Posts

Pragma Securities named Best Algorithmic Trading Technology Provider of the Year at FX Week’s e-FX Awards 2019

Pragma Securities has been named ‘Best Algorithmic Trading Technology Provider of the year’ at FX Week’s e-FX awards, which took place on 11th July in New York.

Hosted by FX Week, these awards recognise excellence in electronic Foreign Exchange.

Pragma’s multi-asset broker-neutral algorithmic (algo) execution platform, Pragma360, is leveraged by large banks and brokers to handle their enterprise trading needs. It is deployed as a hosted and managed technology service and enables a sell-side institution to create its own unique algorithmic trading suite under its own corporate brand.

In 2018, Pragma incorporated 1600+ software changes on behalf of its clients, while giving clients the control to adapt algorithms directly where necessary. In addition, Pragma handled over $1.3 trillion of algorithmic flow in multiple asset classes on behalf of our clients across over 50 venues.

David Mechner, CEO of Pragma Securities, commented: “We are delighted to receive this award as recognition of the teams hard work over the past year. We are always trying to improve our service by onboarding our clients and making necessary changes as swiftly as possible. Ensuring our clients are satisfied with our service is the main priority for us, and winning this award shows that we are continuing to do this.”

“Looking to the future, we aim to continue on this path and remain fully committed to enhancing our offerings and providing our clients with a high-quality product.”

FX Operations and Credit: Hampering Liquidity, Raising Costs (White Paper)

The FX market currently looks like the ultimate mismatch. Front office processes have been transformed to accommodate the realities of electronic trading – operations and credit haven’t. This is acting as a drag on FX liquidity, as well as imposing an enormous cost burden: ~£20bn per year for the top global investment banks and buy-side institutions. Fortunately, as Anoushka Rayner, Global Head of Sales and Business Development at Cobalt explains, there is a simple and readily achievable remedy: centralised standardisation.

The FX market has a proven track record for acting on its own initiative to ensure that trading is always orderly and unnecessary risks are curtailed, with the creation of CLS an obvious example. There is now a pressing need for it to act in similar fashion to address the issues of post-trade processing and credit management.

Operational Drag

The FX front office has evolved to accommodate the shift from a voice brokered market – resulting in transparency, efficiency, liquidity and consistency – by bringing counterparties together so they can interact more effectively. In doing so, all participants have benefited from lower frictional costs and greater transparency.

Sadly, the same cannot be said of FX post-trade processing, which still uses much of the same basic infrastructure it used to support voice broking. In two decades, it has remained essentially unchanged, resulting in legacy processes/practices that are wholly unsuited to supporting electronic trading as conducted in today’s FX front offices. These processes/practices are also excessively costly, to the extent that post-trade costs can now even exceed the potential profit from the execution of a trade.

At the core of the problem are the fragmentation, replication and complexity of internal processes. This is hardly surprising given that at least 23 services are usually involved in managing current FX post-trade activities, which inflates both costs and operational risks. Multiple vendors are needed, as are multiple copies of the same trade (20+ is not untypical). At the same time, existing legacy processing technology cannot keep up with market evolution and so requires additional outlay to pay for the manual processes needed to cover its shortcomings.

In some cases, extremely costly processes persist. These could be dispensed with altogether in a more efficient processing environment. A case in point are confirmations, the costs of which at some top tier FX banks – just for their EB and PB businesses alone – run to nearly USD5mn per year.

Attempts to respond to changes in the front office by changing post-trade methods have also made the situation worse, as new substandard processes are layered on top of an already fragile and inefficient process stack. Each new process added therefore effectively exacerbates an already suboptimal process flow, in terms of both cost and risk.

These issues apply across all FX-related instruments, which when one considers that volume in uncleared FX derivatives (a market approximately twice the size of spot) totaled ~USD88trn at 2018-year end, illustrates the sheer magnitude of the problem. In fact, for FX derivatives, the risks and costs of these operational limitations are even more acute, as the processes involved are more complex than for spot.

These issues are collectively hampering the FX market’s overall efficiency and growth. This applies across bank to client, bank to bank and prime brokerage segments. In some cases, it is already causing market distortion, such as driving participants to review their position in FX prime brokerage. Given the FX market’s established reputation for resolving structural issues of this nature, it should be possible to find a solution internally, rather than directly involving external bodies, such as regulators.

Credit

A related area that is also creating unnecessary cost and risk – as well as damping liquidity growth – is credit management. Given the large trading volumes now conducted via API and at high frequency, FX is probably the market least tolerant of latency. Yet despite this, antiquated and fragmented credit management processes still persist, causing significant practical problems. Workaround remedies have emerged in an attempt to address these but create different problems instead. Credit kill switches are a case in point, because they can create disputes when clients find themselves having to reduce positions at unfavourable prices and also requiring a manual unwinding process, exposing both clients and banks to further issues.

Credit-related risks, such as over-commitment, still remain stubbornly high, while workaround remedies actually reduce credit efficiency, such as over-allocating to accommodate localised management of credit within venues. Costs are also an issue in credit management, with top tier banks spending considerable amounts unnecessarily on redundant/inefficient credit processes and technology.

The Remedy

The good news is that a solution is already entirely achievable at technical level. The obvious remedy is a single centralised shared ledger platform using standardised data that can handle all the necessary post-trade activities (plus credit) in one solution. It would mean that compliance with many of the principles in the GFXC’s FX Global Code of Conduct could become an achievable and immediate reality rather than merely being aspirational. A case in point is the principle relating to real time monitoring of trading permissions and credit provision

A centralised industry shared ledger platform would deliver multiple practical benefits across the market place. The most obvious would be to eliminate duplication and cost saving. Instead of running multiple versions of inadequate processes, participants could handle trades using a single set of consistent industry-standard processes. In the long term this could deliver cost savings of up to 80%, with ~50% possible in the medium term.

An additional benefit is cost transparency. In the current environment, with the accumulation of multiple layers of legacy operations and credit technology/processes, it is often extremely difficult to determine the post-trade cost of a transaction. A central standardised process would by contrast make the measurement and monitoring of post-trade costs straightforward and potentially deliver the same degree of transparency as already available for FX execution costs.

This shared ledger approach would also deliver various credit management benefits. For instance, the availability of near real time credit data would enable more efficient credit processes, such as:

  • Preventing erroneous credit cut-offs (thus improving client relations)
  • Making more efficient use of available lines
  • Avoiding over-commitment risks
  • Alleviating balance sheet pressure

Centralising credit management using a shared ledger enables more dynamic control across all types of trading relationship (bilateral, tri party and quadri party). This will dispense with the need for over-allocation and rebalancing in order to accommodate localised management of credit within venues. Those issuing credit will also be taking control of it (as is the case in equity markets) and will therefore be able to recycle it back into the market in the most efficient manner (a key consideration for non-CLS currencies and non-CLS members). Ultimately this will result in venues receiving business because they offer the best price, not because there is residual credit left at them.

In operational terms, workloads will also reduce when using this sort of solution, as less remediation will be required. Efficient credit management and automated processing will drive a reduction in failed trades, thereby also reducing the need for manual intervention and repair.

Liquidity and Regulation

The cost and efficiency benefits delivered by a centralised industry shared ledger platform have important implications for liquidity and market participation. Trading volumes in G7 pairs have been declining in recent years for a variety of reasons, but operational/credit inefficiencies are clearly playing some part if they are cutting trade margins to near zero.

If individual ticket processing costs decline significantly, then logically this will boost existing participants’ willingness to trade, both in general, but also potentially in smaller transaction sizes. By the same token, new participants may be encouraged to join the market once they can see that the processing cost burden and operational risks have been alleviated.

Finally, there are also prospective regulatory advantages to the FX market adopting a centralised shared ledger solution. Some regulators are already clearly aware of the issues, as shown by the FCA and BoE’s convening of a ‘Technology Working Group’ to reform post-trade processing so as to reduce complexity, encourage innovation, and improve systemic resilience. A shared ledger platform could support this initiative in various ways, but one of the most obvious is with regulatory filings.

At present, participants (often using manually intensive processes) incur substantial costs collecting trade data and submitting it to regulators. Market-wide adoption of a shared ledger solution would instead make it possible for participants to submit regulatory filings far more easily, plus do so in a consistent format. This would enable better monitoring of any potential systemic risks, plus delivering lower regulatory costs for all concerned (including regulators). Central banks could send a strong message here by adopting a shared ledger solution for their own trading activities, which would also serve as a clear signal to the organisations they regulate.

Conclusion

Adopting a single centralised utility for FX post-trade functions based on a common data standard ticks numerous boxes for all market participants. These include considerable cost savings, reduced credit/operational risks and better use of balance sheet, which in turn also facilitate greater trading activity and more diverse participation, as well as enhanced price discovery and lower regulatory overheads. Finally, it will also reinforce the FX industry’s existing reputation for innovating in the common interests of all market participants.

FXCM Adds ForexBaskets to its Retail Offering

FXCM announced today the introduction of foreign exchange baskets to its retail customers.

