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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

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.”

ECB publicly endorses FX Global Code

The European Central Bank (ECB) has become the latest central bank to endorse the Bank of International Settlements’ (BIS) FX Global Code, joining others including the New York Federal Reserve and the Reserve Bank of Australia. This signals that currency-trading institutions who do not sign up may well find their counterparties limited in future.

Whilst the ECB did not issue a legal mandate for its currency market counterparties to sign up to the Code, market participants have been invited to publicly declare commitment to the Code by May 2018, one year on from its publication. It is clear that the central banks are taking the Code very seriously, and rightly so.

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

Since the final version of the Code was published two months ago, many institutions have already committed to adopting it. Those that haven’t will likely be spurred into action by the ECB’s firm encouragement.

This advocacy for an important set of principles is to be welcomed.

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.

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.

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.”

London’s position as the world’s FX trading centre is damaged by Brexit

London’s position as the world’s main currency trading centre would be threatened by a British exit from the European Union, with Frankfurt, Paris, New York and Dublin likely to be the main beneficiaries, according to a survey of foreign exchange (FX) market professionals.

As reported in Bloomberg and Reuters, the research team at Chatsworth Communications polled 12,000 members of the ACI Financial Markets Association, the largest global trade body representing the international currency markets, for their personal views ahead of the UK Referendum vote on 23 June.

Key findings:

  • Two-thirds (65%) of respondents believe a UK vote to leave the EU would negatively affect London’s position as the world’s largest FX trading centre, while 13% believe a Brexit would have a positive impact.
  • Of those concerned about the negative impact on London, more than 70% identified Frankfurt as the trading centre most likely to benefit from a Brexit, followed by Paris (49%), New York (40%) and Dublin (28%).
  • 80% of all respondents believe the UK will vote to remain in the EU.

London’s dominance of the foreign exchange market has grown exponentially as the size of the market expanded, and is, by far, the largest and most established centre for currency trading. Nearly 41% of global trading goes through London, more than double the market share of New York, according to data from the Bank for International Settlements (BIS)*.

Currency trading increased globally to an average USD 5.3 trillion (GBP 3.8 trillion) per day in 2013. The vast majority (75%) occurred in five jurisdictions: London (41%), New York (19%), Singapore (5.7%), Japan (5.6%) and Hong Kong (4.1%).*

Detailed findings:

A UK vote to leave the EU will…

  • Positively affect London’s position as the world’s largest FX trading centre: 13%.
  • Negatively affect London’s position as the world’s largest FX trading centre: 65%.
  • Have no effect: 22%.

How do you think the UK public will vote?

  • The UK will vote to remain in the EU: 80%.
  • The UK will vote to leave the EU: 20%.

Which global trading centres do you think will benefit the most if the UK votes to leave (NOTE: answered only by respondents who believe a Brexit will have a negative impact on London)?

  • Frankfurt: 71%.
  • Paris: 49%.
  • New York: 40%.
  • Dublin: 28%.
  • Zurich: 14%.
  • Hong Kong: 8%.
  • Singapore: 7%.
  • Geneva: 7%
  • Dubai: 4%.
  • Tokyo: 4%.

How long have you worked in the FX industry?

  • Less than one year: 0%.
  • 1-2 years: 9%.
  • 3-5 years: 10%.
  • 6-10 years: 16%.
  • 11-15 years: 17%.
  • 16-20 years: 18%.
  • More than 20 years: 30%.

ParFX adds Citi and JP Morgan as founding members

Citi and JP Morgan have joined ParFX as founding members, the trading venue said on Wednesday, taking the number of core members to 14 and bringing the company closer to introducing prime brokerage clients in the coming months. The less-than-a-year-old platform says the addition of Citi and JP Morgan represents a validation of the idea that foreign exchange trading is changing and the platform is gaining momentum.