better accesses to institutional grade liquidity, confirmed the firms. 

Currently, FX swaps account for more than half of total daily FX turnover and are the most traded instrument (in excess of $3.8 trillion per day).

This deal follows LMAX’s acquisition of FX-focused execution services and data analytics provider Cürex last year.

Jay Moore, chief executive and founder of FX HedgePool, asserted that “this significant milestone for FX HedgePool and our community marks the start of a period of considerable innovation. The established yet agile, LMAX Group, complements FX HedgePool’s proven ability to introduce groundbreaking solutions for the modern trading desk. 

“Both firms are aligned in delivering innovative products that set new standards for transparency, fairness and efficiency, and we look forward to an exciting future.”

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Historically market structure in foreign exchange (FX) has lent itself to ISDA-based, direct bilateral trading, meaning buy-side firms – in particular real money firms who don’t have the capabilities to use a prime broker model – are often locked into these relationships with banks based on credit lines.

However, buy-side institutions have become increasingly keen to diversify their access to liquidity outside of these relationships. And this has only been exacerbated by the introduction of new liquidity providers into the market, a reduction in warehousing by banks in recent years and market volatility on the back of macro events – such as the Yin carry trade unwinding in recent weeks.

“What if a bank channel is blocked?” said Tjerk Methorst, senior trader manager at PGGM. “We then need a new route. My role is to ensure tooling is sufficient to access liquidity via different routes.”

Given the challenging environment participants find themselves within, traders have become increasingly keen to explore how new liquidity providers and sources could help the industry to better prepare for similar events in the future.

However, in order to do so the untangling of liquidity and credit must take place, panellists said, speaking in discussions exploring various solutions including peer-to-peer liquidity and the prime brokerage model used by by hedge funds.

“Historically speaking, market structure has required two things to happen in bank relationships and those are pricing and credit. Without both you’d have no relationship and no liquidity,” said Jay Moore, co-founder and chief executive officer of FX HedgePool, a peer-to-peer liquidity platform.

“Hedge funds can access deeper and more specialist pockets of liquidity through prime brokers, but the real money space is not in the prime broker world because of the complexity of their fund ranges. A prime broker at the centre of their credit universe doesn’t make sense.”

He also noted that given real money asset managers are reliant on the ISDA relationships that they have this can sometimes be limiting to what they can access.

“You might have a fund manager with 15 banks on the panel but perhaps not SEB and they want to access specialised Scandinavian liquidity but they can’t today,” added Moore. “Asset managers should be able to access the best liquidity in the world. Separating credit from liquidity will open up specialist LPs [liquidity providers] to help where needed most.

“Big banks want to do more trading but they’re capped out at capacity. This is where other specialised providers come in with other pockets of liquidity. The credit story is changing.”

New protocols and greater transparency were called for by panellists in order to overcome this reliance on traditional providers and “bridge” the gap amid the decoupling of credit and liquidity.

“It’s about new protocols. All to all will increase transparency. Decoupling [liquidity and credit] will mean a better price for both parties,” said Alvin Chopra, chief operating officer and co-founder at SpectrAxe, an all-to-all FX options trading platform.

“Banks are crucial. They’ll make money elsewhere. It’ll be a migration from risk transfer services to algo trading. The client to dealer relationship will be better.”

Methorst concurred: “This will spur innovation in other ways to solve credit through platforms.”

New liquidity providers

Given the shifting dynamics, panellists speaking this week explored the potential for new liquidity providers. The overall conclusion was that while new liquidity sources are of course desired, ensuring that relationships are meaningful enough to prove fruitful is essential. Finding the “right mix of liquidity providers” is paramount, but the question is, what is that?

“More liquidity providers is not the way to go,” said Jonas Virtanen, global head of spot trading at SEB. “You need fewer but stronger relationships and you need to make sure it works for both parties at all times. The client also needs to behave as the taker and look after liquidity.”

Panellists were united in their stance that communication is central to maintaining the strong relationships required in today’s environment. Like Virtanen, Anthony Brocksom global head of sales at FX Spotstream reiterates that this is the responsibility of both the liquidity provider and the client.

“You want a liquidity provider to take the call. You need open dialogue. Clients have to behave too,” he explained. “They have to be honest with how they’re going to be trading. For example, if you tell them off the bat you’re going to sweep the book then they know to expect it.”

When asked how a participant might go about identifying a new liquidity provider to use, speakers agreed that having a natural franchise connected to it would make it favourable.