A foreign exchange or forex basket is comprised of a mix of several currencies, each initially starting with the same equivalent value. It allows traders to buy or sell a base currency, e.g. USD, against a basket of multiple currencies. The value of the basket will be determined by how the base currency performs vs the other currencies in the basket, since the time of the basket’s inception.

FXCM customers in all global regions, including the UK, Australia and South Africa, will initially be able to trade three different baskets: The Dollar Index Basket, The Yen Index Basket and The Emerging Markets Index Basket.

The Dollar Index basket reflects the change in value of the US dollar and is measured against a basket of major, highly-liquid currencies: the British pound (GBP), Euro (EUR), Japanese yen (JPY) and Australian dollar (AUD).

The Yen Index acts a Japanese benchmark and is designed to reflect the change in value of the Japanese yen against the Australian dollar (AUD) British pound (GBP), Euro (EUR) and Canadian dollar (CAD).

The Emerging Markets Index is designed to reflect the value of the USD against the Chinese Renminbi (CNY), Mexican Peso (MXN), Turkish Lira (TRY) and South African Rand (ZAR).

Brendan Callan, CEO of FXCM, commented: “Our customers typically trade different currencies at the same time to broaden their portfolio, diversify risk or hedge an existing position. Trading a basket of currencies offers them an efficient way to trade against multiple currencies. This reduces the risk of exposure or adverse movements in a single currency and lowers trade costs.”

Cobalt strengthens team as it moves ahead to re-engineer the FX market

Cobalt, the foreign exchange (FX) infrastructure based on shared ledger and high performance technology, has hired five experienced professionals to lead its drive to re-engineer the FX market.

Post-trade FX is currently riddled with complex legacy systems and manual processes, creating unnecessary cost and risk across the market. The new hires bring a wealth of FX experience to the company and will play an important role in the rollout of Cobalt’s shared infrastructure which optimises risk management and slashes cost by up to 80%.

Bob Linton, based in New York, has become head of connectivity and onboarding at Cobalt. He will be responsible for replacing old, legacy technology incumbent in many institutions’ post-trade FX operations with Cobalt’s low latency, high performance shared ledger technology. He joins following a 13-year stint at market infrastructure technology provider, Traiana. 

Dan Evans was appointed product analytics lead and is focused on product innovation and reporting as well as highlighting the hidden opportunities for financial institutions. Dan is experienced in analysing FX trading data both as a director of FX trading at UBS, where he spent seven years, and as the director of his own consultancy.

John Fitzgerald joins as information security manager. John has over 15 years in risk and security management and prior to joining Cobalt, he was the lead for information security at Rathbone Brothers Plc.

Nitin Talway has been appointed head of support. He has over 13 years’ experience in the FX industry having previously worked for institutions including Bank of America Merrill Lynch, RBS/Natwest Markets and Credit Suisse.

Kameldeep Bhachu is now a senior business analyst at Cobalt. He previously worked at Murex and in the FX and treasury divisions at Morgan Stanley, UBS and Royal Bank of Canada. He brings extensive front to back knowledge of the FX cash and derivatives business.

Darren Coote, managing director of Cobalt, commented: “We are thrilled to welcome Bob, Dan, John, Nitin and Kameldeep to the rapidly expanding Cobalt team. They bring a breadth of FX experience across the interdealer and prime broker space and have an intimate knowledge of the competitive landscape as well as financial institutions’ systems. Each will play a key role in reengineering the FX market from the ground up, getting rid of legacy systems and replacing them with new technology which is more suitable for the low-latency FX market of today.”

London maintains its grip on global FX market

London has become a hub for Chinese yuan trading and continues to solidify its role at the centre of the global FX markets – even with the spectre of Brexit looming on the horizon – according to the latest data from the Foreign Exchange Joint Standing Committee (FXJSC).

Chaired by the Bank of England, the FXJSC’s semi-annual turnover survey is considered a benchmark for the health of the UK’s wholesale FX market. The numbers for the six-month period leading up to October 2018 were published earlier this week and showed a sharp 17% rise in yuan turnover compared to the April 2018 results.

In particular, USD/CNY turnover increased to a staggering $73 billion per day, its highest absolute turnover to date, and overtook EUR/GBP as the seventh most traded currency pair in London. The UK government has made a concerted effort to promote yuan trading since its internationalisation began and the FXJSC numbers indicate that the hard work is now paying off, according to Pragma Securities, an algorithmic trading technology provider.

This marks a notable moment for what is arguably the most important emerging currency to the global economy. By promoting free use of the yuan, the Chinese monetary authority is enabling Chinese corporates and financial institutions to develop their businesses overseas, which in turn is leading to a continued rise in the currency’s market share.

FX – the largest and most interconnected of global markets – is the crowning jewel of London’s financial services industry and the City is a natural hub for the yuan as it continues its path to internationalisation.

More broadly, the FXJSC survey pegged average daily UK FX turnover at USD 2,611 billion in October 2018, the third largest turnover figure on record for the survey. While this represents a fall of 4% from the record high of $2,727 billion reported in April 2018, it still makes for promising reading in the uncertain macroeconomic and political climate.

In particular, FX spot activity rose to $775 billion, its highest level since April 2015 and a year-on-year increase of 11%. This growth in spot activity was also seen in data released by the Fed in New York, and is reflective of the bouts of volatility which spurred higher trading volumes on electronic platforms such as ParFX.

With the March 29th Brexit deadline fast approaching, the UK could find itself in a very different position when the results of the next FXJSC survey are published, but the signs look overwhelmingly positive for the UK maintaining its tight grip on the global FX market.

ParFX wins top accolade at Central Banking Awards 2019

ParFX, the wholesale electronic spot FX trading platform, has been named the winner of the Financial Market Infrastructure Services Award at the Central Banking Awards 2019.

The Central Banking Awards recognise extraordinary examples of public service, pioneering activities, best practice in policy, governance, economics and management and innovative practice in service provisions by market practitioners.

ParFX was selected as the winner by the Central Banking Awards Committee in recognition of its significant contribution to improving efficiency and reducing risk in the financial system. The committee comprises members of Central Banking’s editorial staff and the Editorial Advisory Board, chaired by Central Banking’s Editor Christopher Jeffery.

Roger Rutherford, Chief Operating Officer at ParFX, comments: “Central banks have played a prominent role in promoting best practice and improving standards in the FX industry. Winning this award is strong validation from this important community of ParFX’s work to increase fairness, equality, and transparency in the FX market.

“Since the platform’s inception five years ago, we have contributed to and brought about the industry-wide dialogue that led to the development of the FX Global Code, which is already making waves across the market. This is a very positive start to 2019 for ParFX, and we are looking forward to continuing our mission to improve trading behaviour in the FX market.”

Chris Jeffery, Editor-in-chief of Central Banking Publishing said: “Central banks have worked hard to instil best practice within the USD 5 trillion-a-day foreign exchange market but there are many areas where it is difficult to mandate a truly global change. ParFX has supported the central banking community by leading an effective market effort that has helped to create a better functioning FX environment.”

ParFX was founded in 2013 and is governed by a group of leading global FX institutions. The company was one of the first trading platforms to commit to the FX Global Code and it continues to attract business from all segments of the FX market.

ParFX’s top 10 most active counterparties are now equally split between the largest banks and non-banks, demonstrating how all market participants are attracted to the platform’s principles and seek to engage in good trading behaviour in a fair and transparent trading environment.

Briefing: FX, the world’s largest and most liquid financial market

The foreign exchange (FX) industry is now emerging from a difficult period of scandal. Following the resulting increased scrutiny, which culminated in the creation of the FX Global Code, the global USD5 trillion-a-day market finds itself at a crossroads.

The Code’s efficacy is yet to be tested, but adoption continues and is strong. Why does any of this matter? Well for one, foreign exchange remains the world’s largest and most liquid market and plays a critical role in enabling international trade and investment.

Currencies provide a bell-weather for economic health, and short-term sentiment and speculation of course, but also a tool for hedging and the genuine flow of business and goods across borders.

Trust in its operation has to be restored, not just for investors but for the broader reputations of the institutions with FX operations.

A handful of banks, and non-bank trading firms – still mistakenly referred to as “the buy-side” – now dominate FX completely. This concentration was built over two decades and these global franchises have also been the first to adopt new technology and models, from prime brokerage to really maxing out on their API trading strategies.

A common muttering on FX street is that the banks have been distracted by regulation, paving the way for non-banks to steal clients from underneath the noses of the banks. Fair comment or sour grapes?

Meanwhile, in the post-trade space, there is a growing consensus for a shake-up of the current model, which is expensive and outdated. Demands for instant settlement continue to grow and more participants are backing DLT/blockchain-based platforms.

Many of the post-trade giants of today were established more than 20 years ago, as is their technology, so there is certainly scope for disruption. New entrants such as Cobalt are shaking up the post-trade FX landscape, while incumbents sensing their dominant position under threat, are eyeing the roll-out of DLT-based systems and – in some cases – investing in start-up systems.

 The move towards automation and straight-through processing began many years ago. Lower costs generally translate into lower barriers to entry, and we have already seen new entrant establish themselves as key market players. This will gather pace and will open the door to a new wave of market players to enter the FX market.

