Preparing for FX-equity market convergence

By Jens Persson, Senior Product Manager, Multi-Asset Class Solutions
November 27, 2018
Share:

The shifts over the past decade in the structure of the flow FX and equities markets have driven a convergence of the two markets. As a result of these shifts, participants across both asset classes often face similar market structures and matching methodologies, in both cases spread across a diverse set of trading venues. It’s a situation that’s ripe for leveraging business benefits – particularly through the use of new trading technologies.

The flow FX market – comprising spot as well as vanilla OTC and listed FX futures and forwards – was until the early 2000s structured as a multi-tiered market with a strong focus on dealer-to-client (D2C) venue trading supported by dealer-to-dealer (D2D) platforms used by investment banks for hedging and risk management. This structure was characterized by fragmented liquidity, with buy-side firms using only a small number of broker-dealers for their FX activities. In the early 2000s, the proliferation of liquidity aggregation in FX created a structure that resembled the traditional all-to-all (A2A) structure of the cash equities and equities derivatives markets.

Meanwhile, the equities derivatives markets – in which liquidity in any given instrument historically centered on a single exchange – began to fragment with the introduction of the US RegNMS in 2006 and the EU’s Markets in Financial Instruments Directive (MiFID I) in 2007. Today, equities liquidity is spread across a range of venues, including broker crossing networks (BCNs), multilateral trading facilities (MTFs) and systematic internalisers (SIs).

These venues use a range of matching methodologies, ranging from central limit order books (CLOBs), to request-for-quote (RFQ) and auctions, some of which are structured as multi-tiered D2C markets. This creates more fragmentation as liquidity cannot be easily aggregated across different methodologies.

As a result of this convergence in structure, participants across the two asset classes face both single-tiered and multi-tiered market structures and a range of matching methodologies across multiple diverse trading venues. To address this emerging landscape, market participants are adopting new behaviors and trading solutions, with functionality that has been refined in one asset class adapted for the new context.

Often that means that the core requirements and capabilities of trading tools for flow FX and equities are also converging. Recognizing the similarities between the markets – and enabled by changes in the technology function set – broker-dealers are beginning to consolidate their previously separate FX and equities trading desks.

Technology suppliers, in turn, are responding by offering multi-asset trading solutions that allow broker-dealers to refresh their legacy trading technology stacks while reducing cost overheads. Those firms that have opted to combine their flow FX and equities desks now have a unique opportunity to utilize a range of trading technology toolkits that are capable of servicing the needs of both asset classes while also accommodating their remaining, marginal differences.

Firms need to assess their own situations before deciding which approach to take in order to exploit this opportunity. Vendor solutions tend to fall into one of three categories of approach, each with its own pros and cons: Packaged software; development frameworks; and so-called ‘Buy & Build’ systems.

Market practitioners need to decide how best to take advantage of the ongoing convergence in the flow FX and equities markets, so as to rapidly deploy a fully functional solution from Day 1, while retaining the ability to customize the software to meet its needs and establish competitive advantage.

Read about Itiviti FX

Related Content

Best approaches to adopting a cross-asset trading platform

Best approaches to adopting a cross-asset trading platform

Trading As we’ve learned from previous blogs, there’s an opportunity to leverage growing commonalities between the equities and foreign exchange markets into a more streamlined approach to trading and by extension the use of a single trading platform for both market. But what’s the best approach to migrating from discrete set-ups for the two segments to […] February 13, 2019

Shared trading system design across FX & equities

Shared trading system design across FX & equities

Trading The convergence of structure and behaviors of the equities and FX markets presents opportunities for those firms that identify them and can focus on how best to exploit them. At the heart of what’s needed is a cross-asset trading system that incorporates the same functionality components across both asset classes while still supporting the asset-class-specific […] January 29, 2019

Benefitting from convergence in FX and equities

Benefitting from convergence in FX and equities

Trading As discussed in an earlier blog post, convergence of equities and FX markets is spurring some institutions to merge their respective trading operations so as to enjoy economies and leverage successful activities across both asset classes. But for firms taking this route, there are significant challenges. Despite the convergence of FX and equities markets, there […] January 14, 2019

MiFID II: turning challenges into opportunities

MiFID II: turning challenges into opportunities

Risk & Compliance MiFID II posed a significant number of challenges for trading firms across Europe, but its regulatory impact has perhaps not been as dramatic as many had anticipated. Although many analysts predicted the imminent failure of smaller market players and potentially serious consequences for firms undertaking systematic internalization, the regulation came into play without creating quite […] January 7, 2019

Itiviti Talks

Get our view on global capital markets

Subscribe

Subscription successful

Thank you for subscribing!

Close window

Itiviti Talks

Get our view on global capital markets

Weekly email

    Trends in global capital markets from a technology perspective.

By submitting this form, you acknowledge that data collected by us will be handled in accordance with our Privacy Notice.