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A Brave New World At a recent OnTheBlock event in New York, Daniel Gorfine, chief innovation officer and director of LabCFTC, talked to Galen Stops, editor of Profit & Loss, about the challenges facing regulators overseeing crypto markets, why the rules in this space are often more clearly delineated than many will admit, and the key technology trends he sees shaping financial markets in the future. Galen Stops: As a regulator, how does the CFTC approach the crypto space? Because it seems to me like there’s a fairly fine line to walk between allowing and encouraging innovation and new markets on the one hand, but ensuring that there are protections against potential bad actors on the other…
The Challenges of Managing Risk in Machine Driven Markets The increasing automation of the FX markets is changing how firms manage their risk, said speakers at the Profit & Loss Scandinavia conference in Stockholm in October 2018. Marian Micu, director of quantitative research at Qube Research and Technologies, highlighted the emphasis on new technology and automation in trading by pointing out that five years ago he had no machine learning specialists on his team and that now over half of them are machine learning traders or researchers. Micu went on to explain that in the past, news that was likely to impact prices in the market mainly came from scheduled announcements from sources like the European Central Bank (ECB) or the Federal Open Market Committee (FOMC), and that such announcements could be very well monitored and understood by a team of human traders and then integrated into the trading strategies.
Does the Crypto Price Plummet Tell the Whole Story? At the start of 2018, the total market capitalisation of cryptocurrencies was above $828 billion, with many predicting that it would only rise further. Now, that market capitalisation is below $130 billion and continues to fall. Meanwhile, the price of bitcoin is down to $3,688, a 42% month-on-month drop and 65% year-on-year.  But does the price action of cryptos tell the whole story in this space right now? And what are the implications of this bear market on liquidity? After all, the Intercontinental Exchange (ICE) and Nasdaq both plan to launch new crypto trading platforms next year, while Fidelity is also set to launch an asset custody service in 2019. Trading volumes on the CME and CBOE bitcoin futures have ticked up even as (because?) the market price has trended down and there are still ETF proposals sitting on US regulators’ desks that could still be approved. 
Is the Global Code of Conduct in Trouble Already? The opening panel discussion of this year’s Profit & Loss Forex Network Chicago conference featured an unusually frank and honest discussion about the challenges associated with implementing the FX Global Code of Conduct.  I t has been well documented that buy side firms have been much slower than their sell side counterparts to commit to the Global Code, with one panellist at Profit & Loss Forex Network Chicago highlighting that of the 452 entities that have signed the statement of commitment only 23 were asset managers. Indeed, they noted that of the asset managers that have signed the Code, the majority trade currency as their primary business, or even as their sole focus.
Non-Bank Firms Continue to Go Mainstream FX market structure changes are behind a change in approach on the part of several non-bank market makers, and the direction of travel is very much the mainstream. “The market structure has changed and our model has definitely changed with it,” said Laine Litman, head of Virtu Financial’s customised and disclosed liquidity offerings in FX and fixed income, in kicking off the second panel on liquidity provision at Profit & Loss Forex Network Chicago. “What liquidity consumers needed two or three years ago has changed and with that, we have had to look at our models as well as at how we interact with markets.
Re-Imagining the Prime Services Ecosystem On a panel discussion entitled “The Twists and Turns of FXPB”, speakers at Profit & Loss Forex Network Chicago discussed the possibility for technology to radically re-shape the prime services ecosystem. Technology’s impact on prime services was the jumping off point for the last panel at Profit & Loss Forex Network Chicago. Peter Plester, head of prime brokerage at Saxo Bank A/S highlighted the impact that technology had already in terms of risk management in this segment pointing out that the traditional plumbing for starting up a prime broker was to connect to NEX Traiana and the various ECNs and have STP for tickets, but that the central risk system internal to the PB was fairly manual.
Knowledge is Power FX liquidity providers that use technology and data analytical tools are becoming more powerful in FX markets, but liquidity consumers are becoming better informed. The role of data and the empowerment it brings FX market participants was a key theme of the first panel looking at liquidity at Profit & Loss Forex Network Chicago. Panellists agreed that generally speaking, liquidity in FX markets is fine, there is always a price; however, the question liquidity consumers need to ask is: “How high is that price?”
Emerging Markets: Picking the Winners and Losers Rather than moving in a synchronised manner, speakers at the Profit & Loss Forex Network Chicago conference predicted that emerging market (EM) performance has become divergent due to idiosyncratic factors within each country. “In general, EM does well when you have at least two out of three things: one is global growth, two is a weak dollar, and three is lower US rates. So, if you look at this combination and where we are in the cycle, especially given all the easy money that we’ve had since 2008, I would be very careful with the emerging markets right now,” said Mo Grimeh, CIO at Mogador Capital Management at Profit & Loss Forex Network Chicago.
Profit & Loss Scandinavia is One Week Away The sixth in Profit & Loss’ hugely successful Scandinavian conference series takes place next Thursday (October 11) in Stockholm at the Hotel at Six. In partnership with ACI Sweden & ACI Denmark, the conference showcases industry experts across banking, tech and trading, who will deliver key insights on today’s biggest challenges. The conference will be headlined by a keynote address from Cecilia Skingsley, deputy governor, Sveriges Riksbank, and features panels on a range of subjects from the macro outlook, through to critical market structure issues such as managing risk in machine driven markets. With insights from a range of experts from the quant, macro, trading, technology sectors on both the buy and sell side, this event is a must attend. To attend, Register here.
The Future of Liquidity Provision Forex Network Chicago features two panels looking at the most important subject of liquidity provision in FX markets through two very different prisms. The first looks at the issue from the perspective of FX banks; how are they prioritising where they send liquidity and how are data capabilities changing how clients are evaluated? It will also look at the role of buy side as genuine liquidity providers and look at the impact on market conditions if what some consider to be a withdrawal from the market by the banks takes place.