A Look Ahead at what we can expect with e-FX in 2024

January 2024 in Market Commentaries

Nicholas Pratt spoke to a number of key industry players about the year ahead to see what we should expect for the FX market in several important areas including settlement, digital assets, data analytics, algo trading and FX swaps.

Vittorio Nuti, Global Head of LD & FX Algo Trading at Deutsche Bank, on FX algo trading & Execution analytics:

Algo execution in FX has been expanding at a decent pace over the last five to seven years, and I believe the product will enter a new phase in 2024. This phase involves a slowdown in  growth from the typical client base and an increase in hedge fund business. Hedge fund clients will be looking at execution more holistically, particularly considering the hidden costs of executing, such as co-located servers, IT costs for maintaining systems, and connections. This shift has the potential to change the landscape for FX algos. 

Regarding the development of new algos, we observe the FX algo business maturing, and we expect providers to differentiate their products by offering better quality of execution. This quality will be assessed quantitatively via third party TCA. As the client base will changes, further customisation of algo outcomes will be important to optimise client requirements. At Deutsche Bank, we’ll be focusing on delivering the successes achieved in FX to our Listed Derivatives platform.

Balraj Bassi, co-founder & CEO of Tradefeedr, on data analytics:

Data analytics in the FX market has now reached the point where clients have access to complete global data sets, capturing data from across multiple counterparties and venues, then making it available for analysis. We expect that 2024 to be the year where these data sets change how counterparties interact with each other and enable increased automated trading workflows.

As more information becomes available on data networks, it is now easier than ever for buy-side and sell-side firms to interact and collaborate, to make informed decisions about who they trade with and how they execute trades most effectively and profitably. 

This is far beyond Transaction Cost Analysis (TCA), as trading data is now available to inform trading decision making in pre-trade.

Automation is a key trend for 2024. During Q4 last year we started to see some clients’ trading desks automate their workflows using the information contained in our data network. As an example, we see this with our Algo Forecasting model, which uses performance data from FX execution algos to identify the most appropriate algo for specific orders. 

Clients use this in pre-trade to select specific execution algos, and some firms are automating this whole process, using APIs to gather forecasts on specific trades before automatically sending orders to execution algos. As firms look to increase workflow efficiency, we expect this type of automation to increase in 2024.

As firms increasingly use data in all parts of their trading, we have seen demand for data networks supporting multiple asset classes. Tradefeedr’s initial focus was FX, but in response to client requests we will launch Equities and Futures in 2024.

Rob Wing, Head of Digital Assets & FX at 4OTC:

Over the past two years we have seen more financial institutions move into digital assets trading. We expect this to continue during 2024, as investors continue to diversify their portfolios with a range of crypto assets, including Bitcoin, Ethereum and other more established crypto currencies.  

The recent SEC approval of Bitcoin ETFs will make it significantly easier for large pools of institutional capital to be deployed, pushing Bitcoin prices higher (with some predicting a new all-time high). What is certain is that there will be renewed interest in some of the more established crypto currencies.

The market remains highly fragmented, with institutional traders typically connecting to between five and 25 exchanges globally to access market data and liquidity. As with other asset classes, firms are demanding institutional-grade infrastructure to access these markets in the form of robust, secure, and low latency connectivity. 

They also require failover and full disaster recovery procedures. The digital assets markets are far more fragmented than in FX.  Firms want to receive market data and execute first. Co-location is becoming essential and given the rate of change of venue offerings, trading firms require active 24/7/365 support.

Lisa Danino-Lewis, Chief Growth Officer at CLS, on FX settlement:

Exploring ways to tackle rising settlement risk in emerging market (EM) currencies will continue to be a priority for the FX market next year. Adding currencies to CLSSettlement requires ongoing support from the relevant central bank and can require changes in the jurisdiction’s laws. 

Given these challenges, CLS will continue to focus its efforts on addressing this issue by enhancing CLSNet, our standardized, automated bilateral payment netting calculation service across 120 currencies. CLSNet reduces payment obligations exposed to settlement risk while improving operational and liquidity efficiencies.  

With an implementation date of 28 May 2024, supporting FX market participants through the move to T+1 securities settlement in the US and Canada will be another priority next year. As 20% of US securities and 16% of US equities are held in foreign portfolio holdings, the move to T+1 will impact many cross-border transactions. This is because to settle cross-border securities on T+1, the FX component of the transaction needs to be settled prior to the settlement of the security. 

CLSSettlement can support the trade flows resulting from a move from T+2 to T+1. However, time zone and/or operational constraints may require some cross-border market participants to adjust their FX post trade practices in order to meet T+1 requirements.  

CLS is engaging with both sell- and buy-side clients to explore how our current suite of products can assist the market in the short-term and consider the feasibility of adjusting CLSSettlement processes to accommodate later cut-off times. However, our main priority is maintaining the stability of the FX ecosystem, so any adjustments will need to be carefully considered.

Dirk Bullmann, Global Head of Public Policy at CLS, on developments around central bank digital currencies (CBDCs):

Since the term ‘CBDC’ was coined almost a decade ago, there has been increasing engagement globally by both the public and private sector in CBDC research and experimentation. In 2023, we observed an increasing focus on wholesale CBDC and saw some significant advances in the work around cross-border payments. 

