The foreign exchange markets are full of small firms with big technology overheads. Controversially, they use tiny speed advantages – faster access to market data, faster algorithms – to engage in risk-free trades.
As a smallish, non-bank trader – 75 staff in two offices – XTX Markets may superficially resemble these so-called latency arbitrageurs. But that's where the resemblance ends. The firm's executives boast of executing big trades and warehousing risk; and it is using its growing clout to make life harder for the speed demons.
"Without certain conditions in place, foreign exchange could develop issues the US equity market has. We don't want to be worried about whether my superhighway connection between Chicago and New York is quick enough. Being fast and not holding risk is not a business model we think adds a lot of value to the market, so where liquidity is fragmented, we would like the introduction of speed bumps," says Zar Amrolia, the London-based co-chief executive who joined XTX in 2015 after running the forex business at Deutsche Bank.
Amrolia says the firm is wary not to execute on some venues where its models do not produce the expected results – a possible indication that latency arbitrage is at work. Elsewhere, it uses its influence as a liquidity provider to campaign, along with others, for changes that level the playing field: for example, at Icap-owned EBS, and Thomson Reuters Matching. Both venues have introduced latency floors in the past several years.
XTX's voice is increasingly difficult to ignore. In last year's Euromoney survey, which calculates market share across the top forex market-makers, XTX took ninth place with a 3.87% share, all the more impressive considering it currently trades only cash and non-deliverable forwards (NDFs). In electronic spot trading, XTX came third, ahead of Deutsche Bank.
We're not a latency-sensitive firm. We take risk and we operate a fair-value model
Zar Amrolia, XTX Markets
The firm also sits on key policy and governance bodies, including the Bank of England's FX Joint Standing Committee and the Fixed Income Currencies and Commodities Standards Board – the latter was set up in response to a call for better industry leadership from the BoE and the UK's Treasury department.
There is plenty of work to do. The Bank for International Settlements (BIS) published the first phase of a global code of conduct in May last year, but Amrolia says the industry will need to add more detail: "There is a lot of principles-based regulation coming out. The Global FX Code is quite high level, and once you drill down there will need to be some more detailed work done on topics such as last look in creating best practices for the industry."
According to the BIS, cash foreign exchange is now traded electronically 70% of the time, up from 60% in 2012, in line with US Treasuries, standardised interest rate swaps, and just below cash equities. Increased electronic trading may help a firm such as XTX, but its culture has something in common with old-fashioned institutional liquidity provision as practised by the traditional dealers.
"We're not a latency-sensitive firm," says Amrolia, who sits as co-chief executive alongside Alex Gerko, another Deutsche Bank alumnus. "We take risk and we operate a fair-value model."
Rather than offloading risk immediately into the market, as many high-frequency firms might do, XTX holds on to positions for more than 10 minutes on average in G10 markets and for 20 minutes in emerging markets, allowing its counterparties to limit the market impact of trading positions.
This means XTX has to be comfortable with its risk management. The UK's referendum on membership of the European Union offered a stern test of the firm's credentials.
"The night of Brexit was a very successful exercise in firm-wide risk management," says Andrew Brand, head of operational risk at XTX. "We provided liquidity continuously and it was a great event from an operational risk perspective."
Part of the reason the firm was able to ride such an event so smoothly was the processes that XTX had already put in place: the firm's size means senior management can communicate directly with staff to effect changes.
"The firm is designed around simplicity and efficiency. We don't have legacy systems and processes, and if a process isn't working, then it's my job as risk manager to talk directly to the manager that owns that process to make the necessary change, often with almost immediate effect. You would never get that to happen as quickly in a large organisation," Brand says.
Plenty of XTX's top management know that only too well. Prior to joining XTX in May last year, Brand ran the operational risk function at merchant bank Close Brothers. Other refugees from the banking industry include Michael Irwin, who joined XTX in 2015 as chief operating officer after working at State Street, Morgan Stanley and JP Morgan, and Jeremy Smart, who held a senior e-distribution role at Royal Bank of Scotland and now heads up sales at XTX.