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Foreign Exchange Infrastructure: Yesterday, Today and Tomorrow

Traders Magazine Online News, November 17, 2017

John Turney

Not all financial infrastructure is created equal. If you were to “look under the hood” of ten buy-side institutions, you would find diverse approaches, workflows and tools across operations, dealing and analytics – the essential processes that make up the infrastructure of modern FX trading. In and of itself, the inconsistency is not necessarily a problem. FX is after all an OTC market whose varied participants have different needs; there may be a “form fits function” to a firm’s processes.

Regardless of the particulars of a firm’s approach, market participants need to be cognizant of the strengths and weaknesses in their model and ensure that it is fit for purpose, scalable to support growth, and adaptable to keep pace with an evolving marketplace.

Working with firms that trade foreign exchange, we find that current infrastructures fall largely into three categories – dated, mixed and integrated.

Dated” may sound harsh, but the truth is some firms still rely on manual processes, desktop solutions and stop-gap macros that have not aged gracefully. Such workflows, with their inherently limited straight-through processing (STP), are marked by readily identifiable operational hazards. They can also conceal more insidious risks, such as key-man, liquidity and measurement risk.

Established workflows are sometimes treated with an ‘if it ain’t broke, don’t fix it’ reverence, since they may have served their purpose for years. Sometimes these processes require workarounds, or have known quirks. It has to be asked: who knows these quirks? Who knows the origins of the process and how to support it? Sometimes the answers to such questions highlight the degree of key-man risk extant in the process.

Digging deeper, one finds these approaches may not be able to keep pace with a rapidly evolving marketplace and are disadvantaged in terms process-induced FX risk (market risk) and limited price discovery tools. Almost universally, dated infrastructure lacks metrics. Such a deficiency critically limits oversight functions and prohibits analysis-driven process improvements. Fortunately, a combination of falling technology costs and regulatory and client pressures have relegated this approach to a shrinking minority.

The mixed approach – the current industry standard – can involve vended or internal workflow tools and systems, across order management and execution management. Such workflows exhibit fairly high STP rates and may take advantage of off-the-shelf compatibility between platforms. Efficiency is driven by the specific systems in use and their degree of integration.

While vended FX dealing applications have included front office tools for some time, some have only recently rounded out their offering to include tools for the back office. Importantly, the less time the front office has to spend managing and handholding the workflow, chasing exceptions and managing workarounds, the more time they can spend focused on execution. Even a great trader is not going to be able to overcome an inefficient set up generating delayed or inaccurate data.

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