TradeTech FX US: The two-way dialogue between liquidity providers and liquidity consumers is paramount to a successful trading ecosystem

When looking for methods to optimize the liquidity mix, panelists at the TradeTech FX US conference in Miami agreed that fostering good and consistent dialogue between liquidity providers (LPs) and liquidity consumers is crucial.

Christopher Connolly, business strategist at Cubic Systemic Strategies, explained that there are two key phases if you want to work in this space: the initial setup when you first start working with LPs to find a liquidity mix, and the subsequent adjustment phase once trading has started.

“It really starts with honest conversations with each provider and LP, laying out what your strategy is, what currency you want to trade, what times you want to trade, holding periods, etc.,” he said. “I’ve really found that the more honest you are, the more valid your feedback is.”

Panelists acknowledged that there are costs associated not only with establishing a new relationship, but also with the adjustment period that follows. They agreed that implementing the results of important dialogues between the actors increases the performance of both sides.

Michael Babic, head of eFICC sales at Bank of America, further explained that the search for an optimal liquidity mix is ​​now no longer a “set it and forget it” process compared to the past where there were fewer two-way conversations “, but rather a continuous assessment of how you can improve as a provider.

“We've seen this really significant shift since 2020, or maybe even before, where providers are becoming more critical on their part about how many people they want in their pool […] I think that both the seller and buyer sides are coming together in a mutually beneficial dialogue that leads to a really good result at the end of the day,” said Babic.

When asked how many LPs is optimal, the panel appeared to agree that there is no one-size-fits-all answer for an optimal liquidity pool.

“It depends on what the drivers are for clients, what they are looking for,” said Srichakri Adhikarapatti, global head of foreign exchange and cash equities principal quant trading at UBS.

Phil Weisberg, EVP of strategic planning and partnerships at OneZero, acknowledged that approaches are changing and therefore the optimal number has evolved with the market: “We're thinking about it being not just one pool, but pools.”

“Different strategies and trading types are implemented. When you step back and better understand your own flow, you realize that different flows are better suited to different pools, and there are actually the tools now to analyze this.”

Speakers also addressed the question of what data is taken into account in decision-making. Connolly explained that general overviews include rankings and volumes by currency and specific times of day, emphasizing that a particularly good metric is what percentage of the day a participant is on one side or the other and what the performance is in the short term after the trade .

Adhikarapatti added: “LPs can differentiate themselves to some extent by how much distortion they show and how much we actually internalize […] It used to be all about execution costs, but now it’s much more about market impact.”

Eugene Markman, Chief Operating Officer at ION FX, also touched on the importance of data, saying that while it is difficult to make generalizations from a data perspective as solutions vary depending on customer profiles, good and clean data exists in everyone Case the most important things are things.

However, the speakers agreed that overall, it's all about understanding what's important to each individual participant and understanding what the data actually says.

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