We’d all like to write our own reviews, but if the recent emphasis on third party transaction cost analysis (TCA) has taught us anything it’s that it can be beneficial to have an independent party conduct reviews too. With that in mind Profit & Loss challenged some of its readers to look over our 2018 predictions and provide feedback.

Prediction: Despite a strong H2 performance in 2017, the euro will not – as some analysts predicted – continue to strengthen in 2018 and work its way to EUR/USD 1.30. Instead markets will get spooked by the Italian election in March and EUR will drop, it might recover a bit in the second half of the year but won’t be near 1.30.



James Mackenzie-Smith, director, Record Currency Management: A good call, although we would argue Italian politics were more a marginal driver of EUR/USD compared to a slowing Eurozone economy, trade disputes and, of course, Fed policy. After the election, the euro range-traded for the remainder of the year, reflecting the ups and downs of Italian budget negotiations, as well as the odd exogenous shock (not least from the Turkish currency crisis over the summer). Italy now looks to have satisfied policymakers, pushing break-up risk further out to the future. Therefore, monetary policy will once again be at the forefront of investors’ minds. Slowing global growth could weigh further on the Eurozone through delayed interest rate normalisation; that said, EUR is undervalued vs. USD which, in the absence of political risk, could exert upward pressure on the currency.



Momtchil Pojarliev, head of currencies, BNP Paribas Asset Management: In 2018, EUR/USD has suffered from a perfect storm of weak European data and hawkish Fed. The Federal Reserve hiked four times in 2018 while the ECB remained on hold. However, we believe that EUR will appreciate in 2019 and we are targeting 1.25 by the end of 2019. First, the structural strength of Europe’s underlying balance of payments continues to improve. Second, with Italian and trade war pressures abating the market will focus on Eurozone reflation. Third and most importantly, over the last few weeks, there has been an important shift by the Fed. Fed communication began to shift at the end of November when Powell spoke at the Economic Club of NY. The Fed is no longer following a pace of “further gradual rate increases”. Importantly, Fed officials have taken pains to correct some of the communications missteps from the December FOMC meeting. Recent comments have put greater emphasis on their risk management approach, recognition of downside risk, and their ability to be patient regarding further rate increases given low inflation. The bottom line is that the Fed is very close to the end of the hiking cycle, while ECB hasn’t started yet. Monetary policy convergence will be the most important driver in FX in 2019.


Prediction: “Going Greener” – There will be more focus on liquidity re-cyclers and some may be squeezed by the ‘tier 1 LPs’ they all boast of. This means we could end 2018 with a smaller, but stronger group of liquidity providers that are held to a higher standard than previously.

Mark Bruce, head of FICC business development, Jump Liquidity: I’m going to give you a B grade on this. The market has certainly started to open its eyes, pay attention and talk about what a liquidity provider, (i.e., the true creator of a price vs a market maker i.e. an ability to show a price), really is. But let’s be honest, there is still a lot to be done here. It’s fair to say a ton of progress was made this year looking into an optimal number of liquidity providers (big credit to Roel Ooman at Deutsche for his work on this, which is well worth a read) and an overwhelming acceptance that the whole bank vs nonbank debate is so 2017…it’s now about the quality and measurability of liquidity providers and the value they have. However…let’s not forget…at some point in time, liquidity consumers will come under scrutiny for the way some interact in the market…2019…go on guys, go out on a whim for once.


Prediction: “MiFID II: Like a Swan Gliding Through Water” – The continued implementation of Mifid II will be characterised by lots of hard work in the background and not much immediate action in the foreground. Come the end of the year the conversations will all be about the implications of Brexit for Mifid II and the boundary will build throughout the year between those operating within and without the Mifid jurisdiction.

Allan Guild, head of FX and commodities alternative execution services, HSBC: Galen’s key prediction around MiFID II has turned out to be broadly accurate – we have seen little direct impact on the surface with a huge amount of work going on beneath the surface. Some technical and interpretative challenges remain around trade reporting and the market has largely adapted to paying for research directly or via RPAs. Venues and their participants have largely adapted (through the processing of significant amounts of paperwork) and we haven’t seen a fracturing of liquidity into US, EU and “Other” as many, including Galen, feared.