We would most certainly not bet against the blockchain, despite the inevitable kickback to the hype cycle. Cloud computing went through a hype cycle and subsequent trough of disillusionment before becoming a ubiquitous part of the IT landscape on what Gartner calls the slope of enlightenment.

The past is the key to the future of FX. The winners will continue to innovate using technology and will meet the challenges of adopting big data and analytics, distributed ledger technology, cloud computing, robotics and artificial intelligence (AI) head on.

Cobalt appoints new global head of sales & business development

Cobalt, the foreign exchange (FX) post-trade processing network based on shared infrastructure and high performance technology, has appointed FX specialist Anoushka Rayner as global head of sales and business development.

Anoushka brings over 20 years of experience in the FX industry to Cobalt. She has held a number of high-profile roles, most recently as business manager and global FX sales specialist at Traiana. Prior to this she worked as sales director at smartTrade Technologies and as global head of FX option sales at FXCMPro, the institutional arm of Forex Capital Markets.

Anoushka will be responsible for managing Cobalt’s commercial relationships and will play a key role in scaling up the business as it gets ready for its launch later this year.

Darren Coote, Managing Director of Cobalt, commented: “We are very pleased to welcome Anoushka to our ranks as we work towards reengineering the largest and most liquid financial market in the world. She brings a wealth of experience and contacts to Cobalt and is a key part of our plans as we prepare to launch later this year.”

Anoushka Rayner said: “Current post-trade FX service providers and infrastructure are shackled by legacy technology and inefficient processes which are unfit for purpose. This increases costs for market participants and poses significant operational and systemic risk to the FX market.

“I’m excited to be working for Cobalt as I believe it poses the single biggest innovation to post-trade FX in the last 15 years and look forward to playing my part in creating a shared infrastructure which will benefit the entire market.”

Cobalt appoints Darren Coote as Managing Director

Cobalt, the foreign exchange (FX) post-trade processing network based on shared infrastructure and high-performance technology, has appointed FX industry veteran Darren Coote as managing director.

Darren has been working with Cobalt since the end of 2017 as a strategic advisor and will now take on responsibility for the day to day management of the company. This comes at a key time for Cobalt as the company launches and looks to significantly scale its business.

Darren brings over 25 years’ experience in FX to Cobalt, having held a number of high profile roles running global FX trading and e-FX businesses at UBS where he drove the business through significant industry and technology change. He has also worked for Lloyds, served on a number of FX boards and committees including the Bank of England’s FX Joint Standing Committee and EBS’s executive board prior to the company’s sale to ICAP in 2006.

Adrian Patten, Co-Founder, and Chairman of Cobalt, commented: “We are very pleased to welcome Darren to our fast-growing team. He brings invaluable expertise and market contacts. We are confident he is the right person to lead Cobalt as we prepare to go into full production later this year.”

Darren Coote said: “Having worked in FX for over 25 years, I have seen first-hand the negative impact that aging, inefficient legacy technology is having on market participants and their bottom line. As the industry gets increasingly competitive and margins shrink, it’s important for institutions to save money and mitigate risk wherever possible.

“Cobalt is a unique solution which solves an urgent need for participants by creating a shared FX post-trade back office utility, significantly reducing risk and cost by 80%. I’m excited to play a key role in Cobalt’s development as we prepare to go live this year and re-engineer the FX market from the ground up.”

This May, Cobalt secured a strategic investment from Singapore Exchange (SGX), which operates Asia’s largest, most diverse and fastest growing FX exchange.

Market data fees back in spotlight

The lack of transparency and rising cost of market data is a concern continually raised by participants across FX, equities, fixed income and derivatives markets.

The issue was brought to the fore again with two major hedge fund trade groups, the Managed Funds Association and the Alternative Investment Management Association, asking the U.S. Securities and Exchange Commission (SEC) to carry out a full review of market data costs and to require exchanges to be more transparent about the fees they charge.

We take a closer look at the industry’s concerns, the transparency of market data packages, their associated fees, what regulators are doing to tackle the issue and where we go from here.

Industry’s concerns

The two hedge fund trade groups are concerned that institutional investors continue to experience significant increases in market data fees, new fee categories and unbundling. They believe this restricts trade and harms competition.

“Our members have likened the practice to ordering a hamburger which used to cost $20, but now costs $7 for the bun, $15 for the beef patty, $3 per fixing and $1 per condiment, for an overall total cost of $33 (with lettuce, tomatoes, pickles, ketchup and mustard),” the petition said, according to Reuters.

The hedge fund industry is not alone in raising these concerns. Back in December 2017, 24 trading institutions, including banks and asset managers, called for more transparency and requested exchanges reveal their profit margins for market data products.

Fees skyrocketing to benefit of exchanges

Over the past decade, the costs and fees associated with market data have seemingly skyrocketed. It is clear from exchanges’ results that this increase in market data fees is positively impacting on their revenues.

This CNBC article reported that market data fees have become the growth area for exchanges. Indeed, ICE gets about 44 percent of its revenue by charging for market data, and at Nasdaq it’s about 26 percent.

Cboe Global Markets reported a 51% increase in income from market data fees for Jan-June 2018 when compared to the same period in 2017. The firm cited increasing market data revenue as a contributor to its 6% year-on-year rise in net revenue.

CME reported an 18% year-on-year rise to $113.8m, primarily due to a fee increase put in place in April.

Furthermore, a report by the Healthy Markets Association found that some market participants have seen the cost for equity market data products rise from $72,150 per month to $182,775 in five years – an increase of more than 150%.

From this, it’s clear to see that prices are increasing and are an important source of income for exchanges. It remains to be seen if exchanges will act to reduce prices and increase transparency themselves or wait for regulators to get involved.

Shining a light on opaque market data packages

Market data fees remain one of the most opaque areas of trading and has been a constant bugbear for FX institutions as well those operating in other financial markets. Institutions are now realising that they are paying different amounts for the data they receive.

Dan Marcus explains: “Large institutions are negotiating better prices and cutting special deals based on how much they agree to trade on a particular venue. This means smaller institutions with lower trading volumes and less bargaining power are struggling to get value for money.”

This is against the spirit of the FX Global Code which advocates greater transparency and equality in the FX market, he adds. “Market participants simply want affordable, accurate market data that allows them to trade, is good value for money and is delivered in a fair, equal and transparent manner.”

Regulators and market participants taking action

There is now a realisation that institutions are paying vastly different amounts for the data they receive. The good news is that the industry participants are increasingly vocal about their concerns, and as a result, the distribution, cost and transparency of market data packages are now coming under scrutiny.

The SEC has responded positively to the industry’s concerns. SEC Chairman Jay Clayton has confirmed the commission would hold an industry roundtable on the issue at some point in the near future, but no date has been announced.

Back in March, the European Securities and Markets Authority said it shares concerns that have been raised over the increase in fees for market data in the region and intends to take a closer look at recent developments.

It’s positive to see regulators such as ESMA and the SEC carrying out reviews and it will be interesting to see if their research results in action which addresses the market’s concerns.

Dan Marcus believes market data doesn’t have to be opaque and expensive: “At ParFX, we deliver market data to our customers at no additional cost – everyone gets the same data, at the same frequency in parallel. We also don’t negotiate special deals – this is in direct contrast to the approach of other providers.”

We see the move towards lower market data costs as inevitable, as the current pricing structure is unsustainable. It seemingly does not provide value for money, prices out smaller participants and provides an unfair trading advantage to those with the deepest pockets.

It’s time other venues and platform providers bring themselves in line with the standards we expect in 2018 by making market data more transparent and affordable for everyone.

Is the FX Global Code working?

In recent years, the FX market has been experiencing a period of turbulence. A series of scandals, following a string of misconduct issues, led to some market participants reassessing their existing relationships and trading processes.

To tackle the deficit of trust, the global foreign exchange (FX) market came together with policymakers to create the Global Foreign Exchange Committee (GFXC). This public-private partnership is tasked with overseeing and developing the FX Global Code, a set of guidelines which aim to improve transparency and ethics across the FX industry.

The FX Global Code debuted in May 2017. A little over a year later, the GFXC has carried out a thorough assessment of the progress so far and identified its priorities for the year ahead.

One of the main takeaways from the report was the sizeable levels of awareness and commitment theFX Global Code achieved in its first year. In a survey conducted in September 2017, 250 market participants said they would eventually sign the Statement of Commitment (SoC) to the Code. By May 201­­8, more than 326 had done so – an increase of 30%.

Along with the number of SoCs, 12 different public registers have been created to monitor and track sign-ups. Such numbers are indicative of how much the FX Global Code has embedded itself across the industry.

The Code has also achieved great penetration across the globe. It ranks high on the agenda of FX trade associations and at industry events around the world. Furthermore, in its first year, Mexico, South Africa, Scandinavia and Switzerland have either established FX committees to support the Code or are in the process of creating one. These local committees are critical to embedding a Code that is truly global and standardised.

