The Next Big Thing In FX - Price Making

The next big thing for retail desks is optimized price making. Price and Liquidity provisioning is the single most important component for a banks day-to-day operations in FX. A bank in New York and a bank in Tokyo may be making markets at the same time and each may have a slight bias towards the bid or offer depending on where their book sits. Now let’s look at these two banks and peel back a few layers. Each has a team of quants and developers whose key job is to make sure the banks algorithms handle pricing risk correctly. This bank also provides liquidity in all different shapes and sizes depending on the counterparty.

Price Discovery

Now what does the bank in New York and the bank in Tokyo have to do with a retail FX brokerage? Take a look back and remember those quants and developers. Their job is to provide a precise price in order to lay off risk of their own internal book – an internal book that has absolutely nothing to do with the book of a retail brokerage, yet that broker may be using that same bank as part of price discovery.

Brokers and banks differ in many ways, and one of the biggest differences today is the ability to price flow. Pricing flow is second nature for a bank, but 99% of brokers literally have no conceptual idea of what it even means to price flow.

The ability to price make not only opens up revenue streams, but also protects a broker. Efficient price making in the retail sector will be the next wave of internal enhancements for brokers.