Despite the
numerous technological advances in the FX industry in recent
years, panellists at Profit & Loss Latin
America emphasised the significant role that humans, and human
relationships, still play in regional markets.

However, seemingly juxtaposed against the
importance of human relationships is the inevitable drift towards further
automation of FX trading activity.

As John
Ashworth, CEO of Caplin Systems, explained: “The thing that separates
regional markets from mainstream markets is that there’s still a very strong
focus on relationships in the sales function, where human beings want to talk
to human beings.

“And yet,
there is a tremendous need for this industry to take cost out of itself and
there’s a tremendous availability of new automation. So what we’re seeing in
markets around the world is firms honing in on which are the really profitable
customers, we’re seeing customers take onboard mobile technology to eliminate
some of the manual processes around notifications and amendments and we’re
generally seeing banks requiring sales people to do more with less human beings
and encouraging their customers to do a little more self-service.”

The
solution to these seemingly conflicting requirements, said the panellists,
is finding a balance between automated technology and human interaction
that is appropriate for each specific market.

“I actually
think that as it relates to some products the US market has moved a little
faster than some people would like in terms of
automation, partly because of regulatory
reasons, partly because of transparency reasons
and partly because of cost reasons. As with anything else,
sometimes the pendulum can swing a little too fast in one direction but over
time we get to the right place,” said Alan Schwarz, CEO of FXSpotStream.

He
continued: “But at the same time, it can be difficult to make a spot trade
profitable so it makes sense to just automate that process. In fact, if a
trader in Mexico has to call someone to ask where USD/MXN is by the time they
get off the phone the price could have moved. So what firms need to do
is find a balance between having the right amount of coverage, spending
the right amount of money and having the right amount of technology. It’s also
important to remember that one size doesn’t fit all, what works in the US and
Tokyo and London doesn’t necessarily work in Mexico, so you have to be
sensitive to the specific needs of each market.”

The idea of
providing technology that is specific to the requirements of firms in different
geographical markets was a recurring theme on the panel. Firms looking to
implement new FX trading technology in Latin America have a “late mover”
advantage because they are able to access the latest iteration of the products
that have been tested and proven in other markets, but the speakers warned that
in many cases the most highly evolved products aren’t yet needed in
Latin American markets.

“A lot of
vendors want to sell an expensive system with lots of functionality, but there’s
a danger of selling the customers something that they don’t need. For the
client it’s like purchasing a Ferrari when you don’t have a street to use it
on,” said Schwarz.

Implementing
new technology in markets that have traditionally been very driven by human
interaction can be challenging because there can be internal resistance at
financial services firms from individuals who are concerned that this
technology could erode their client relationships.

Or as Jack
Linker, head of hedge fund sales for the Americas at 360T, succinctly put
it: “The sales trader in Latin America is not excited about the
prospect of putting a GUI in front of the customer.”

Linker
argued that the way to overcome this resistance is to convince these sales
staff that the implementation of technology will reduce the amount of time they
have to spend working through basic trades with their clients, freeing up more
time to focus on more profitable activities.

Developing
on this theme, Darren, CEO of MarketFactory, commented: “Successful
technology moves with the market, not against it. Even in a market like Mexico
where some firms have a big sales trading staff and there is a lot of voice
trading activity, I guarantee you that if you interviewed this sales force
you’d find that they would love to have a tool to deal with that one customer
who calls every day to get market colour, but only trades
occasionally and in small size. That’s the first thing that you automate
because it’s free money once you put that in place.”

Regarding
the attitude of individuals within financial services firms towards technology,
and in particular towards how it shapes their view of
commercial relationships, Ashworth pondered whether generational changes
will eventually lead to significantly less human interaction.

“Let
me hypothesise that relationships are not necessarily just a function
of regional markets or a particular culture, but are also massively a function
of age. Age can be a controversial issue to talk about, but the fact
is that the younger generation is fully conversant in interacting with a
device. Their social life is controlled by access to social media and they’re
completely comfortable with having a device welded to their left or right hand
as they go about their business,” he said.

Despite
this generational change, Ashworth rejected the idea that this could lead to
the complete automation of financial markets, pointing out that there will
always be scope for humans to process items like structured products and complex
derivatives transactions or to trade in highly illiquid markets.

In
addition, Linker noted: “There will always be a basic human desire to have
contact with another person as part of a financial relationship. And at a
time when there have been a lot of headlines about firms getting
regulatory fines for their FX practices, its important for a lot of firms to
know who is on the other side of their trade. Then sometimes there’s just a
need for advice, or guidance, or sometimes the customer just wants to
hear someone confirm a decision they’ve already made. Technology does what any
tool does: it makes people’s job simpler, giving them more time to do other
things.”

The panellists all
strenuously advocated for technology as a means of
ultimately improving and developing relationships, citing a broader
trend in the FX market towards disclosed trading as evidence of this.

“For all
the talk of technology in FX, only 25% of the FX market trades anonymously, the
other 75% is disclosed and in fact we see more activity shifting towards
disclosed trading. So as the use of technology increases, the market is
becoming more relational, not less, and this is because technology is enhancing
those relationships,” said Jer.

He added:
“As long as people still hug and kiss each other at Profit and Loss conferences, this will remain a relationship-based
industry.”
 

Schwarz
said that the sharp market moves that occurred when the Swiss National Bank
(SNB) suddenly stopped pegging CHF to the euro, following the
UK’s Brexit vote and after the election of Donald Trump as the
President of the US, have all accelerated this trend towards
disclosed trading, because it is in stressed market conditions when
relationships prove their importance. He added that a growing concern about market
impact when trading is also driving this trend.

“Anonymous
venues are not going to disappear, they have their time and their place. But
because people need to communicate with their counterparties and they need to
know whose credit is on the other side of the trade we’re seeing an interesting
shift – going counter to what you might expect – back towards relationship
trading. Firms want to know who is on the other side of a trade and know that
if there is a problem they can pick up the phone and talk to the counterparty,”
he said.

Colin Lambert

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