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Could the Shift to Clearing Alter FX Market Structure? Although there are clear drivers pushing more FX products into central clearing, this is unlikely to have a significant impact on market structure, says Paddy Boyle, the head of ForexClear, LCH. “The pressure to clear for banks that are subject to bilateral initial margin rules is very, very high and we have banks who tell us they’ve been cut off by other banks because they weren’t clearing,” he says. That, explains Boyle, is one of the negative drivers towards central clearing, while on the positive side there are lower capital costs, lower initial margin requirements and fewer credit line restrictions for firms that choose to use clearing services. As a result, Boyle predicts that cleared FX volumes will increase “pretty significantly” going forward.
Taking it One Step Further: Using Machine Learning to Improve Trading Hasan Amjad, head of algorithmic trading at GAM Systematic Cantab, explains how machine learning tools and techniques have enabled his firm to improve almost every aspect of its trading capabilities. “It goes all the way really,” he says, “Starting with portfolio construction, all the way to the final trade and the post-trade analytics.” For example, Amjad points out that machine learning can be used to improve pre-trade analytics by more effectively identifying what kind of trading the firm should be engaging in during current market conditions. He concedes that there are other techniques that enable firms to determine market conditions, but that “machine learning just takes it that one step further by being able to ingest a lot more data and give you the answer”.
Tracing the Evolution of a Currency Manager Philippe Bonnefoy, the founder of Eleuthera Capital, explains how his firm has evolved over the years in response to changes in the FX market. “Over the last 20 or 30 years we’ve evolved massively, starting as discretionary macro traders, then using more and more quant models to manage positions and then finally using the quant models to actually do the trading and become a quant portfolio manager,” he says. Part of the reason for this, explains Bonnefoy, is that the price behaviour of the FX market has changed significantly as market making has become overwhelming conducted electronically. Even now, he points out, FX trading firms need to be cognisant of these changes and how they’ve impacted liquidity when they screen and look at data to test their models.
What’s Keeping Institutional Money Away from Cryptos? Uncertainty about regulations, a lack of trusted custodians and concerns about security are key factors that continue to deter many large financial institutions from trading cryptoassets, says Kevin Beardsley, a managing partner at B2C2. Amongst these three factors, Beardsley cited the lack of regulatory clarity around cryptoassets as the biggest issue for these firms right now, pointing out that no major bank wants to clash with their regulators for trading in what is, relatively speaking, still a small marketplace. “The large institutions are all waiting for the regulations to become clear, which is a very rational approach,” he says.
A New Brokerage Model Following the launch of the consolidated tape in September, Dmitri Galinov, CEO of FastMatch, is envisaging a new business model whereby the platform will not charge firms at all for brokerage. Looking ahead in 2018 Galinov explains that the focus for FastMatch is going to be on expanding its market data business, which he predicts could grow large enough that it will be unnecessary to charge market participants a brokerage fee for trading on the FastMatch platform.  The analogous business model to this, according to Galinov, is Facebook.
US Regulators Eye Algorithmic Trading Justin Slaughter, a partner at Mercury Strategies, warns that US regulators are examining if they need to take further action around algorithmic trading.  Talking about how the Commodity Futures Trading Commission (CFTC) has not necessarily given up on “Reg AT”, which included a controversial provision that trading firms hand over potentially proprietary source code related to trading to the regulator, Slaughter highlighted broader questions about what data regulators should have access to.  “What should the government do to make sure that we have access in an emergency to critical data but not give it so much access that we’re then in danger of leaking our critical proprietary knowledge?” he says.
Taking a Deeper Look

in Media, Videos

Taking a Deeper Look

LMAX Exchange CEO, David Mercer, explains that some market participants need to take a deeper look at their FX execution in order to improve it.  Discussing the findings of a whitepaper published by LMAX Exchange earlier this year, Mercer says that too often buy side firms only look at fill ratios and spreads to judge their execution quality. Instead, Mercer advocates using five key metrics provided by each liquidity provider and trading venue being used by that trading firm to judge execution quality.
Are SEFs Back on the Menu? Micah Green, a partner at Steptoe and Johnson, addresses the future of Swap Execution Facilities (SEFs) now that Christopher Giancarlo is the chairman of the US Commodity Futures Trading Commission. Green points out that Giancarlo was working in the financial services industry during the initial roll out of Dodd-Frank and the SEF rules that were implemented as a result of this legislation.  “I think it became clear to him, and I think it’s reflected in his white paper on swap execution rules, that the SEF rules that were adopted in a relative rush post-Dodd-Frank missed the mark from his perspective as to what the statute required,” says Green, who adds that CFTC staff are beginning to draft now swap execution rules as a result.
Making Peer-to-Peer Matching a Reality Paul Aston, CEO of Tixall Global Advisors, discusses the feasibility of peer-to-peer FX matching between large buy-side firms. One of the long-standing problems with the concept of peer-to-peer matching between buy-side firms is that the probability of being able to actually put together complimentary buyers and sellers is very low. For example, the chances of a large asset manager needing to sell a certain amount of a particular currency at the exact same time that an insurance company needs to buy the same amount of that currency are remote. Aston refers to the need to “get away from the quantum problem of having to know when something is available in time and level”, and suggests that there needs to be some form of “dark mechanism” whereby these buy-side firms can leave an order without it being exposed to the market, in order to make peer-to-peer trading more feasible.
Is FX Liquidity Trapped in a Vicious Cycle? Although Greg Wood, SVP, global industry operations and technology at the Futures Industry Association (FIA), says that technology is increasingly causing FX to trade in smaller sizes, he explains that experience in other asset classes shows that this doesn’t necessarily mean that liquidity is diminishing. With more trading firms using algorithmic execution tools to slice up large FX orders into smaller amounts to reduce market impact, this could potentially create a cyclical pattern where the amount of small orders going through exacerbates the impact of larger orders, forcing firms to execute in smaller and smaller sizes. “It is to a degree a vicious circle and to a degree we’ve seen it happen in other asset classes, such as futures and equities,” says Wood.