Market Data as Aggregators
Increasingly there are a set of vendors who lead brokers to believe that pricing is just a function of getting market data as quick as possible and routing or filling orders using an aggregated order book at the best possible price.
If we all did this, how would there be any variation in price in the market? And just to be clear we do see a lot of variation in the market.
"Get more and more LPs in the aggregator and offer tighter spreads." - Let's explore this in a more nuanced fashion.
- Aggregation slows down the rate formation to the rate of the slowest LP
We believe that aggregators have an inherent problem. They move as fast as the slowest LP in the pack. They are subject to Winner’s Curse when it comes to order routing i.e. an over aggregated pool results in LPs only getting flow when it is bad for the LP (latent quotes) and if you send it to the LP it damages your LP relationships.
- Internalising flow on someone else's rate
This problem is compounded where you are internalising the flow without sending it to the LP. The LP who's rate you are honouring your end client with, may have rejected the flow in the first place.
- Crossed order books
With highly liquid instruments in sufficiently competitive compressed spread environment a lot of the time, sometimes more than 50% of the time an aggregated pool can be crossed. i.e. contain bids higher than offers.
- Loss of rate control. Skewing your own rate based on other LPs skew
Whilst as a retail broker you will have to honour your own execution policy's best execution requirements for your retail clients, your LPs are not as duly obliged to make their rates as best execution centered. They can and will send a skewed rate as they will be making a B2B rate.
This can be beneficial and helps differentiate their rates from others. Using our predictivity framework we are able to help monetise and exploit this information
As a flip side, if you include this in the rates published to clients, effectively you are delegating your own skew to the skewed LP, rather than controlling it based on your own business objectives.
- Loss of spread control. Fixed markup on top of other LPs rates.
If you apply a fixed spread on top of an aggregated rate you will lose control of the spread distributions you offer your end clients.
If you have been sending bad flow to LPs this may cause them to widen the spreads, which in turn may make your own spreads to clients unfavourable.
We can help you achieve better control of your spread response to achieve a much more marketable spread distribution independent of spread fluctuations from your LPs.
- LP Selection and Execution Policy
How do you choose which LPs to include in aggregation in the first place?
Our LP Measures are a useful starting point for deciding what might be a good set of LPs to include in rate formation.
Making your rate either flow or price predictive will make your business more profit.
- Execution Policy Context
What are you obligations to your end clients?
Different regulatory considerations apply to retail vs professional traders.
Retail vs Professional Traders
In some regulated environment very little difference applies.
- Retail Optimisation
You don't have to choose every single LP who is willing to quote an instrument.
As an example, in fact ESMA does allow having a single LP providing in doing so that clients are consistently better off e.g tight spreads, symmetric slippage.
If a Multi-LP market data is chosen we can use a sophisticated set of LP filtering to ensure that you rate remains as predictive as possible.
Retail: LP Filtering
We have a range of market data filters that intelligently filter quotes
Professional & B2B
Here we are able to differentiate our rates further to increase the profitability of the firm whilst improving client execution factors like:
- reducing spreads
- reducing (asymmetrical) slippage
- improving last-look times
Improvements on these client execution factors can be key for growing your business trade volume wise.