Philippe Bonnefoy, the founder of Eleuthera Capital, explains how his firm has evolved over the years in response to changes in the FX market.
“Over the last 20 or 30 years we’ve evolved massively, starting as discretionary macro traders, then using more and more quant models to manage positions and then finally using the quant models to actually do the trading and become a quant portfolio manager,” he says.
Part of the reason for this, explains Bonnefoy, is that the price behaviour of the FX market has changed significantly as market making has become overwhelming conducted electronically. Even now, he points out, FX trading firms need to be cognisant of these changes and how they’ve impacted liquidity when they screen and look at data to test their models.
“There’s no doubt that we’re in the best pricing environment that the market has ever been in, the bid-offer spreads are the tightest for surface level liquidity, it’s great,” says Bonnefoy.
The bigger issue, he adds, is that many market participants are surprised that when they scratch beneath the surface, they find that actually the $5.1 trillion per day FX market can be quite “gappy”, meaning that big asset managers now have to work much harder to get larger trade sizes done.
Bonnefoy says that, whereas big market making firms used to be willing to take large amounts of risk from these buy side firms and offer competitive prices for that risk transfer, now they offer a much better price to them, but only for smaller chunks of that risk, leaving it up to the buy side to break-up their orders.
He continues: “We tend to do a lot more short-term trading, it’s much smaller size many times – rather than doing big chunky trades – so we’ve navigated around that problem by specialising in a short-term time frame.”
Elsewhere in the interview, Bonnefoy talks about the broader implications of the changing nature of FX market liquidity and discusses whether the industry needs a more effective benchmark.
The full video interview can be accessed here: