Plugging the leaks in skewed pricing
Liquidity recycling has made it trickier for LPs to identify information leakage
Sitting on the foreign exchange spot desk at Deutsche Bank in London is a staff member whose primary task is detecting information leakage.
The information they are protecting is the desk’s pricing skews. Liquidity providers (LPs) give discounts on their bids or offers as a way of adjusting the risks they have on their books. This information is highly prized – it can signal an LP’s intentions and gives high-frequency traders (HFTs) an opportunity to trade ahead of them, resulting in worse
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