In today's volatile market, liquidity has become a kind of financial Tamiflu -- perceived as a cure for severe cases of Lehman syndrome and a panacea for all types of potential market maladies. But far from being a case of hypochondria, the yearning for liquidity is an understandable reaction to the financial crisis and today's market conditions.
Back in 2007, banks and hedge funds were gorging themselves on illiquid credit derivatives that made it difficult for them to analyse their risk or even to understand the market value of their holdings. The response has been a shift to the opposite extreme; traders now want to know their exact positions constantly and want the reassurance of being able to exit them quickly.
This has created a kind of arms race to provide clients with access to the deepest pools of liquidity over increasingly tiny time intervals, and the latest escalation in the foreign exchange market is a new electronic trading algorithm being launched by Barclays Capital today. PowerFill+ is a suite of online FX tools offered on the bank's electronic trading platform, BARX, which matches clients' orders anonymously to provide deeper, guaranteed liquidity -- even in volatile market conditions.
The new functionality is also a market-leading order management system that gives users a great deal of flexibility in the way they monitor and execute orders, including some innovative tools that make it easy to place orders quickly and to see the depth of the market at a glance.
Based on its beta testing with a small group of key clients -- mostly banks and hedge funds -- BarCap says the new system has tripled the number of orders it gets. Clients used to use the online platform mostly to place overnight orders away from the market, whereas the new system is also being used to place intraday trades close to the market.
"It's no surprise that liquidity is what clients focus on," said Tim Cartledge, head of e-FX trading at BarCap, during a demonstration of the platform to FinanceAsia. "There is less appetite for risk right now and more for flow. And if you want to capture that flow, you've got to build out your e-systems, which is what many banks are trying to do right now. It's a good time to be a client."
Banks take this kind of stuff seriously. BarCap reportedly hired Liam Hudson from Lehman in the wake of its bankruptcy to head FX algorithmic execution for a director-level salary of close to $1 million. And Goldman Sachs has been making headlines recently after one of its former programmers was arrested and is now facing criminal charges over allegations that he stole the bank's proprietary trading algorithm -- just 32 megabytes of code, but reputedly worth millions of dollars.
The Tabb Group, a research company specialising in financial markets, backs up that assertion. It reckons that high-frequency trading will earn the big banks as much as $8 billion this year, according to a recent report in the New York Times.
BarCap's new tool uses its existing FX algorithm, launched in 2007. Its innovation is to provide, for free, a system that lets clients provide liquidity to each other with BarCap guaranteeing the prices. Even in turbulent markets, when clients are cancelling orders, the system continues to provide a high level of certainty.
Many banks do both -- give access to liquidity from other clients' orders, and provide their own liquidity to clients -- but none offer them on a single brokerage-free platform with complete anonymity, including so-called iceberg trades, which let traders hide the full size of their orders.
"Clients rightly prefer nobody talks about their trades," said Cartledge. "But they always want to know what everyone else is doing as well."
PowerFill+ is a happy compromise, according to Cartledge, providing much more market information than most other systems, but without any human oversight that could result in order information leaking into the market.
BarCap's advantage in this area is its investment in technology. The only way to offer guaranteed prices is with a fully automated system that accepts orders in real time. Many rival banks take FX orders electronically, but must complete them with human traders -- a system that makes it impossible to guarantee prices because backlogs can develop during frenzied trading, leaving the bank exposed to orders that are far away from current prices. Catching up will require big investments in technology.