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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.

CLS’s aggregated FX trade data now available

CLS announced it has begun making its FX trade and volume data available via Quandl, an economic and financial data platform.

Subscribers to Quandl will now have access to CLS’s data, which will be delivered on an hourly, daily or monthly basis and aggregated by trade instrument (spot, swap and outright forward) and currency pair.

The currency settlement system, which settles 18 of the world’s most actively-traded currencies, receives an average submission of almost USD 5 trillion every day from banks, asset managers, corporations and hedge funds.

According to David Puth, CEO of CLS, this is the first time CLS has made this level of aggregate data readily available to the market. “It is a key source of trade information that will allow a broad range of users to get a clear picture of FX market activity across major currency pairs and products,” he says.

This view was backed up by Quandl’s co-founder and chief data officer Abraham Thomas, who spoke to trade publication Inside Market Data: “CLS had been aware for some time that it was sitting on a valuable data asset, but didn’t have the distribution infrastructure… or background in monetizing data. They reached out to us a few months ago when they became aware of our data marketplace… especially because our audience includes a bunch of hedge funds and asset managers.”

CLS has historically made aggregated and anonymized data available to the market, but the data made available through Quandl is available in a format more conducive to analysis and with greater frequency.

Customers interested in the data is expected to include large financial institutions, small financial services companies, software companies, academic institutions and research organizations.

Read the news story here.

The Currency Ethicist: One Man’s Push to Fix a Tarnished Market

Last week, the Bank for International Settlements launched a code of conduct for market professionals operating in the world’s largest and most liquid financial market – foreign exchange – and in doing so, laid out its vision of how banks, asset managers, hedge funds, corporates and infrastructure providers should behave and operate when exchanging an estimated USD5.3 trillion a day.

At the heart of this initiative was David Puth, Chairman of the BIS Market Participants Group. A former JPMorgan Chase & Co. and State Street Corp. executive, David led the initiative alongside his role as chief executive officer of New York-based CLS Group, a utility that settles trillions of dollars of currency transactions a day and is considered by the U.S. Treasury to be a systemically important piece of the financial system.

He spoke to to Bloomberg about the importance of developing industry-led guidance around trading behaviour and best practice requirement, and how the code of conduct aims to provide a common set of guidelines to promote the integrity and effective functioning of the market.

Read the article, or watch the Bloomberg interview

Daily traded currency values from banks and funds around the globe hit USD 4.96 trillion in April

A surprise from the global currency markets which have been in something of a state of flux of late.

Daily average value submitted to the CLS global settlement system hit USD 4.96 trillion in April, up 5.7% from the previous month, and up 6.9% from the USD 4.64 trillion in April 2015.

Volumes have been below USD 5 trillion a day for most of 2016 so far but the new CLS figures show that April was the busiest month this year.

And this April matters a great deal because the month’s trading activity feeds into Bank of International Settlement’s triennial survey of the foreign exchange market released in September.

The survey is the most holistic picture of global FX market activity, showing detailed activity broken down by trading centres, counterparty types and currency pairs.

The global currency markets remains in a state of flux. Diverging monetary policy, changes in liquidity provision, venue usage and the profile and diversity of trading counterparties are all factors changing the shape of the market.

Take trading venues. Despite the uptick in month on month CLS settlement activity in April, trading volumes actually fell on some of the major trading platforms.

EBS reported USD 82.3 billion last month, which was actually a drop of 15% on the USD 96.9 billion last year recorded in April 2015. It was a similar picture over at Thomson Reuters.

Pragma launches SmartFix algorithm to improve FX trading performance against WM/R 4pm

Pragma Securities, a leading provider of high performance algorithmic trading tools, has launched a sophisticated algorithm designed to improve average execution performance against the daily 4pm WM/Reuters foreign exchange benchmark fixing.

Following recommendations from regulators in the wake of the FX rate-rigging scandal, in February 2015 the methodology underpinning the WM/R benchmark was changed, widening the calculation window from one minute for the most liquid currencies to five minutes.

