A number of geopolitical events – Brexit
and the US presidential elections to name but a few – have led to ongoing currency volatility. What
has the FX market learned about how the modern market functions in times of
high volatility and ...
Along with “Blockchain” the most ubiquitous phrase in financial markets this year has been “FinTech”, which of course encompasses blockchain technology.
Venture capital (VC) money continues to pour into the space, innovation labs and accelerator programmes are sprouting up in banks across the globe and many established technology vendors within the financial services industry appear keen to adopt the FinTech label.
But is the FinTech that we’re seeing come to market now really anything new? Or is it just the continuation of an old trend that’s been given a more exciting and investor-friendly label?
When discussing the future of the FX industry finding consensus amongst market participants about what the market will look like and how it will function can be challenging.
Yet one thing that appears to be broadly agreed upon is that the use of algorithms for executing trades is likely to continue growing in the coming years, as technology continues to evolve and firms look for new ways to minimise their market impact when trading.
Indeed, the use of algos is often prescribed as the answer to a market where it is becoming harder to execute in size and buy side firms are increasingly concerned about this issue of market impact.
The now infamous “SNB Day” forced a number of FX market participants to re-assess some of their long-held assumptions and business practices.
As liquidity evaporated fresh concerns were raised about the lack of risk taking experience and appetite amongst some sell side institutions and the impact of technology on liquidity in stressed market conditions.
As some firms reportedly attempted to re-paper certain trades it also added fuel to the ongoing debate about whether or not the practice of last look still has a place in the modern FX market. This is debate that has continued to rage on, notably at a very lively debate at Profit & Loss’ Forex Network New York conference in May.
With less than one week to go before the industry’s premier FX conference, Forex Network Chicago, Profit & Loss has recorded a special “Chicago Edition” of its podcast “In the FICC of It”.
The panel sessions will study all aspects of the current market structure with special focus on those areas most open to debate, this includes volatility levels, liquidity provision, the ubiquitous last look, and also the impact of the FinTech sector on the industry.
To preview the conference, P&L’s managing editor Colin Lambert and deputy editor Galen Stops, have been discussing what they see as the key issues facing the industry, as well as how they expect the panel sessions to go.
To access the preview, please click here, or go to the Media tab on the Profit & Loss website.
With the latest Bank for International Settlements (BIS) survey showing the first contraction in the size of the FX market since 1998, some market participants have commented that this is further evidence that the banks – long the principal source of liquidity – have stepped back significantly from the market.
This has left a clear opening for alternative liquidity providers, some of whom have been very public about their ambitions in the FX market. Some of these alternative liquidity providers have been quick to emphasise the fact that they do hold positions and take risk in the market, as opposed to just recycling liquidity or arbitraging between different areas of the market.
“I don’t believe in the idea of liquidity provision,” says one market source, adding: “Liquidity is a service, it’s not just provided, and all services have a price tag.”
There has been a broad re-pricing in a number of services provided to FX market participants over the past few years, and this is true of liquidity services as well. Of course, the big shift appears to be that banks are moving from a principal business model, where revenue is generated from spreads, to an agency one, where revenue is generated by charging a fee.
In many ways alpha seeking firms trading FX have endured something of a perfect storm of return reducing conditions over the past few years.
Interest rate differentials are still largely non-existent as central banks persist with low interest rate policies. Many banks have pulled back from both principal risk taking and credit provision in FX, making life harder for their buy side counterparts.
Regulations continue to take their toll on both buy and sell side firms, introducing new cost pressures and causing budgets to be increasingly diverted towards compliance functions.