“Is there a franchise behind it that makes sense? Non-bank LPs don’t have the same shape for them you have to ask what’s the model? What drives the additional benefit?” said Sam Johnson, managing director at iSAM Securities – a new liquidity provider.

“If the story makes sense, it’s compelling. Clients need more novel analytics tools that simulate the market. We need that dialogue.”

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Foreign exchange matching platform FX HedgePool appointed Karen Phillips as head of business development. Based in New York, Phillips oversees the firm’s sales and relationship management efforts, reporting directly to Jay Moore, chief executive and co-founder of FX HedgePool. She joined the firm from Refinitiv, where she served in a variety of roles over the last 21 years, most recently as Americas head of transactions sales and relationship management for FXall and matching.

Start-up United Fintech expanded its sales team with the appointment of Raj Rathor as head of sales for Athena Systems. Rathor joined the firm from Enfusion, where he served as vice president of sales. He holds 10 years’ experience in the financial technology sector, including product management and pre-sales engineering roles at buy-side vendor SimCorp. Prior to that, he served as an OTC execution broker at ICAP, covering bonds and swaps.

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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.

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Based in New York, Phillips will oversee the firm’s sales and relationship management efforts, reporting directly to Jay Moore, chief executive and co-founder of FX HedgePool.

She joins FX HedgePool from Refinitiv, where she served in a variety of roles over the last 21 years, most recently as Americas head of transactions sales and relationship management for FXall and matching.

“When we set out to fill this role, we were looking for a unique set of skills. Few people can claim to have done so much in their career in FX as Karen, so the choice was obvious,” said Moore.

“She’s got a long history of building strong relationships and delivering product solutions to meet the ever-changing needs of both the buy- and sell-side and we couldn’t be happier to welcome her to our growing team.”

Phillips’ appointment comes as part of FX HedgePool’s ongoing expansion. Earlier this year, the firm secured $8 million in a Series A funding round led by Information Venture Partners, with participation from Fidelity International Strategic Ventures and NAventures, the corporate venture capital arm of National Bank of Canada.

“I am thrilled to be joining Jay and the amazing team at FX HedgePool and look forward to working closely with market participants to continue building innovative solutions for the FX community,” said Phillips.

“I am excited to again be at an early-stage company introducing new technology and ideas to the FX market.”

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Launched in January 2020, FX HedgePool claims to have facilitated more than $4 trillion in matched foreign exchange trades.

The firm said it planned to use the additional funding to accelerate its multi-product strategy, which aims to improve efficiencies for its growing network of investment managers and banks.

In addition, FX HedgePool will launch the FXHP Innovation Pool – a platform for leaders in finance to collaborate and address challenges from within the industry.

“Our new partnerships will further strengthen FX HedgePool’s ability to deliver on a shared vision of changing the market for good,” said Jay Moore, CEO and co-founder of FX HedgePool.

“We’ve led the market towards peer-to-peer matching, and this investment will allow us to continue innovating to bring efficiency, cost savings and better outcomes for the investment community.”

FX HedgePool currently has more than 30 global institutions using its platform. To meet increasing demand from its growing community of buy-side participants, the firm has revealed plans to launch an FX spot matching service before the end of the year.

According to FX HedgePool, this extension of its product suite will further reduce market impact, tracking error, cost transparency and operational inefficiencies for buy-side participants in the foreign exchange market.

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Jay Moore, founder and CEO, FX HedgePool

Why has peer-to-peer buy-side liquidity become increasingly popular for market participants?

Managers that find new ways to reduce costs, streamline workflows and optimise their resources are the ones able to pass along efficiencies in the form of more cost-effective products to their investors. With FX swaps, pricing is often the lesser issue as many managers have a range of banks to trade with, but they work hard for that. Buy-side firms allocate talented trading resources who are spending time rolling passive hedges rather than generating alpha. These are not alpha-generating trades; these are alpha-preserving trades. It’s just trying to get from the 29^th to the 1^st with as little loss, impact and effort as possible. 

In the FX markets, there are two essential elements of a trade. The first is pricing and the second is credit and settlement. In order to provide and accept a price, a credit relationship must exist between the firms. Under the FX HedgePool model, while liquidity is now directly accessible between peers, the sell-side remains central for the credit and settlement of the trade.

Balance sheet costs are relatively stable so banks can provide credit at a transparent and fair rate and matching fees are independent of market conditions. In March 2020, when the COVID-19 pandemic hit, we saw EURUSD spreads, arguably the tightest in the market, spike tenfold. For us, it was just another day.

