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Outsourcing FX Connectivity Services in a Fragmented Marketplace

FX trading presents tremendous opportunities as the asset class is highly liquid and the most traded globally with average daily turnover exceeding $5 trillion.

FX trading presents tremendous opportunities as the asset class is highly liquid and the most traded globally with average daily turnover exceeding $5 trillion. A considerable amount of the high daily turnover is a result of significant high-frequency trading taking place in the deepest and most liquid parts of the FX market such as the spot FX markets for the major currency pairs (US Dollar, Euro, Pound Sterling, Japanese Yen and Swiss Franc). The emergence of smaller banks and retail investors trading in this market also accounts for the high daily turnover.

The FX markets have also witnessed considerable fragmentation of liquidity and a rise in algorithmic trading and electronic execution methods with trading taking place on electronic broking platforms, multi-bank trading systems and single-bank trading systems. As a result, high-performance FX trading firms are leveraging cutting edge technologies to develop trading strategies that ensure best execution while reducing market impact.

The lack of a central marketplace along with dramatic growth in algorithmic trading has created connectivity challenges for market participants. The right type of connectivity enables FX trading firms to differentiate themselves, capture alpha and gain strategic advantage in the marketplace.

As a result, FX trading firms are increasingly leveraging ready-made FX ecosystems to rapidly access liquidity venues and trade lifecycle services. They typically achieve this by partnering with a managed network service provider thereby ensuring best execution and capturing liquidity at the best available prices. Recently IPC partnered with Greenwich Associates on a webinar that provides insight into these trends. To learn more view the webinar replay here. Benefits of the outsourcing model for high-performance FX trading firms include:

  • Access to a ready-made FX community of liquidity venues, trade lifecycle services, market data and trading counterparties
  • The ability to gain a single view of the market
  • Trading cost-effectively - FX traders are increasingly looking to transaction cost analysis (TCA) as a means of benchmarking execution quality
  • Enabling focus on core business of alpha generation rather than connectivity

There is no doubt that complex connectivity challenges face market participants in the rapidly evolving and fragmented FX market. The most successful firms are outsourcing connectivity services to managed network services providers that have an established FX community of market participants, deep knowledge of the FX markets and a strong track record of providing world-class customer service.