At TradeTech FX last week, a key discussion centred around how workflow automation could transform market access by giving Tier 2 and 3 institutions a level playing field with larger banks and asset managers, especially in emerging markets – while the argument around low v high touch reared its head once again.
l to r: Tod Van Name, Bloomberg; Benjamin Mahe, AXA; Alex Scarsini, Edgewater; Ed Mount, Elysium LD Technology; Eva Szalay, moderator.
Workflow automation is a buzzword on everyone’s lips right now, and it’s top of mind for both buy- and sell-side as firms look for methods to enhance workflow, reduce trader distractions and automate as efficiently as possible. “The buy-side is most interested in taking quick advantage of opportunity – so you need to be nimble and get things on the desktop as soon as possible,” said Ed Mount, CEO of FX post-trade solutions specialist Elysium.
Cost remains a factor – Benjamin Mahe, head of electronic trading and data at AXA Investment Managers, noted that he’s always looking to reduce expenses, to make sure they don’t spend too much. That being said, the argument is becoming increasingly imperative, especially given the shift from high to low touch and the importance of executing low touch efficiently. “Today we’re not doing no-touch, we’re doing one-touch,” said Mahe. “The human trader will look at the order and then send it for execution. We have automated around 30% of RFQ-executed traders but we want to increase that to 80$ over the next two years – and we need platforms to work with us to achieve that.”
On that topic, both pre-trade analytics and post-trade TCA are crucial to demonstrate best execution and improve outcome. “When we talk about automation it’s a process, not a binary step,” said Mahe. “It’s important to understand the interoperability of systems, and how well they can execute in the marketplace.”
The idea of no touch, low touch or high touch is a prevalent conversation right now. Traders want to take smaller orders that are less sensitive and automate them so they can spend more time on more complex orders. “The value add of trading low touch flow is decreasing, so we’re looking for the next step,” noted Mahe.
But an equally important conversation is occurring around access to market – and here, automation could be a game-changer.
““In FX markets, the largest banks are no longer the largest providers of liquidity. It’s those who are quickest with technology. The big opportunity is automating and presenting these new efficiencies to markets where there is a gap in terms of access,” explained Alex Scarsini, president of FX trading technology provider Edgewater.
“Automation can put Tier 2/3 institutions, or regional players, on a level playing field with large banks and asset managers – that’s the gap we’re currently addressing, often in emerging markets. To be able to provide a Tier 1 bank in Latin America with the tools that enable them to participate in the market like their US/European peers – with a pricing system, a risk management system that can balance on/offshore trading and so on – means that they can be market participants on a global scale. That’s a game-changer. It means they can go from trading once a day to three times a day, at three times the yield – and in their own currency.”
For example, the largest bank in Chile used to be a price taker in its own currency because it had to rely on a bilateral relationship with a bank sitting in New York. Automation has changed that.
“It matters to asset managers because they’ll get a better price, and it matters to local banks in local markets because it opens up the world to them,” said Scarsini. “Who will pay for it? They will. If they can treble their volumes and revenues just by adapting technology that is already available, then why wouldn’t they?”
The panel also discussed the upcoming move to T+1 in North America – but agreed that it wasn’t a major issue for them at the moment. “For liquidity providers that can stream rates, moving from T+2 to T+1 isn’t a big deal,” explained Tod Van Name, global head of foreign exchange electronic trading, Bloomberg. “The impact will be overseas, not in the US.”
“As a provider, it’s not a big deal for us,” agreed Mount, although he also noted that “post-trade is now sexy”.
However, looking ahead, the panelists agreed that the one thing that does need to change is automated access to credit – and this could be the next big step, especially given the change in interest rate environment, which could drive a renewed interest in capital and credit optimisation.
“A big piece of functionality has been developing a credit model for our clients,” said Scarsini. “To be able to trade knowing that the credit is available is very important.”
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