Changing the habits of a lifetime is a very difficult proposition in the foreign exchange industry, but is now a prudent time for some platform providers to have what will no doubt be some very difficult conversations with their liquidity consumers about actually paying for it?
FX liquidity is a more valuable commodity than ever and LPs continue to look at where they stream, what the value from that venue is, and how they can, if at all, warehouse the risk profitably.
It’s not necessarily that extracting alpha in FX has become harder, but rather that the way it needs to be extracted is changing, said panellists at Profit & Loss’ Forex Network Chicago conference.
Douglas Cilento, global head of execution at AQR, opened the discussion by point out that FX has traditionally been viewed as a good market for generating alpha because there is a large segment of non-profit seeking market participants, there are inefficiencies in the market and, because currency is not something that can be bought and held with the expectation of a return, it is effectively a market without beta.
Colin Lambert has retrieved the trusty Profit & Loss Crystal Ball from the dark recesses of the office, given it a wipe, and peered into the future to produce 10 predictions for 2017.
There is little doubt that as an industry foreign exchange is a more optimistic place than it was just 12 months ago – and hopefully the majority of themes in this year’s Crystal Ball reflect a more upbeat message.
es, the coming year will not be without the challenges of legal battles that have dogged the industry for the past three years, but if nothing else the shock factor has worn off and most people see what is happening as the continuation of a long process.
Galen Stops looks back at how the OTC FX platforms fared in 2016 and talks to them about their strategic plans for 2017.
Speaking to platform providers at the end of 2015 about their prospects for the next year, they were all fairly bullish that a period of subdued volatility, and subsequently trading volumes, was about to come to an end.
And on the surface, the reasons they cited for this optimism were logical. The US Federal Reserve had just approved a quarter-point increase in its target funds rate, the first change in rates since 2009 and the first increase since 2006. Many hoped that further rate increases were coming and that interest rate differentials might start to produce trading opportunities and therefore lift FX volumes.
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.
The consolidated tape for FX launched by FastMatch today looks very different to the one initially proposed by its CEO, Dmitri Galinov. Galen Stops takes a look at what's changed.
FastMatch has today announced plans to launch a consolidated tape for FX, something that its CEO, Dmitri Galinov, has been working towards for some time.
Profit & Loss previously reported on an earlier proposed iteration of this tape back in May 2016, but the one launched today looks significantly different.
FXSpotStream has onboarded State Street as the latest liquidity provider to its service, hired a new CTO and revealed plans to make a new analytics suite available to its liquidity providing banks and clients.
State Street becomes the 13th bank to go live as a liquidity provider on FXSpotStream’s price aggregation service, after Bank of Tokyo-Mitsubishi UFJ (BTMU) was added in December 2015.
“We know from client requests that liquidity from State Street will be a welcome addition to FXSpotStream’s existing bank liquidity. Our service provides State Street an expanded e-distribution network through our global connectivity network and client base. With co-location sites in New York, Tokyo and London, clients can use either our GUI or single API connection to access State Street’s liquidity,” Alan Schwarz, CEO of FXSpotStream, tells Profit & Loss.
The first four platform providers to publish FX average daily volume (ADV) for September have all reported significant month-on-month (MoM) and year-on-year (YoY) increases.
FXSpotStream’s ADV for September was $23.9 billion, which represents its highest ever monthly ADV since the service was founded nearly six years ago. It is also a 24.6% MoM increase and a 54.9% YoY increase in ADV.
The record setting volume in September caps a newsworthy month for FXSpotStream, as it revealed exclusively to Profit & Loss that it has added State Street as its 13th liquidity provider, has hired a new CTO and is planning to launch a new analytics suite.
There isn't much left up for grabs, but 2018 will see a deal in the platform world, says Colin Lambert.
In all the history of the Profit & Loss Crystal Ball, platform consolidation has been the most fertile ground.....mainly for critics! If viewed in terms of the number of deals, however, the story is a little different.
The headline has been in demand from exchange groups for an OTC presence, culminating in deals for Hotspot, 360T and Fastmatch, and it is hard not to see this continuing – in spite of CME finally deciding to do something about further penetrating the OTC space by launching a service itself rather than entering partnerships.
Colin Lambert believes data will become a commodity and will generate a divide between the "haves" and the "have nots".
There is little doubt that data drives most things in foreign exchange. Pricing is the obvious area, but client business is now also analysed to great depth as service providers seek to more clearly define the value they extract from their franchises. Throw in operating metrics as well as reporting, and data permeates just about every part of the business.
So the big news this week was that 360T has agreed to buy the GTX ECN for $100 million. This is obviously an interesting deal in a number of ways, and here are some of my initial thoughts.
Firstly, let’s look at the price per $1 billion of spot FX average daily volume (ADV).
We did a very rudimentary analysis of this when Deutsche Börse announced the purchase of 360T back in 2015 and found that it paid about $11.36 million per $1 billion dollars of spot FX ADV, compared to about $12.7 million per $1 billion of ADV paid by then-BATS Global Markets for Hotspot.
If you ever wanted an example of how an enhanced market structure – specifically around electronic trading – helps to build volumes, one need look no further than NDFs. Volumes have been climbing steadily over the past five years, indeed I am starting to think they may eclipse FX options soon, and how people trade them also appears to be shifting, to the degree that I wonder if the NDF market is giving us a glimpse into the market structure of the foreseeable future?