FX Has a Place in Emerging Markets, Too

"One of the biggest problems you encounter when you go out there to find some liquidity or provide liquidity is people not knowing you and not trusting you," said Ugur Arslan, CEO of New York hedge fund AienTech, during the StreamBase-sponsored webcast. "They don't want to trade with you."

James Taylor, JPMorgan's global head of FX e-distribution, attributed that to the prominence of voice-broking in smaller markets. With that type of personal interaction, it's easy to see how relationships take on greater importance.

"There's been no electronic market where people have gotten to know each other electronically," Taylor said.

There are also domestic sources of competition when it comes to technology, said StreamBase CTO Richard Tibbetts. Local service providers watch established companies come into their market, then try to replicate those systems as quickly as they can.

Other pitfalls include markets that aren't open 24 hours, and low volumes of currency being traded, which can lead to disappearing liquidity. "The big challenge from my point of view is you never know if too many people are going into play in a specific market or a specific currency, and therefore impact the local economy," said Soren Haagensen, head of FX e-commerce at Societe Generale. "You will see regulatory things come into play in that country so, all of a sudden, you have a decent-sized position and it's a long term investment, but now you can't get out of it."

Though it can be tough to crack the market as an outsider, once inside, there is the potential for high yields and great opportunities. There is far less competition than in an established market. Arslan pointed out that spreads are usually wider in emerging markets.

A key to broker success is an ability to change and adapt the algorithms that were crafted with an established market mindset, and re-issue them with local preferences and regulations in mind.