What have we seen? Galen’s prediction that MiFID II would morph into a Brexit conversation was prescient, as no-one envisaged a situation where you might have two jurisdictions with identical rules that were not “equivalent”. At the time of writing, the industry continues to wrestle with that conundrum, with March 29 fast approaching.

Secondly, MiFID II (along with the Global Code and the continued progress of automation) seems to be a driver of the ever increasing interest that we are seeing in alternative execution services. Our clients are getting more questions from their clients and investors about best execution and as a result they want to have full transparency and transaction cost analysis around their execution so that they can answer these questions.

Prediction: “The Great Divide” – 2018 will be all about the data and it will empower those willing to pay for it, however there will be challenges for those who cannot or will not pay up to consume and store the vast amounts of data required. Those with data will be more protective of how their pricing is used by counterparts and those without will struggle in an increasingly fragmented market as more platforms package and sell their data.

Roger Rutherford, COO, ParFX: This is a HIT, but I don’t think ‘the great divide’ began in 2018. Rather, skyrocketing fees associated with market data is an uncomfortable, long-term trend.

More recently, this has been exacerbated by the unbundling of existing market data packages and selling them separately to improve profit margins. A leading hedge fund trade association likened the practice to ordering a hamburger which used to cost $20 but now costs $7 for the bun, $15 for the beef patty and by the time you add condiments, it costs $33.

Hamburgers aside, this has further increased the divide between the haves and have nots.

Last year, frustration levels reached new heights and the distribution, cost and transparency of market data packages is under more scrutiny than ever before. End-user investors made their views clear, and the regulators are listening closely. It’s now up to market operators – those charging trading and market data fees – to show they too are listening to these concerns, and adapt their models accordingly.

As a starting point, there needs to be greater transparency in the pricing of market data packages so counterparties know what they are paying for, how that compares against their peers and whether they are getting value for money. Kind of like transaction cost analysis but for market data.

This will bring them in line with the rules and principles that underpin MiFID II and the FX Global Code. Not a bad way to start 2019.

Prediction: “Edging Towards the Exit?” – Last look will not disappear as a practice in 2018, although it’s use may diminish slightly. More importantly, the industry will move on from the discussion around this practice because of increased transparency from LPs and platforms about how it’s used and better analytics on the client side to monitor the impact of last look.

Nick Downes, co-founder, Axiom Global Advisors: Firstly, it’s clear that last look is not dead. Yes, on certain FX platforms hold times have been reduced and fill rates are higher in general, but has there been a significant shift away from venues offering last look to firm venues? The numbers would appear to say not!!

There is certainly more awareness around the topic of last look given all of the noise in the system from “insightful journalists” and those market participants with either a vested interest in firm liquidity or highly developed systems that benefit from the ever increasing speed in the FX market. This noise appears to be centred around executions on anonymous trading venues, which in the great scheme of things is a tiny proportion of the daily global FX turnover.

Additionally, the increasing adoption and awareness of the FX Global Code ensures firms are doing their own due diligence of LP’s FX disclosures and the differing rulebooks and execution logic across the multiple FX trading venues.

Last look has a bad reputation due to a small number of large banks doing bad things that their clients were not aware of….that was in the past and regulation and high profile legal cases should ensure that, that type of behaviour no longer exists.

In today’s market, with greater awareness and transparency, we seem to have reached an equilibrium where makers and takers better understand the nature of their relationships and what they can expect from one another…this is a great thing!!

Of course there will continue to be noise from those with a vested interest but in general most market participants seem happy with the current status quo and hopefully we can now move on as an Industry.

In 2019 an award should go to the first FX conference that doesn’t have a panel talking about last look!!!

Roger Rutherford, COO, ParFX: This is another hit – Last look dominated the headlines in recent years, but the debate died down following guidance from the Global FX Committee (GFXC). The reason for this: the revised language provides clear guidance on when and how last look should be used, advocating greater transparency in the way it is applied and how its use is communicated to clients.

