Articles tagged by e-FX
Much has been made of the sharp drop in spot FX volumes in the recent BIS Turnover Survey, but, Colin Lambert asks, is what we are seeing merely a return to a longer term trend?
A regular theme in Profit & Loss over the past two years has been, since the traumatic events of January 15, 2015 around the Swiss franc peg, the return to relationship trading at the expense of the all-to-all model.
Analysis and data recently released by the Bank for International Settlements based upon its recent Triennial Central Bank Survey of FX Turnover appears to support the notion that the FX market is losing its infatuation with market share at all costs and is much more choosy about who it deals with.
In broader society, the year 2016 was a dichotomy – it was a horror year in terms of global celebrities passing away, especially musicians, but it was a great year if you are a fan of sports teams like Leicester City or the Chicago Cubs.
Likewise, it could be easy to claim that 2016 was a horror year for e-FX in terms of product development and budget for anything other than compliance and regulation; however, there were pockets of optimism in the industry. It should also be noted that in terms of product delivery, the slowdown is natural and should have been expected – after all, if you already offer most products and services it is difficult to add to them.
P&L Report Card: Structured products continues to represent a broad church – there is a focus on FX structured products here, but it should not be ignored that it is also about wider investment products and the ability to build a basket of investments.
Clearly any bank with a healthy private client franchise is going to score well here and indeed UBS’s structured products sit very well within Neo. Credit Suisse, likewise, continues to keep pace and users like its Index functionality, which two years ago added basket building capabilities, a la Barclays, to its suite of services.
P&L Report Card: Did anything happen in the prime brokerage space last year? For the second year in a row, developments in this field were few and far between, which probably indicates the focus on making sure risk systems are fully up to scratch on the part of providers. It obviously started with SNB Day, but has continued with a few further market events, and as a result the major PBs have not only continued to cut some of the tail risk among their client bases, but they have increased their monitoring of existing clients as well.
P&L Report Card: The next 18 months are going to be interesting for the banks’ research teams, not only do they have a rather erratic geopolitical situation to deal with, but they are also firmly in the firing line over MiFID II. Post-January 1, 2018 will be the time when we learn a lot more about how important clients actually think research is, and while paying for research is only a small part of the regulation, it will have a large impact on this segment of the FX business.
We have noted previously that the more in-depth reports are lightly read – partly this is a question of time, and partly it is a question of the value of such reports.
P&L Report Card: There is something of a paradox in how the algo execution space has become much more competitive in terms of providers, but the overall take up – while it ticked higher last year – remains subdued. There is so much emphasis on best execution, liquidity management and analytics – most of which falls to the algo execution teams to deliver – that one senses it is only a matter of time before demand surges. If it doesn’t, there is a lot of client facing technology to be accounted for, of course, but it should always be remembered that a lot of the client facing ideas that we see in the market have also driven upgrades in banks’ own ability to participate in FX markets.
P&L Report Card: Given the focus on regulatory compliance, probably the one area as busy – probably busier – than the technology development teams, is the back office. Post-trade is where the box ticking is done, the checks and balances exist here. We have noted in previous years how we view the end game in post-trade as being based very much around a utility model – the stricter the rules get, the less room there is for manoeuvre and innovation.
P&L Report Card: This award remains about information and interaction. Traders need more information than ever before and they need it in an easy to read format, preferably on the same desktop (or mobile device) as their pricing. They also need excellent analytics, because their decision-making process has to be as informed as it can be if they are to succeed in what remain tricky, event-driven markets. This means a clean dealing tile – the origins of this award – remains important for GUI traders, and we would highlight that GUI traders typically offer better value to a provider bank than a fully automated client.
P&L Report Card: This remains a strange time for hedge funds, because the discarding process that we have witnessed for almost two years now seems to have accelerated. Part of the problem is a clash of cultures – the hedge fund manager has a direct obligation to its investors to make every dollar and cent count and this inevitably means there is less on the table for the banks. Throw in a key skill of the hedge fund manager – market timing – and you have even less enthusiasm on the part of the banks to embrace the sector to the degree they once did.
