Joseph Wald wants the money managers accessing the FX market increasingly through electronic platforms to receive the best aspects of the electronically matured equities markets, and avoid the worst of it.
Wald, executive vice president at GAIN Capital and head of GTX, the firm’s institutional trading business, has spent the past six months building GTX into a platform that will allow money managers to do just that, even if it means spurning some high-frequency trading clients that other liquidity pools would welcome.
More than two-thirds of all global FX market participants and more than 80 percent of U.S. participants traded FX electronically in 2012, according to numbers from Greenwich Associates, demonstrating that the FX market has embraced equity-style electronic trading.
However, there is a worrisome side of this, Wald warned. “Asset managers, especially, are wary of certain elements of equity trading coming into the FX market,” he said. These negatives include things like shallow or quickly disappearing bids and price quotes, whipsaw volatility, and overactive high-frequency traders gaming other players’ activity. “Asset managers want to find the right liquidity destination to use,” Wald said.
The exec is well-versed in the liquidity needs of the buyside. Prior to joining GAIN Capital in January, he was head of Knight Direct, equities market maker Knight Capital Group’s institutional electronic trade execution business. With GTX, Wald wants to bring the best parts of equity trading—and only the best parts—to the FX world.
With that in mind, Wald said GTX is differentiating itself not by simply replicating the equity trading environment and focusing solely on achieving speed and volume, but by providing a quality liquidity pool. “If you build only on speed, then you’re building simply for the High Frequency Trading set and asset managers seeking quality execution will balk at that platform.”
At least one buyside pro agreed. Philip Simotas, president and director of investment management at FX Concepts, a New York-based currency hedge fund with around $2.9 billion under management, said those negatives are a concern when trading through FX ECNs. FX Concepts carefully scrutinizes the quality of any liquidity pool in which it trades, Simotas said. This analysis includes evaluating the depth and pricing of a pool as well as determining the origin of the liquidity, not only for quality but for the holy grail of ECNs—fresh liquidity that cannot be accessed elsewhere. “I think we use more analytics [for evaluation] than most,” Simotas noted. “And we’ve seen that every ECN has its strengths.”
Looking to differentiate itself among the crowd of FX ECNs, GTX has built its own technology from the ground-up and created its own asset pool, which it closely monitors through proprietary technology, Wald said.
HFTs are not banned from the pool, but all participants are monitored for behavior that could be detrimental to other traders. Of course, HFT strategies encompass a wide range of trading behavior, some beneficial to others in the pool, others not so much. “There’s a big difference between latency arbitrage and an automated liquidity strategy based on macro or market-making,” Wald said.
The pool’s monitoring technology also features a credit engine, within the matching engine, that shows available real-time credit for pre- and post-trade, and can open access to additional credit by leveraging GTX’s central clearers.
The focus on monitored quality is paying benefits, too, Wald said. While volume growth has leveled off at many ECNs used for trading foreign exchange, GTX reported year-over-year volume growth of 119% through April 30. (GTX has not released the size of its liquidity pool, but plans to break out numbers at the end of June.)
“The paradigm is changing,” Wald said. “It’s not just ‘Tell me the numbers’, it’s ‘Tell me about the numbers’.”
