I recently had the opportunity to attend for a second year the Forex Magnates London Conference. It was a great event with many international participants in the FX marketplace & a chance to meet, listen & learn about current and future political, economic & financial situations affecting specifically the retail FX market. Topics were varied; however here are some of my impressions of what was being talked about from my notes. The first thing I noticed upon entering was there seemed to be slightly less people than last year though it was still a very bustling place in both the auditorium & the exhibition area. Nationalities were mixed as last time but there seemed to be more Asian, notably sub continent participants than last time whilst from Europe there appeared to be more from the UK and possibly fewer from the US.
The first panel session was titled Technological Trends in FX with a number of panelists. Viral Tolat, Chief Technology Officer at EBS started by detailing three things that he had seen spur technological growth:
1) volume growth had spurred technology
2) algotrading & its increase
3) the distribution of FX other than IDB’s.
Jakub Zablocki, MD at X Open Hub agreed that ‘’...without ‘broker’ technology we would not have the volumes now...’.’ He added that this helped spreads narrow as well. Harsha Bhat, CTO at State Street Global Exchange added that volatility was the biggest driver, technology allows new participants as it lowers the cost of entry. John Beckert, MD at First Derivatives spoke of how each of the many firms involved have their strengths & weaknesses. Technology enables scalable growth and it fills the gaps! Andrew Ralich, CEO of OneZero Financial Systems said it was easy to see connectivity nowadays and the question was ‘’How do I look different?’’. John noted that multi-asset technology was beginning to become a race on whom could do what. Viral pointed out that everyone else says that FX was a ‘’...late comer...’’ and that the lack of regulations would inevitably see more being done as oversight. The important areas to him were innovation & multi-asset! Harsha said ‘’..in some areas FX was not the leader!’’ and that it faced ‘’...challenges of fragmentation..’’. Jakub pointed out that the retail area had more demand for multi-asset services and that it was ‘’...easiest to introduce commodity CFDs and then equity CFDs.’’. John added as ‘’... market becomes more exchange like, we’ll see flows in FX pickup.’’. Trevor Young, VP at OANDA spoke of the growth in FX mobile & social networks and Harsha said that this was something new!
Challenge of HFT
The next panel session I found interesting was the HFT Challenge. John Howard, CEO of Automated Trader moderated and he asked the question - what are the key drivers in HFT growth? Graeme Burnett an industry veteran answered first that it was initially a simplistic model with easy entry into the market when HFT really started in 2007/8. Now there were increasing barriers to entry. Jay Hibbin, Commercial Director at MarketPrizm said it was a lack of opportunities in equities in Europe, fragmentation of the market in liquidity which equaled opportunities in arbitrage between liquidity pools. John said to him there were two components - 1) relativity between pools allowing arbitrage & 2) underlying demand for FX as a product (unlike ‘some’ equities). Unlike equities - FX - is a ‘blind spot’ for regulators. Jay said he saw HFT being threatened by the proposed FTT and by politics. Graeme added that HFT was not welcome in the FX arena. LPs provide liquidity but when it suits them. He saw a danger that politicians will hit HFT. John gave the example of PAR-FX who have introduced random ‘sleep’ restrictions on trading. EBS may also and asked ‘’...is this right?’’. Frederic Ponzo, Managing Partner GreySpark Partners pointed out that sell-side firms need assurance that the buy-side is not arbitraging them (which was met with a little laughter). Jay noted that there were enough LP sources & platforms for HFTs and they have multiple strategies. Latency is ‘’...not on its own ‘toxic flow’ ‘’ and delays against toxic flow are predatory. Frederic added that drive-by-latency arbitrageurs should be welcome as it was ‘’...survival of the fittest!’’. However, there was general agreement to a comment by Graeme that ‘layering’ where orders are resent again & again at the end of the validity period ‘’...should be outlawed!’’ and Frederic added that ‘flash crashes’ are caused by the trade venue(s).
