New Liquidity Protocol Facilitates Large Trades, Minimizes Information Leakage, “Phantom Liquidity”
CHARLOTTE, NC—November 24, 2014—Advanced Markets, a provider of foreign exchange direct market access (DMA) solutions, today launched Full Order eXecution (FOX), a new facility that enables buy-side market participants to execute large trades anonymously in a single transaction with a single bank liquidity provider. The new facility enhances block liquidity by ameliorating information leakage, market impact and other concerns facing buy and sell-side foreign exchange market participants.
A new liquidity protocol is at the heart of FOX. Banks stream liquidity at different volume tiers enabling orders to be executed for their full quantity. Initially, sizes quoted will be 10 and 20 million currency units.
The protocol differs significantly from existing liquidity aggregation systems, which bundle existing bids or offers to show weighted average pricing for block-size trades. Instead FOX aggregates block prices at each discrete volume tier enabling clients to trade on the best price for the full block quantity with a single trade with single bank counterparty.
This protocol enables fund managers to trade anonymously without signaling their trading interest to the broader market, ameliorating pre and post-trade information leakage as well as market impact concerns.
“In speaking with our fund manager clients and bank liquidity providers, we realized they were both looking for an optimal way to trade with a single transaction with a single counterparty without broadcasting their trading interest or position to the rest of the market,” said Anthony Brocco, Executive Chairman, Advanced Markets LLC. “FOX provides real benefits in these respects, which we believe will enhance block trading and best execution in the foreign exchange market.”
In addition to minimizing information leakage for buy-side traders, the new system ensures the bank liquidity provider that wins the trade is the only bank that knows a buy-side market participant was interested in trading. Moreover, only the winning bank liquidity provider (and the price taker client) knows the trade took place. This feature eliminates the “winner’s curse,” which occurs when multiple banks knowingly compete for a block transaction and the banks that are not dealt use the information that a large trade took place to skew the interbank market away from the winning bank.
Lastly, by optimizing liquidity and minimizing information leakage, FOX discourages traders from simultaneously trading on multiple platforms to amass the full trade amount they seek. This practice creates a “phantom liquidity” phenomenon and often results in a bank market maker getting hit on a price across multiple platforms simultaneously, which is undesirable from a liquidity provider perspective.
Eliminating these risks for both sides of the transaction is expected to enhance block liquidity available through the new facility. In addition, executing the full amount as a single transaction generates a single trade ticket, which minimizes ticket charges and related costs and operational requirements.
Fox was beta tested with bank liquidity providers and global fund managers for more than two years prior to launch.