Squared Financial Services Ltd (SFSL) launched its platform in 2005. At that stage, electronic trading – especially on the foreign exchange side – was changing rapidly. Like many asset classes in the electronic space, both over-the-counter and exchange based, forex was becoming more transparent and efficient.
The origins of this transformation predate the NASDAQ ECNs by many years, and although the equity and futures markets adopted the values of transparent centralised trading more completely, it could be argued that forex, due to its range of products, trading models and participants was approaching true global price discovery more rapidly.
But there were still substantial gaps between retail, professional and institutional markets – and unlike most financial markets, foreign exchange was further complicated by the commercial and treasury related participants in each of these segments.
Nevertheless, even at this level trading venues were becoming more competitive, performance-oriented and user friendly. And above this level, true institutional and professional players were beginning to aggressively bridge the gaps so that the lack of transparency and centralisation which was once an outstanding drawback of forex trading now began to evolve into an advantage, as the asset class achieved broader and broader global penetration.
In the following years these trends greatly strengthened. Technology and innovation in both trading and clearing services allowed a great diversity of primary and niche players to offer specialised ways to trade even more specialised products.
The same advances allowed customers and vendors alike to develop their own best execution environments and economies of scale. In this environment, one of the primary missions of our platform sales team was to continuously review the landscape with customers and adopt the markets and models which offered greater benefits and trading opportunities.
In many cases these are driven by the newer ECNs and MTFs, but just as many are driven by traditional venues introducing enhancements. It’s a very competitive environment with increasingly sophisticated and knowledgeable customers, and no single venue can afford to be complacent with its current offering.
From this perspective, offering the traditional ECN principles of speed, transparency and price discovery is merely one of several foundations required for efficient foreign exchange and multi asset trading. This type of development and interaction has become so pervasive that forex is becoming a widespread component of price discovery in other asset classes, and vice versa.
Virtually every electronic product or market is becoming available to both retail and institutional traders in one form or another. Although there are legitimate concerns about best execution and leverage standards at the uninformed retail level, for the more informed, true multi asset global price discovery is becoming a reality. Perhaps ironically though, all the rapid developments have created even greater variation in the standards of liquidity, market data, execution, and rules of engagement.
Fluctuating standards and lack of clarity around the trading process itself create their own challenges. These may well outweigh the benefits of greater choice; especially if the customer and the platform are operating under different assumptions. At SFSL we very carefully assess these to ensure we communicate properly through the demo phase.
Platform development
Most of the platforms in production today either maintain the model which was dominant at the time of their launch or altered their rules of engagement as the market changed. At SFSL we followed the progression from single bank, to multi bank, to multi bank and non bank trading, but we did not abandon earlier incarnations, so that now we offer a broad range of liquidity pools, order types and trading methods – all enhanced with the latest technology.
Maintaining system integrity was slow and labourious, but it allowed very high customer retention and critically it kept us up to date on precisely which profiles gained the greatest value from which setup. Not incidentally, this flexibility is the most important factor in our recent white label success.
We are not restricted to rebranding our technology wholesale: instead we are able to reconfigure the entire platform, including trading interfaces, strategic partnerships and trading principles, so they match the client’s objectives and trading environment.
In this way we can rapidly roll out a range of end to end, user friendly solutions: from simple and functional retail MetaQuotes solutions, to complex corporate and regional banking structures.
In our system it is not unusual for a professional trader to execute his systematic EUR/USD limit orders and OCOs in our aggregated bank and non bank market service, and have his stops routed to a designated LP for low slippage execution. It is also not unusual for a mid-tier bank in our system to trade market orders for five million EUR/CHF against our non aggregated single bank quotes while working smaller orders inside the bid offer spread on our aggregated market and trading the same price on both. Efficient trading today is largely about understanding the interests of all parties to the trade and applying the appropriate rules of engagement.
Innovation and technology
As products become more complex this merging of innovation and technology becomes ever more important. Take the case of a liquid and competitive aggregated Spot to Futures Swap market. It provides endless opportunity for participants of both markets, but it also facilitates competitive quotation of OTC equivalents to those exchange traded products – and of course also functions as an alternative Forward market.
When it came to launching emerging markets on our platform we quickly realised that understanding the nature of order flow, liquidity, the trading process and clearing efficiencies were essential just to get regular business done. Here again the rules of engagement varied wildly from RFQ to competitive order driven aggregations depending on currency, order size, credit, and the nature of the flow itself.
I believe it is clear that electronic markets are not converging on one set of principles or trading architecture; instead they are continuously fragmenting and regenerating disparate products and areas of value. The service providers who will capture market share in this environment are those that take the time to understand their customers’ objectives and piece together the solutions in an efficient and user friendly way.
Jeff Grossman is Head of Sales and Marketing at Squared Financial Services Ltd
