A well-known figure in the world of FX and the head of its industry association, Stephane Malrait sat down with BEST EXECUTION to discuss the most important issues for him ahead of TradeTech FX: including automation, electronification, innovation and the spaces in between, as well as an insight into why the upcoming revision of the Global FX Code is so important, especially for the buy-side.
What are the key themes for you in the FX space this year?
The FX market has existed for a long time, and electronification has been going on for a while now, but we’re still seeing a lot of innovation coming through – the race for automation and to improve workflow is by no means finished. I’m always looking for the next step, and in what direction. I tend to find this in different areas. A big one right now is algorithmic trading, which is developing now in FX. It’s something we started a few years ago and it’s becoming increasingly mature, with more acceptance from users and traders.
Another important trend is real-time automation. I think we’re finally starting to see a link between relationship-based trading versus electronic trading, and the connection between those two things is important. It’s about how you automate communication through electronic channels like chat functions, which a lot of banks use to communicate and even trade with clients. Before, we had a lot of voice trading and then at the other end of the spectrum we had pure electronic trading activities – but this communication element is now the third piece of the puzzle. It’s a mix of both, you’ve got one foot in the relationship and one foot in the electronic. That makes it a really interesting area.
What are the innovations that are helping FX traders to move forward?
If you look at FX compared to other asset classes, the journey to automation has come from three angles. First, it came from new types of technology being available, and being developed and useful for trading FX. We saw a move over to web-based technology, then to cloud technology, then a move to more dashboard technology to analyse that data. So the technological direction of travel has always been a focal and front-facing point for the evolution of the FX market, and people use that to innovate.
The second piece is that it’s not enough to just have that technology. It’s about client demand and client adoption – something you see less in other types of market where it is more difficult to automate. Here in FX there was a very rapid adoption of people trying out those new technologies to trade FX, which has been important for its success. And the third pillar is the continuing role of the market makers and banks who are trying to bring liquidity through the system using that technology and reaching out to those clients. Those three things work very well together in terms of pushing forward to automation of FX.
We’ve seen an acceleration of electronic trading in swaps – how is electronic trading helping to reduce execution cost and improve trade outcomes?
It is the ability to seek liquidity from different players and different market makers – the technology helps you to do it seamlessly and with less manual error and better visibility of where liquidity is. I think what’s new here, at least for the FX swap market, is that while we have been able to trade FX swaps electronically for quite a while, there was always a lot of manual intervention in the background. The screen was a way to help some of this workflow, but then there was still manual pricing from a bank and manual acceptance of this price from the buy-side. I think in FX swaps the big difference we are seeing is that you can now automate further what was manual in the past in terms of pricing capabilities and hedging capabilities as well as interbank trading – that wasn’t big in the past but is now growing, as is buy-side acceptance of this electronic workflow into their own systems. So we’re pushing to the next stage and this will reduce costs on both sides, which will make it more attractive on each side, and that will increase the number of transactions we do with our clients.
“In FX swaps the big difference we are seeing is that you can now automate what was manual in the past in terms of pricing capabilities and hedging capabilities”
You’re on a panel this week discussing the future of the Global FX code – what is the direction of travel on that?
Well, people will have to come to the panel to find out! But as a brief background, the global code was introduced around five years ago as a set of principles to trade FX. There was a first revision of the code about two years ago to clarify some of the principles. Next year, this code is going to be revised again into its third iteration, and the central banks are going to be looking for feedback from the industry to find out what has been working well and what needs improvement. So we are at the early stages of gathering that feedback now, within the industry, and the good thing is that it’s a true global market collaboration between all market participants, including the central banks, who are behind the creation of this code of conduct and will be with us on this roundtable to discuss their views. So a positive of this code of conduct is its leadership.
The code has had a positive effect on FX execution, and the adoption has been very good from a sell-side perspective. There are still areas of improvement when it comes to buy-side sign-up, and I think this will be one of the focus points of the next code revision – how can we attract more market participation from the buy-side?
“One of the focus points of the next Global FX Code revision will be how we can attract more market participation from the buy-side.”
What are you looking forward to most at TradeTech FX?
What is fantastic about this event is that you can meet your peers, you can meet your clients and you can meet technology providers all within the same event. You can learn a lot – and you learn as much during the networking as within the panels. I think people are quite open in sharing their own experiences so listening to the panels has great value. I learn a lot from my peers and from my clients to be able to serve them better. And you can also go through the exhibition, demo new systems, learning what you know, and discovering new innovations.
©Markets Media Europe 2023
