One to one with FXCM CEO Drew Niv and a detailed look at how to beat interbank execution

Last week, FinanceFeeds reported that FXCM Inc (NYSE:FXCM) had completed a comprehensive study with regard to its order execution, which concluded that FXCM had achieved better spot FX execution than major futures venues and interbank market.

Execution practice is a fundamental component within the electronic trading industry, and in order to investigate this further, FinanceFeeds CEO Andrew Saks-McLeod engaged in a very interesting dialog with with FXCM CEO Drew Niv, one of the industry’s most senior and knowledgable leaders, to take a close look at what is important with regard to execution across all sectors of the business, and how the interbank FX market can be usurped by leading-edge electronic trading companies.

Order execution is critical to the trading environment. With figures such as those in the recent study and the savings made, do you think an arms race between exchange-traded FX providers such as the major venues of Chicago will begin to emerge?

For the intended audience which is high frequency traders and banks the CME and other exchanges have a very good solution. This is not where they are lacking. It’s a regulatory and structure issue not a tech issue. The only way they can fix their issue with retail traders would be to not let HFTs be market takers at the exchange but that can’t happen as it goes against the basic fundamentals of an exchange as an all for all market place.

How does FXCM achieve effective execution in terms of order fill and time and avoid slippage when orders are going directly to a live market in which the bank is the market maker?

Given amount of order flow we control we mandate very strict terms on what we will accept in terms of rejects etc.  (as we highlight on question 10).  All this is done to reduce actual execution cost minimizing slippage as much as possible.

What parameters were used to gauge potential savings of $36.3 million for FXCM retail clients using a spot FX platform compared to executing orders through an exchange such as CME?

As written in the methodology section of the study (as we highlight on question 19), we compared actual executions at FXCM to quotes with exact time stamps on CME, EBS and Reuters.  This even presumes that those venues had no slippage which is unrealistic.

There has been a lot of speculation within the industry over the past year that retail FX in the US will make its way onto exchanges, with many executives conveying this to FinanceFeeds. Do you think the regulators will push for exchange-traded futures, or will data such as this provided by FXCM be influential in maintaining spot FX and off-exchange CFD contracts as best for customers?

This would require congress to pass a new law and that is something that there are no plans for at this time.  FXCM showing that exchange clients are paying 3 to 5 times more on  a typical trade on a spread comparison basis (not including commissions and fees) is definitely going to make any prospect of this even harder.

Exchange fees are well known to be expensive, however if a dedicated FX exchange aimed at retail customers became established, this may reduce the cost of on-exchange execution. Something along the lines of a virtual venue which is hosted and owned by a big exchange technology firm perhaps. How would FXCM compete with it on execution speed and pricing?

The exchanges aren’t really interested in investing heavily for retail clients. HFTs make up the bulk of revenues from trading, technology hosting, connectivity fees and market data fee revenues. Retail clients only make up a tiny piece of the action for the exchange. In my opinion the exchanges pretend they care about the retail clients for public policy speeches and for the regulators. I think actual dollars spent and a true study of all exchanges and how heavily dependent they are on their top 20 customers would show otherwise.

What role do you see non-bank prime brokerages playing in global markets in the year ahead when considering that banks have made good market makers for large firms like FXCM?

Non-bank prime brokers are essential given the drastic drop in credit access in the FX space as so many prime brokers cut back and eliminate clients.  I see this need as even more urgent in the future as cut backs aren’t slowing down at all but only accelerating.

Does FXCM plan to sell retail liquidity to white label partners globally and allow them to become execution/liquidity providers in their own right with the same execution terms as direct business?

Most firms that white label our technology use our built-in liquidity pool and same market makers we do.  In the past, for some of our big bank white labels like Barclays and Deutsche Bank we did allow them to have their own liquidity for the obvious reason that they can easily do it given their status as top FX banks.

What should OTC brokers do to maintain best execution practices, and how do you think the requirements and parameters will look in 2016 for American OTC FX brokers in terms of customer requirements and regulation?

Despite us showing that a customized liquidity OTC FX solution is better for retail customers then an exchange or interbank ECN that still doesn’t mean we don’t have anything to learn from them.

These are three excellent trading venues and are VERY transparent.  This transparency is needed in FX and to be better democratized.  This means FX trading venues need to publish trading volume and other helpful data for traders and not just monthly summaries but real data traders can check against.  That is the hallmark of the good practices we need to learn as an industry from the exchange traded world.

Photographs at FXCM’s global headquarters, 55 Water Street, Manhattan, New York. Copyright FinanceFeeds