After the Bank for International Settlements (BIS) Triennial FX Survey revealed last year that the industry has shrunk in terms of notional volumes for the first time in 15 years, speakers at Forex Network London outlined the factors that could help this market get back to growth.
During the discussion the speakers on the panel outlined a number of issues that have constrained trading volumes over the past three years, including technology shortcomings, a lack of investment in some areas of the market, and regulatory challenges.
Against this background, the question was put to the panellists, how does the FX industry get back to the kind sustainable growth that it witnessed between 2001 and 2016?
Paul Millward, head of FX product strategy at Hotspot, highlighted two things that could help achieve this.
“I think the interest rate environment needs to change, and that looks like it’s starting to occur in the US,” he said, referring to the fact that Federal Reserve “I think the interest rate environment needs to change, and that looks like it’s starting to occur in the US,” he said, referring to the fact that Federal Reserve Bank announced last year that it expects to hike US interest rates three times in 2017.
Millward added: “The second thing is access to credit. If you start to see a loosening of credit, a Volcker pullback, clearing, etc, I can see the volumes really picking up.”
Basu Choudhury, business intelligence at Nex Traiana, having previously highlighted the need for innovation in the FX market during the discussion, said that this could be the key for unlocking growth in the market.
“For me it’s about innovation, the innovation of products all the way from execution straight through to post-trade, pre-trade credit monitoring but then looking at compression even within options and forwards that will help alleviate a lot of the regulatory and capital burdens that people face today, whether you’re sell side or buy side,” he said.
Giving his perspective on what will get FX trading more again, Noel Singh, head of e-FX business development at Sucden Financial, said that firms need to look for ways of diversifying their businesses and use technology to help them leverage opportunities that still exist in this market.
“We’re looking at trends in the market and one of the things that we’re seeing is a growth in the investment of the physical payments business. For me, it’s one of the last areas of opportunity to disintermediate the traditional providers,” he said.
“We’re investing heavily in having a deliverable FX business, so from our point of view, we’re diversify and evolving a business that’s stuck in the doldrums a little because of low volatility, so it’s about identifying these opportunities and investing where there is opportunity and disruptive technology.”
According to Isaac Lieberman, CEO of Aston Capital Management, one of the main issues that has depressed FX trading volumes has simply been the lack of volatility in the currency markets.
He pointed out that in the first decade of the millennium there were significant and sustained trends in these markets, which attracted firms from other asset classes to come and trade FX, while developments in open access and the shift towards e-trading helped encourage more activity.
“Since around 2011 or 2012, when central banks became very involved in capital markets, you’ve seen low volatility across all asset classes, FX volumes declined in-line with their price action and I’m pretty certain that the number one thing we need is a tail wind of price movement and that will bring back the volume growth,” said Lieberman.
When pressed on whether FX volatility will continue to suffer because firms are unwilling to pre-position in the markets for fear of being wrong, Lieberman responded that this means “people haven’t been hurting enough”.
He explained this comment by saying that if corporate treasurers get caught out by market moves and their board subsequently grills them on why they didn’t hedge their exposures earlier, they will start to pre-position in the future. Likewise, Lieberman said that if speculators show poor performance they will eventually have to answer to investors about why they missed moves in the market.
“Natural selection is the best friend of markets,” he concluded.
Antony Brocksom, SVP, Sales and New Business, EMEA at FXSpotStream Europe, chose to focus in on how relieving the cost pressures that have afflicted parts of the FX market in recent years could also contribute to greater market growth going forward.
“Cost has been a major battleground for liquidity providers across the industry. So now it’s about small innovations: how do you eliminate fat from the game, how do you make it more cost effective to do that trade?” he said.
Rather than trying to re-invent the wheel, Brocksom noted that the most effective innovations in the FX market will be the ones that look for ways to take existing systems, processes and technologies in the industry and reduce the costs associated with them.
“Everyone needs to monetise their flow ultimately, so lets remove that cost from this process and generate some business,” he said.