Market impact is a major focus for the banks right now. Especially with the Global Foreign Exchange Code (GFXC) and the regulatory pressures that banks are feeling around pre-hedging. These large, predictable and passive swaps that everyone in the market knows are coming and in what size and direction they are happening are arguably the most susceptible to pre-hedging risk. If you wake up and your portfolio manager decides to buy European stocks and you go out and buy euros, nobody can plan for that. A bank can’t pre-hedge that. However, if a bank knows that their clients’ passive hedges are approaching roll date, then they might start pre-hedging to create an inventory so that they are able to provide a competitive price while managing their internal position risk. By then the damage is already done.

How do you expect FX swaps trading will develop?

Trade automation, e-trading and alternative liquidity in the spot market have surged over the past decade, however, forwards and swaps have largely remained unchanged. While there are a number of contributing factors, I’d argue that this lack of innovation in the swaps market is primarily due to the market structure of credit.

Forwards and swaps come with considerable credit exposure to both parties of the transaction and with that comes regulatory, capital, collateral and operational implications. As a result, under the current market structure only those willing and able to supply the credit are able to compete for the trade.

This has been long addressed by the prime brokerage market, where centralised credit allows for multiple access points to liquidity. However, in the FX swaps space where large institutional managers drive incredibly sizable volumes, largely on a passive basis, credit diversification is a central component of their best execution policies. As a result, few have embraced prime brokers and instead continue to rely on the bilateral trading model with a relatively narrow panel of banks.

Technology is enabling innovation that allows us to think differently about how the pieces fit and blur the line between how we define buy-side and sell-side. As client demand continues to grow, we could easily allow members to match outright forward, spot and NDFs and possibly even beyond FX.

Within the swaps realm, we have had growing interest from our members for expanding the product set to include more NDFs and emerging currencies where pricing, spreads, and market impact are most challenging. Workflow automation is a big trend in the market. Traders are recognising that a lot of their flow can be automated and they can shift to focusing on more strategically important trades.

We are now trading about $200 billion a month in match volume. That is $200 billion a month that the market never sees and is instead being done directly between the firms that are responsible for looking after our investments.

How and why has swaps trading become more automated?

Swaps continue to dominate the overall FX market in terms of volume and growth, in large part due to the incredible pace of growth of the passive investment space where FX hedging is a major driver. For trading desks to keep pace with the growing size of their trading requirements, they must either hire more people or automate the process. Necessity is the mother of invention and in this case, necessity is the need to remain efficient, lean and profitable.

In what other ways has FX electronic trading technology changed in the last year?

With remote working becoming the norm over the past 18 months, the necessity for change has never been greater. Screen real estate has become scarcer, the ability to rely on teams is more challenging and internal technology teams are stretched to the max. This environment invites innovation as people are forced to do things differently.

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Startup matching engine for mid-market trading of FX swaps, FX HedgePool, has matched its first transaction associated with international monetary market (IMM) dates with support from BNP Paribas and Standard Chartered.

BNP Paribas and Standard Chartered acted as the credit providers to the buy-side institutions that completed the first match aligned with quarterly IMM dates on the FX HedgePool platform.

The FX swaps matching engine said this initial transaction was a segway into its expansion into offering discrete FX matching sessions based on the quarterly IMM dates as its current offering only supports an end-of-month roll. 

The addition of a quarterly IMM offering at FX HedgePool expands its current end-of-month roll and is part of its commitment to sourcing liquidity that is aligned with the monthly and quarterly hedging schedules of buy-side institutions. 

The new quarterly IMM option aims to address information leakage and market impact which can occur for buy-side traders during each IMM cycle, said FX HedgePool.

By introducing a single liquidity event for each IMM date for passive hedgers, the matching engine will allow rolls to be automated based on liquidity to avoid risks due to uncertainty for each roll.

“Buy-side traders face the risk, cost and hassle of rolling positions simply to maintain a passive hedging mandate,” said Jay Moore, CEO and founder of FX HedgePool. “As we’ve done with the monthly matching events, creating a safe and reliable marketplace with midmarket matching around the highly traded IMM dates is a natural evolution for us.” 

Founded in 2019, FX HedgePool launched its matching engine in January 2020 and earlier this month confirmed it had matched a total of $1.5 trillion in volumes since then. 

The firm unbundles liquidity from credit in a bid to eliminate market impact, reduce costs and streamline operations. The platform allows buy-side traders to directly match liquidity with each other, while the sell-side is paid directly for credit to optimise balance sheets

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