And Another Thing…

Aside from what one news service decided was the headline – more like click bait – “FX Volumes Slump Globally” (guess what, yes, there was a dip from April, but on a more considered year-on-year basis FX turnover is up 8.9% at the third highest mark ever), there were actually a few interesting snippets in this week’s FX committee surveys. The two that stood out for me were the surge in RMB trading and a quite remarkable resurgence for the voice brokers in the UK.

The RMB growth story is not a new story of course, however the fact that it did, for the first time, overtake EUR/GBP in the UK survey could be a landmark on its journey to reserve status. This is especially the case since the Brexit story continues to play out, a time during which one would expect more hedging in the cross.

If there is one potential dampener on this story it could be that as we heard from Citi’s CFO earlier this month, investors and clients are being driven away from markets by the lack of clarity over future direction. If – and it’s a big ‘if’ – Brexit is resolved we could see more volume back in the cross and the USD/RMB’s brief, heady moment as the seventh most active pair in the world’s largest foreign exchange market could be over.

I doubt it will though, or rather even if EUR/GBP does regain ground it will only be temporarily, for the RMB is a steady growth story that is nowhere near its ending. I mentioned the year-on-year growth at the top of this column and I do feel that is a better measure because there are undoubtedly seasonal variations in FX markets, especially around hedging, that often makes April a busier month than October. That said, even the impressive 8.9% growth across the seven centres to report data (Hong Kong joined the party in April 2018), is dwarfed by the 36.8% hike in USD/RMB trading in the UK. 

That is a serious jump and interestingly much of the growth was in deliverable outright forwards, which more than doubled to $12.8 billion per day, and deliverable FX swaps, which rose 78% year-on-year to $16.4 billion. Spot and NDF volumes both rose (as did currency swaps) but by nowhere near as much, suggesting this was structured trading, rather than speculative and therefore not a one off.

Although the UK data was the most eye-catching, the story was not limited to that centre, for Hong Kong saw a 4.6% increase to $91 billion per day, Tokyo RMB trading rose by almost 46% to $33.9 billion and even the US, not the biggest RMB centre, saw activity rise to $9.8 billion per day from $6.7 billion a year ago.

Sadly, and this is a repeated refrain of this column when this data is released every six months, the Singapore FX Committee’s report is pretty inadequate beyond providing headline data. Not only is execution style not reported, but it doesn’t even break out RMB volumes. Anecdotally, however, locals say RMB trading is rising strongly – I would also refer to our report inProfit & Loss last year which revealed that pre-London, EBS handles more RMB volumes than JPY.

This to me was a notable development, but not one that is totally surprising. The same cannot be said however, for the UK’s data on execution methods, specifically activity via voice broking.

In the JSC’s survey, in October 2018, voice brokers executed 20% of all FX volume in the UK – an increase in notional amounts handled of $175 billion to $604 billion per day. That is impressive enough, for in October 2017 it was just over 16% of a smaller amount, but what really hit me was how the growth was not limited to the usual products. 

Normally when I see voice broker volumes go up I look at the FX swaps market in particular and more esoteric products generally, and indeed FX swaps volume did go up by about $94 billion per day or around 30%, and FX options activity doubled to just under $25 billion per day. 

NDFs and outright forwards both went up in notional terms, although as a percentage of volume the voice broking share of the former went down, probably an indication of the ECN’s growing influence in this market, but what really staggered me was the spot data.

Spot FX, for so long a desert without oasis for voice brokers, saw a 150% increase in average daily volume with the channel handling almost $98 billion per day, up from just under $40 billion in October 2017. There have been a couple of occasions in the October releases where spot volume has hit $50 billion, but you have to go a long way back to find anything like this number.

I had a quick ring round to see if anyone had any clue as to why the voice brokers have suddenly grabbed a chunk of spot business and generally speaking there was mystification (and one or two who suggested someone had filled out the form wrong or hadn’t realised Icap didn’t own EBS anymore!)

The closest I came to a credible answer was that it could be banks putting more volume to the voice brokers ahead of the 4pm fix. This would make sense given how chat rooms are now pretty much a no-no in the banks, and that there was a positive side to those channels in that traders often found genuine matches. The voice broker represents a trusted neutral provider of matching services and importantly does not suffer from what are mostly unfounded concerns about information security in the automated environment.

I honestly do not know whether this is the key factor behind the surge in activity, but it does raise one slightly tongue-in-cheek question – are voice broking shares under-valued? As far as I can tell there has been no guidance from the broking firms, but given their bread and butter is volume one would think this data suggests they’re going to have a good end to the year.

So the conclusion is that either we should all buy shares in a voice broking firm* or we should ignore the data as one of those quirks that these surveys occasionally throw up. 

Sadly, fix volumes are not published, but if indeed it is fix volume then the data could also suggest that either more volume is going through the mechanism or the voice brokers are getting an upper hand on those automated netted mechanisms rolled out in the wake of the benchmark reform of 2015. It could be an issue of fragmentation being to the detriment of a netting service, which would make sense, but it could also be something more mundane. With a broader pool of participants as seen through a voice broker, perhaps there are more matches available at the fix than was previously the case?

All thoughts and ideas welcome…

*does not constitute professional advice, please see any investment professional for the total disclaimer as I can’t be bothered to write it all out…

Twitter @lamboPnL

Twitter @Profit_and_Loss

Colin Lambert

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