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First Year of the FX Global Code in Review

On 25 May 2017, the FX Global Code of Conduct was launched to promote the integrity and effective functioning of the wholesale foreign exchange (FX) market.

One year on, nearly 200 firms, ranging from central banks to algorithmic trading providers and ECNs, have signed statements of commitment to the Code.

Despite the deadline for signing ups passing on 25 May 2018, there are still institutions that are yet to sign up the Code and thus, a long way to go before it achieves widespread adoption.

ParFX

Spot FX platform, ParFX, was one of the first to sign up to the Global FX Code. The exchange’s principles of transparency, fairness and equality align with those of the Code’s, making signing up a no brainer. Talking to Markets Media, COO Roger Rutherford stated that the Code was the best method to correct the industry’s reputation, “the alternative could have been more regulation which takes time and introduces further costs to the industry. So whilst the market is adjusting to MiFID II, a code of conduct is a better way to bring ethics back into the FX marketplace.”

Moving forward, Rutherford believes institutions shouldn’t immediately be penalised for having not signed up. “For now, an institution could probably make a good case for why they haven’t done so yet because they are waiting for the final details on last look, anonymous trading and cover-and-deal to be decided by the working groups.” However, Rutherford added we can expect to see central banks refusing to do businesses with those who haven’t signed up to the code.

ACI FMA

The ACI FMA is a trade association which represents over 9,000 financial markets professionals. The ACI was the first to set an industry standard in the 1970s with its ‘Model Code’, which was retired upon the launch of the FX Global Code last year. As a strong believer in setting an ethical standard, the ACI has supported the launch of the Code with its ELAC portal, an online platform which provides FX professionals with continuous training and certification. It also offers an online version of the FX Global Code Certificate which formally tests an individual’s understanding of the Code’s 55 principles.

Looking beyond the first year of the code, Paul Chappell director of education at the ACI Financial Markets Association, believes the industry has more room for improvement in relation to adoption of the code. “There are elements of the code – particularly around pre-hedging as well as last look – that demand a significant cultural shift and some large market participants have a long way to go in this respect,” he says.

Pragma

Pragma is one of the leading algorithmic trading technology providers in the FX and equities market. The company recently made headlines with its statement of commitment to the Global FX Code. Pragma believes algorithmic technology lends itself to aiding traders with their transparency requirements, as each transaction is databased and therefore easy to analyse.

A less successful part of the Code is the rate at which buy-side institutions have signed up to the code. “If you look at the public registers, there are certainly fewer buy-side participants that have signed up to the code. I think there is a sense that the code was pointed towards the sell side, because that is where the bad behavior in the FX market was uncovered, therefore the buy side feels less urgency to sign up,” according to Curtis Pfeiffer, Chief Business Officer at Pragma Securities.

Looking forward, Pfeiffer believes that corporate treasurers will have a key role in the success of the Code. “For a corporate treasurer to now commit to the Code sends a public message to its service providers – banks, brokers and vendors – of the behaviour it expects from them. Doing so opens and encourages new ways of doing business, and advocates for greater use of algorithmic trading and TCA [transaction cost analysis].”

What to look for next year

It is clear that the Code is the first step in a long journey the FX market is taking to improve its reputation. To reach full effectiveness there needs to be unanimous adoption across the industry. There will need to be a further push to get market participants such as buy-side and corporate treasurers to commit to the Code. On the other hand, there are aspects of the Code such as last look, anonymous trading and cover-and-deal, that will need to be developed before some institutions commit.

It will be interesting to see how the FX Global Code evolves after its deadline and if, following the outcome of the three working groups, it continues to see the same critical mass it has experienced in the first half of 2018

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.

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.