Solving the e-FX Liquidity Puzzle

Without a complete analysis, sourcing liquidity will be a try and fail and try again process for most consumers.

This guest article was written by Divisa Capital’s Ryan Gagne , an e-FX market veteran, with over 15 years of experience working some of the market leaders in FX such as State Street Global Link, Hotspot FXi, FX Bridge, Alpari and Divisa UK. His experience has positioned him on the front line of e-FX trading consultation to institutional money managers, leveraged hedge fund and proprietary firm, corporate and retail trading firms.

When it comes time to discuss liquidity from your e-FX provider, not all streams are the same. The largest and ever-changing puzzle for most liquidity consumers (i.e. downstream banks, brokers, trading firms, corporate treasury groups, etc.) is piecing together the “best” liquidity that suits their particular needs. Whether it is big chunky blocks of business or small and plentiful retail flow, not all providers supply the same liquidity.

There are several important factors that are essential inside the stream and each factor may weigh more or less with a particular consumer. Spread, top of book quantity, overall depth of book, execution rate and distance between provider and consumer are the main points to pay attention to and all of these factors should be investigated when performing a search for a new e-FX liquidity provider.

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Bear in mind, that for a particular liquidity consumer, any of these factors may weigh more or less in their business model than another consumer, but missing any of these factors on the table, the puzzle will never be solved and the picture will not be completed.


“Spread is bread and the tighter is better”, is a typical thought by most liquidity consumers, and who can really argue with that. However, spread is only a piece of the puzzle and without other key factors on the table to analyze; looking at the spread alone is virtually pointless.

Take for example, an ultra-tight spread in say, EURUSD of 0.2 pip, sounds great, looks even better, but how much is it good for, or should it be asked, “What is the top of book quantity?”

Top of Book Quantity

Ryan Gagne
Ryan Gagne, Divisa Capital

Although this cannot be measured quickly and to some extent this factor may be more a visual analysis, the result may be a significant piece to the puzzle for many liquidity consumers. The “Top of Book” quantity is the amount of available liquidity at the Best Bid and Best Offer rates. Most wholesale e-FX providers have the ability to indicate the amount in lots or estimate sizes visually on their GUI (graphic user interface) or electronically within their API (application program interface).

The quantity at the top of the book is critical because in some cases, it beckons to a “teaser rate” for those LPs who attempt to lure potential clients in with an ultra-tight spread that has a dismal quantity available to trade. For example, how good is a EURUSD spread of 0.2 pip if only 100K is available on both the Bid and Offer if the consumer has an average trade of 500K?

Overall Depth of Book

Following the quantity on the top of book is the overall depth of book, a feature typically only available on ECN or multi-provider platforms. The depth of book is the amount of available liquidity up and down the price ladder of Bids/Offers created when multiple liquidity providers are aggregated into a single view. There can be any number of providers at the same rate and in these cases, platforms providers may bulk up these Bids/Offers into a single amount for ease of view.

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The depth of book is critical to consumers for a number of reasons such as; fulfilling a larger order at a quicker speed, refresh of available liquidity as well as indication of interest/available liquidity. In some cases, e-FX platforms may have a limited number of liquidity providers and consequently, the consumers on that platform could suffer gapped and wider spreads or worse, the inability to execute, a critical factor with respect to “Execution Quality”.

Execution Quality

An overall assessment of the quality of execution on an e-FX platform is a combination of several factors, and the prior mentioned pieces of the puzzle all interlock to form the Execution Quality piece. Additionally, the condition of if “Last Look” or “No Last Look” are in place as well as the overall reject rate play into the quality of the executions on a platform.

A “Last Look” capability is a feature on a platform in which a liquidity provider has the ability to review a pending trade for a specified amount of time (from 250ms to as much as 2 seconds in some cases) and has the ability to reject or reprice a proposed trade. Typically a platform that permits “Last Look” will have a lower execution when compared to a “No Last Look” platform.

Execution quality can be measured in a couple ways but simply put, if a consumer attempts to trade on a rate and is filled completely, then there is success on the trade. Conversely, if a consumer attempts to trade on a rate and any of the following results happen; trade is rejected, trade is partially filled, trade is filled but at a different rate (negative slippage), then this is not a successful trade. The overall quality of executions on a given platform can vary, some consideration can be made for consumers attempting to trade in adverse manners (i.e. large tickets, high ticket volumes, etc.) that the e-FX platform is not capable of handling.

Distance between Provider and End Consumer

The last critical piece of the liquidity puzzle is the physical distance between the provider and end consumer servers. In the age of co-location and remove data centers, this issue has been managed down from miles to feet and in some cases even inches for the distance between the provider and the consumer, but it has been at a price. Moreover, for end consumers (i.e. retail brokerage clients) the solution has not been truly solved.

Many e-FX platform providers run a single, global server location, a critical issue when it comes to distance latency. Take for example, a European brokerage looking for liquidity from a single global server e-FX platform that is located in the metro New York area. That broker has but one choice, co-locate in the US and push the latency all the way over to their end clients. Or, on the other hand, that same European broker co-locates in London or Munich, with a regional server-based e-FX platform provider, the broker has reduced over fifty percent of the latency out of the picture.

So, distance does matter and even though there are still some limitations and no one solution will solve every problem, this factor cannot be ignored.

Putting the Puzzle Together

Once all of the pieces are laid out on the table, a picture can start forming and every client will have a set of needs that can be weighed and measured against these factors. The value of each puzzle piece is in the eye of the beholder and each consumer needs to prioritize and decide what is important to make their business successful.

Without a complete analysis, sourcing liquidity will be a try and fail and try again process for most consumers.

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