This is not to say the relationship is irrevocably broken however, rather that, as banks focus on the tail clients, hedge funds figure quite highly in that group.
P&L Report Card: I f there is one client segment that is in the eye of the storm when it comes to execution quality and market impact, it is real money. Execution desks are well aware of the challenges that currently exist in the FX market, however the same cannot be said for their oversight function – too many of which still seem to believe that top of book is good for 100 million. So the real money sector remains at the centre of the upheaval around best execution.
Putting aside this segment’s use of the WMR Benchmark Fix, this client set is possibly the most challenged of all segments due to its need to shift larger tickets into the market.
P&L Report Card: The key to a superb service to corporate FX clients remains flexibility and the ability to provide for a huge range of customers. From the biggest multinational with its very sophisticated technology and execution desk, through the standard corporate hedging desk, down to the corporation seeking to make international payments, no other client segment offers such a broad spectrum. Inevitably, given how the focus for years was on volume and market share, the top end of corporate town is well catered for by just about every bank.
Likewise, several banks have solutions for payments.
P&L Report Card: Yes, we are going to start with our annual reminder that servicing one’s peers is always the hardest task, mainly because their background is similar; they could be potential competitors, and as far as service levels go, they are very demanding! The past two years has seen more banks come up the curve in terms of technical knowhow and product development, so servicing this critical segment becomes even more challenging – for both parties.
Whilst the global bank has to capture some value from the flow, the regional players’ need to provide best execution means they are a lot more selective when it comes to where they trade.
P&L Report Card: We have to repeat ourselves at the start of this award write up. There is, as we have experienced over the past three years, a degree of sensitivity over who we consider “regional” or “super regional”! Generally speaking we have sought to target this award at banks from outside the top 10 e-FX institutions that are helping regional customers. It’s part emerging markets and part technology provider. The field is quite broad for this award, anyone who, for example, empowers customers and other banks can be considered, but we want that little twist that is a focus on certain regions.
P&L Report Card: The last year has seen the final breaking down of barriers between emerging markets and G10, helped in part, it has to be said, by the odd liquidity event in G10! A big factor in the blending of the (major) emerging markets and G10 has been the ability of the non-bank players to really get into the former, firstly via NDFs but then in the cash markets. One or two multi-dealer platforms are helping the process and generally speaking, data appears to be improving – this remains the lifeblood of the non-bank market maker. Of course, if we thought that market impact was an issue in the G10, imagine how people feel about it in EM?
P&L Report Card: The development cycle means this category has fewer new entrants than other years, but that is not to say there are not some great products out there, it’s just that, as we have noted in previous years, this award seeks to recognise new products, that while the idea behind them may not be innovative per se, they do help customers navigate the sometimes tricky waters of the FX market.
As we have just noted, JP Morgan’s commodities offering has taken off in the past 12 months, making it a contender. Similarly, it has been a big year for Morgan Stanley with its development and release cycle that has seen the physical keyboard, Fusion Edge and QSI analytics, all seriously enhanced.
P&L Report Card: This really is a story of two institutions. Yes, there are many excellent precious metals providers out there but telling them apart is different, and yes, an increasing number of players are offering options on precious metals, as well as more cross currency opportunities. The fact is though that precious metals are viewed by investors, and us here at Profit & Loss, as just another currency pair.
This means we tend to look further afield when looking at commodity providers, especially into the base metals and energy products. With this in mind, and given there are two very good providers – Goldman Sachs and JP Morgan – that stand out from the crowd, we are going to ruin the suspense of this award by highlighting the excellence of both platforms, one here and one in the award winner’s section.
P&L Report Card: The rates space remains in a state of flux, in spite of regulatory certainty finally being established. The confusion – such as it is – stems from whether banks are principals in the business or not. The general mood is that they don't especially want to be, but as always, there are different thinkers. We continued to be uncertain going into this year’s awards process whether this award has merit given the general move towards SEF (or similar) trading, but we are happy to report the rates business has had a stay of execution from Profit & Loss for at least another year!
