From The Management
What’s next for FX: In conversation with Matthew Reid, SimCorp and John McGrath, BidFX
Foreword by Matthew Reid, Product Manager, Director of SimCorp’s Order Manager solution.
Matthew Reid, Simcorp
What is interesting is that while FX desks had the advantage of electronic trading and algos, over other asset classes, the crisis earlier in the year also saw a return to voice calls, as long-standing sell-side relationships were called upon in the scramble for liquidity. According to Greenwich Associates, two-thirds of FX market participants interviewed in their recent study said relationships became more important during the COVID-19 crisis, as the entire the FX ecosystem underwent a plunge in liquidity. While the two approaches – voice and electronic – may seem at odds with each other, Ken Monahan, Greenwich Associates summarizes that: “In reality, both can be true at the same time. The crisis demonstrated that, in extreme volatility, market participants need both relationships they can count on and effective alternative tools for sourcing liquidity and executing trades.”
The growth of FX in long-only institutional investment
Matthew Reid: If we look at the growth of FX in long-only global institutions, it has mostly been used as a hedging exercise. More recently though, we’ve seen active trading grow steadily, as many investors are forced to go outside their domestic market to seek liquidity. It seems the need for scale has become considerable. What is your view on this?
John McGrath: Yes its true, the FX market has seen significant growth in recent years with Average Daily Volume (ADV) up from $4.3 trillion in 2009 to $6.7 trillion in 2019, according to the BIS surveys. Within this 10 year period long-only institutional investors have increasingly added more and more sophisticated technology to cater for the advanced needs of underlying investors, based on liquidity and regulatory/best execution concerns. For example a large buy-side firm with a centralized dealing desk and a fully integrated OEMS finds e-forex lends itself naturally to the integration of credit and trade limits, as well as capturing the best execution data required for underlying investors and TCA analysis.
John McGrath, BidFX
Matthew Reid: With this growth in mind, if we look at the rise of electronification and the automation it has created, there have been benefits realized for the buy side, such as optimized workflows. But what are some of the existing FX pain points that available solutions and services need to tackle, to turn those into opportunities too?
John McGrath: There is no doubt that COVID-19 has accelerated the roll out of new technology to respond to pain points being experienced by the buy side previously. Automation has long been an area long-only institutions have looked to achieve, in order to increase efficiency and optimize investment workflows.
That said, one pain point that that very few existing solutions and services have nailed, is the coverage of a multi-asset class EMS working in conjunction with a multi-asset class OMS. Achieving this really comes into its own, as the work being invested in one asset class can be rolled out across other asset classes. More importantly having one multi-asset view of your positions, holdings and cash across public and private markets, and strategies such as emerging markets FX, offers firms a clear advantage when it comes to investment decision making and risk management.
Other areas of growth in recent years that are being tackled by EMS/OMS providers and the buy side at large include the growth of algo usage and the increasing sophistication of TCA in FX. It seems most institutional investors now trust the leading EMS’s to deliver a total algo package, which integrates with their LP’s algo suite and allows them to manage this order flow along the lines of their standard risk and automated trades. Algo flow rose dramatically during the initial stages of lockdown this year (March/April), as the buy side looked for some form of comfort in a volatile and high-volume period. Another feature of algo development has been the implementation of more deal types, with Non-Deliverable Forward (NDF) algos seeing a large area of growth, as many of the sophisticated institutions looked to manage their more difficult non G10 liquidity requirements.
TCA has seen a similar surge in growth, with long-only institutions investing in OEMS technology, which has allowed TCA to really deliver some demonstratable results. This investment combined with an agnostic integration to 3rd party providers at an EMS level, has enabled institutions to make large strides in FX TCA. Working as a partnership, both Institutional investors and EMS, OMS providers with experience in this product, now have a real source of data in, which to monitor fiduciary responsibilities to their investors. Going forward the willingness and shared roadmap of leading multi-asset OEMS integrations, such as SimCorp and TradingScreen, have a real opportunity to drive product advancement in conjunction with their institutional clients, and this will be key to the continued growth in this area.
Matthew Reid: If we look at addressing multi-asset class coverage, rather than approaching FX in isolation, an approach many desks take, what developments are taking place in the market and at BidFX to facilitate firms with this?
By consolidating FX with other asset classes in the investment chain, particularly in the front office where the default has been to run it on point systems, FX desks can pool analytics and trading strategies, as well understand their exposure to risk in real-time. An example of this is the recent acquisition of BidFX by the Singapore Stock Exchange (SGX) , which has now enabled the integration of OTC and Listed FX, positively impacting many more investment processes beyond pure execution, including UMR.