White paper on FX eCommerce / Single-Dealer Platforms

One of the key services PropelGrowth offers is developing content for our clients’ lead generation and lead nurturing efforts. As part of this, we often write detailed white papers, articles, executive briefings, e-books and other marketing and sales collateral.

I just finished a first draft of a white paper describing single dealer platforms or FX eCommerce systems, which are designed for market makers and dealers in foreign currency trading. The paper discusses FX aggregation, pricing, auto-hedging, position-keeping, smart order routing and internalization. This was a challenging project for a number of reasons.

  • FX trading is significantly more complex than equities, which is where I cut my teeth.
  • The white paper was targeted to a sophisticated audience of executives who know FAR more about trading currencies than I could learn in a lifetime.
  • I had to weave in the importance of using an event-driven architecture and a complex event processing (CEP) platform to demonstrate the value of this kind of technology without getting technical since my audience is more of a business audience than a technical audience.

Fortunately, our client, Progress Software, is very well-informed and was able to walk me through a number of product demonstrations and white board discussions so I could learn the product and market. But I also had to do a tremendous amount of primary research to produce the document. I learned some interesting things in the process of my research. Here are a few tidbits:

FX single dealer platforms aggregate liquidity from dozens of sources, identify base pricing, determine and publish pricing to clients, manage positions, handle order flow, automatically hedge positions, route orders to counterparties, and internalize client orders.

The FX market is highly fragmented, with hundreds of dealing banks, ECNs, and interdealer brokers all publishing prices and competing for order flow. Pricing approaches are not standardized. Liquidity may be reflected as streaming quotes, live resting orders, indicative prices, request for quotes, or request for streams.

Every FX deal involves two currencies – one being bought and the other being sold. This means that the dealer takes a position with every execution of a customer order, and those positions have to be hedged promptly to reduce risk. However, prices offered by other banks can shift rapidly, and quotes are not always firm, which makes routing orders and ensuring execution more complicated. The life span and nature of each price varies by venue and sometimes by message. Some venues want a “last look” option allowing them to take a look at the markets before they automatically execute an order. This might result in them rejecting an order at a quoted price even if the price was valid when the order was sent.

Most FX market data is delivered in pulse intervals instead of continuously, and substantial activity can occur outside of regular data distribution intervals, which also affects the validity of prices, especially in a high frequency trading environment.

Geography also plays a role. Since the dealing banks are geographically distributed around the globe, prices have a varying amount of latency when they first arrive, adding more complexity that has to be considered by the pricing engine, smart order router, auto-hedging and risk management.

This is a fascinating market with a lot of complexity that makes it very interesting for someone as geeky as me. As I researched the problem and wrote the white paper, it became increasingly clear that an event-driven architecture really is the ideal approach for creating an FX trading system.

Once the white paper is published, I’ll provide a link in the event that you’re interested in the subject. This has been a fun project, and I’m looking forward to doing more work on this topic. Based on this initial research and writing, we’ll be able to create quite a bit of derivative content for Progress Software’s content marketing and thought leadership programs including articles, executive briefings, slide decks, videos, blog posts, etc.

I recently hosted a TrendSpotters episode on FX ecommerce. You can listen to it here.