Another success of the first year of the FX Global Code is the creation of training programs. These are created to aid FX traders that don’t have a process within their institution outlining how to follow the Code. One such program is the ACI FMA’s increasingly popular ELAC Portal, which provides step-by-step professional development for those looking to prove their adherence to the Code via tailored questions and real-life scenarios. This is a healthy sign that there is genuine demand in the FX community to follow the principles of the Code, and that it isn’t simply being forced upon industry professionals by the GFXC.

Of course, signing a SoC does not mean an institution has completely changed their practices to align with the Code. Rather, it indicates that they have reviewed their processes and intend to align with the principles laid out in the Code.

Looking the public registers, it appears the bulk of those that have adopted the Code’s principles are made up of sell-side institutions, central banks and FX market infrastructure providers. The buy-side and non-bank institutions are lagging behind, with only 11 of the top 25 asset managers and two corporates signing up to the Code.

According to the GFXC, the complexities of buy-side institutions and the lack of incentives for signing up are the reasons for the slow take up. The buy-side is much more diverse than the sell-side, and therefore has varying levels of resources.

At the same time, it is important to recognise that the Code has not been met with universal approval from all sections of the market. Issues such as last look have been contentious for some sections of the FX market.

Overall, it appears market participants believe the Code is robust in its current state, although evolution in line with market changes is inevitable. In this respect, a new working group has been set up to focus on integrating the Code into the ‘fabric of the FX market.’

To answer the question posed in the title of this blog, the Code is working and has achieved a lot of things it set out to do, securing significant awareness and commitment throughout the industry. However, there is a lot more that needs done – particularly around engaging the buy-side. It remains to be seen how the industry actually implements the principles laid out in the Code over the next year and the consequences, or lack thereof, for those that do not.

Spot FX volumes show impressive year-on-year growth

NEX reported a 5% decrease in spot FX trading activity as its volumes dropped from $101 billion in May to $96 billion in June. This follows a 21.7% increase in May from April. Year-on-year volumes are up a healthy 15.7%.

Thomson Reuters’ spot FX volumes have seen a small rise of 1.9% to $109 billion in June. It has experienced month on month growth since April when it recorded $95 billion, its lowest ADV since December 2017. June’s ADV represents a 17.2% increase when compared the same period in 2017.

Cboe FX’s spot volumes suffered the most in June, dropping 7.3% to $38 billion, compared with May’s $41 billion. Year-on-year painted a more positive picture for the platform with growth of 36% in spot FX volumes.

Spot FX volumes on Fastmatch fell by around 4% from $23 billion in May to $22 billion in June. This represents a 10% increase year on year.

FXSpotStream experienced the biggest increase this month, rising 7% from $28 billion in May to $30 billion in May. This represents a substantial 50% growth from the $20 billion recorded in June 2017.

Spot FX

Insight

So far this year, electronic trading platforms have seen strong performances in the spot FX market. June 2018 was no different with overall volumes across Thomson Reuters, FX SpotStream, Nex, Cboe FX and Fastmatch up 21% on June 2017.

Spot FX platforms have bounced back after a slow start to Q2. In April, all of the platforms recorded a decrease in trading activity, with the exception of Fastmatch.

Following large increases for all platforms in May 2018, we have seen a mixed picture of trading activity for the five spot FX platforms in June.

Key currency pairs came out of the wait-and-see mode they experienced in April. This is reportedly because volatility increased in May and June due to rising geopolitical tensions, concerns about trade wars and the prospect a global economic growth boom is nearing its peak.

A key focus over the past month or two was on the regulatory side with the Global Foreign Exchange Committee (GFXC) meeting taking place in South Africa on 27 June. At the meeting in Johannesburg, the GFXC appointed new Chair, Simon Potter, and Co-Vice Chairs, Adrian Boehler and Akira Hoshino.

It also revealed that more than 300 institutions have now signed up to the FX Global Code.

The GFXC has established a new group to deepen engagement with the buy-side, so all eyes will be on these institutions over the coming months.

Future predictions

The US-China trade war came to fruition with a first round of tariffs on $34 billion of Chinese imports on July 6, followed by a second round on $16 billion of imports.

The US’s trade partners including the EU, Canada and China are set to respond to latest U.S. trade barriers with retaliatory tariffs of their own. Starting in July, we could be getting dangerously close to a full-blown trade war.

Hopefully policymakers can put economics ahead of politics and come to a resolution to ensure unimpeded trade flows.

SEB chief EM strategist, Per Hammarlund, told FX Week that this trade spat could support the dollar in the short term, given the risk-off sentiment.

But, over the longer term, the event will undermine US growth, as well as its economic leadership, and weigh on EM currencies “for years”, Hammarlund says.

“Once countries lock themselves into a tit-for-tat battle, they will find it very difficult to get out of the spiral.” “If growth continues to slow, the EM FX sell-off will be prolonged, even if markets would see a temporary rebound if the US and China reach an agreement,” he says, adding that any interest rate hikes by the Federal Reserve will trigger a sell-off in EM currencies.

Sign up here to receive our monthly Global Spot FX Activity report.

London FX turnover hits record high

The results of a new survey released by the Bank of England have revealed record-breaking FX turnover in the UK during April this year.

The survey, compiled with the responses of 28 London-based institutions, shows that daily FX turnover during the month was a staggering $2,727bn – up 15% on October last year and 14% on April last year.

The Bank of England says this represents the highest reported turnover on record, beating the previous peak of $2,711bn set in October 2014.

Turnover in FX swaps accounted for the largest increase, growing by 18% compared with October last year. There was an 18% increase in turnover in the sterling-dollar currency pair, an 11% increase in euro-dollar trading and a 13% increase in dollar-yen. 

In particular, London’s turnover in the British pound rose to a record $351 billion, up 18% from October 2017 and nearly doubling from last year. This was driven largely by traders dumping the pound against the dollar when the Bank of England declined to raise interest rates.

The survey results reflect London’s continued position as the epicentre of the global currency markets, despite ongoing debate about the UK’s future trade arrangements post-Brexit. The UK growth rate in turnover also overtook US data revealed today by the Federal Reserve Bank of New York, which showed a 5.2% increase on a six-month basis and 11.7% year-on-year, with turnover only around one-third of that in London.

As ever, volatility has been the major driver for the increase in turnover. After years of ultra-low interest rates across the globe, central banks are beginning to diverge again in terms of where they set their policy rates. Growing concerns over a global trade war and political turmoil in the Eurozone have also contributed significantly to this volatility.

FX trading remains one of the City’s most profitable industries, and the Bank of England’s survey is a timely reminder of the dominance of the UK’s FX providers in a period of significant political and economic uncertainty for the country.

Deepwell enters new phase with 7 major hires across three continents

DeepWell Liquidity Management, the global financial markets intermediary for the buy-side community, has added seven senior market professionals to its team across three continents as it eyes further growth and expansion into different asset classes.

DeepWell launched in September 2017 and offers global coverage across a range of OTC and exchange-traded FX products, including spot, forwards, options and futures.

The company’s new hires experience range from the who’s who of the banking world, from, Credit Suisse, Morgan Stanley, Deutsche Bank to RBS, with more than century’s worth of experience between them.

In an interview with Finance Magnates, Deepwell CEO Richard Leighton spoke on the purpose of the hirings, “These additions will allow us to continue meeting the demand we are experiencing for our services and will help us to grow our market share in FX. Growing our capacity also enables us to service more institutions and investors and look at expanding other markets and products.”

These hiring’s have evidently taken place with a larger goal in mind. In the same interview, Leighton went to explain, “We took the strategic decision to set up offices in three of the biggest FX hubs in the world as we believe these have the greatest growth potential. We expect to grow our team at each of these locations as we continue to increase our market share in FX and expand into new asset classes.”

Cobalt secures investment from Singapore Exchange

Cobalt, the FX post-trade processing network based on shared infrastructure and high performance technology, has secured a strategic investment from Singapore Exchange (SGX), which operates Asia’s largest, most diverse and fastest growing FX exchange.

SGX’s investment will support the continued expansion of Cobalt’s footprint into the FX space, further accelerating technology development and build out of the team.

Cobalt’s unique solution leverages highly optimised technology alongside an in-house immutability service based on distributed ledger technology (DLT) to deliver a shared back and middle office infrastructure that is scalable, secure and fast.

By creating a shared view of trade data, Cobalt frees up back and middle office resources from multiple layers of reconciliation; creating a ‘golden’ portfolio of FX transactions from which to provide multiple services.

The platform takes a fresh approach to financial infrastructure and has been developed to replace the dated middle and back office systems of today, which can be disorderly, inefficient, risk-laden and costly.

Adrian Patten, Co-Founder and Chairman of Cobalt, comments: “SGX’s investment is testament to our innovative application of technology in the FX space. Our platform addresses pain points faced by almost every institution that trades FX: the unnecessary cost and risk associated with post-trade processing. Singapore is an important global hub for FX and we are delighted to welcome SGX on board as we continue to expand our footprint in the region.”

