It’s a bold statement from a man who has proven again and again he is not afraid of rocking the boat, “We consider a full move to 24/7 spot FX trading a real possibility within the next five years”. So, is David Mercer, CEO of LMAX Group, making a bold statement or actually predicting what would be a significant change for the FX market? And what would it take to effect that change?
We should start by reiterating, as I did on my social media posts, that the Weekend FX service unveiled by LMAX this week is starting as a non-fungible product and based on CFDs – it is a particular product likely to appeal to a particular segment of the market at this time. I have no doubt there is a demand for such a service and, as someone who has always liked people who aren’t afraid to innovate and promote what others may consider dangerous ideas, I welcome it. The take up will, I predict, be mainly in the retail space, however, which embraces crypto traders, used to trading relatively infrequently in small notional amounts. But in the mainstream FX markets? That is likely to be a different matter, even over the five-year time horizon.
I have been wrong before, and when it comes to innovation, I am happy to be wrong again (and yes, Mr Mercer will, quite rightly, remind me when I am wrong!) but I am not sure on this one. Either way, though, what would it take to get the FX industry to this level?
Several people got in touch to suggest the idea will not last the first big move over a weekend, pointing to a retail broker that tried this a few years ago and got mullered thanks to a weekend move. That broker, however, was using proprietary pricing, and therefore running the “naked risk” that Mercer refers to in our story, whereas LMAX is touting the support of “quality institutional liquidity providers”
Obviously those LPs are going to have to be comfortable with, and able to, price in a largely retail product, CFDs, but the real key to surviving the first weekend blow out will be, I suspect, these LPs being willing to price each other. The FX market works well because there are venues on which LPs can clear their risk, which means to achieve a fully-functioning 24/7 FX market these firms either have to embrace trading with each other or, if they are married to the primary venues it needs another platform to extend its hours.
We have seen hints from data scientists that the FX market is reluctant to run risk over the weekend and that liquidity conditions worsen on Fridays, well this would be an opportunity for those firms to constantly manage risk, with no shut off, there is no need to pull back from the crucial risk absorption role several players play. Before this could happen, of course, it would need the weekend market to be more than CFDs, and while I think it is a huge ask to have settlement systems operating on a 24/7 basis, the path of G10 NDFs for example may be worth exploring.
A second obstacle needing to be overcome is system upgrades by the major players. To a small, nimble,, cutting edge, tech firm this may not seem to be a big issue, but for a large bank an upgrade to the tech stack involves so many connections and can have an impact on so many customers, it needs to be done right. I can recall a friend, who is in FX sales, telling me once they were always keen to know when rivals were rolling out upgrades in case there was a glitch. If there was that was my friend’s opportunity with the other institution’s clients. Often this work not only takes time, but it needs to be checked and double checked and everything tested. Occasionally, as anyone involved will tell you, it doesn’t work even when there has been a full 48 hours to get it right, imagine the challenge if that time isn’t available?
Non-bank firms may find it easier, but even there, work has to be done and new technology tested, and while it can be done in a shadow environment, there is nothing like the confidence a test run on the actual tech stack can bring. I also think, when it comes to non-bank firms, there is a degree to which they rely upon broader market liquidity and if the banks aren’t there, they may have to trade with each other – which isn’t likely to a) be popular or b) work that well.
A third obstacle is probably the biggest, because I do believe that most tech challenges can be overcome, and that is the human effort required. The FX market would need to be the sort of place where participants are making seriously good money and are willing to pay out for more staff.
The cynics amongst us might agree that one reason institutions have come to accept WFH is because their staff rarely switch off and most of us – and I do include myself in this – are working longer hours than ever before, even taking into account the commute we might normally have. Even these institutions, however, will know there are basic employment rights and a seven day week isn’t among them. So, who monitors the systems, the market risk and the pricing engines? It probably needs to be a second group of (highly paid) staff and are institutions going to be willing to take on this extra expense? Possibly, but I think it will require yet another new way of working to be imagined – and I am not sure the institutional world has the imagination (or budget) left at this moment, it’s all been used up coping with the pandemic.
Those queries aside, I like the idea, and we have to acknowledge that we live in a 24/7 world, so who is to say it won’t go places, but for it to happen the aforementioned (and probably other) obstacles I have noted here need to be overcome. To go back to the comments from correspondents I mentioned earlier, it will be interesting to see what happens when there is a market event over the weekend. I understand the point that the LPs can get wiped out, but if they don’t, and retail traders are suddenly able to get a jump on institutional, how ironic would that be and how long before institutions look to see what they can do about it? The evidence thus far, given how there is, technically, a market in Middle East centres at parts of the weekend, is not good, but build enough momentum and something could shift – it would just be the ultimate irony if that trigger was actually an event that most people think would undermine the project in the first place.