John asked - what latency technologies were there for HFTs? Graeme spoke about the need to analyse the trend in 1 - 2 microseconds to which John asked about the decision latency - the time to process the decision? Jay saw a shift to lower latency by LPs with a ‘’...whole infrastructure...’’ approach. The commoditisation of low latency trading strategies and its outsourcing will see the need for more than just low latency. Graeme spoke about the hardware necessary with upcoming microwave links and/or next generation fibre links. Frederic interjected that ‘’...what we are talking about is optimising the final bit...’’ and gave the example that we were looking at the tyre pressure on a fast sports car rather than looking at it end-to-end. Which would you rather be - fast, safe, whole volume, etc...Jay mentioned that the whole ‘race to zero’ has become very expensive - ‘’...the gravy train has ended!’’ Firms may not make money out of it, instead they should be looking at the whole cycle of trading rather than the ‘’...nanoseconds!’’. Graeme elaborated about how the move now was away from software and into hardware. ‘’...there are now languages out there that operate sub microsecond.’’. He saw the next thing being the ‘’...real use of big data. Intelligent tools to use big data!’’.
Two sides of the FX coin
The next session I attended was entitled - buy & sell: two sides of the coin in FX! Peter Joseph Garnham of Euromoney asked the first question - how should the buy side embrace FX as an asset class? Mark Suter, Co-Founder of Digital Vega answered first with - narrower spreads! He could get ‘’...0.1 tic bid/offer spread on my iPad!’’. Glenn Stevens, CEO of Gain Capital next answered ‘’...there is a purity in FX markets!’’ as it trades around the world around the clock. Mark added he was ‘’...tired of equity markets saying they were first! We were first there 2000 years ago!’’. Robert Fleischler, MD KCG Hotspot FX next added ‘’...FX is the perfect asset class. The net worth to the system is zero - if the (US) dollar goes up then the other currency goes down!’’ and that ‘’...it is difficult to trade FX... there is no bias!’’. Glenn added ‘’...equity or fixed asset managers are also FX traders.’’ to which Robert added ‘’... the Big Bang in FX was the Euro in 2000!’’.
Peter also asked the question- FX, where now? Mark answered with more EMFX! Robert said with retail, especially the last three months as institutional moves down to retail. Yoav Barnes, MD at Victory FX who had been fairly silent, said China, specifically the retail side and some interest in Africa!
Peter then introduced the next question - a topical and potentially awkward one - fixing! Glenn saw a need for a change in oversight of fixings and as for banks restricting traders in chatrooms ‘’...have fun with that!’’ to general laughter and applause. Mark said he knew of five or six companies working on how to automate a fixing.
The final panel session I attended was on how to efficiently execute FX! The first question posed by the moderator Mitch Eagistein, MD of Boston Prime is whether FX is all one market now? Derek Sammann, Senior MD at the CME Group said that added pools of liquidity are welcome. ‘’...FX supports multiple models...’’ but ‘’...not sure that T+2 trades should be clearable!’’. Mitch asked him if he thought the FX market will continue to be fragmented to which Derek replied that we should let the market make the choice. Innovations as a market make us unique and ‘’...not a fan of regulators forcing choice!’’. James Watson, Head of EMEA at FXall said it was not about our business but about our clients and he did ‘’...not like the negativity associated with fragmentation.’’ and ‘’...the customer s have the choice.’’. There ought to be a ‘’...big ‘get over it’ moment on regulation.’’ from everyone! Harpal Sandhu, President & CEO of Integral added that ‘’FX is an OTC market, it has always been fragmented!’’. The market prefers fragmented or ‘specialised’ offerings and services the way they want to receive it! The key to making it work is integration but to keep the ‘specialisation’. He doubted regulators will touch it!
Mitch then asked the question as to whether it is possible to automate the LP or even if it is relevant to have a relationship with an LP. David Mercer, Chief Executive of LMAX Exchange stirred up the pot by saying ‘’...not everyone gets the same price!’’. Derek said that technology is a tool to a means to manage a relationship - not the actual management of a relationship. James added that the relationship was the business augmented by technology. Harpal mentioned that it depended on the type of FX business. Solving problems require people. If you’re dealing with the high technology end of the market then that matters. However, there are ‘’hundreds of versions out there...’’. For some high technology brokers they need the technology but for some voice brokers they need good people. Drew Niv, CEO of FXCM added that the business was changing, some still need the ‘high touch’ relationship but retail brokers can change the market. On the other side, LPs become unhappy so we all need to customise. Typically relationships change every six months and that is why it is a human business. The market has to be fragmented as all the market cannot be in the same place.