TradeTechFX

Key takeaways

360T was an important sponsor of the event and their top five takeaways from it were:

1. There’s simply no replacement for in-person gatherings
2. The buy-side are becoming more data savvy
3. Benchmark data and compliance are key EMS focus points
4. Momentum is building around FX Futures
5. The industry is poised for change

1. There’s simply no replacement for in-person gatherings
   There was a palpable excitement around this event, in large part because for most (if not all) of the attendees it was the first time that they had been able to actually sit down face-to-face with one another for about 18 months. All the virtual channels that market participants have been using to stay in contact during this period have been incredibly useful for maintaining relationships and ensuring that the disruption to businesses have remained minimal. With that being said, the TradeTech FX event was a strong reminder that while these channels can substitute for in-person interaction they can never replicate it.
   
2. The buy-side are becoming more data savvy
   FX trading continues to become a more data-driven business but there exists clear disparities between the amount of data which market participants can access and the level of sophistication around the analytic tools available to them. For example, a large sell-side firm operating as a liquidity provider to many counterparties is likely to produce a lot more data which can then be used to refine their trading compared to an equities-focused investment manager who only trades FX in order to complete other transactions. Moreover, the sell-side firm is likely to have the resources necessary to hire quantitative experts and then arm them with all the tools they need to make use of this data; this might not be the case for the investment manager. What became evident during the TradeTech event, however, is that this playing field is being levelled somewhat on a couple of fronts. The first is access to data. Buy-side firms are more conscious than ever of the need to access independent data in order to continuously monitor the pricing and behaviour of their counterparties, and this data is becoming more readily available to them. Importantly, whereas G10 Spot FX data has long been accessible to buy-side firms it is only recently that they have been able to get accurate, reliable data for other instruments, such as forwards and swaps.
   
   The other change has been around the availability of analytics tools. There has been a proliferation of third-party transaction cost analysis (TCA) providers which have helped buy-side firms to measure and, hopefully, improve their FX trading. And now it seems that platform providers are increasingly giving these firms the tools needed to conduct their own execution analysis.
   
   On top of all this, there is a noticeable and still growing sophistication amongst the buy-side with regards to the different ways that data can be used to analyse and understand the behaviour of their counterparties and improve the pricing that they see. This development is undoubtedly good for the buy-side, and good for the industry as a whole.
   

3. Benchmark data and compliance are key EMS focus points
   360T took part in a lively roundtable discussion at TradeTech which was centred around how buy-side demands for EMS platforms are evolving, and a number of illuminating points emerged from this. The first is how important it is for these firms to be able to integrate high quality benchmark data into their EMS at the point of execution and without interrupting their own existing workflows or having to do the engineering work themselves. This enables them to use the data as a tolerance check, ensuring that no trades are executed when the price is more than a predefined distance from their benchmark. Such functionality gives buy-side firms the confidence to automate parts of their trading activity, freeing their traders to focus on the most complex trades or other more mission-critical tasks on the desk.
   
   However, the roundtable participants made it very clear that a tolerance check like this is just one of a number of rules that they want in place for their low-touch or no-touch trading. The group emphasised that automated trading parameters should not be an “all-or-nothing” proposition and instead want a highly granular and bespoke set of rules which can be implemented according to their own specific needs.As is often the case these days, compliance was top of mind for many amongst the group, but this only served to highlight the importance of having this benchmark data within the EMS.
   
   People pointed out that in addition to providing a good benchmark for trading activity, a system which automatically blocks out of tolerance trades can help firms to meet their best execution mandates. Indeed, much time was spent talking about the importance of having a good system of compliance alerts within an EMS for order handling and execution policy which allow users to easily document any reasons for abnormal trading activity so that their oversight team can refer to the data.

4. Momentum is building around FX Futures
   At these types of events there is always at least one panel focused on listed FX products and it’s usually populated by a group of speakers who have a vested interest in this product segment, talking up the reasons why it’s poised for growth. The TradeTech event stuck pretty close to this format (they did manage to get one buy-side firm on the panel) and yet something about this discussion felt very different from previous years. And perhaps the key reason why is because instead of just talking about why listed FX trading is likely to increase going forward they were also able highlight the current growth that is occurring in the market. It very much seemed from the discussion that listed FX — and FX Futures in particular — have some wind in their sails right now.
   
   There are multiple reasons that could all work towards explaining this new momentum. One is the Uncleared Margin Rules (UMR), Phase 5 of which just came into effect this month after having been delayed from 2020. It seems that a whole swathe of buy-side firms have been caught up in Phase 5 of the rules, with even more due to comply with them by September 2021. UMR makes it more capital intensive for firms to trade certain products on a bilateral basis, and hence it has been widely expected that they could push more FX market participants to look at both FX Futures and OTC FX clearing.
   
   Another reason is the expansion of the listed FX products on offer. For example, the Eurex representative on the panel was able to tout the launch of USD/KRW Futures which are fungible with the corresponding contract listed on the Korea Exchange (KRX), which is a very frequently traded product. The idea behind this is that global market participants are now able to trade Korean won Futures at Eurex during core European and North American trading hours. Eurex has also recently launched seven new FX Futures for Scandinavian currencies as it seeks to position itself as the European hub for listed FX. And who knows, maybe another reason for the uptick in listed FX trading could be that the message about the advantages these products can offer is, after all these years of panel discussions, getting through to the industry?

5. The industry is poised for change
   An overarching theme across the entire TradeTech event this year was that there appears to be a significant and growing appetite for change amongst the buy-side. Many of these firms felt that they were forced to put projects or new technology implementations on hold while they grappled with the impact of the pandemic on their business. With something akin to normalcy now established, even if for some firms “normal” looks a little different than it did before the pandemic, it seems like many of these firms are now eager to make up for lost time. Some firms expressed a desire to implement more modern FX trading systems which can enable them to fully optimise their workflow across the trade lifecycle whilst also being flexible enough to meet their evolving execution demands. There was talk about new ways of trading, with peer-to-peer platform providers being conspicuously present on the stage this year.
   
   And perhaps unsurprisingly, cryptocurrencies were a topic that somehow managed to find their way into the conversation during most of the panels on the first day of the event. This might prove to be significant because the TradeTech event was largely attended by large institutional FX market participants, and it suggests that they are increasingly also interested in the crypto space.
   
   The different ways that buy-side firms are accessing and using market data was a theme that weaved between nearly all of the panel sessions. And while there has been a lot of talk about why buy-side firms want to automate parts of their FX trading and how they should go about it, the sense from this event was very much that these firms are now taking concrete steps down this path.

Finally, it feels like perhaps the pandemic has caused something of a mental shift in the FX industry. We have all been confronted with unique challenges and been forced to think and behave differently for a year-and-a-half now, and as a consequence it seems that some parts of the industry are more open to embracing change than they have been in some time.