Hedge Funds Face More Scrutiny as They Expand FX Market Making
(This article originally appeared on Bloomberg)
Be careful what you wish for — that’s the advice from State Street Corp. to the newest market makers in the $5.3-trillion-a-day foreign-exchange market.
As hedge funds and automated-trading firms ramp up their currencies businesses, they’ll probably attract more interest from regulators, said Chip Lowry, senior managing director at State Street Global Markets in Boston, in a conference call Tuesday hosted by Greenwich Associates.
Algorithmic trading firm and brokerage KCG Holdings Inc. said it’s accustomed to dealing in highly regulated asset classes such as equities and favors a more comprehensive approach to foreign-exchange regulation to give investors better information about pricing, execution and order handling.
“Firms like KCG do not hold retail or other client deposits — firms like KCG are not too big to fail,” said Michael Cahill, head of relationship management for the company’s foreign-exchange market-making business. “We let our execution speak for itself, we know it has to. There are very few clients that will deal with me just because they like me.”
KCG had a record day after the U.K.’s Brexit decision, Cahill said, declining to specify on what basis. Citadel Securities LLC, the market-making arm of money manager and securities firm Citadel LLC, said its foreign-exchange volume on June 24 surged to more than four-and-a-half times the firm’s daily average this year.
About 5 percent of global foreign-exchange market participants surveyed last year had access to nontraditional market makers, with whom they traded 20 percent of currency volumes, Greenwich said in the May report. That’s up from 4 percent of investors who transacted with nonbanks for 16 percent of volumes in 2014.
“Anyone trading foreign exchange on the buy side should be up to speed on these relatively recent developments, and the emergence of the nonbank liquidity providers,” O’Brien said.
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