Foreign Exchange Dark Pools Gain Traction with KCG Hotspot Introducing Hotspot QT

HotSpot QT will bring in a non-displayed crossing venue or dark pool, assisting banking and non-banking institutions to trade large

hotspot logoAccording to a company announcement by KCG Holdings Inc. (NYSE:KCG), the firm’s division which is dedicated to deliver solutions to the foreign exchange market, KCG HotSpot is launching a new product named HotSpot QT. The solution aims to provide dark liquidity, permitting traders to trade orders in large sizes without impacting the market price in a material way.

The trading venue will be anonymous and orders on the market will remain in the dark making it a “dark pool” trading venue. Such marketplaces are used by companies to trade in secret without exposing their full position to the broad market.

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This permits customers trading on dark pools to post large orders for execution without moving the market materially as they would have if those were displayed on the broad market. While trades can happen in seconds, orders can take hours to complete as the pool is looking for liquidity at the preset price.

HotSpot QT is a separate offering from the HotSpot FX platform and will be operating with a different liquidity pool. According to the company’s announcement, the new trading venue fully supports firm limit orders and high minimum quote sizes.

The pool is not only limited to bank participants, so asset managers and hedge funds willing to participate in the foreign exchange dark pool can sign up.

The company’s foreign exchange trading volumes have been on a tear lately, after subdued activity in the summer months.

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KCG Hotspot’s Global Head of Sales, William Goodbody, said: “HotSpot QT is yet another offering from HotSpot that solves specific challenges for our clients, in this case meeting the needs of institutions that trade larger orders and are sensitive to market impact.”

The pool will start operating offering 10 currency pairs – EUR/USD, GBP/USD, USD/JPY, AUD/USD, EUR/CHF, EUR/GBP, EUR/JPY, USD/CAD, USD/CHF, USD/MXN.

Dark pools have been particularly attractive for banks, which have a large book of orders and aim to conceal their full exposure from other market participants. On a regular trading venue such as EBS or Thomson Reuters, the books are available for every counterpart to see, which makes it difficult to conceal one’s trading intentions.

There are several banks which are running their own foreign exchange dark pools, like Deutsche Bank, UBS and Credit Suisse. Thomson Reuters owned FXall is also running its own venture, while one of the biggest dark venues in the forex industry is owned by inter-dealer broker BGC Capital, which is wholly owned by BGC Partners Inc (NASDAQ:BGCP).

The company’s all-electronic “MidFX” venue has been gaining traction and growing substantially. According to the firm, trading volume on the company’s dark pool has risen more than 13 times since 2009, totaling about $15 billion per day.

Yesterday, KCG Holdings Inc. (NYSE:KCG) announced that it will part ways with 4% of its workforce in a move to focus on its core business areas. Recent reports however, revealed some internal tensions and the company’s CFO left the firm in the beginning of September.

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