Last week’s TradeTech FX event at Miami Beach brought together buy-side, sell-side, trading platforms and technology providers for two days of discussion on the current state of the FX market. This year saw a major focus on the impact of electronification of buy-side FX trading. The limited attention paid to crypto currencies perhaps reflected the current environment of increased margin pressure and changing market structure.
As the FX industry continues to experience ongoing regulatory change and liquidity fragmentation, including the emergence of an increasing number of non-bank liquidity providers, both buy-side and sell-side firms are struggling with rising costs. At the same time, long periods of low volatility, punctuated by event driven (often geopolitical) liquidity gaps, is creating a drag on revenues.
Cost pressure is nothing new to sell-side banks, but asset managers and the broader buy-side are increasingly having to focus on driving efficiencies in the face of higher operational and regulatory costs, increased competition and the erosion of inducements. These drivers have been partially responsible for some interesting emerging themes on the buy-side, not least the growing adoption of execution algos, a desire to move to multi-asset trading desks, and end to end automation of trade workflow. A recent FX landscape market report by Refinitiv highlighted that over 50% of buy-side firms they surveyed are interested in implementing multi-asset trading technology to help drive efficiencies.
Trade electronification and workflow automation are seen as essential to survival, with one large asset manager claiming that they are now handling five times more volume on their FX trading desk with half the team numbers of a few years ago. This is reflective of other firms who mentioned trading multiples of historic volumes with flat or reduced staffing levels. This trend has contributed positively to cost management but requires firms to invest in highly scalable technology to achieve longer term efficiencies.
The automation of trading and growth in the use of algos has also enabled improved performance measurement and data collection by the buy-side. TCA tools have become commonplace in FX trading and the adoption of Algo Wheels is expanding. TCA tools and improved post trade data analysis help firms create a feedback loop to continuously improve execution quality and rank the performance of their sell-side brokers. However, they can only reap the benefits if their trading technology has the flexibility to tune algos and routing logic intraday and easily replace underperforming broker relationships with connectivity to new liquidity providers.
The reality is that many participants in the market are at different stages of technology investment and maturity. Greater electronification and the growth of eFX trading has driven the creation of huge quantities of high-frequency data and speed compression in real-time price dissemination from large liquidity providers. This data has benefited price formation and contributed to improved trade execution through data mining and analytics but has also driven up cost and complexity. One of the concerns is the prevalence of price throttling in the industry due to legacy infrastructure that can’t cope with update rates and data volumes. This raises the question as to whether important data is being lost in the process? Despite cost pressure across the industry, participants will have to invest in scalable trading technology to achieve execution benchmarks and meet current and future regulatory obligations.
Obviously, there are many types of clients in the FX ecosystem and their business objectives vary. High touch relationship with sell-side counterparts remain valuable for many reasons. Capabilities such as market insight, research, capital provision and balance sheet strength are often seen to be as important as access to liquidity. However, the ability to offer efficient low touch execution has become a pre-requisite, and as the buy-side continues to focus on cost and execution quality all participants will need to invest in continually evolving their trading technology.