Same Movie, Different Market: Moving from Stocks to FX

By Tom Steinert-Threlkeld,  Traders Magazine
24 October 2012

Steve Rubinow thinks he’s watching a replay.

The former chief information officer for NYSE Euronext is now CIO at FXall, the supplier of an electronic platform for trading currencies.

Steve RubinowWhen Rubinow got to NYSE, “fragmentation” of stock markets was just beginning. Trading was dominated by the New York Stock Exchange and the Nasdaq Stock Market. His outfit, Archipelago, was an upstart “electronic communication network.” Now, there are 13 national exchanges, more than 40 dark pools and alternative trading venues, plus a couple hundred internal pools of capital operating at brokers.

In foreign exchange, trading has been dominated by five banks: Deutsche Bank, Citigroup, Barclays, UBS and HSBC, according to research firm Celent.

But now, technology is able to bring together a wide range of dealers onto a given platform. The dominant player has been FXall, recently acquired by Thomson Reuters for $625 million. It provides service to more than 1,000 institutional clients. A rival, FX Connect, gives access to liquidity from more than 55 providers.

“It’s like equities was once upon a time and we’re replaying the movie,” Rubinow told Traders Magazine. “And how many times in your life do you have a situation you can go into saying, ‘I’ve seen this movie before and I know how to produce the movie better the second time around because I’m so much smarter’?”

Rubinow, who lives in Chicago and commutes to New York, left the business of applying technology to the trading of stocks in April.

Shortly thereafter, he said, “I basically got tired” at NYSE Euronext, after having helped it through the creation of a world-spanning Secure Financial Transaction Infrastructure and the building of two $250 million-a-copy data centers in Mahwah, N.J., and Basildon, England.

The FX business may be tonic. Roughly $36 billion a day worth of stocks was traded on the New York Stock Exchange in April and $59 billion on the Nasdaq Stock Market.

By comparison, roughly $4.3 trillion worth of currencies are getting traded every day this year, according to Celent. And it’s a “highly fragmented and lightly regulated industry,” Rubinow contended.

Which puts the market “kinda sorta where the equities markets were a decade ago,” he said.

Here’s how he expects the next decade to play out:

Consolidation. Last year, everyone from Deutsche Borse to NYSE Euronext to Nasdaq to the London Stock Exchange wanted to merge. “We’ve seen consolidation happen in equities and so we know what consolidation looks like. I suspect that that will happen in FX as well.”

Regulation. There are no central market and no global regulatory agency responsible for monitoring the activity of the currency markets. But oversight is increasing, country by country. Expect that to continue.

Automation. Just as in equities, “servers will be talking to servers, as opposed to people at workstations chatting with each other.”

Watching a market go from one where human beings are in the middle to servers in the middle to one driven by algorithms the humans wrote is the movie Rubinow expects to see play out again in foreign exchange.

Which makes FXall an interesting outpost for a technologist. “I think there’s lots of opportunity for making this market more interesting and more efficient for all the participants,” he said.

He hasn’t developed a step-by-step plan of attack for aiding or abetting the change. But he does think his experience at NYSE Euronext prepares him for whatever speed of trading in currency pairs becomes the norm.

Right now, for instance, response times on equities trading platforms, he says, are measured in “double-digit” millionths of a second, or under 100 microseconds. “Here in the FX world, fast trading is single-digit milliseconds,” he said. “So we’re talking about two orders’ of magnitude difference, in terms of the mind-set.”

That doesn’t mean FX trading necessarily will make the leap to microseconds. “But I can tell you that, directionally, it’s headed faster,” which means the same applications of technology as in equities, he said.

Data centers, connected by high-speed fiber or microwave. Customizable hardware and software. Plus, the hallmark of high-speed stock trading: co-location. Trading firms putting their algorithms and their servers under the same roof as the relevant trading engines. And as close to the matching engines as possible.

FX is also more interesting, right now, than equities because volumes are low on exchanges worldwide, and volatility is relatively low-not what’s needed to exercise the machinery in place or put commissions in pockets. The New York State Comptroller in October noted, for instance, that securities industry revenue dropped 7 percent in the first half of 2012, after falling 20 percent over the prior two years. Plus, bonus pools are being cut for the second year running.

”The draw of FX is, it is kind of a new frontier for some veterans of equities as a place to seek alpha,” Rubinow said. “It’s getting a lot of interest from the equities veterans who say, ‘You know what? I think we can make some money here.'”

The automation of FX trading differs little from the automation of equities trading, Rubinow contends, after half a year at FXall.

“It’s just a question of how streamlined the path is from point A to point B,” he said. But there is a difference in what equities regulators come to call “transparency.”

You may or may not know who the counterparty to your transaction is. You may not broadcast your order to “everybody in the universe.” You may just direct orders at parties you’re used to dealing with. No consolidated tape.

That could change, when systemic risk regulators start scratching around the FX business, trying to head off another global calamity. And the market may demand it.

“If I can broadcast my liquidity to everybody out there and I can see everybody else’s liquidity and the market overall is better for it, then the kind of very open, transparent, central order of books found in equities could start to pop up in FX,” Rubinow said.

The challenge, for the developer of technology, Rubinow said, is to find ways to bring buyside and sellside firms together over an electronic platform. Easier said than done.

In the FXall case, the trick is to find ways to integrate a well-accepted electronic trading platform with services already provided by a new owner, Thomson Reuters.

Ultimately, however, technology is not a producer of “alpha.” Nor is it able to even induce more liquidity. It can only respond, to orders placed electronically or manually.

“If volumes are low, volumes are low,” Rubinow said.

But that, he said, is due to macroeconomic issues, like sovereign debt stresses in Europe-forces out of the control of foreign exchange traders or system suppliers.

“And that’s a shame. Because it’s not good for our business. There’s nothing we can do to get people to trade more,” he said.

“Lower our prices? I don’t think people are going to trade anymore,” he added.

The trick in implementing new systems, he said, is not to accept the existing ones, like those routine processes that, for instance, mandate that installing a fresh server will take six weeks.

When confronted with a dictum that sets a fixed, six-week installation, Rubinow said he would ask an installer: “What if I told you that that server going in that rack, someone’s life was dependent on it?”

The answer Rubinow said he got was: “If you put it that way, I could have it done by the end of the day.”

Rubinow’s response, in turn: “Now I’ve opened your mind a little bit, we know that on the low end we could do it today.”

Meaning: An industry changes how it operates, if it allows itself to change.

“I’m always trying to put myself out of my comfort zone,” Rubinow said. “So I’m not saying that I’m the world’s leading expert in this and I kind of dial the job in and could do it in my sleep. God, it’s not that easy. But from the perspective of looking for new challenges, this is … like equities was once upon a time and we’re replaying the movie.”

And now it is refreshing to say, “I know how to produce the movie better the second time around because I’m so much smarter,” Rubinow said.