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?”
“The biggest change in the nature of liquidity has been how LPs are much more clever about how they manage liquidity by using analytics,” observed Eddie Wen, managing direct, macro markets, JP Morgan. “Firms that have invested in the tools and technology to better understand their business have gained market share and this in turn has given them more data and allowed them to become even better at what they do.
“There has been more consolidation of LPs as one group has got better at this and the nature of liquidity has changed as a result,” he added.
The use of data to better understand business is a two-way street, however, for it also allows the buy side to better understand how their LPs are handling their flow. Michael O’Brien, global head of trading at Eaton Vance, explained how the buy side having better access to tools and analytics that were once the preserve of the sell side is at the same time, an opportunity and a challenge.
“Figuring out what to do with the data is the biggest challenge for the buy side right now, because it informs how they approach the market,” he observed. “There is a wider range of tools available and lots of data, but it is not always appropriate to every situation, which means there can be an overload of data. How we execute is not a black and white issue – it is not just about using an anonymous or disclosed channel, whether the market is liquid or not, the reality, as the buy side has discovered, is that it is rarely that straightforward.
“The role of the buy side trader is changing and much of the value they bring is in the pre-trade where they use these tools and technologies,” O’Brien says. “The decision making over what channel to use is significantly different to what it was 10 years ago and the data and analytics can help that process.”
Data has also meant much more open discussions, which has in turn raised transparency levels. “We see so many more conversations taking place thanks to the data,“ said Fred Allatt, managing director for INTL FCStone in the Americas. “The technology is enabling these discussions, but importantly there is still the human interaction piece, which means our team can help the clients understand what the data is telling them.”
Market participant behaviour was at the forefront for Tim Cartledge, global head of FX at NEX Markets. He argued that how data was being applied was changing traders’ approaches to the market. “The data is shining a light on the behaviour of both LPs and LCs and leading to improved behaviour on both sides,” he said. “We publish everything we can that the data shows us around behaviours and it has led to a discernible improvement in both last look times, which have gone down from around 90 milliseconds on our disclosed channels to around 30ms, and reject rates which are down from around 5% to around 3%.
“The data is having an impact for two main reasons; firstly, it establishes a benchmark for LP behaviour and secondly, if an LC’s execution style is having market impact, it will show up,” he added.
“There is no doubt that the level of the sophistication in the dialogue between us and our customers has improved,” agreed Wen. “This is good for the community overall because it helps build more sustainable relationships.”
Alan Schwarz, CEO of FXSpotStream, agreed about the power of data in improving relationships in the market, but also noted that sometimes the behaviour being highlighted by the data is unintentional. “We have clients who may be having market impact but they don’t even realise it,” he said. “The data allows them to have conversations with their LPs and, if they wish, and change how they execute. These types of conversations just didn’t happen before because people did not have the facts.
“There has been a shift from anonymous to disclosed channels in the FX market and this has also helped drive a healthier and more open dialogue. We started seeing this shift post-SNB and the availability of better data and analytical tools is accelerating the change,” he added.