Soft-FX's Max Faust Talks Next Generation FX Liquidity Solutions

Forex Magnates reached out to Max Faust, Chief Executive of Soft-FX, for an in-depth look into technologically-driven FX brokerage solutions that are taking the industry by storm.

According to Mr. Faust, “The choice of available Liquidity Liquidity The term liquidity refers to the process, speed, and ease of which a given asset or security can be converted into cash. Notably, liquidity surmises a retention in market price, with the most liquid assets representing cash.The most liquid asset of all is cash itself.· In economics, liquidity is defined by how efficiently and quickly an asset can be converted into usable cash without materially affecting its market price. · Nothing is more liquid than cash, while other assets represent The term liquidity refers to the process, speed, and ease of which a given asset or security can be converted into cash. Notably, liquidity surmises a retention in market price, with the most liquid assets representing cash.The most liquid asset of all is cash itself.· In economics, liquidity is defined by how efficiently and quickly an asset can be converted into usable cash without materially affecting its market price. · Nothing is more liquid than cash, while other assets represent Read this Term providers is not an easy one for any broker, since there are various different views as to weigh for the best option. In the highly competitive and boosting market of today, liquidity management is without a doubt, a top priority for both – institutional and retail FX brokers.”

“The rapidly changing FX market demands brokers to provide reliable service and quality liquidity for their clients, whilst the broker also has to pay close attention to the costs of Liquidity Aggregation Liquidity Aggregation Aggregation or liquidity aggregation can be characterized as the process of gathering buy and sell orders from different sources and directing them to a given executing party. This is most commonly done from multiple sources to minimize the risks from using a single liquidity provider. By aggregating liquidity from multiple sources, the broker is able to increase the depth of market it offers to its clients and therefore deliver better fills on the order flow when compared to when it uses a sing Aggregation or liquidity aggregation can be characterized as the process of gathering buy and sell orders from different sources and directing them to a given executing party. This is most commonly done from multiple sources to minimize the risks from using a single liquidity provider. By aggregating liquidity from multiple sources, the broker is able to increase the depth of market it offers to its clients and therefore deliver better fills on the order flow when compared to when it uses a sing Read this Term. Due to this reason, new generation toolsets have been created in order to ensure profit optimization via technology innovations, that let brokers concentrate on their core business activity – bringing in and managing new clients,” added Mr. Faust. His full-length interview with Forex Magnates can be read below.

1.) What benefits can the Soft-FX Aggregator bring to the table in terms of liquidity procurement/information that traditional avenues cannot?

In order to improve the execution of each order, the Soft-FX aggregator combines liquidity from external suppliers with the pending orders of the brokers’ clients, therefore forms a market depth, which results in a better spread offering.

To improve the quality of quotes, the aggregator filters out market prices from the external suppliers and in order to minimize the average execution price, it will split a big order into several smaller ones. Orders are processed within milliseconds, therefore decreasing the probability of slippage significantly.

When it comes to increasing volume-based trading income, the aggregator can be a useful tool in a number of ways. First of all, execution rules can be set individually for each instrument, which helps to avoid the loss of profit. Secondly, spread costs can be optimized, by executing orders directly between clients, which allows bypassing external suppliers. The aggregator also reduces counter-positions on different suppliers and minimizes the use of margin and rollover costs.

2.) Has technology been a gateway or a barrier in the world of forex in recent years given that we have largely not seen a large number of gamechanging developments?

If we speak about markets strongly influenced by technology enhancements, FX is surely no exception. Due to the continuous technical improvements, it is obvious to witness the trend of technology decreasing in price, whilst the capacity and efficiency is growing continuously. Logically, the number of brokers who decide to enter the market of Liquidity provision is also increasing. The competition is becoming more aggressive and even the largest Liquidity providers are inevitably losing their individual market shares.

The rather new turn as of technology enhancements have been the aggregated liquidity solutions, which have removed the need to engage a prime broker or third party technology firm for price aggregation. Although not a brand new invention to the world of Forex, this is a solution to minimize the costs of liquidity management quite significantly.

Liquidity management tools and features previously only used by the high-end of the institutional market are now becoming more and more popular among retail brokers and it will ultimately continue to improve the quality of liquidity available to the end client. Since competition leads to progress, it can be stated that technology drives the market and will continue being a driving force towards new developments in FX.

3.) What kind of technology solutions do you feel are making or will make the biggest splash on the forex industry in years to come?

Strong depth-of-market and low-latency execution are now a standard requirement, as the FX volumes are growing globally. STP execution combined with manual or automated exposure management, is the basic solution for retail brokers who wish to hedge their exposure to redirect toxic flow or to run a Book A business.

Latency and inefficiency of pricing will always be a problem present in FX as a decentralized market, however, as eFX-trading technology becomes cheaper, more regional banks will launch eFX solutions to enter the market and provide liquidity. This will then provide efficient home currency pricing to the local traders. TCA reports, which are limited due to the massive data resource used, and therefore are available at a relatively high price at this time, will eventually become more affordable and lead to more efficient markets and educated traders. Liquidity management will follow the development of the market-leading retail GUIs and the general shift towards more Book A retail brokers.

Speaking of risk and liquidity management, I do believe that as for many other industries, what the future holds for FX is the development of artificial intelligence. Liquidity management challenges will be ultimately resolved by programs and machine-learning software.

4.) Liquidity is often a fundamental crux for brokers, is this process broken or in need of fixing, or is limited liquidity serving as a preventative step to curtail unsustainable operations?

Since the competition in the FX market is constantly growing, brokers are indeed under constant pressure of keeping up their ‘A game’ and providing top quality liquidity to their clients. A combination of the right components in this regards, is a must. Even some of the globally most known liquidity platforms lack the ability of adapting to the unique characteristics of retail trading. A strong liquidity pool has no value if the bridge component that connects the liquidity to the trading platform or front-end is weak, and the other way around. In the current competitive state of the retail FX trading business, effective liquidity management strategies really can make all the difference between success and failure.

Aggregated liquidity solutions, can serve as a sustainable way out, however, in order for brokers to get the most out of their liquidity applications, it is essential to have the right mix of personnel, costs and infrastructure. A technology-focused broker may miss the need for key business-oriented personnel to handle the clients’ needs, and it is also common to see a broker equipped with top-of-the-notch personnel but lacks the right technology know-how to manage the platforms installed.

5.) What sort of success has your platform had with arbitrage – between two or more banks or LPS – and is this something the industry will be seeing more of?

In order to control the market risks, the Soft-FX aggregator distributes trading volume between A and B books, based on present rules. It compensates the B-book trading risk by A-book brokerage commission.

Before the platform sends an order execution confirmation, it will check the actual market price, therefore eliminate the appearance of out-of-market positions in B-book.

The risk is reduced over limits by balancing positions between different external suppliers, based on margin usage. The aggregator creates positions reconciliation between clients and external suppliers in this way, eliminating market risks, as a result of hidden undercover positions. New ways of risk minimization is what we at Soft-FX believe to be a top priority in future development of the industry.