FX Liquidity Management

1. How will the role of liquidity managers evolve?

As the number of liquidity providers, venues, and platforms continues to grow, so too does the challenge of continually assessing the quality of pricing and execution across these multiple liquidity sources. New sources of liquidity may present the opportunity for better pricing or execution outcomes for clients, however without careful management, they may also increase the risk of over-aggregation, leading to sub-optimal executions by exacerbating market impact.

Liquidity managers are constantly required to review and optimise pricing and executions in the face of an increasingly fragmented liquidity landscape and rapidly evolving client flows. The liquidity manager’s role will increasingly focus on compartmentalisation of these flows and matching them with appropriate liquidity pools which are aggregated via well considered execution methods. Key though, is the ability to understand the intention of the liquidity consumer when routing flow. A solid understanding of client intent can inform suggestions as to how changes in execution style or tweaks to the configuration of trading systems can lead to better execution outcomes for clients.

For example, proactive conversations with clients regarding the negative impacts of over-aggregation are important, however there may be limitations within the liquidity consumer’s infrastructure that mean over-aggregation is an unfortunate reality. In such instances, liquidity mangers should be in a position to optimise liquidity pools and segregate hedge flows according to flow profile and market impact – ensuring the flow is being effectively priced, rather than subsets of more impactful flow resulting in higher execution costs for benign subsets.

In these cases, a greater reliance on real-time data-driven decision-making is required. Automated analysis of input pricing and client flows has further enhanced liquidity managers’ ability to identify and assess changes in input pricing or client flow quality more efficiently than ever before. Crucially, the outcome of such analysis will still involve direct dialogue with clients. These conversations can increasingly be informed by metrics that are not just transparent, but timely.

New products and access to new markets will continue to present challenges and opportunities for liquidity managers. For us at 26 Degrees, our newly launched trading product Pairs CFDs – enabling clients to trade any instrument against another, just like an FX Pair – has forced us to be agile and develop innovative approaches to managing this distinct flow effectively.

2. How will the makeup of liquidity pools change/need to change in 2025?

As liquidity sources become more volatile and client flows are increasingly differentiated, I think we will see increased segregation of liquidity pools based off flow quality and client preferences or intent. The goal is to ensure that different flow profiles are matched with pools that offer optimal liquidity, whether that be for benign flow, flow exhibiting market impact or other segregations such as skew safe pools.

Building on this, it is important that liquidity consumers/aggregators, like 26 Degrees, ensure that the risk models of LPs are as aligned as possible within any particular pool of curated liquidity. It only takes one LP to exit risk more aggressively than their peers in a particular liquidity pool for market impact to be amplified, leading to wider spreads and higher total execution costs in the long-term.

It’s also possible that we see segregation among a broader cohort of clients of lit and dark pricing availability. With more and more providers of liquidity looking to gain a competitive advantage by showing more aggressive skews, defending against any undue leaking of these skews will become an increasingly important component of the compartmentalisation that liquidity managers oversee. More granular methods for testing of skew leakage are regularly being deployed that make the job of pinpointing skew leakage more effective.

3. What kinds of liquidity provision analytics do you see coming into the market next year?

It is important that liquidity providers and Prime of Primes like 26 Degrees can simplify the liquidity management function and provide data in real-time that supports decision-making. The latest generation of liquidity analytics are key to this process.

Benchmarking and quote filtration are a great example of this and one area where aggregation is really blended with curation of client pricing. Whether benchmarking takes the form of an independent, non-executable price source or simply a specific subset of liquidity providers which are selected from within the liquidity pool, understanding the client preference is key. Some clients simply want to see a clean and transparent view of the market mid-rate with minimal spread volatility, others are keen to deal into heavily skewed pricing and are less focused on spreads or mid rates. Customisation of liquidity pools, benchmarks, quote filters and spreads is something we focus on heavily to ensure clients achieve pricing and executions that best reflect their specific needs.

Real-time market impact data is also critically important, and 26 Degrees has created a proprietary data analytics system (“Insights”) in-house to deliver just that. The data can be readily grouped and filtered across multiple facets of client activity (time, pair, size, client-tag, order type, market condition, correlations etc) – which allows our team to communicate openly with clients to easily identify subsets of higher impact order flows, changes to market impact profiles, and trends across liquidity pools/providers.

Real-time spread monitoring (also a feature within “Insights”) is an essential tool for identifying when LPs tighten/widen their spreads. By closely monitoring these movements, we can proactively optimise pricing for our clients, making adjustments such as adding or removing specific LPs from liquidity pools to stabilise or improve spreads.