Uncertainty is paralysing the market in places, leading to a fall in trading activity, along with tighter spreads, which is squeezing bank margins, according to the panel ‘Liquidity Aggregation, Data & Tech’ at TradeTech FX in Paris.
“We’ve had three years of unprecedented events but, as of this year, we’ve seen that come to a screaming halt,” says Simon Bevan, global head of eFX Trading, ING. “I’ve heard lots of people needing to ‘be nimble’, which is really a euphemism for them not knowing what they are doing next.”
This has played out in the market, he notes, by changing the way that firms are trying to trade in the FX space.
“I spent my entire time trying to automate things, but we’ve kind of come to a point where we’ve come full circle back to a relationship-driven product,” he said. “It’s no longer just click-to-trade.”
Although innovative ways of trading have been proposed by platforms and some new financial technology providers, their effect has been moderate to small, and with limited future changes predicted.
“I think fragmentation has already happened, more than it’s happening further,” he says “We’ve seen new players come in, but have they made a massive impact? We’ve just not seen that happen. The more interesting aspect [of fragmentation] is the move from the primary markets to the futures market. It is not cheap to trade futures, you need access to swaps. It’s not something everyone can just do. It is risky. That’s where potential fragmentation could really play out.”
Tom San Pietro, CTO of FXSpotStream, said, “People are using [the primary markets] as a benchmark price, but then they don’t want to send their trades there. So, when they stopped sending their trades there, how does it continue to be a benchmark price? And then when it’s not functioning in a volatile market, what happens?”
Bevan also observed there was unlikely to be any greater fragmentation to smaller banks as liquidity providers, because smaller regional banks will find it harder to survive due to the regulatory costs and costs of distribution on top of the FX team itself, if they do not change their current operating model.
“I just can’t see how they can keep going the way they are,” he said. “There must be a loss [made], just to keep the rest of that business going. But that’s not to say you can’t compete. Deutsche Bank, about 15 years ago was the best, then stopped investing and completely dropped off the grid, then started investing and come out on top again.”
To solve for the loss of faith in the primary markets for benchmarking, firms are casting their nets wider to reach an expanded set of pricing information.
Steven Totten, director of quantitative analysis at OneZero, said. “I don’t think people are purely relying on [those sources] to make reference prices anymore. They’re trying to get a broader range of sources. Regarding smaller players, I agree, they probably have to be a bit more careful.”
However, data on its own is not a panacea to price formation he said.
“FX is really a spider’s web, with different prices connected to different people, so everyone just sees strands of that web,” he said. “Capturing as much of that data as you can is going to give you a holistic view of what’s going on in the market. It’s super important. When things are going wrong, the most interesting things are happening that you want to analyse.”
Eugene Markman, CEO of ION MarketFactory, agreed, and noted that changing the profile of the data was key.
“How do you make generic data that’s applicable for everybody, and actionable for everybody?” he asked. “If you’re just purchasing data directly from an ECN, or LPs, is it properly timestamped? Can you use that data? You have tremendous challenges of actually what to do with that data. Collecting the data is one thing, and then getting the data to a point where it’s usable to start making decisions is the next level challenge.”
Totten added that keeping any solution flexible was also a vital aspect in order to supporting pricing.
“The challenges are going to be around overfitting; if one liquidity provider is capturing more and more flow on, how do we then integrate those changes to the market?” he said. “As things shift around and volatility changes, how do those models react? How do you get new platforms integrated into your pipeline, to avoid the threat of overfitting?”
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