FFastFill is the leading SaaS Provider for trading and risk management serving the electronic trading community.

A new generation of linkages is building bridges between established liquidity pools

Every so often there comes a development, which attracts a nominal amount of attention and then gets rolled over by the continuing flow of news and progress reports which characterise our business. Barely a day passes when the futures business is not responsible for producing scores of announcements about IT developments, which will change the way the world works. While it is true that IT issues now heavily influence the industry, there is still a great deal of ‘noise’ out there, which sometimes disguises a really fundamental development. One of the more substantial innovations this year followed from the May announcement that CME and Reuters were going to collaborate on creating a bridge between Reuters Dealing 3000 and the CME FX futures segment. The link will create access to CME eFX futures for the huge, global, Reuters Dealing 3000 user community.

Why is this important in a more general context?Two main reasons: fx is one of the largest cash markets in the world at $1.8 trillion per day (Bank for International Settlements figures), yet CCP and clearing does not have a major impact on this market. Secondly, the principles of linking one major market with another via on demand technology services is going to become important as exchanges compete for market share.

In September, BIS announced new record volumes in cash fx markets. Although fx markets operate at high levels of gearing – 20:1 or more between the higher rated firms – there remains a clear and substantial counterparty risk endemic in these markets. CLS Bank provides settlement services – which cover settlement risk – but does not address counterparty risk. One immediately obvious attraction of a linkage between a cash market and a futures market is the ability for the cash market to stretch into the CCP/cleared market model of futures. With banks increasingly focused on regulatory capital limits, the ability to reduce operating capital liabilities using the netting effect of clearing greatly enhances their liquidity pool, subject, of course, to comparable core market efficiencies in terms of bid offer spreads, depth and liquidity.

The second point is that the IT-enabled link between two previously separate and alternative markets signals possible developments for other electronically traded markets.

The business requirements which must be met to make this attractive are flexibility and time-to-market. By flexibility, we mean the ability to potentiall link any group of traders to any pool of liquidity using the same technology infrastructure. Speed to market is, of course, critical in these times of highly volatile markets so as to capture the opportunities as they arise.

What is needed from an IT perspective, and what FFastFill uniquely provides, are two critical ingredients. The first is a modular software architecture, built around a message bus, which allows complete freedom in linking existing front end order capture systems via FIX 4.4 with exchange API’s. The second is the ability to provide this link via a completely resilient, high performance, managed service platform ensuring that intermediaries can take advantage of market opportunities quickly and independently of any workload pressures within their internal IT department.

With such an innovative, new solution available to the market, this type of link is likely to be replicated between other entities. As we are now in period of competing, for-profit exchanges, where exchange results are volume driven, then innovations which can steer volume from any source to an
exchange are going to be in the spotlight. Certain energy markets, credit, swaps, standardised equity products, for example, might all be candidates for moving into established futures exchanges. In this way, the exchange gets the turnover value from their import while the exchange/clearer offers enhanced services to established cash markets.

And given the commercial imperatives, which markets operate with now – as opposed to under their previous membership structures – one additional
characteristic of such links is their cheapness relative to the alternative choices. Exchanges wanting to develop into new markets, for example, or OTC markets wanting to build additional functionality have historically been faced with the choice of buy or build. This new generation of linkages builds bridges between established liquidity pools but without the substantial costs historically associated with generating volume or providing important new services, such as clearing. It is hardly surprising that big market participants are already queuing up to cross the new bridge. ❑


Nigel Hartnell, director of FFastFill