The 2020 Profit & Loss Innovation Award

P&L Report Card

As we predicted in these awards last year, 2019 turned out to be a good year for ideas and product innovation and with some of the work ongoing and projects still in their infancy elsewhere, 2020 could prove to be the same. Inevitably in such a mature industry as e-FX, the innovation – as it has been for several years now – tends to be in the detail rather than a broad brush stroke that changes how the entire industry operates, but nonetheless there were some really interesting initiatives.

As we note elsewhere in these awards, Citi has become a real thought leader in the industry, not least because it has challenged conventional wisdom in so many ways. In terms of product development it remains early days and much of the thought leadership is more about the business model than product, however we really like how Citi has built a universal adaptor as part of its efforts to build efficiency into asset manager workflow.

Away from there, the most recent, and ongoing developments that interest us are at UBS, one project is up and running, the other not quite there yet (at time of writing, and we are disappointed because it could have been a shoo-in for this award). We will focus on the existing, and the models the bank is building for its options clients (for more on this please refer to the Best Multi- Asset Class Platform Award). Suffice to say that anything that helps the client more effectively manage their hedging programmes and take advantage of positive market developments has to be a good step forward. “Advisory” appears to be the acceptable word for the service banks are providing around execution, this offers that service for FX options.

Elsewhere, Credit Suisse continues to think innovatively over how it further embeds its AES product set into the business and this year it has created products that bring together elements of algo execution, netting, fixes and (agency) FX swaps that we think really offers clients an excellent and efficient solution to help them manage their business. More on this later, as there will be on another initiative we really liked this year, Goldman Sachs’ integration of its algo execution product suite with Bloomberg, effectively bringing the multi- and single dealer experience even closer together.

We are not sure what this means for the single dealer platform business if banks are going to start giving product away on the multi-dealer platforms, but this decision probably reflects the reality of the client base needing to operate on an independent venue, as well as the need to make a statement. Either way, it will be interesting to see if, and how far, other banks follow this move, which is in itself a step further than BNP Paribas’ “view only” service for its algos on Bloomberg.

Winner – Deutsche Bank

Last year we gave one of our Awards for e-FX Excellence to Deutsche Bank for its thought leadership – specifically how it was using academic research to help clients build smarter liquidity pools and execution mechanisms. At the same time, the work was still progressing in terms of actual product roll out, however in the same section of this report we also noted the high quality of the bank’s Market Colour analytics package. This year, the two have been successfully welded together and the result is an analytics package that uses cutting edge analytical techniques to deliver the best possible picture of market conditions to clients.

This publication is often highlighting the most crucial aspect of any market – liquidity – and the events of early 2020 have only served to reinforce the message. Genuine liquidity providers are getting thinner on the ground, or at least they are being increasingly lost in an ocean of firms claiming to be LPs, and that means where a client executes, ands with whom, has become critically important.

Thanks to there being a degree of “known-unknown” about conditions in the market we are not seeing flash crashes as such, rather there are plenty of sharp moves and the occasional gap. Whether they be called flash crashes or just a market move, the fact is that the nature of liquidity in the modern FX market structure reflects that well-worn adage, “you can get as much done as you like when you are wrong”. The second half of that adage is the important factor, however, and that is, “when you’re right, good luck!”

Another relatively recent market phenomena – at least in terms of how often it happens – is the market reversion. Whether a move is a factor of more algos jumping on an already moving train or LPs stepping away is largely irrelevant to many players in the market, especially those looking to execute hedges – and it is here that our winner comes up trumps.

Around the time we were actually presenting these awards last year, Deutsche Bank started rolling out its Seismometer on Market Colour. Created from academic work, the Seismometer is a ground breaking analytical tool that helps clients understand the nature of a sharp directional move. Based upon statistical analysis (a link to the underlying academic research is available from within the app), the Seismometer indicates exactly how stressed market conditions are and, importantly, whether there is a likelihood of a reversion.

Allied to other analytical tools available in Market Colour 2.0, the Seismometer represents a great example of how a bank can take genuinely unique and innovative thinking, and structure it into a technology solution for clients.

 

Colin Lambert

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