JPM: 2017 to Be “Watershed” Year for FX Algo Usage

A new survey released by JP Morgan, which almost 200 institutional FX traders took part in at the end of last year, shows that although just 12% of respondents currently use algorithms for trading, 38% plan to increase algo usage in 2017.

This, in and of itself is not necessarily a surprising statistic. Numerous market commentators have been predicting for a few years now that more institutional FX trades will employ algorithms for a variety of reasons. These include navigating an increasingly fragmented liquidity landscape, helping firms to minimise their market impact, providing a more auditable trading record, and potentially enabling buy side firms to take on more risk themselves as some banks drift towards a more agency-focused business model.

And yet, the fact that only 12% of the survey respondents currently use algos shows that the uptake in this department has not been that rapid. Additionally, going from 12% of institutional FX traders using algos to 38% in one year represents a big jump.

But Richard James, co-head of markets execution for macro products at JP Morgan, claims that 2017 will mark a distinct shift in the usage of these tools.

“We do think that 2017 is going to be a watershed year for algo usage because it was without question one of our fastest growing product areas last year. We’ll have to see if it hits an all-time high of 38%, but the things that were driving that growth last year haven’t changed and are not likely to go away soon – fragmented liquidity being the primary one, which is a real problem for people to navigate. The rise of algos in EM cannot be overlooked either,” he says.

James adds: “As algo usage increases, clients are rightly looking for better assurance that they are getting good value from their trades, which is why we are now providing TCA analysis on our algo execution in partnership with BestX, the start-up tech firm. If that kind of partnership helps clients get more comfortable with the concept of what algos do, how they work and removes some of the causes of their hesitancy, then we’ll look at doing more of them.”

Elsewhere, the survey showed that in total, 76% of the respondents’ trading volume is expected to go through e-trading channels this year, with the average number of e-trading platforms used by each firm being 4.4. It also revealed that 71% of respondents use a single dealer platform (SDP), while 36% only use a single dealer platform to trade.

Seventy-eight per cent of respondents pinpointed competitive pricing as their top reason for choosing a platform, while 38% cited the depth of liquidity available and 30% picked ease of navigation as the top factors determining what platform they use.

Commenting on these statistics, Scott Wacker, head of e-commerce sales and marketing at JP Morgan, emphasises that competition amongst SDPs is just as intense as ever.

“If you think the competition for desktop real estate in FX has dampened in the last few years, then you’d be wrong. Competition between platforms remains strong, especially between SDPs where you are more likely to see a dealer’s tightest pricing and significantly better functionality. 

“The survey showed very clearly that people choose bank platforms because of competitive pricing, depth of liquidity and ease of use, so those will be the differentiators. For our part, we have been investing pre- to post-trade every year in JP Morgan Markets overall since we first built it, and we have set aside $100 million for its development this year alone,” he says.

The continued competition amongst SDPs will be highlighted in the next issue of Profit & Loss as the editorial team reviews the various offerings available, and at the 2017 Digital FX “Eye on the Client” Awards on March 29 in London.

Wacker flagged that user experience and ease of navigation ranked highly amongst respondents for why they choose to use an e-trading platform and the fact that 31% said that they are likely to use a mobile trading app in 2017 as a “comforting surprise” amongst the survey results, given that these are areas where he says JP Morgan has focused its investment dollars in recent years.

“In the past, some users of our eXecute platform have been limited by the internal IT policies of their respective institutions, but younger users tend to expect a ‘mobile-first’ product, even when it comes to trading platforms. So the boundaries have been pushed, and if you don’t fully integrate the mobile experience and instead treat it as a crude bolt-on, you’re increasingly going to find that it won’t cut it with your user base,” he says.

In terms of product usage, the survey showed that more FX traders are planning to increase their use of options than any other product. Thirty-nine per cent said they plan to use more options in 2017, while they anticipated an increase in swaps, cash and NDF products of 30%, 24% and 15%, respectively.

One explanation for this could be that more firms are looking at options products as a means to hedge against a political and macro economic outlook that looks uncertain right now, but James claims that there is a different driver at work here.

“The increase in use of FX options indicated by the survey is likely to be more a reflection of clients getting used to trading FX options electronically than any particular change in the macro environment, even though that is indeed volatile. We’ve been quietly pleased with how quickly clients have made use of that functionality since we proactively expanded that product offering on eXecute two years ago, and last year we saw a 65% usage increase. Perhaps the surprising thing is that people are trading not just vanilla options, but more exotic and multi-leg products too, so the market is more than ready for it,” he says.

The survey also revealed that although respondents currently spend 70% of their time trading G10 markets and 26% in emerging markets, only 15% plan to increase their usage of G10 currencies in 2017 while 32% plan to trade more EM currencies. Wacker says that one reason for this is that as liquidity conditions in EM currencies continued to improve, they become more attractive products to trade, and that JP Morgan has responded to this by bringing more of these product-types online.

“In general, there has been far more liquidity available in EM currencies over the last couple of years and that has created a virtuous circle where clients are in turn, trading more EM currencies electronically or otherwise. Our electronic platform has seen a 77% increase in EM trades across FX products in the last 12 months and we have capitalised on that interest by bringing online expanded offerings such as Mexican interest rate swaps and EM FX index products,” he says.



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