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I have covered the rise of ‘non-bank’ or ‘alternative’ market-makers a few times recently, notably here, here and here.

Looking at how, armed with market leading technology, talented etrading techies from sell-side firms and teams of razor-sharp quants, these firms are now providing deep consistent liquidity to the market in a capacity previously the preserve of the top-tier ‘flow’ monster’ banks.

The perception of non-bank market makers has traditionally been that they are high frequency traders, engaged in latency arbitrage, holding large positions for milliseconds and trading mainly on exchanges and anonymous ECNs.

However, the new bread of non-bank market-makers are coming out of the dark pools, and just like the banks, they are interested in building relationships with the liquidity takers, who in this case, are the banks themselves. They are not engaged in latency arb, but are market making and taking risk positions onto their books, with average hold times for G10 currencies around 10mins whilst for Emerging market currencies as long as 24mins.

As Zar Amrolia Co-CEO of XTX Markets said in a recent interview with Risk.Net;

“Non-banks have traditionally supplied liquidity to banks via anonymous order books, which has fostered suspicion and accusations of predatory behaviour. XTX, however, has established direct streaming relationships with some of the world’s biggest banks, without the need for a broker or platform to sit in the middle.

He goes on further to say:

“You build a relationship with direct connectivity and interesting things start to happen. You can develop a relationship where you understand the nature of the flow and the nature of the end-user client base much better, enabling you to tailor your pricing accordingly.

With regard to the ongoing debate over last-look, he adds that:

“Some clients will want a full amount stream with no ‘last look’, and we can do that. Others are more sensitive to emerging market spreads and are happy with ‘last look’, and we do that, too. We also provide full post-trade transparency, so counterparties can evaluate XTX on its fill-ratios and market impact”.

It’s a win-win for both sides,” Amrolia says.

As I said before, it’s a changing of the guard, as we see the continual rise of the non-bank market-maker. Bank’s will continue to reduce their risk appetite and focus on servicing their client’s, whilst firms like XTX will step forward and become to quote a recent EuroMoney article ‘liquidity providers to the liquidity providers‘.

Filed under: alternative market maker, FX, Paul Blank, Regulation, Technology Trends |