To be a successful market-maker, two attributes are required: you need to be responsive to price requests, and you need to make money. For foreign exchange swaps and forwards trading desks, the latter is harder than you might think.
The FX swaps and forwards business is often thought of as a loss leader, there to take on the predictable, month-end swap hedging rolls from asset managers at compressed margins in the hope that clients will remember you when they have more profitable trades to do, like FX options, for example. It also boosts volume rankings with clients.
The emphasis on profitability has prompted more dealers to start using so-called mark-out tools.
A mark-out analysis tracks the change in the market’s mid-price in the minutes and hours following the execution of a trade, relative to the price at which the trade was executed.
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