Michael Syn, Head of Derivatives at SGX, comments: “We are pleased to be supporting this important FX market infrastructure, which is complementary to our growing FX futures business and a natural fit for SGX given our own commitment to product and platform innovation. We look forward to seeing Cobalt continue to gain traction in the global post-trade FX market as they pioneer FX technology development, delivering cost and risk mitigation benefits to market participants across the world.”

Henry Ritchotte, Strategic Advisor to Cobalt, comments: “Exchanges around the world continue to invest in the critical infrastructure underpinning financial markets. This collaboration between a major Asian exchange and an innovative firm that has developed a unique high performance, DLT solution is a major step forward in upgrading the systems our industry relies on to operate efficiently, safely and cost-effectively.”

To keep up to date with news from Chatsworth Communications follow us on Twitter & LinkedIn.

Tech Answers The Call To Tackle FX’s Best Execution Dilemma

Over one-third of traders cite ‘best execution’ as their greatest daily trading issue according to a recent report by JP Morgan. The FX industry is looking to all aspects from, exchanges, market infrastructure providers and algorithmic trading to aid them in solving this problem.

The report entitled ‘e-trading trends for 2018 surveyed over 400 institutional traders to gain insight into what they think the main issues and trends will be in the year ahead.

ParFX

ParFX, a spot FX platform has measures in place to improve execution quality such as its unique randomized pause and enhanced trade cycle transparency. The company’s CEO Dan Marcus explained on Bloomberg TV that, “As a venue, what we’ve always tried to deliver is best execution, what you now see is there is more transparency, more surveillance, more systems, more controls, to sure we deliver the best execution that the regulators can see is traded in the market.” ParFX’s measures were put in place to remove the negative impact some high-frequency traders were having on the FX markets. By reducing this negative impact, ParFX has provided traders a fast, reliable and ultimately accurate platform where orders can be carried out efficiently.

Pragma

Traders are also looking to algorithmic trading to improve the quality of their execution. Curtis Pfeiffer, Chief Business Officer at Pragma Securities, believes the rise of algorithmic trading, which now accounts for more than one-third of flows in institutional currency markets, is due to how market prices and execution prices are databased. A database makes it simpler for their clients to carry out analysis of their execution quality and therefore improve their future decision making.

CLS

CLS is also providing tools to aide traders achieve their best execution goals, with the timely release of CLS’s FX Forecast data. This new tool provides subscribers with a forward-looking view of FX markets on an hourly basis, enabling them to quickly detect potential price movements and identify times to trade with greater liquidity, reducing market impact and signaling risk.

Alan Marquard, Chief Strategy and Development Officer at CLS, said: “Our position at the center of the global foreign exchange market means we are ideally placed to provide comprehensive and accurate data insights to market participants. Incorporating our forecast data into trading strategies can provide institutions with a better view of trading capacity, enabling them to optimize and time their trades. It also helps risk teams to more accurately adjust their models to the changing market. Ultimately, this will lead to a safer and more profitable foreign exchange market.”

Where Next? 

In a financial landscape where liquidity seems abundant, new innovative technologies are aiding traders to maximize best execution, however, it remains to be seen whether this will address what is now the biggest concern facing traders today.

For daily updates from Chatsworth Communications follow us on Twitter.

Foreign exchange in 2018: David Puth speaks to FX Week

Technology and regulatory guidance and principles will shape the foreign exchange (FX) market’s structure in 2018, according to David Puth, CEO of CLS, in an exclusive interview with FX Week.

2017 saw the publication of the FX Global Code, and a number of leading financial services and technology institutions confirmed their commitment to adopting and instilling its principles. This trend, Puth says, will continue in 2018 as the Global Foreign Exchange Committee publishes its final guidance on Principal 17 covering “last look”.

2018 will also be a year in which CLS expands its role offering new solutions to improve efficiency and reduce risk in the FX market.

“We are becoming more than a settlement utility. While delivering the risk mitigation that comes with safe settlement is our primary mission, we continue to focus on delivering products that solve client problems,” says Puth.

These include a same-day settlement service for five of the world’s most liquid currencies, and its much-anticipated distributed ledger technology (DLT) enabled netting service, CLSNet.

These technologies will likely have a significant impact on FX market structure, helping it to become more efficient and speed up the movement of currency around the world.

For more on what 2018 holds for FX, including David’s thoughts on the dollar and bitcoin, read the full interview here.

Defining the FX Flash Crash

On the 15th January 2015, the euro crashed 20% against the Swiss franc in a matter of moments, before recovering rapidly. Similarly, on 7th October 2016, sterling plunged in value by over 9% against the dollar, again regaining most of its value minutes later.

These are amongst the most famous examples of the market phenomena know as the ‘flash crash’, but they are by no means the only examples. In fact, according to a study by algorithmic trading technology provider, Pragma, which aims to help monitor and track the prevalence of flash crashes, there were some 69 flash crashes in 2015 and 2016. Almost one a fortnight.

The causes of these market phenomena are unknown. It has been suggested that flash crashes are the result of ‘fat-fingered traders’ or lapses of human judgement. After the pound sterling incident, the Bank of International Settlements (BIS) released a report which suggested technical error as a possible cause.

However, as most research has considered these events as of one-off incidences, drawing generalised conclusions has been difficult. Without other flash crashes to compare, it is not possible to tell which variables in a complex market are contributing to the crash and which were incidental. For example, some commentators have suggested that a principal cause is algorithms overreacting to news events, but further study has found no particular correlation between other flash crashes and news events.

This is where Pragma’s research is vital. It has analysed two years of tick by tick foreign exchange data to identify and catalogue all instances of flash crashes across numerous major currencies between 2015 and 2016. To do this, it has developed a precise, quantitative definition of the flash crash.

Previously, the BIS described a flash crash as a ‘large, fast, V-shaped price move and a sudden widening of bid-offer spreads,’ the V-shape implies a reversion of the price after the initial price move. Pragma’s definition builds on the BIS’s and defines a flash crash as having a:

  • Large price move ( 13x than normal price volatility)
  • Widening bid-offer spread 2x normal)
  • Strong price reversion ( 70% price reversion)

Using this standard, the examined time period had 69 instances of what would be considered a flash crash.

This dataset allows industry analysts and academics to more accurately examine the causes of flash crashes and what effects such as changing technology, regulation and industry practices are having on market quality going into the future.

For now, the causes of flash crashes remain unclear. But Pragma’s research provides an important foundational step in moving the market towards a more full understanding of this market phenomena.

For more information, you can request Pragma’s research report here. You can also read more about the report on Bloomberg and Reuters.

FX trading volumes rebound from summer lull

CLS’s currency trading volumes saw a significant uptick, as volatility in the foreign exchange (FX) market bounced back in September.

Following a bumpy period in geopolitics over the summer, trading activity rose strongly to almost USD 1.750 trillion in last month, according to the largest provider of settlement services in the global foreign exchange market.

Data from CLS showed a 10.7 percent month-on-month increase in the number of trade instructions submitted in September from USD1.581 trillion in July 2017.  This also represents a very significant 15.9% increase from this time last year, when volumes totalled USD1,514 trillion.

CLS’s figures reflect the trend observed in the monthly figures from many of the major trading platforms. However, given its position as a central settlement hub for the wholesale market, CLS provides the most comprehensive snapshot of activity, encompassing data from 18 global currencies and approximately 21,000 trading entities around the world.

 

 

 

 

 

 

A Reuters bon voyage… and welcome

So it’s bon voyage to Reuters’ Patrick Graham who is moving to India after almost four years covering the FX market.

Patrick covered the largest and most liquid financial market from its main trading centre in London through a period of profound change.

He now heads to Bangalore, where he will be overseeing over forty journalists at Reuters’ largest news bureau.

Chatsworth has worked closely with Patrick for many years and we wish him well as he embarks on this new stage of his career.

We also extend a warm welcome Patrick’s colleague Saikat to London, as joins the London FX team from his previous role covering Asian financial markets.

Cobalt closes investment from former Deutsche Bank COO Henry Ritchotte who also joins as Strategic Advisor

Cobalt, the FX post-trade processing network based on shared ledger technology, has closed an investment from Henry Ritchotte, the former Deutsche Bank COO who will also become a member of Cobalt’s strategic advisory board.

Henry Ritchotte spent over two decades at Deutsche Bank where he was a member of the Management Board and Group Executive Committee acting as Chief Operating Officer and Chief Digital Officer. Since leaving the bank at the end of 2016 Henry established RitMir Ventures, a principal investment firm focused on investing in products and services transforming finance through disruptive regulatory and technology driven business models.

Cobalt delivers a private peer-to-peer network that significantly reduces post-trade costs and risk for institutions operating in today’s FX markets. The platform is designed to create a single, shared view of a transaction on shared infrastructure and allows clients to reduce reconciliation and operational costs by up to 80%. With its production beta now live, Cobalt is ramping up to launch its live platform later this year.

Adrian Patten, Co-Founder of Cobalt, comments: “Henry’s investment reflects the increased interest our platform is receiving from the wider financial industry. With our innovative technology and his experience and knowledge, we are strongly positioned to redesign post-trade.”

