This November’s Profit and Loss Conference in Singapore saw an interesting panel discussion on the electronification of EM currencies or rather the introduction of eEM.
SEF rules and better data are leading the drive to higher e-ratios in emerging market currency markets, but what are the challenges involved in trading NDFs and local currencies online?
This turned into a lively discussion which touched on both the difficulties and therefore opportunities apparent when taking this part of the market electronic.
It was agreed that this will happen faster than other parts of the market and has the opportunity to both learn from the mistakes of the past and take the good from other venues and place them in one spot.
The debate on SEF vs NON SEF continued with both London and Singapore potentially benefiting from a trading shift away from the USA, as well as the opportunity offshore US banks have as the possible conduit between the two regime’s. Leading to this year’s word of the day – ‘Bifurcation ‘ or perhaps not just one Liquidity Mirage – but two.
One of the more interesting sources of debate was the question of what defines a market maker ?
Earlier panels had discussed how big banks were now internalizing up to 90% of flow and only going to market when they need too. Whereas Non Bank Market Makers are the complete opposite – often showing prices and inventory with the sole goal of being traded on to complete their position requirements.
The Singapore market has seen the wide spreads in some currencies come in solely in response to bank and non bank electronic pricing and that’s all down to a very small handful of people having a very big affect on that market.
“We’ve seen the China market come in from 7-10 pips , to 5, and now sometimes 2- 3”
“ Yep – that was me “
The ultimate and somewhat future solution possibly being a mix of traditional bank market making alongside tech led non bank market making. The EM world being such a fragile thin liquidity market as it stands today - the need to separate pools and trading behaviors (in the short run anyway) appears to be the best strategy.
Sometimes the market is like a school yard and you have to keep two kids apart for the greater good – but eventually they do learn to play well together. There is some hope that within the right framework the requirements of both sides will move from a parasitic to a more symbiotic relationship.
Which is certainly grounds for another 18+ letter scrabble winning word we can add to ‘Extraterritoriality’ and ‘Bifurcation’