In addition, banks have largely shifted their execution of customer fix orders from the spot desk to their electronic desks, where time-weighted average price (TWAP) execution algorithms are often used.

Pragma’s research highlights that together, these changes have created predictable patterns that can be leveraged to improve trading performance using only publicly available data. The full research findings are available via the Pragma Securities website.

Pragma’s new SmartFIX algorithm is built on the firm’s own research, which has identified predictable patterns of trading behaviour around the key FX benchmark.

The algorithm observes only publicly available information, and adjusts its trading rate in a systematic way based on those observations to achieve better execution on average for traders benchmarked to the Fix. In addition, these dynamic adjustments are layered on top of a proprietary trading schedule that achieves lower tracking error against the benchmark than a simple TWAP

David Mechner, CEO at Pragma Securities comments: “For traders that are constrained to match the fixing rate, our algorithm can reduce risk relative to a simple TWAP, and can also improve execution quality for a modest increase in risk. This makes it a good tool for banks servicing customer fix orders whether in a principal or agency manner.”

The new algorithm complements Pragma’s existing foreign exchange platform offering, Pragma360, which includes a suite of execution algorithms, transaction cost analysis (TCA), risk controls, and a next-generation algorithm monitoring system called Panorama. Pragma360 is provided as a broker-neutral trading solution to banks and asset managers.

London’s leading position as a USD 2.2 trillion hub for FX trading would be harmed by a Brexit, according to poll of currency market professionals

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%.

Global FX bounces back to over USD 5 trillion in February

February was a tumultuous time for financial markets, with high volatility influenced by the threat of a potential Brexit and ongoing turmoil in the Chinese economy. 

CLS, the global FX settlement utility has released its settlement data for February showing average daily input value was USD 5 trillion up 3.3% from USD 4.84 trillion in January 2016.

Some FX platforms reported a month-on-month decline in daily spot trading volumes. 

Average daily volumes at EBS were USD 102.6 billion in February 2016, down 1% from the January 2016 reading of USD 103.8 billion.

Read the full report in Reuters

JPY Gains, AUD Falls as China Weakens Yuan

Ilya Spivak, Currency Strategist, at DailyFX, comments:

“China has triggered another sharp burst of risk aversion after devaluing the Yuan by over 0.5 percent at today’s daily fix, marking the largest downward revision since Augusts’ fateful readjustment.  The sentiment-linked Australian Dollar dropped alongside Asian share prices while the safety-linked Japanese Yen outperformed. Cycle-sensitive commodities including copper and crude oil fell while gold and silver traded higher. Chinese stocks were shut down for the day after hitting the limit-down threshold of 7 percent.

 “The consensus interpretation for the markets’ negative response is that Chinese devaluation speaks to a need for emergency stimulus expansion, which implies greater-than-expected malaise in the world’s second-largest economy. Weakening the currency can be seen as a form monetary stimulus however, so one might have expected markets to cheer Beijing’s actions. With that in mind, it seems as though price action reflects a reflexive response drawing surface-level parallels with Augusts’ panic selling rather than a sober evaluation of China’s actions on their fundamental merits.

 “Looking ahead, S&P 500 futures are pointing sharply lower, hinting that risk aversion is aiming to continue in the hours ahead. The economic calendar is relatively quiet, putting the spotlight on Fed-speak as the source of event risk du-jour. Comments from Richard Lacker and Charles Evans, Presidents of the Richmond and Chicago Fed branches respectively, are due to cross the wires.

 “The two policymakers represent the hawkish and dovish extremes of last years’ contingent of FOMC voters. Traders will look to their remarks for clues about the likely 2016 rate hike path. The central bank projected four 25bps increases last month while the markets continue to envision no more than two. Investors’ dovish lean skews volatility risk to the upside for the US Dollar in the event that cumulative commentary strikes a hawkish tone.”