1. Market Evolution: Predictions for the Future
James Sinclair
CEO, MarketFactory
Market Evolution: Predictions for the Future
ACI Denmark
September 20, 2012

2. Tonight
Why is FX different?
Where are we now?
Where are we going?

3. Why is FX Different?

4. Global, Dispersed, Fungible
Asia
$375bn
per day
Chicago
$100bn
per day
Americas *
$400bn
per day
Europe
$725bn
per day
* Excludes Chicago

5. Also…. Natural interest: real needs
Cross-border capital markets, FDI, trade
Lightly regulated: can differentiate
Strong credit model (CLS, Prime Broker)
Well established (Biblical references)

6. Resilient 1,039 Banks; 580 Buy-side Banks; 300 Prop Funds;
euro, mergers consolidation
euro, mergers, consolidation
1,039 Banks; 580 Buy-side Banks; 300 Prop Funds;
Real Money; Hedge Funds; Corporates 6

7. Retail
Aite Group

8. Equities and FX Market Structures are Inverted
Millions msgs per second
Thousands
Real-time broadcast
Tick by tick – every tick!
Thousands / second
Centralized markets
Heavy – e.g. Reg NMS
Standardized
NBBO
Established; low difficulty
Full depth of book
None b/c of CCP
Order routing from point of order submission
Attribute
Throughput
Symbols
MD Frequency
Order Submission
Fragmentation
Regulation
Market Structure
Price Discovery
TCA
Transparency
Price Filtering
Order Routing
OTC FX
Millions msgs per day
20 pairs; 66% of FX in 6 pairs
Real-time custom snapshots
Max 100 orders per second
Globally fragmented venues
Light – isolated venues
All non-standard; all bespoke
Venue specific
Difficult – lack volume info
1-3 levels of depth common
Heavy b/c of bilateral credit
Complex decision process
Complex
Easier
Easier
Complex

9. Where are we now?

10. CLS FX Spot Volume Flat recently
CLS data indexed to July 2010

11. CLS FX Spot vs. US Equities But better than other markets
CLS, US Consolidated A, B, C tape

12. CLS FX Spot vs. Europe Equity Similar in Europe
CLS, Thomson Reuters Monthly Market Share – all lit, hidden, auction, dark, off order books

13. FX, US Bonds, US Equities Clearly correlated
CLS, US Consolidated A, B, C tape, SIFMA primary dealer treasury, corporate>1 yr, agencies

14. Playing the Scale Game But is it the only game to play?
Greenwich Associates

15. Customer FX Growth

16. Interdealer FX Market in 2003
CME
EBS
Reu
Not shown:
Futures brokers
Retail DB
Citi
Prop Shop
Prop Shop
Prop Shop
Prop Shop
Barx
Prop Shop HS
BoA
JPM
UBS
Dres-dner
Integral
FXall CX
Com-merz
FXall CX
Execution through ECNs, banks and some funds
Real Money, Corporates
Structure akin to US treasuries: Interdealer: Brokertec, eSpeed;
Customer: Bloomberg, Tradeweb
Still similar + GovEX.

17. The HFT Riddle Their liquidity “lowers costs for users”
They make millions of dollars
How do they do both at once?
Some hold for μsecs; have no customers

18. Pragma: They may raise costs
The highest volume US stocks are the most expensive to trade!
June 29, 2012 market. Red dot indicates 10% with longest queue length. HFT and the Hidden Cost of Liquidity, Pragma Securities, July

19. Pipping: Repeat of Sub-Pennies in Equities
Source: Tick Size Regulation, Intermarket Competition and Sub-Penny Trading Fig 1. Sabrina Buti, University of Toronto, et. al. June 1, 2011

20. An Opinion HFT additive if: Always there in many pairs;
Use info from other asset classes; or
Hold positions for material time
But can we choose? A slippery slope

21. Major ECNs and CME Trends are converging

22. CLS vs. Established ECNs Established ECNs are losing share
CLS, Major ECNS

23. Low Volatility, Low Volumes

24. FX Options
BIS Survey; Aite Group

25. FX Options
BIS Survey; Aite Group

26. So, where are we going?

27. Predictions The Easy Ones
Emerging markets (RUB, CNY)
New platforms, new exchanges
(e.g. CME Europe)
Asset managers seek better FX access
TCA

28. Predictions The Harder Ones
Volume
Fragmentation / Consolidation
Which products?
How traded?
Retail
US elections; fiscal cliff; eurozone economy
Basle III, MIFID II, Dodd-Frank, EMIR

29. Tighter Spreads Equities Market Turned Agency
Aite Group

30. Modest Net Consolidation
FINRA
Customers value relationships

31. Fragmentation
US cash equities: 13 exchanges; 50 dark pools; plus broker-dealers European equities: 28 lit books; 2 hidden; 20 auction markets; 13 dark books.

32. Many Platforms will Succeed
Bring New Segments
Enable hedges not economic before
Grow market

33. Democratization of Options
BIS Survey; Aite Group

34. Electronic FX Options Hybrid Broker-backed RFQ Order books
Major single bank platforms: UBS, Deutsche Autobahn and BARX 34

35. CME FX Options A model for options?

36. How Will Traders Execute?
Revival of direct market?
Fragmented platform market
Block trading – four ways to trade:
Transfer risk to a Bank
Algorithmic Trading (chop it up)
Dark Pools/Order Types (akin ITG Posit, Liquidnet)
Shop through a Voice Broker

37. Trader gets an ‘assist’ from the computer.
Algorithmic Trading
Trader gets an ‘assist’ from the computer.
Can give it to customer

38. DMA The Agency Model
New Participants, More Participants
Next Phase of Market Growth

39. In Summary FX is special: real need; global; dispersed
Increasing fragmentation. Modest net consolidation
Emerging markets, options. Regulation helps
Banks have customer relationships. Scale is a strategy, but not the only one
Banks increasingly empower their customers: algorithmic trading, DMA

40. Greenwich Forecast Our best days are ahead

41. Appendix In case of questions on these topics

42. High-Frequency Trading
Choose your definition:
Systematic; Quant; <1 day holding
High volume; Low inventory
CFTC (US govt) defn.
25% of volume, but highly visible
Irene Aldridge – Estimating Proportion of High Frequency Traders, July 10, 2012

43. Growth by Geography