The survey found that Refinitiv clients’ biggest challenges included spreads –especially in hedge funds and banks –and a lack of access to liquidity, which was a prominent issue for banks during the onset of the pandemic. Clients also expressed opinions on what they have found to be the most reliable methods of execution, their experiences of the virtual office environment, and their expectations for the rest of 2020?
Refinitiv collected a wealth of information from participants on their FX Transactions Venues –FXall QuickTrade, FXall Pricestream, Refinitiv Matching and Orderbook. The survey was conducted in mid-May through the first week of June. Respondents came from across Refinitiv’s four client segments (asset managers, hedge funds, corporations and banks) and they represent significant buy-and sell-side participants in the FX market.
Clients were asked about their biggest FX trading challenge. Unsurprisingly, ‘Spreads’ was the most popular response, with 50 percent giving that answer. This was felt more significantly at hedge funds and banks. 68 percent and 57 percent respectively said this was their biggest challenge, as opposed to only 35 percent of corporates. The changes to spreads during this period have been well documented. Spreads widened as volatility increased and providers became concerned about client credit.
This was clearly a market-wide impact, but one that was mitigated, at least partially, by utilization of tools to aggregate available pricing and find that elusive ‘best price’.
The second most popular answer was a lack of ‘Access to liquidity’. This seems to have been an issue predominantly for banks; 31 percent of the banking segment chose this answer compared with much smaller percentages from the other client segments.
In parallel with this, Refinitiv saw a significant uptick in interest in sourcing liquidity from their Primary Market –Refinitiv Matching. 28 percent of respondents (that are not currently using it) expressed an interest in sourcing liquidity from Matching, which has traditionally underpinned FX price discovery and pricing by liquidity providers. This could be seen as a flight to quality as the trading community opt for the certainty of firm pricing and low rejects.
Reliable Execution method
Refinitiv also asked which execution method participants found to be the most reliable during the crisis period. The top two answers were ‘Streaming risk transfer’ (as provided by FXall QuickTrade and Price stream) and ‘Primary market execution’ (as provided by Refinitiv Matching).
This latter point reinforces the aforementioned flight to quality. Banks wanted to trade on the Primary Market because they found it the most reliable mechanism to get their executions completed, while most buy-side participants opted for immediate risk transfer to their relationship banks.
If you dive slightly deeper into the numbers, you can see that over 70 percent of Refinitiv’s corporates and asset managers favoured streaming risk transfer. The balance of their answers highlighted an increased use of tools to automate the workflow around a voice trade (Send Details) and algorithmic execution.
This belies some recent press coverage about the death of the Request for Quote (RFQ). The results clearly show that this is the most reliable way of getting FX business done for a very significant proportion of the market. The use of Send Details is interesting.
This is a facility that allows trades to be agreed by voice, but then automates the booking through normal STP. Its increased use suggests that even trades that would normally take place over voice need the reduced risk of automated booking. It further demonstrates that a fully integrated electronic solution is the lowest risk method to execute FX.
Virtual office environment
Conscious that most of their clients are presently working in a virtual office environment(VOE), Refinitiv also asked them about their biggest challenges working from home.
The most significant VOE challenge was ‘Communication’, both with colleagues, and with clients and/or dealers. This difficulty communicating could be part of the reason why electronic trading was found from the survey to be far more reliable for Refinitiv’s participants than ‘Voice risk transfer’.
It also shows that instead of reverting to old-world methods (voice), the market is now so far down the path of electronification that it pushed even further in this direction when a crisis situation evolved. 18 percent of respondents described ‘Lack of a home-working capability for critical systems’ as the biggest challenge. This seems to demonstrate the initial teething issues that most people experienced while transitioning to their crisis working set-up.
The anecdotal updates that accompanied the survey results suggest that most of these home-working issues were resolved relatively quickly, and business-as-usual working was proven to be successful in most instances, despite extraordinary market volatility. Indeed, when asked a follow-up question about what clients would retain when working practices returned to normal, the most common answer was that they had proved working from home could be viable, and they were likely to do more of it.
Prospects for rest of 2020
A final questions asked respondents for their outlook on FX trading market conditions and what is expected in Q3 and Q4 of this year.
The responses showed some divergence between regions and client segments. However, the general theme is an expectation that the market remains somewhat subdued in Q3 but bounces back to pre-crisis conditions in Q4. Of the three regions, the Americas was the most optimistic, with a strong belief among the corporate and hedge fund communities that the market would bounce back sooner.
If we dive into the client segments a little deeper, we see some divergence in opinion on what comes next. Corporates definitely see the landscape improving over the next two quarters.
There is some fear that Q4 will bring high volatility (perhaps a second spike in the virus) in Asia and Americas, but far less in EMEA. Asset managers globally seem broadly confident we will get back to business-as-usual conditions as soon as Q3. There is less concern about an overheating market in Q4. Those situated in EMEA seem particularly confident that we will get back on an even keel in Q4.
Hedge funds in the U.S. (which include HFTs) seem to have a slightly different outlook to other constituents. The data shows that they see conditions in Q3 being marginally better than Q4. Perhaps thinking that the unwinding of the crisis removes some of the trading opportunities that have arisen from the volatility in the first half of the year.
Within the corporate client segment, we split the results into sectors. There was general consistency across the segment, but a line can be drawn between the health, manufacturing and technology sectors and all others in terms of optimism. Retail, entertainment, transport and professional services remain relatively pessimistic about a recovery, which chimes with the overall impact to those sectors imposed by lockdowns across the world.
All images Source: Refinitiv FX client survey 2020