We have operated without last look liquidity provision on ParFX since launch, but we have always been clear that the practice in itself is not bad. Overall, we are pleased that going forward, its use will be transparent and made clear pre-trade. It fosters trust, this can only be a good thing for the industry.

Without this, there will always be scope for misconduct to occur, particularly if there is a perception that trading information gained during the last look window is used to learn more about a counterparty’s market position with no intention to execute the trade.

The GFXC working group is expected to release more conclusive recommendations later this year. Hopefully it will be widely accepted and adopted so we can finally put this issue to bed in 2019.

Prediction: “Not Necessarily Consolidation But…” – CME’s FX Link will be a big play of 2018 and how it works could dictate the M&A landscape in FX. A successful FX Link could provide the circumstances for CME to buy an OTC platform, specifically NEX Group.

Adrian Patten, co-founder and chairman, Cobalt: Hit. Great call. Hope you bought some shares in Nex when you made it!

With the CME, Deutsche Borse, CBOE and Euronext now all owning OTC platforms, the FX market is undergoing a fundamental change.

Though much the focus on these deals has related to execution, to me, the interesting aspect is how these deals will accelerate changes to post-trade infrastructure.

New clearing models and a move to transparency for post-trade costs will lead to the savviest participants slashing their cost base. There will undoubtedly be big winners and losers in terms of participants and service providers.


Mark Bruce, head of FICC business development, Jump Liquidity: I cannot decide whether to give you this one or not – ‘Colin Lambert: King of the Hedge’ feels appropriate. The prediction did come to fruition, but I’m fairly confident this wasn’t driven by FX Link per se… ..although the concept of FX Link was (and still is) great. This was certainly one of, if not the, largest market events of 2018, with one of the largest cash OTC venues merging with the unequivocal leader in FX futures trading, creating an FX behemoth. The cash and futures markets have been intrinsically linked for a long time, but this merger will likely lead to some interesting innovations and challenges throughout 2019 and beyond….do you guys dare to try again?


Prediction: “Can Peer Pressure Work?” – The biggest challenge for the FX Global Code will be getting peripheral players onboard. The GFXC will need more examples and clearer guidance over who is responsible for ensuring anonymous environments operate fairly. Three key words for the GFXC will be “marketing”, “education” and “evolution”.

Allan Guild, head of FX and commodities alternative execution services, HSBC: Despite the tireless efforts of the GFXC and many market participants over the past year, it’s hard to read Colin’s article without wondering whether he could write the same article today, as many of the same questions that Colin posed a year ago remain.

The market participants that are directly regulated and overseen by the global central banks remain enthusiastic about the Code and the positive impact of both the process of writing the code and that it can be a force for good. At HSBC, we completed our adoption process in 2018 and signed our statement of commitment in the first half of the year. As part of the process, we updated our trading disclosures to clients and in particular included much more detail on “last look” (how we check price and credit validity at point of trade) and how we handle benchmark orders. This has led to many positive conversations with our clients on how the FX market operates and HSBC’s role in it and as mentioned in the MiFID II review, would seem to have led, at least in part to the increased interest in our alternative execution services offering.

However, the same key question remains as we head into 2019. How will the Global Code be adopted by the buy side? The notion that the Global Code is in some way a “sell side document” would not seem to be reflected by the make-up of the GFXC, the various FXCs and the working groups on the code, but that perception persists.

Roger RutherFord, COO, ParFX: The Code undoubtedly gained momentum in 2018, both in terms of increased awareness and adoption, but there’s still a long way to go. Last year, peer pressure largely worked.

If a client asks why your peers have signed up to the Code and you haven’t, you don’t really have a leg to stand on. Central banks also warned about only dealing with institutions that have signed up. It would be a bold move on their part, but it takes an even bolder bank or counterparty to call their bluff. Seriously, is it worth the risk?

With only 11 of the 30 largest asset managers signing up to the Code so far, some say that the process isn’t moving fast enough. But this fails to recognise the sheer scale of the challenge.

