Recent reports indicate that more than $7.5 trillion is traded every day in the OTC market for Foreign Exchange (FX).1

While the majority of this volume is countries and financial institutions trading with each other, up to 10% of this volume is also businesses buying and selling currencies to keep things running and hedge their risk.

After all, the FX market is the most liquid financial market in the world and is highly valuable — as long as you’re on the inside. And getting in on the inside starts with having the ability to:

  1. Conduct price discovery via high quality data sources
  2. Create optionality and competition by having more than one counterparty

However, many businesses don’t have the opportunity to do either, significantly degrading the efficiency they’re seeing out of the FX market. 

Their price discovery is typically limited to the one or two cash management banks that they have established credit lines with. While the concept of “tailored pricing” — where the bank tailors their pricing and margin captured by how sophisticated the business appears to be — means that they could be receiving less favourable pricing terms than other companies.

For your business to rise above these challenges and to ensure execution efficiency and cost control , you need to start expanding your range of liquidity providers while still mitigating risk. In this guide, we’ll walk you through the advantages and challenges that come with seeking out alternative FX liquidity providers, as well as best practices to follow to see this process through. 

Why corporate treasurers need to consider alternative solutions

Seeking alternative options comes down to opening yourself up to what other providers may be available (including banks), what they offer, and how this wider range of offers can help you achieve fairer margins.

At Just for example, we’ve seen firsthand how overall margins and annual cost can typically be reduced by a factor of 3 to 5 for any business that onboards liquidity providers outside of their pool of existing bank relationships. Let’s explore more in-depth as to why this happens:

  • Competitive pricing: Expanding your range of providers to alternative sources automatically increases your chances of seeing more competitive rates. With lower overheads and more agile operations, this greater range of choice gives you the ability to step outside of the pricing models you’re accustomed to with your existing banks.
  • Diversification of sources: Diversifying your FX liquidity sources not only spreads risk across a broader spectrum of liquidity sources but also enables you to tap into unique and potentially more advantageous market opportunities. By accessing a wider range of liquidity providers, corporate treasurers can enhance their risk management strategies and ensure more resilience against market volatilities and instances of liquidity crunch.
  • Solutions customised to your business: Alternative FX liquidity providers often excel in offering bespoke solutions, tailored to meet the specific needs and objectives of your business. This level of customisation allows for more targeted and effective FX strategies, addressing the unique risk profiles, cash flow requirements, and operational intricacies of your company. These services can lead to more efficient currency management and better alignment with your overall financial strategy.
  • Greater transparency and control: In conjunction with alternative providers, advanced analytics and real-time reporting can grant you a more comprehensive view of your FX exposures, transaction costs, and market trends. This enhanced visibility is crucial for informed decision-making, allowing you to strategically navigate the FX market with more confidence and precision.

The challenges in investing in an alternative liquidity provider

The benefits of alternative FX liquidity sources are clear. However, these benefits cannot be easily realised without considering the challenges that come with investing in just any other provider. Those challenges being:

  • Counterparty risk: It's critical to thoroughly evaluate the stability and credibility of potential liquidity sources. This involves analysing their financial health, track record, and reputation in the market. You have to ensure that your chosen liquidity providers have robust risk management frameworks and are financially sound to mitigate risks of default or failure, which could have significant impact on currency management strategies.
  • Diverse regulations: Liquidity providers operate in various jurisdictions, each with its own set of financial regulations and compliance requirements. This due diligence is crucial not only for legal compliance but also for safeguarding your company against potential regulatory risks and penalties that could arise from non-compliance. However, vetting and evaluating alternative liquidity sources is a complex and enduring task. From financial and legal diligence to interviews and price negotiations, treasury teams have a lot to navigate before they can decide on a provider. 
  • Market volatility: The FX market is subject to frequent fluctuations, and alternative sources, with their diverse profiles, may have different levels of resilience to these changes. You need to assess the robustness of a provider's strategies to handle market volatility, including their ability to maintain liquidity and execute trades effectively during turbulent market conditions.
  • Integration concerns: Your choice in an alternative provider should be easily integratable with your company’s existing financial systems and processes in order to maintain uninterrupted FX operations. That includes evaluating the technological compatibility, ease of integration, and the support provided by these different sources.

Ultimately, these challenges arise from not having a trusted resource to do the heavy lifting of assessing the range of providers available for you — granting you the freedom to make an informed decision on which liquidity source (or sources) to partner with.

How Just’s Liquidity Connect platform fills the gap

Your business deserves to have the option of partnering with providers that can bring you improved user experience, lower cost of trading and transparent margins. With that said, you also have a fiduciary duty to your shareholders to consistently achieve best execution and minimise costs — which cannot be achieved out-of-the-box by your banks. 

As a non-biased, third party entity, we at Just have already carried out the due diligence, curation, and deal-making needed to help you seamlessly navigate through multiple alternative FX liquidity providers.

With Just, your business can benchmark new providers against the historical cost and execution of your banks — helping you immediately gain better transparency and greater returns. 

  • Enhanced choice and access: We believe that businesses should have the freedom to select their trading counterparts with as much information and transparency over what they have to offer as possible. We have channelled that into Liquidity Connect, as it expands user options by providing access to a wider range of FX trading partners.
  • Curated network of liquidity providers: With Liquidity Connect, you get access to a meticulously curated network of liquidity providers who align with Just’s commitment to fair and transparent FX execution.
  • Seamless integration and user experience: The tool is integrated within the Just Analytics platform, allowing for easy navigation and selection of liquidity partners once you sign up. The onboarding process is handled by our compliance teams, expertly-led to get you up and running as soon as possible.
  • Automatic trade documentation and analysis: Trades executed through Liquidity Connect are automatically documented, stored, and analysed in FX Analytics. This allows users to monitor and assess their execution performance against standard banking relationships, providing valuable data to inform trading decisions.
  • Visibility and performance tracking: Users can view and track the volume and execution performance of their trades with liquidity partners alongside their other banking relationships, aiding in the assessment of reduced margins and overall trade efficiency.
  • Ongoing expansion and support: We plan to continuously add more partners to the Liquidity Connect network, from FX brokers in various locations to Nordic banks, enhancing the tool's versatility. We also offer on-demand guidance and support for users navigating this new feature.

To gain access to our exclusive network of leading FX liquidity providers, simply book a demo of our product today.

2 OTC foreign exchange turnover in April 2022