In the foreign currency markets, where exchange rates can change in microseconds, speed of execution is everything. Yet when it comes to holding on to risk, the time a liquidity provider takes will vary.
This is something spot FX liquidity providers are increasingly considering when designing their execution algorithms and internalisation engines.
At one extreme there is full risk transfer, where the whole balance is executed instantly on a venue with no time for the market to drift. This can be a fairly aggressive approach from an LP that wants to exit a trade, and can have a significant market impact.
The alternative is to hold the risk for longer and wait patiently for other client orders to come in and offset the trade, thereby removing the need to hedge the risk in the external market. Significant balance sheet and technological capabilities are required to warehouse the risk…
Read More
