FX is the world’s most heavily traded and liquid asset class with an average daily turnover in excess of US$5 trillion according to the Bank for International Settlements.1 Non-dealer financial institutions such as hedge funds, institutional investors and regional banks have been driving a significant portion of the growth in this asset class over the past few years. The dramatic increase in the number of buy-side firms participating in the global FX markets has created two major challenges – the need to have reliable connectivity throughout the trade lifecycle and the compulsion for trading firms to rapidly access a ready-made ecosystem of liquidity venues, counterparties, brokers/dealers, institutional investors, trade lifecycle services and market data.
These are challenges for any growing asset class, but they are particularly acute for FX given the vast range of instruments being traded – spot, outrights, non-deliverable forwards, swaps, options, forwards, structured products and FX indices. Additionally, the lack of a central marketplace and the controversial ‘last look’ compound issues faced by market participants and create exceptionally complex infrastructure and connectivity demands.
The figure opposite, “Multimodal Communications for Traditional and Alternative Asset Managers” highlights the communication, collaboration and connectivity requirements of a hedge fund, fund of hedge funds, forex commodity trading advisor or asset manager. Clearly, fund managers that deploy the right type of network technology can successfully execute complex trading strategies for investors while mitigating operational, market, business and investment process risk.
There are five distinct areas where network technology plays a vital role for fund managers:
1. Communication with investors – pension funds, endowments, foundations, sovereign wealth funds, corporate treasuries, insurance companies, family offices and high net worth individuals.
2. Collaboration among geographically dispersed fund employees to not only ideate and execute investment theses but also manage the risks associated with these strategies.
3. Business continuity management and disaster recovery planning to ensure the ability to invest and trade in the FX markets around the clock.
4. Access to trade lifecycle services such as order management, execution management and portfolio management systems as well as market data.
5. Connectivity to prime brokers, brokers/dealers and liquidity venues to generate alpha, optimize liquidity capture, achieve best execution, manage collateral and reduce market impact.
Every trading strategy of a hedge fund or forex CTA necessitates the deployment of one or more of these communication solutions. Discretionary global macro funds that trade based on performing fundamental analysis depend heavily on collaboration solutions to execute their strategies. Systematic trend-following forex CTAs need the ability to quickly connect to liquidity venues around the world to exploit opportunities as they present themselves in the global FX markets.
Fund managers must not only have access to a ready-made ecosystem of FX liquidity venues but they must also be able to access venues trading equities, fixed income and commodities to execute cross-asset strategies. For example, successful buy-side firms were long CHF and short Swiss equities when the Swiss National Bank stunned markets on January 15 by scrapping its peg of 1.20 Swiss francs per euro. The execution of the popular carry trade, where an investor buys a currency with a relatively high interest rate and sells a currency with a relatively low interest rate, is also dependent on having access to a financial ecosystem. Ecosystems are also becoming ever more important for trading the offshore renminbi (CNH) - which presents one of the most attractive opportunities for foreign investors to gain exposure to China - with market participants demanding access to ECNs, aggregators and platforms that offer CNH.
Managed Network-as-a-Service (MNaaS) Model
Successful buy-side firms are increasingly deploying the Managed Network-as-a-Service (MNaaS) model to effectively execute trading strategies and manage risk. The MNaaS solution offers market participants adaptive, on-demand connectivity throughout the trade lifecycle and across asset classes. It addresses the buy-side’s communication, collaboration and connectivity needs and possesses the following attributes:
• Ready-made financial ecosystem with global reach
• Flexible and tailored technical and commercial solutions to meet exacting business requirements
• Capital markets focus and expertise – built exclusively for the capital markets and tailored to a firm’s operational needs
• Competitive SLAs under a single global master service agreement
Today – and presumably even more so in the future – profitably implementing FX strategies such as carry trades, volatility arbitrage, trend-following and momentum strategies, countertrend strategies, relative value trades and asynchronous trading is governed by connectivity throughout the trade lifecycle and access to a ready-made ecosystem. Partnering with a MNaaS solution provider can go a long way in helping to ensure the successful execution of trading strategies by hedge funds, funds of hedge funds, forex CTAs and asset managers. For more information please contact firstname.lastname@example.org.