Henry Ritchotte, Founder of RitMir Ventures, comments: “There has been comparatively little investment in post-trade over the past few decades. Cobalt’s network is an elegant solution that provides significant benefits for users and will reshape the industry as we know it. I look forward to working with the leadership team on their fresh approach to the post-trade challenges shared by all FX participants.”

Chatsworth congratulates Pragma and Cobalt on FX Week e-FX Award wins

Leading industry trade publication FX Week has announced the winners of its prestigious e-FX Awards, which included two of Chatsworth’s foreign exchange clients.

The awards recognise firms from across the foreign exchange industry for their excellence and innovation in the world’s most liquid financial market.

Announcing the award winners, FX Week editor Eva Szalay said technology in the market was “booming”, pointing out that “innovation has been extended to small start-ups, as well as the largest players” and highlighted the market’s “genuine desire to become more transparent, more competent and highly innovative”.

Innovation was certainly in evidence from algorithmic trading technology provider Pragma Securities, which was named Best independent algorithmic trading technology provider, and post-trade distributed ledger technology company Cobalt, which was awarded e-FX initiative of the year award.

Pragma

Reflecting on the increasing sophistication amongst the buy-side and the push for best execution in FX, Pragma has seen rapid growth and expansion over the past 12 months.

The company serves banks, brokers and sophisticated buy-side institutions, and identifies its value proposition around transparency and control as differentiating features.

It added a number of new capabilities to its Pragma360 algorithmic trading platform. This includes algorithmic trading non-deliverable forwards (NDFs), which offers traders better execution when investing in popular emerging market currencies.

It has also expanded its international client base through a new connectivity presence at Equinix’s LD6 data centre in London, providing lower latency connection to London based FX matching engines.

Cobalt

Cobalt has a very eye-catching proposition – it uses distributed ledger technology to cut 80% of the costs of post-trade reporting.

Founded by former Traiana executive Andy Coyne, and Adrian Patten, the company is offering to completely revolutionise the costly and time-consuming way in which post-trade FX services are conducted, cutting out duplication by storing records of all transactions on a single distributed ledger.

“I think if we are successful, the biggest impact will be on trading and Cobalt will increase volumes. Post-trade costs are a tax on trading and the idea that you can charge someone 50 cents to a buck for sending an unencrypted message to the back office is ridiculous.

“So if we can reduce those costs by dollars per transaction, that will feed into increasing volumes,” Patten tells FX Week.

The team at Chatsworth would like to congratulate both Cobalt and Pragma on their well-deserved award wins.

Chatsworth supports global push to restore trust to the world’s largest financial market

 

Foreign Exchange is the world’s largest and most liquid market and it has taken a repetitional battering over recent years.

Now the final part of the Bank of International Settlements’ (BIS) FX Global Code has been published, following a two-year, industry-wide effort to rebuild trust in the FX market following a series of scandals and market challenges over the past decade.

The Code sets out a comprehensive set of best practice guidelines which outline how all market participants should behave to uphold the highest standards of transparency and ethics in the wholesale FX market.

Chatsworth is proud to have played our part through our work with CLS and its CEO David Puth – Chairman of the BIS’s Market Participants Group and one of the principal authors of the code. This included an extensive engagement campaign to educate the press and FX market on the Code’s aims and objectives.

More than 1,500 people have had input to the Code and have helped to shape a set of high-level principles that will impact their day-to-day business practices.

The final document has received widespread support across the FX industry. A number of industry participants – banks, platform providers, technology vendors and trade associations – have backed it.

Now it is the time for the FX industry to adopt the Code’s principles and all FX professionals to read, understand and apply it to their everyday trading and transactional activity.

David Puth speaks to Bloomberg TV about the Code

 

The potential benefits for corporates in algorithmic trading

Curtis Pfeiffer, Chief Business Officer at Pragma Securities, explains to FX-MM how corporates could stand to benefit from using algorithms for FX execution.

Why should corporates consider using algorithms for FX execution?

Corporations want to maximise profit, and a penny saved is a penny earned. Algorithmic trading can contribute to the bottom line by significantly reducing FX trading costs. Corporations trade on the order of $70 trillion a year – roughly the same as the total global GDP. On such large amounts, basis points matter.

That’s why, to fulfil their mission, corporate treasurers are increasingly focused on ensuring that they get best execution on their FX transactions, which includes using the best available trading tools and practices.

What advantages do algorithms have over other trading techniques?

With the speed at which trading is conducted today, the proliferation of trading venues, and sheer levels of information that is processed, it is simply impossible for a human trader to stay on top of all the data that the market is generating.

There are four core benefits to algo execution:

  • Breaking up a large order into multiple smaller pieces means, on average, paying less than trading in a block
  • Building algorithms on top of an aggregated liquidity pool effectively narrows the spreads being traded on
  • Building algorithms on top of an aggregated liquidity pool effectively narrows the spreads being traded on
  • Algorithms have the ability to provide liquidity as well as to take prices, allowing patient traders to capture part of the bid-offer spread
  • Automation frees treasurers and traders to focus more of their time on those issues where human intelligence and judgement add the most value.
What factors should investors consider when choosing an FX algorithm?

First, corporations should understand the bank’s liquidity model for their algorithmic offering – principal, agency or hybrid.

Bank algos access liquidity differently depending on the model. A pure principal algo accesses just the host bank’s liquidity, which also provides indirect access to other liquidity pools in the marketplace. Agency models do not interact with the host bank’s liquidity, but are able to provide liquidity on ECNs as well as taking prices, potentially capturing part of the bid-offer spread for the customer.

Hybrid models can offer the best of both worlds, though customers should understand how the bank manages its dual role as principal and agent. Corporations should assess the liquidity pool underlying each bank’s algorithms to determine which model will be most effective.

Second, corporations should be satisfied that their bank provider has first class algorithmic trading tools – either through a major investment it has made in algorithmic trading research and development internally, or by partnering with an algorithmic technology specialist. Smart algos have sophisticated order placement logic, change their behaviour based on pair and time-specific liquidity patterns, and make intelligent and dynamic use of the real-time liquidity available across venues – for example based on order fulfilment rates.

Provided liquidity and investment checks out, corporations can consider algorithmic trading as another service their banks provide, and direct flow as part of the overall banking relationship.

Finally, best practice is to use TCA after the fact to track performance across bank providers and make sure all is as expected.

To read more, please visit the FX-MM website here.

Sterling reigns over euro amongst central banks

Central banks view the UK as a safer prospect for investing their currency reserves, despite the uncertainty created by the Brexit vote and Article 50.

That was the key revelation from a survey of reserve managers at 80 central banks, conducted by trade publication Central Banking and HSBC.

According to the FT, concerns over political instability, weak growth and negative interest rates mean reserve managers consider sterling as a long-term, stable alternative to the euro.

This is significant for several reasons. Firstly, reserve managers at 80 central banks are responsible for investments worth more than GBP 5.1 trillion and are tasked with ensuring the value of their domestic currency is maintained. Their decisions will be closely followed by currency traders and investment managers around the world.

Secondly, sterling’s post referendum plunge was widely noted last June. However, it gained against the US dollar during the first quarter of 2017 – the first quarterly gain since June 2015 – and the bullish bets from central banks suggests a further upward correction is on the horizon. 71 per cent of respondents said the attractiveness of the pound was unchanged in the longer term.

The prospect of an imminent resurgence in sterling is backed by analysts at leading investment banks, which predicted an unwinding of near-record bets against sterling if a constructive tone was adopted by the UK and Brussels continued over Brexit negotiations. Japanese bank Nomura in particular, believes the pound is undervalued against the dollar by as much as 25 per cent.

Thirdly, the survey’s findings highlight concerns over the stability of the monetary union, which was identified as the greatest fear for 2017 for reserve managers. Some central banks have reportedly cut their entire exposure to the euro, unprecedented for the world’s second most popular currency, while others have reduced their holdings of investments denominated in euros to the bare minimum.

The survey found that the ECB’s negative interest rate policy was also key factor causing bearishness on the euro. The policy was designed to boost growth across the Eurozone but has impacted profits at banks and financial institutions across the Eurozone.

While these conclusions give reasons for both optimism and trepidation – it’s a matter of perspective, after all – they highlight the fluid and interlinked nature of politics and the currency markets.

More than GBP 3 trillion of currencies are traded every single day around the world, and its impact stretches far beyond the trading floors of the largest international banks.

Currency movements affect everything from individual pensions to the cost of daily household goods, and with politicians on both sides of The Channel spinning dealing with multiple, complex challenges, currency markets will listen intently to their every word.

Brace yourself for a period of excitement, nervousness and volatility over the next 24 months.

London’s post-Brexit future as a financial hub

UK Prime Minister Theresa May finally triggered the formal process for Britain leaving the European Union (EU) on March 29.

While the EU referendum and a post-Brexit scenario may have been something of a blow to confidence in the City, it still has plenty going for it as a financial hub. This year’s Global Financial Centres Index, an international ranking of the world’s leading financial centres, placed London top of the pile.

“London’s rating has been influenced by not knowing what will happen after the UK’s departure [from the EU],” Mark Yeandle, associate director of Z/Yen and author of the report, told The Financial Times. Despite this, London remains top of the list and, over the period which the report tracks, has even recovered some ranking points.