We expect wholesale cross-border CBDCs to continue to be a significant theme for the coming year. As CLS provides a multi-currency, cross-border and wholesale payment system, which forms the settlement backbone of the global FX market, those developments are particularly relevant for us. 

We have established an innovation lab to follow and support CBDC and other initiatives where relevant. CLS is for example among a group of 30 financial institutions participating in a second phase of the SWIFT CBDC sandbox testing to explore FX and other use cases. 

As regards the use of new technologies such as DLT, we are always evaluating new opportunities to deliver enhanced services to our clients and mitigate risk in the FX market. However, any new technological solution must deliver efficiencies and/or reduce costs while also meeting extraordinarily high standards of resilience. 

Technology can only transform the market when it is translated into solutions that solve real business problems. That requires a deep understanding of business processes and platforms, and for activities currently undertaken by FMIs, such as CLS, the correct levels of oversight, governance, credibility and trust.

Peer Joost, CEO of DigiTec, on developments in the FX swaps market:

Technology will be the key theme of 2024. With increasing trading volumes, greater involvement from banks of all sizes and further buy-side participation, the FX Swaps market will continue its rapid volume growth and migration to electronic channels. This will drive further demand for accurate and robust pricing engines, and more automated end-to-end workflows. Staying ahead of the game will require much faster adoption of technology than we’ve seen in the past and this can only be achieved by frequently updated and scalable SaaS solutions.

We will continue to see banks of all sizes moving away from spreadsheet-based or manual pricing, and instead implementing accurate and robust pricing engines. These are required to accurately price in the rapidly moving electronic FX markets. Pricing FX Swaps is complex, and the scale of the challenge is demonstrated by Market Maker banks typically calculating 20,000 prices along their forward curve.

Automating workflows is another key trend for 2024, which will drive the further adoption of technology. All banks and the buy-side are already looking to improve automation throughout the trade lifecycle, to cut costs and have the capacity to manage more client business. Client demand to trade FX Swaps across more currencies and dates is growing and banks are looking for efficient ways to manage that additional volume.

The importance of data will grow as more pricing engines are implemented and more banks automate workflows. We continue to see more banks using the Swaps Data Feed (SDF). For banks and traders to fully build and maintain their own curves, the SDF allows them to improve pricing and extend currency coverage.

We also expect to see an increase in the electronic trading of these instruments in 2024. As clients look to FX Swaps as a source of global funding there is demand for their relationship banks to provide liquidity across multiple currencies and tenors. The only realistic way for banks to manage this client business in an efficient way is by trading using electronic channels, and automating workflows – in data, pricing, distribution, and settlement.

As the FX Swaps market continues to grow, we also expect to see regional banks trade more FX Swaps. In the past many could not justify the investment in on-premise applications, but with SaaS apps deployed in the cloud they are increasingly adopting FX Swaps pricing technology to service their client needs. This pricing technology enables regional banks to price more accurately and faster – both of which are essential for electronic markets. 

Electronification and automation result in better pricing along the curve, more clients serviced, more currencies traded, and more quotes accurately auto-priced – leading to increased trading volumes and improved client service. Typically, when a regional bank goes live with our D3 solution combined with the SDF, they are able to expand their offering beyond G10 and specialist currencies.

Electronic trading increases the need for accurate pricing and any bank publishing a wrong price is likely to quickly lose money. As banks look to attract more business electronically, we are already seeing tighter prices, but the main theme is that price accuracy along the forward curve has improved significantly. 

In 2024 Interdealer trading of FX Swaps, which has traditionally been dominated by the broker market, will start to migrate to electronic venues like 360T and LSEG. After our recent launch of D3 OMS we are seeing significant interest as banks look to access these venues to efficiently manage risk positions. As a result, we expect to see increased volumes on electronic interbank matching platforms, which will drive increased market liquidity, greater participation, improved client pricing and risk management, and for the FX Swaps market to grow for the benefit of all parties. 

Finally, Jeff Ward, CEO at FXSpotStream, talks about the key technology decision this leading provider will be making in 2024.

When considering developments in the FX market, it is important to note that these do not happen overnight, and the trends are already in place. In 2023, we began reporting our spot volumes separately and found that, while spot had remained fairly flat compared to our record year in 2022 – we actually saw strong growth in other products, namely NDFs (up 42.05% from an ADV perspective in 2023 vs 2022).

As with any service, a growth in volumes can come in one of two ways: through new additions, whether that be in the form of new clients or adding new liquidity providers (LPs), or through working with clients to maximize their relationships with their LPs. FX is, and always has been, a relationship driven business and understanding what each side is thinking puts us in a great position to help.

As with any technology provider, there are several technology decisions we will have to make in 2024. Last year we embarked on our ultralow-latency network migration and this year will move on to the next phase of the project, specifically the order entry and order confirmation processing.

Whenever we make a decision for the company, there are obvious risk versus reward questions, and ultimately the biggest driver in these is usually the value added for the client and/or FXSpotStream LPs. We maintain a constant dialogue with both sides and are always looking for ways to improve their experience.