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Light Up Your FX Markets

Traders Magazine Online News, May 1, 2017

James Singleton

For decades, corporate treasurers transacting in the foreign exchange (FX) markets have been feeling their way through the dark. We’re all familiar with the hazards inherent in making our way across an unlit room. When the lights are off, the furniture, floor lamps, and area rugs all seem intent on tripping us, no matter how hard we try to avoid them. Navigating with zero visibility is uncomfortable. For corporate treasurers who need to make cross-border payments, purchase foreign securities, and/or settle international trade, using an opaque FX platform presents the same risk of getting tripped up that a dark room might present.

James Singleton

The global FX marketplace is both immense and highly fragmented. Trades occur 24 hours a day, five days a week, across every time zone. Yet, despite a daily average volume of more than US$5 trillion in the aggregate, FX markets are among the least “lit” of the capital markets. Unlike the equity markets, the FX markets have no central portal for price discovery and no consolidated tape to inform the broader market of the value of the securities or instruments being traded at any point in time. In the equity markets, the consolidated tape reports every purchase and sale of every security, providing transparency. Because the FX markets are so enormous, global, and open 24 hours a day, an FX consolidated tape is not practical or realistic, but its absence contributes to the opaque nature of that marketplace.

By their nature, FX trades are mostly one-off, bilateral transactions in which operational users of FX—corporations, asset owners, and asset managers—tap their banking partners for the credit they need to conduct their desired foreign-currency transactions as well as for the execution of the transactions. As recently as 15 years ago, the vast majority of these transactions occurred via the phone or fax. Without a technological means for checking market prices, institutions and corporations needing to transact FX gave their orders to one or more banks or brokers, then received order fills that may or may not have represented the best, or most reasonable, prices available. Nowhere was accurate aggregated data available on the overall transaction pricing or volume in the market. Operational users of FX had no recourse but to accept the prices delivered by their banks or representative brokers. In essence, the lights were off.

Enlightenment Coming Slowly to FX Market

Then, about a decade ago, a new generation of technology was born. Instead of using the phone to place an order, operational FX users could turn to an order management system (OMS) or an execution management system (EMS), which could not only manage trades but also—equally relevant—allocate a trade across multiple internal accounts and provide for entry into forward positions, if desired. These improvements propelled FX forward.

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