I think I can say with confidence that 2020 has been the strangest year in my career to date. The FX markets have faced their share of global crises and geopolitical disruptions over the decades, yet nothing comes close to the impact of COVID.
The importance of relationships in FX has proved central to institutional trading in recent months. Not that relationship trading ever went away in the FX markets. However, in a clear ‘Back to the Future’ development, the role of the single dealer platform (SDP) is once again having a resurgence.
In an era where pundits like to predict doom and gloom for banks FX businesses, Integral’s Chief Revenue Officer Vikas Srivastava offers a different perspective that shows how a change in the approach towards technology can allow heads of FX desks to significantly increase their profits – even during the periods of low volatility.
We’re all aware that the size of the FX pie hasn’t been growing. The latest triennial survey by the BIS supports this sentiment, having flagged a decline in FX volumes for the first time in 15 years. After the slow-down in market activity amidst the spate of regulations that the FX market had to contend with it is quite likely that the worst may be behind us. Continue reading Why now is the time for a fresh approach towards FX technology at banks
Just as asset managers recover from the herculean effort of preparing for MiFID II, along comes another rule to adhere to. As of this September, uncleared initial margin rules will hit hundreds of asset managers. The objective is ultimately to make over-the-counter (OTC trades) costlier so that more firms turn towards trading on regulated venues.
The overall impact of these rules is likely to be significant – with numerous asset managers set to manage margin with a large number of counterparties at the same time. One emerging trend is for asset managers to turn towards their prime brokers for clearing services. While this is not exactly new, the rules mean those asset managers with portfolios above €750bn in notional, who have never previously had to post margin, will suddenly have to do so. The year after that (September 2020), the notional threshold drops dramatically to $8bn! Continue reading Why uncleared IM rules will spur innovation among asset managers
Social media changed the way people interact with each other. Now it’s time for FX trading to catch up.
This past May marked the five-year anniversary of Facebook going public, a seminal event that cemented the influence of social media on our lives.
At the risk of heaping too many additional encomiums on the bright people that brought us these networks, it’s not hyperbole to note that the advent of social media has changed the way we interact. People can now very easily reconnect with grade-school friends, quickly share photos of loved ones, and be introduced to new people through mutual friends or shared interests. At the same time, everyone has the option to control their levels of privacy. You can view and share only those things that suit your needs.
The future of trading technology is going in the same direction. Each trader will sit at the center of his or her own universe, controlling what trades to make available to whom. And the best market to demonstrate this new paradigm is the currency market. Continue reading Currency Trading That Everyone Can ‘LIKE’
Reading industry-related headlines over the last eight months or so must have been scary. Volumes dipped to historic lows towards the end of last year and some major players including many market making banks and large ECNs have been experiencing internal reorganizations with the associated departure of high-profile executives. Let me state for the record that this is not an attempt to judge anyone as they are going through tough times. This is an attempt to put what is happening into perspective and provide FX market participants with a better understanding of what we are experiencing. Where many see only gloom and doom, I also see a story about opportunity and growth.
One-size-fits-all era is coming to an end
In a recent commentary on personnel changes at EBS, Colin Lambert, Profit & Loss (restricted access), puts the finger for the firm’s difficulties at “increasing competitive pressure” and suggest among other things that EBS is “feeling the squeeze from internalisation and more granular streaming from banks”. I don’t want to make light of what this may mean for individuals affected by these restructurings, but for the industry as a whole, these changes are a positive sign. They prove that FX markets are maturing, that competition is increasing and that the one-size-fits-all area in FX is coming to an end. The future will see a much larger number of different business models, liquidity sources, risk management approaches, FX exchanges, all co-existing in an even larger market than FX is today.
When trading in larger sizes, liquidity takers have come to understand that FX aggregation services have a profound positive impact on the quality of the execution they see. They know the risks involved and want to be sure that they are getting the best deal possible. An FX aggregation and Execution Management System (EMS) understands how to aggregate different streams from liquidity providers who each may have imposed their own trading rules, and still ensures that you’ll get what you clicked on. To that end, an FX aggregator is a trader’s best friend in ensuring competitive bids. It virtually guarantees (pun intended) tight spreads on the top of the book, full fill in the market with little slippage, and even possible price improvements.
While a majority of traders intuitively understand its value when trading $20m,$50m or more, they are sometimes ignore its advantages when trading $500k, $2.5m or $5m. That might be because with large trades, the monetary value often is self-evident vs. with smaller trades, the value is strategic and harder to quantify.
Short-term gain but long-term pain
Long term trading strategy, not short term cost concerns, should be driving your trading system choices. Here is why you shouldn’t trade smaller amounts on a single-bank system, even if it offers tighter rates.
As the operator of FX Grid, a global inter-institutional connectivity and trading network, linking market making banks to FX market participants, we are getting good visibility in how other systems are performing. During the hectic days in May that put strains on everybody’s systems, we know for instance who had outages. (Integral did fine by the way. Read more in our press release and in an earlier blog post.) Single-bank systems were among the ones that suffered the most severe outages. I see this as a clear indicator that their decline is ongoing, despite some marketing hype.
Greenwich Associates already reported in April 2008 that “single-bank systems are failing to keep pace with the growth of multi-dealer platforms.” (E-Forex Comes of Age, Greenwich Associates, e-Forex Magazine, April 2008). In analyzing the results of its 2010 FX survey, Euromoney magazine made several observations that substantiate this claim. Euromoney writes: “The top three banks in the survey accounted for 40.44% of the total market in 2010, compared to 45.99% in 2009.”While Euromoney doesn’t say to where the market shifted, the fact that it continues to move away from the largest financial institutions suggests that single-bank systems are still losing market share. In my opinion, multi-dealer systems have clear advantages and the market seems to agree. Here are the four key arguments that proof my point. Continue reading Why Single-bank Systems Are Losing Ground