London also remains the world’s biggest FX market by a huge margin, according to the latest BIS Triennial report. While Brexit may result in some jobs being relocated, the industry still believes London will remain front and centre and a key financial hub.

One of the key factors which will insulate London’s FX market is its concentration of trading infrastructure and activity. “When trading becomes concentrated in a particular region and is supported by a comprehensive legal and regulatory environment it develops natural strengths that enable that particular market to function well.” says Dan Marcus, CEO of ParFX, talking to Finance Magnates. “By leaving that pool of liquidity, a firm could disadvantage themselves and their clients.”

This means that, far from vacating the city, many businesses are investing further in London’s future.

Algorithmic trading technology provider Pragma is one such company, with the New York-based firm expanding its equities and FX business to London. “Our investment in the data center at Equinix’s LD6 site offers Pragma360 clients access to state-of-the art technology and the largest ecosystem for foreign exchange trading globally,” says Pragma’s Chief Business Officer, Curtis Pfeiffer.

“Despite the uncertainty caused by Brexit, we are moving forward with this large capital expenditure because London, as the largest FX trading centre in the world, hosts the largest datacentre ecosystem for low-latency FX trading applications and we do not see that changing any time soon,” he explains.

While nothing in the negotiations has been determined at this early stage, the City will also weigh up the potential challenges of Brexit.

Continued access to the European single market through financial passporting and the ability to attract skilled technology professionals from across the EU to work in London top the list for many institutions.

“77% of my staff in London were born outside the UK. We need those people. People are very mobile. I just worry that tough negotiations will send the wrong signal.” Michael Kent, CEO of remittance service Azimo, told Financial News.

In addition, J.P. Morgan has reportedly spent the last nine months weighing up various EU cities as a potential new continental home for their operations, according to The Wall Street Journal.

Looking beyond the headlines, however, the picture is more nuanced. Most of the relocation plans announced over the past few months involve relatively small numbers of staff. For many banks and financial institutions this may be a hedging exercise rather than a wholesale exodus.

Going forward, the UK government is determined to ensure London remains a central part of the international financial landscape, and it’s worth remembering London has a number of strategic advantages which mean it is likely to continue to be the city of choice. It uses the global language of business, English; it is situated in the perfect timezone between Asia and America; and has a legal system that is world-renowned for clarity and reliability.

None of this will change; in fact, it will continue to ensure London remains open and attractive to business.

In search of FX liquidity

Foreign exchange (FX) is one of the world’s most liquid markets, with around USD 5 trillion exchanged across borders every day.

However, there is a perception in the market that liquidity is on the wane.

This is not necessarily true, according to David Puth, CEO of CLS. Speaking to Euromoney, he said “There is a tendency for market participants to believe that liquidity was better in the past. From what we see at CLS, liquidity appears to be very strong. It is, however, different, with liquidity widely dispersed over a number of different trading venues.”

The pessimism may in part be as a result of the increasing difficulty in defining exactly what liquidity means in the modern market, and measuring it accurately.

This was one of the questions which a recent report on liquidity in the Americas from the Bank of International Settlements (BIS) attempted to address.

Traditional liquidity metrics, such as cost metrics, quantity metrics and trade impact, have their uses, but the report finds that none are a perfect way to measure liquidity in the modern market.

This is important because one thing which is clear is that the modern FX market is becoming increasingly complex, making understanding liquidity more difficult.

The market, like many others, is fragmenting as electrification proliferates the number of trading venues and sell side participants put more emphasis on internalising trades.

Whether this fragmentation is having an impact on traders ability to trade, remains an open question.

The BIS report indicates that fragmentation does appear to be having some impact on liquidity measures, particularly when it comes to periods of market stress.

It gives examples such as the 2016 British EU referendum and flash crashes, where traditional liquidity metrics appear to have been impacted across a number of currency pairs, at least over the short term.

Dan Marcus, CEO of ParFX, points out that sometimes individual metrics don’t always give the full picture. “It may be the case that volumes are down from where they were… [However] on ParFX we do not see evidence of a problem with market depth or the ability for traders, who need to trade, fill orders.”

This is in part because, while technology is driving fragmentation, it is also creating opportunities to aggregate liquidity in more efficient ways.

“Buy-side traders have responded [to FX market fragmentation] by turning to algorithms and taking on more execution risk themselves”, says Pragma’s CEO David Mechner.

Liquidity is the lifeblood of the FX market, it is vital that the market can measure it in a way which gives an accurate representation of what it is like to trade. One solution, suggested by Mechner, is a consolidated tape, much like in equities. Until then, the market should think carefully about the metrics used to measure the market and ensure they are fit for purpose.

Adherence to FX Global Code will reform conduct and behaviour

As we near the final stages of the development of the foreign exchange (FX) Global Code, the ACI Financial Markets Association (ACIFMA) is leading efforts to support education and adherence. We will start by making commitment to the Code mandatory for ACIFMA members, and encourage members to prove their adherence in future. This could prove to be a turning point in reforming conduct and behaviour in foreign exchange, writes Brigid Taylor in FX Week.

As a member of the MPG, ACIFMA has both contributed and witnessed the extent to which market participants and policymakers have engaged, discussed, debated and worked together in the best interests of the wider market. This is an industry that transacts more than USD5 trillion of currencies across borders every single day. Its ability to operate smoothly is crucial to the international economy.

There was of course a broad range of views on how best to address a series of topics, such as governance, information sharing, last look and pre-hedging. An array of views is expected in any large consultation, but consensus has been achieved with the best interests of the market in mind.

The final Code will, in my view, outline principles and guidance that is effective, appropriate and strike the right balance. I expect it to act as an essential reference for market participants when conducting business in the wholesale FX markets and when developing and reviewing internal procedures.

Hardwiring adherence – the third objective

This brings us to the final objective set out at the beginning of the process: develop proposals to promote and incentivise adherence to the Code.

For this to happen, it is essential that individuals (i) commit to adhering to the Code; (ii) receive the appropriate training and education so they are clear on what is expected and understand how to comply; and (iii) sign up to a solution where senior managers are able to observe and address any training and educational gaps amongst their subordinates.

This is where the ACI Financial Markets Association (ACIFMA) can play a central role. With a track record in delivering training, education, attestation and best practice principles that stretches back more than half a century, we represent more than 9000 individuals in 60+ countries.

There are several ways we intend to achieve this. Firstly, we will make it a prerequisite for individuals to commit to adhering to the FX Global Code as part of their membership. This means a meaningful proportion of the market – over 9,000 FX professionals around the world – will sign up immediately after the code is launched and commit to understanding, implementing and abiding by the new principles.

There is an urgent need to restore ethics in financial markets and the FX market is aware of its responsibilities to its clients and stakeholders. The significance of the enormous effort undertaken over the past three years should not be underestimated; to date, the level of leadership and engagement has been exemplary. I expect the FX Global Code to be a turning point in reforming conduct and behaviour in foreign exchange and develop a renewed sense of trust in this important sector of any economy.

To read the full article by Brigid, please visit the FX Week website here.

Algo trading on the rise as Pragma establishes European presence

The decision by Pragma to set up a base in London shows how the UK’s capital remains the natural hub for algorithmic currency trading despite the UK’s looming exit from the European Union.

While the debate about the future of London in a post-Brexit environment continues to rage on, there are many who continue to recognise the role of London at the centre of the USD5 trillion currency market.

Algorithmic trading in particular continues to rise in popularity. A report from Greenwich Associates found that the proportion of volume-weighted FX trading executed algorithmically has increased two and a half times in the past three years.

This trend was further highlighted by Pragma Securities, the multi-asset class provider of algorithmic solutions, which established a new connectivity presence in London to service its growing international client base.

London currently accounts for more than a third of all currency trading activity globally, according to the BIS. In a news article in FX Week, David Mechner, CEO of Pragma, expressed confidence in London and its role at the centre of European and international financial markets.

“Equinix’s LD6 site offers Pragma360 clients access to state-of-the art technology and the largest ecosystem for foreign exchange trading globally.

“The banks we service need state-of-the-art trading capabilities for their traders, and buy-side and corporate clients, making LD6 a natural fit.”

Pragma is not alone in its bullishness on London’s future, and it is clear that maintaining a data centre presence remains crucial to an institution’s trading operations, particularly for FX trading. The Financial Times recently reported on Dutch data centre operator Interxion’s £30m investment in its site in London’s Brick Lane.

Curtis Pfeiffer, Chief Business Officer at Pragma, also highlighted the benefits of proximity to London and risks of leaving London’s FX ecosystem.

“We are moving forward with this large capital expenditure because London, as the largest FX trading centre in the world, hosts the largest datacentre ecosystem for low-latency FX trading applications and we do not see that changing any time soon,” said Curtis.

“Institutions will be reluctant to leave the data centre ecosystem in London, which has increased in size significantly over the last 10 years as a result of a network effect – everyone wants their trading servers to be where everyone else’s are. By leaving that ecosystem, a firm could disadvantage themselves and their clients.”

