Profit & Loss's Scandinavia conference was a great success which once again provided some really good discussions over a range of issues from regulation and conduct, through macro-economics, to intelligent execution and liquidity.
I would love at this point to provide you all with a cutting edge analysis of some of the key themes but I am afraid the event was over-shadowed by one discovery, which was clearly the creation of a local market expert and genuinely in one of the funniest things I have seen in FX circles for quite a while
When discussing the future of the FX industry finding consensus amongst market participants about what the market will look like and how it will function can be challenging.
Yet one thing that appears to be broadly agreed upon is that the use of algorithms for executing trades is likely to continue growing in the coming years, as technology continues to evolve and firms look for new ways to minimise their market impact when trading.
Indeed, the use of algos is often prescribed as the answer to a market where it is becoming harder to execute in size and buy side firms are increasingly concerned about this issue of market impact.
Where to start? Well I will get to those industry “experts” who have been arguing with me for the past two weeks (actually months) that liquidity is great in FX later, for now let’s kick off by getting to the crux of the issue. This is not necessarily about whether algos ran wild, or someone ran an option barrier, this is about a(nother) fundamental breakdown of the FX market structure.
The time has come to accept that what happened Friday morning in Asia is a mess of our own making; to take our heads out of the sand and at least acknowledge there is a problem with liquidity in FX markets.
In recent years the sell side has justifiably been criticised for its behaviour in the FX market. But should regulators and market participants be taking a closer look at how the buy side operates in this market? Galen Stops reports.
The FX industry has been rocked by a number of scandals in recent years and in many cases the implications of these scandals is only now coming home to roost.
Two of the largest custodian banks in the world, BNY Mellon and State Street, have agreed $714 million and $530 million settlements, respectively, related to allegations they systematically set disadvantageous rates for their customers in contrast to their claims to be achieving best execution for them.
Petra Wikstrom, global head of Execution and Alpha solutions at BNP Paribas, talks to Profit & Loss about why FX TCA benefits from “a pragmatic engineering approach”.
Profit & Loss: When it comes to producing meaningful TCA, what are the big data challenges facing market participants?
Petra Wikstrom: Over the last five years we’ve seen a constant uptick in the electronification of FX, but the number of venues offering FX liquidity has increased far beyond that, which means that similar volumes are now offered across more venues.
Dealers are scratching their heads over a sharp move higher in EUR/USD in early Asian trading after the pair moved 130 points in one minute, before reversing.
Dealers say the move occurred just before 8.40 Tokyo time and saw the pair rise from 1.0520 to 1.0651 in a fraction over a minute, before reversing to 1.0575 over the next two minutes. There are reports of the pair trading at 1.0695, however traders spoken to professed no knowledge of the trade.
Isaac Lieberman, CEO of Aston Capital Management, talks to Profit & Loss deputy editor, Galen Stops, why it’s hard to find uncorrelated markets to trade right now.
“Volatility is very compressed right now because there’s a lot of central bank activity and markets are very highly correlated,” says Lieberman.
He adds that the FX market needs a “theme” that will cause it to break away from other markets, but that in the meantime “we’re certainly waiting for volatility to return”.
Lieberman says it’s become very hard to find uncorrelated markets, with equities, rates and FX all trading in unison and therefore dampening volatility. One reason for these correlations is the lack of interest differentials, but he also highlights central bank intervention as another factor that is causing this.
As part of the public service duty of this column (and especially as a warning to any stag parties thinking of going there dressed as Robin Hood and his Merry Men), I feel the need to point out that a law exists in York, England, that says it is legal to murder a Scotsman within the ancient city walls, but only if said Scot is carrying a bow and arrow.
Clearly this is a law that has no basis in reality and is backward looking – however it is only slightly worse than MiFID2 when viewed through the prism of the FX market.
A new survey released by JP Morgan, which almost 200 institutional FX traders took part in at the end of last year, shows that although just 12% of respondents currently use algorithms for trading, 38% plan to increase algo usage in 2017.
This, in and of itself is not necessarily a surprising statistic. Numerous market commentators have been predicting for a few years now that more institutional FX trades will employ algorithms for a variety of reasons. These include navigating an increasingly fragmented liquidity landscape, helping firms to minimise their market impact, providing a more auditable trading record, and potentially enabling buy side firms to take on more risk themselves as some banks drift towards a more agency-focused business model.
Pragma Securities has expanded its algorithmic trading platform, Pragma360, to include NDF products.
While the latest Bank for International Settlements (BIS) survey in 2016 showed that spot FX trading was down 19% compared to three years previous, it also showed that the NDF market grew by 5.3% over the same time period.
The growth of the NDF market, as well as the fact that these products increasingly trade electronically, is what prompted Pragma to start offering algorithmic tools for trading them, Curtis Pfeiffer, chief business officer at Pragma, tells Profit & Loss.