P&L Report Card: One of the more pleasing developments of the past few years has been the arrival and general acceptance of mobile trading. It is now accepted by clients (and importantly their compliance function) to the extent that a good mobile app can be a differentiator when selecting key relationships. We accept that mobile remains something of a niche market because there just aren't that many customers who want to execute out of hours, but those that do typically tend to be “valued” clients and as such, are important to the bank.That more people are using mobile devices for trading as well as information is thanks in no small way to the banks doing a great job of enhancing the security and compliance procedures around the process.
P&L Report Card: For yet another year we were thinking (yes, we know that should read “hoping”) that 2017 would be the year in which the FX options market’s structure was finally sorted out. We were optimistic over the availability of clearing services, customers were more open to structured solutions to their hedging problems, and the multi-dealer world – something we consider to be important for a market’s development – was looking up. A year on? Well not a lot has happened.
Volumes continue to struggle in the public markets and clearing has not taken off, but at least the event-driven nature of markets means that customers still see value in FX options. So, the future of the market is no closer to being defined than it was a year ago (actually, if we are being honest, four years ago).
P&L Report Card: This is the second year for this award, one that reflects the continued interest around understanding execution quality. While we look at the overall experience in our Best Execution Award, a crucial element in any client’s experience, especially in event-driven markets where liquidity can be sporadic, is the pretrade functionality, which is where we focus this award.
The past year has seen more clients understand the critical importance of the decision-making process, specifically when and how to execute that crucial hedge, or how to get into that position without tipping the world off to what you are doing (it can also work the same on the way out!) The changing nature of markets also makes the liquidity view important.
P&L Report Card: These awards cover most aspects of the client experience when it comes to the various e-services and products on offer, indeed a read back through 15 years shows how the categories have changed to reflect the changing demands of the client base and, sometimes in the short term, new areas of competition. It is now two years since we started polling users on the overall experience and what they liked and disliked about a platform and we continue to be grateful that the reaction to the award was positive. The Client Experience Award really represents the core ethos of these awards – how good is the overall experience for someone using these platforms?
P&L Report Card: A good indication of how much longer the development cycle is can be found in our assertion last year that in terms of institutions to watch in 2016-17, it could be a vintage year. It wasn’t. The impact of regulatory compliance dominated the scene to such an extent that few, if any, banks made a serious move forward over the past 12 months. Being the eternal optimists that we are, however, we feel that this time next year could be very different, not least because we have been given a few insights into plans for 2017-18 and some of them are quite exciting.
P&L Report Card: This remains the most interesting area of the FX market with not only customers continuing to study their best execution policies and more often than not, making changes, but also because the subject of market impact has really come to the fore over the past few months. This makes it an interesting time for the bank algo execution teams, because they are firmly front and centre when it comes to execution quality, and the quality of their strategies and market access is also open to more scrutiny than ever before.
P&L Report Card: In past years, this award has been given to the bank that I believed was most likely to make a serious challenge in the next 12-24 months, however, it is probably time to change that ethos just a little. The reason is yet more evidence of the impact of regulation on the FX industry – with just about everybody racing to be compliant in dozens of different jurisdictions, each with their own nuance on the rules, nobody has the budget or time to make a serious move.
P&L Report Card: It is becoming a familiar refrain of this section of the Digital FX Awards – true innovation is harder to find in this compliance dominated world. Put simply, half of the industry is not encouraged to think innovatively – and the other half doesn't want to! That is, of course, overstating the issue, for there are different thinkers in the industry, but inevitably when you are faced with such a broad and mature product offering, innovation is likely to take place at the edges.
Looking ahead, we are genuinely excited by some of the ideas coming out of places like Citi, JP Morgan, Credit Suisse, Morgan Stanley and BNP Paribas (others do exist before you all write to your MP/congressman!) but as always, the proof will be in the end product.