Embedding a new set of principles, educating individuals in different global regions and applying these into day-to-day practices – all with a view to changing culture and introducing greater transparency: it is a huge undertaking.

In any case, it’s infinitely better to take slightly longer and get it right, rather than rush through head-first before sheepishly paring back. Anyone remember the DoddFrank debacle?

The way we see it, the Code is much more than just counting the number of sign-ups. We’ve seen more debate and discussion between banks, vendors and clients about the Code’s application. This is more difficult to quantify, but increases trust and transparency.

But to your point, I think the jury’s still out on this. The GFXC has gone out of its way to engage with the market – this is currently in progress. We are yet to see what the final conclusions are, but I feel positive about what 2019 has to offer. Long live the Code!

Prediction: After years of investors shifting towards passive currency management, there will be a modest uptick in those looking for active management. But rather than just active vs. passive, more will look at things like smart beta or factor investing.


James Mackenzie-Smith, director, Record Currency Management
: Certainly, this was our experience in 2018, during which we saw a noticeable increase in interest in active currency – not just as an overlay to recalibrate from default/hedged to return-seeking currency exposures, but also as standalone investments. In particular, interest in risk premia (factor) based investments continues to increase, and currency risk premia are of course a part of this growth. We remain firm believers in carry, the longest-established of these (in spite of the performance since GFC), and we expect divergent monetary policy in the major economies to be positive for this. We also advocate an allocation to emerging market currencies, given the growth prospects of this sector and the associated expected currency gains.



Prediction: “Bitcoin. Thats The Thing That Goes Up Right?” – The advent of futures in bitcoin will take volatility out of the market. The cryptocurrency will end the year lower, not at zero, but in the single digits of thousands of dollars.

Adrian Patten, co-founder and chairman, Cobalt: This is a hit in terms of the bitcoin price prediction, however saying the single digits of thousands of dollars did give you a fair bit of leeway!

You tried to hedge your bets by saying that you should look to get into other cryptos instead. However, other cryptos have fallen even more and in November 2018 alone, the market capitalisation took a $70 billion hit. For this reason, I am going to have to call it a miss.

It currently costs circa USD $6,000 to create one bitcoin and, as I write this, the price is USD $3,600. In normal commodity markets, as the price falls below the cost of production, supply contracts and ensuing demand sees the price recover. However, that is for commodities that actually have a use.

Bitcoin today has failed to meet its technical, commercial and governance challenges. Just because something wastes a boat load of energy in being created does not make it valuable. Furthermore, the recent purported 51% attack on Ethereum classic will be a further nail in the coffin for many of these coins, especially their current ability to provide a secure store of value.

The combination of cryptography, hashing and distribution are indeed going to fundamentally change many businesses, but most of the current coins and protocols will not. I suggest you have a similar prediction for next year – just remove one or two zeros!

Dan Torrey, global head of FX e-commerce sales, Northern Trust: We still didn’t see much institutional money flow into crypto last year. The lack of proper world-class trading and custodial infrastructure was still lacking in 2018, but there has been a tremendous amount of buildout on that front. For the clearest examples, one need only look at the product rollouts from Fidelity, BitGo, Coinbase – all of which are laser-focused on increasing the comfort level of institutional investors. (Ie., “Build it and they will come!”).

Further to that point, look at all the new exchanges popping up that are chock-full of blue-chip backers, examples include ICE Bakkt, ErisX, Seed CX, CoinFlex and others. Each of these new venues will offer both OTC spot and futures – with physical coin delivery. This is a significant development. Why? Because bigger, more established market participants want a greater degree of hedging certainty and they want to avoid the potential manipulation of benchmark/index levels that is prevalent today.

And lastly… Some say that 2019 will be the “Year of the Security Token.” (Of course, many of those same folks said that 2018 would be the Year of the Security Token!). But seriously, this year the world will open its eyes to the transformative power of tokenised assets – specifically how tokenisation will allow exponentially broader distribution channels and create entirely new secondary markets for assets as diverse as commercial real estate to fine art to rare earth metals to SMEs across various industries.

Galen Stops

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