The foreign exchange market today is fragmented across multiple entities including electronic communication networks and single-bank trading platforms. This level of fragmentation presents many challenges for dealers and market makers alike.

“FX markets are unique in the fact that they are OTC and also there are so many different liquidity providers, some of them of ECN-based and some bank market makers,” Theo Hildyard, head of solutions marketing at Software AG, told Markets Media.

Each of these entities offers their own cost models, trading mechanisms, access protocols, order types, trading rules, and most importantly their own instantaneous view of liquidity.

“The connectivity overheads are vast. You can have point connections for them if you like, but an often preferred route is to connect them to one provider that has market connectivity,” said Hildyard.

One of the consequences of such an unstructured market is the difficulty of detecting and preventing abusive trading patterns. Although sophisticated market surveillance systems have been deployed for other asset classes, notably equities, they are still in their infancy in FX.

Needed is real-time market surveillance, in order to spot patterns while they’re evolving, and alert compliance officers before reputational damage is done. This covers a wide range of areas, from detecting that algorithms are going out of control to detecting that the market is being manipulated or rogue traders are in action.

“We have a number of different areas of focus within our capital markets solutions; one of them is market surveillance and the other, another, is FX e-commerce,” Hildyard said. “So it’s interesting to see the current emphasis on surveying FX markets because if you look at the intersection of our two specialist areas, I think it’s a very difficult thing to do. They have a market structure which is fundamentally different to that of equities. There’s far less transparency. You haven’t got single exchanges.”

Software AG and Fluent Trade Technologies have launched one an FX trading platform for multi-asset and compliance algorithms, combining Software AG’s Apama FX eCommerce platform with Fluent Trade Technologies’ FIXation Framework.

Fluent’s ‘risk-to-risk’ system allows automatic synchronization between FIXation’s risk layer and any in-house legacy risk systems, taking into account any additional circumstances that could affect trading thresholds, according to Joel Steinmetz, managing director at Fluent Trade Technologies.

“We’ve created the piping that enables that entire intelligent decision making that has already been created at the bank,” he said. “So we take the bank’s risk system and integrate it with our risk system in order to enable the prevention of risk rather than just detection.”

This goes as far as monitoring for unusual behavior as well as known patterns of market manipulation and insider trading.

“We at Fluid focus on the piping,” said Steinmetz. “The complexities of the analytics are handled by Apama, and the two combined provide the capabilities of doing very complex analysis pre, post, and during the trade.”

Adding to the fragmentation problems are algorithmic and high-speed trading strategies that have been imported from other asset classes into FX. The size of FX trades being handled electronically is growing as buy-side customers become increasingly cognizant of the potential of algorithmic trading.

FX electronic trading has rapidly grown from a novelty to the point where banks are streaming prices to their customers, who can then access liquidity on venues such as 360T, FXall or a single-bank platform.

“The same fragmentation that existed x number of years ago, whatever problems that caused, have been exacerbated by the advancement of technology,” said Hildyard. “Back then, market data feeds were measured in seconds. “Now we at the point where it’s milliseconds, microseconds, and nanoseconds.”

Featured image via Bruno Bernier/Dollar Photo Club