Spreads Biggest Concern in FX: Refinitiv Survey

Managing spreads has been the biggest trading challenge for FX market participants since the pandemic and resulting lockdowns began according to a Refinitiv survey.

In the global survey of over 1,000 traders, 50% percent of respondents chose spreads, followed by access to liquidity with 24% of respondents cited this as their biggest challenge. 14% of respondents had no issues. The issue of spreads was felt more significantly at hedge funds and banks, 68% and 57% respectively said this was their biggest challenge, as opposed to only 35% of corporates.

Access to liquidity was an issue predominantly for banks as 31% chose this answer compared with much smaller percentages from the other client segments.

“The changes to spreads during this period have been well documented,” says Jim Kwiatkowski, global head of transaction sales at Refinitiv. “Spreads widened as volatility increased and providers became concerned about client credit. This was clearly a market-wide impact, but one that was mitigated, at least partially, by the utilization of trading tools to aggregate available relationship pricing and find that elusive ‘best price’.

“Many clients have taken advantage of auto execution capabilities for smaller orders so that they can focus on their larger, more difficult to execute orders,” he continues. “We also saw a significant uptick in interest in sourcing liquidity from our Primary Market, Matching, which has traditionally underpinned FX price discovery and pricing by liquidity providers. This reflects a flight to quality as the trading community opts for the certainty of firm pricing and low rejects to deal with more difficult market conditions.”

The survey also asked which execution method was the most reliable during the crisis period. The top two answers were streaming risk transfer, chosen by 65% of respondents, and primary market execution, chosen by 24%. Banks were more keen than other groups to trade on the primary market because they found it the most reliable mechanism to get their executions completed, while most buy-side participants opted for immediate risk transfer to their relationship banks. Over 70% of corporates and asset managers favoured streaming risk transfer.

“The balance of the answers highlighted an increased use of tools to automate the workflow around a voice trade and algorithmic execution,” says Kwiatkowski. “The results also clearly show that request for quotation was the most reliable way of getting FX business done for a very significant proportion of the market.

“The increased use of send details, which allows trades to be agreed by voice, but then automates the booking through normal straight through processing, suggests that many clients opted for electronic trading tools, even for voice trades, to reduce the risk of booking errors and satisfy compliance concerns.”

When asked about working from home, 30% of all respondents described communication with colleagues as the biggest challenge. This was followed by market conditions on 23% and communications with clients/dealers on 19%. “Difficulties in communicating could be part of the reason why electronic trading was found from the survey to be far more reliable for our participants than ‘voice risk transfer’,” says Kwiatkowski. “It also shows that instead of reverting to old-world methods (voice), the market is now so far down the path of electronification that it pushed even further in this direction as the crisis evolved.”

Colin Lambert

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