The FX market’s six-month health check is due this week

The Bank of England releases FX trading data from the market for the six months to October last year. That covers a bouncy few months to say the least.

This data set will cover the Brexit vote and the not-entirely-event-free run up to the US election so we’ll be interesting to see what happened with dollar-peso volumes and Sterling which continues to be buffeted by the winds or Brexit and a significant degree of political and economic uncertainty.

These are unprecedented times for the flow and trade of global currencies and the structure of one of the world’s largest and most liquid markets.

The public face of the market has focussed on the conduct of some traders remains in the spotlight following a series of high profile legal cases over alleged malfeasance.

Much of this is being addressed through the Global Foreign Exchange Code of Conduct, led by the Bank for International Settlements.

But it is the changing role of the banks and the funds as makers and takers – the shape-shifting of the formerly API prop traders towards market maker status that, in our view, has delivered the most significant structural change.

Once dominated by the largest global banks, the growth of electronic trading has made it easier for relatively smaller financial firms to become directly involved in currency trading. Access to the market and competing trading venues have exacerbated this process.

Concurrently, regulation has limited the risk these banks can carry on their books, making them more selective about how and with whom they trade.

Currency trading continues to be dominated by what are euphemistically described as “other financial institutions”

This category includes smaller commercial and investment banks, as well as buy-side firms like pension funds, mutual funds and hedge funds. In other words, not the banks.

Broadly, volumes of late have been lower with overall daily turnover declining to around USD 5.1 trillion in April 2016, from USD 5.3 trillion three years ago.

But the there has been a significant uptick in currency market volatility has increased over the past few years.

All eyes on Tuesday to see how the market fared through the events of the latter part of 2016. Expect a few surprises.

Global FX market remains buoyant

The publication of the Bank for International Settlements’ (BIS) Triennial FX Survey results revealed some fascinating findings.

As always, it continues to be the single most comprehensive, trusted and aggregated account of what has been going on in currency trading across venues, jurisdictions and a whole range of macro and micro criteria, and is keenly anticipated by the FX market.

So what did the report tell us?

The headline figure was that, as widely expected, average trading volumes fell slightly to USD5.1 trillion per day, down from USD5.3 trillion in 2013.

But this doesn’t tell the full story; the report found that the appreciation of the US dollar between 2013 and 2016 reduced the US dollar value of turnover in currencies other than the US dollar. This means that, when valued at constant exchange rates, turnover increased by about 4% between April 2016 and April 2013.

This a reality check for everyone with skin in the game. It tells us that the market has been reasonably resilient in the face of many challenges; the SNB revaluation, issues around conduct and low interest rates in major economies to name a few.

While spot transactions fell from USD2 trillion to USD1.7 trillion per day, the decline may have been driven by two main factors. Firstly, the unwillingness of major financial institutions to commit to risk taking activity, and a drop in market volatility. This means the alternative investment community and speculative traders, who are quite active in the spot market, are doing fewer transactions.

The geographical breakdown of trading is also interesting. When BIS last reported in 2013, London was the main FX trading centre by a comfortable margin, with more than 40% of all traded volumes, followed by New York. While London has continued to retain its crown three years on, activity has fallen by 5%, and New York’s share remains flat.

But Asia gained significant ground; Singapore (7.9%), Hong Kong SAR (6.7%) and Japan (6.1%) all increased their market share. The region continues to develop its currency markets and cross border trading continues to increase; it is a positive growth story for the FX market.

In terms of currencies, USD and EUR continue to remain unchallenged as the most actively traded, but the renminbi gained strong ground by moving into 8th place on the list. Emerging market currencies performed well overall, accounting for more than a fifth of trading.

Lastly, the banks have shored up their positions in the industry, in spite of the regulatory and conduct challenges the sector has faced.

Their position as the main FX trading posts was being challenged by a resurgent non-bank FX trading community, exemplified by the entry of XTX Markets in the top ten of Euromoney’s FX survey.

But trading has increased amongst the interdealer community, accounting for 42% of turnover in April 2016, compared with 39% in April 2013. Banks that are not reporting dealers accounted for a further 22% of turnover, while institutional investors were the third largest group of counterparties at 16%.

So overall, the global foreign exchange market continues to remain buoyant. It remains the largest and most liquid market in the world and a critical component of the global financial system.

As confidence in FX is restored through the global code of conduct and other initiatives, we will see a more liquid and stable marketplace emerge.

All FX Eyes on BIS Triennial Survey

The whole FX industry is watching for the Bank for International Settlements’ Triennial FX Survey results, due this afternoon at 2pm GMT.

Why does it matter? Chiefly because it is the single most comprehensive, trusted and aggregated account of what has been going on in currency trading across venues, jurisdictions and a whole range of macro and micro criteria.

It’s a reality check for everyone with skin in the game. It tells us what currencies are trading the most, where and by what means.

It also gives us a sneak peek at the real market share of the FX market transacted on the electronic platforms and through voice trading.

When BIS last reported in 2013, London was the main FX trading centre by a comfortable margin, with more than 40% of all traded volumes.

USD and EUR remained unchallenged as the most traded currencies, but the renminbi gained strong ground by moving into 9th place on the list. It will inevitably be higher on this occasion.

Since then, the market has experienced the SNB revaluation, issues around conduct and interest rate divergence among the major central banks.

Some established currency trading venues also lost market share and were hampered by reduced trading volumes. This points to a number of themes. Firstly, internalisation of trades at banks; secondly, a drop in overall volatility and trading opportunities; and third, greater competition from upstart trading venues, who grabbed a piece of the FX pie.

The position of the banks as the main FX trading posts is also being challenged by a resurgent non-bank FX trading community, exemplified by the entry of XTX Markets in the top ten of Euromoney’s survey.

This continues the trend evident in past Triennial Surveys. The counterparty segment that contributed the most to growth in global FX turnover between 2010 and 2013 included smaller banks that do not act as dealers, institutional investors, hedge funds and proprietary trading firms as well as official sector financial institutions, among others.

In the 2010 survey, this segment surpassed other reporting dealers (i.e. banks trading in the interdealer market) as the main counterparty category in the Triennial Survey for the first time.

What this shows is that the funds and HFTs are established as major players and are cleaning up their act to become genuine makers and takers in the market. This is an inevitable evolution and blurring of the buy and sell side.

This afternoon we expect the BIS to report relatively flat volumes, if not a dip on 2013. The gallery of top traded currencies will remain broadly the same but the devil will, however, be in the detail and the percentage movements showing direction.

There is will be many things to look out for. Which currencies were the most traded? Will London retain its FX crown? Which instruments were the most popular?

All will be revealed in the next few hours. The industry awaits…

Business as usual for London’s FX industry post-Brexit

No signs of exodus to other financial centres as FX recruitment holds firm.

Following the UK’s vote to leave the EU, European financial centres such as Paris and Frankfurt prepared to roll out the red carpet for London’s financial institutions. But this may be more difficult than initially anticipated.

Red tape regulations, heavier personal tax regimes, governmental issues and different social norms means there is little appetite for London’s foreign exchange (FX) trading institutions to move jobs to Europe en mass, according to recruiters keeping close tabs on London’s financial district.

Despite the Brexit vote, and repeated reports about banks accelerating plans to move jobs from the UK, European cities are struggling to match the pull factors that London offers.

London has long been at the heart of the international currency markets, accounting for more than 40% of FX turnover, according to the Bank for International Settlements. With its advanced infrastructure, access to human capital, a strong legal and regulatory system and a time zone that allows London-based traders to service customers all over the world, it has not only maintained its dominance but also attracted a host of emerging fintech companies to form one of the largest technology and innovation hubs in the world – further strengthening the City’s dominance.

All of this means the number of suitable alternatives to London is limited.

In an article for Euromoney, Andrew Kitchen, internal audit manager at recruitment consultancy Morgan McKinley, says there has been no increase in the number of people from the leading banks looking to leave the UK since the EU referendum vote.

This may be because transferring large numbers of FX staff to France in particular will not be a straightforward process, adds Raoul Ruparel, co-director of Open Europe. “Culturally and socially, France has taken a different approach to the UK in relation to this type of business in recent years,” he says. “It remains to be seen whether they have the appetite to offer tax or regulatory incentives.”

French employment and personal tax regimes are also likely to be a factor that counts against Paris, according to James Coiley, a partner at law firm Ashurst. “Making overtures to FX banks and traders to relocate to Paris may not play well with supporters of the socialist French government.”

However, the uncertainty seems to have stopped some banks from transferring jobs from mainland Europe to London, according to Kitchen. “What we are seeing is that several candidates based in Europe who had hitherto been looking to relocate to London are now staying put. This is in part due to the level of uncertainty around future Brexit implications, but also the current weak value of the pound,” he warns.

So while the outlook for 2017 remains unclear, London’s FX industry continues to remain resilient in the face of uncertainty and there has yet to be any knee-jerk reactions that disrupt the status quo on either side. Although it is still early days, what is clear is that fears over London losing its FX crown remain largely unfounded for now.

The City now looks to politicians with bated breath.