Equities traders realized long ago that they needed to upgrade their trading tools to remain competitive, and developed systems that enabled them to do in minutes or seconds what used to take hours. Now fixed-income and foreign-exchange traders are duplicating that success.
They’ve been busy automating order staging, execution and post-trade processes. Machine learning and other forms of artificial intelligence, as well as the wider availability of application programming interfaces (APIs) are enabling them to power-up their trading activities.
Nevertheless, they face challenges, not least because these changes must be made across multiple asset classes and jurisdictions, and in listed and over the counter (OTC) marketplaces.
Everybody’s doing it
More than three-quarters of top-tier FX investors already trade electronically, according to a Greenwich Associates study, which adds that competition among platforms is heating up.
Bloomberg has found similar sentiment among clients and industry leaders at its FX events around the world, where they noted continued growth in the adoption of electronic trading. Additionally, Bloomberg polls taken in Beijing, Johannesburg, Mexico City, Nairobi and Shanghai showed that even in these markets currency traders are already putting such systems in place.
Interest in adopting new technology is high, particularly among firms saddled with older legacy systems and still heavily dependent on spreadsheets. Often these companies have grown through mergers and acquisitions and are trying to harmonize their processes, procedures and policies across very different structures.
Designing an appropriate future-proof system would be a challenge even with unlimited budgets and teams of technologists, but few firms have that luxury. This dilemma is troubling for trading desk heads, who are ultimately responsible for the ROI of any new technology project.
Implementation of technology improvements is giving companies a distinct advantage over competitors. Firms with competent technology will be able to more accurately interact with the market and use tools such as transaction cost analysis to gain a more accurate view of market conditions, enabling them to make the best investment decisions.
Best practice on every trade
Continual changes to regulations and market structure are driving asset managers and corporations to become more self-sufficient as they source liquidity across venues and asset classes.
As a result, they’re working hard to come up with ways to update their systems and ensure they are optimizing the links or interoperability between them. Ignoring automation in such a vital part of a company’s financial activities can impose an unnecessary and costly logjam in its day-to-day operations, and cause further problems for middle- and back-office support.
This is well illustrated in the ever-changing regulatory environment, where new operating rules are being introduced each year. Keeping track of those changes has become all the more vital since the penalties for non-compliance were substantially increased in recent years. And with best execution no longer simply meaning “best price”, firms are looking to comply with regulatory and internal policies as well as reduce transaction costs.
From a regulatory compliance point of view, automation delivers a significant advantage: it ensures the firm’s best execution policy is applied to every transaction, without exception. Most asset managers, especially since MiFID II came into force, have established a best-execution policy committee to review the quality of execution delivered by their trading desks. When the meetings result in policy modifications, those changes can be encoded in the automation technology ensuring that they’re applied to each trade. Adopting best execution this way reduces the possibility of human error in the process.
The application of automated systems has increased transparency, brought new compliance tools, improved analytics and lowered transaction cost. Additionally, it’s driven demand for cross-asset functionality, when client firms are evaluating FX technology providers.
Meeting data, workflow challenges
Demand for more granular data and the ability to leverage additional transparency to drive analysis and decision making will continue to grow. These firms may also need to modify workflows and process to improve integration with the middle and back offices. Automation offers a more efficient source of data dissemination. No longer are fund managers content with seeing data in a report; now they want to see all layers, and want them incorporated into trading decisions. Automation gives them that transparency, control, and actionable data they need.
Applying robust automation and rules-based logic for low-touch flow allows buy-side to focus on challenging, higher value trades that may have significant market impact and warrant greater expertise or the application of algorithmic strategies.
Accessing deep pools of liquidity
Trading is fundamentally dependent on accessible liquidity, and the days of using the telephone to search for a variety of prices are coming to an end. This laborious task imposes huge limitations; traders can spend so much time finding the best price for their trade that they run the risk of losing any market advantage they may have had and of incurring greater costs by the time they trade. The introduction of chat-based trading was therefore the next evolutionary step. But even that has been surpassed in the electronic revolution.
E-trading platforms can provide simultaneous prices from multiple liquidity providers to help treasurers or portfolio managers instantly find a counterparty that suits their trading objective. Bloomberg’s electronic trading platform FXGO, for example, replicates the manual process in digital form, and it does so with more than 350 banks – providing market participants with a deep pool of liquidity to obtain the best price in a single integrated system.
There’s also the issue of good communication. While many platforms can bolt-on a messaging system, few are capable of turning text into actionable data. FXGO’s chat functionality, for instance, can be scraped to harvest actionable data. By automating the process and integrating it into the wider trading system, traders can capture trade data and context, get broader oversight on their teams’ activities, better monitor markets and reduce the risk of human error when processing orders.
Portals and platforms
Fragmentation of foreign-exchange liquidity will persist as long as it remains traded OTC, yet platform innovation has enabled market participants to stay connected and even expand the range of available products and services. Concentrating the trading journey into a single platform – from price discovery to execution and post-trade reporting – means financial executives have a degree of visibility over their companies’ financial activities that manual workflows could never offer. While they may fear the technological leap necessary to make the transition, the cost of inaction can be quantified not only in lost efficiencies but in the dollars and cents of missed opportunities.
Intense competition among FX trading venues can be won or lost on the quality and depth of liquidity they can offer, combined with intuitive yet sophisticated workflows. For a corporate treasury department that has numerous subsidiaries, gathering collective exposures in a consistent and transparent process, is fundamental to improving efficiency and reducing risk. Traditionally, the company’s currency exposures would be managed locally by its different overseas cost centers. Automation, however, can offer centralized visibility, enabling execution of those exposures in aggregate and eliminating the need to pay spreads on individual transactions.
Bloomberg offers a portal that allows the subsidiary to send orders to the central treasury, who can then aggregate or net exposures, map to the proper accounts, and send to market for execution. Margin can be applied to the fills, and the constituent trades passed back downstream to the subsidiary. For corporate treasurers, the ability to connect live with all subsidiaries and manage global exposure in aggregate, within one system, is invaluable.
The benefits of automation are by no means limited to buy-side firms. Their sell-side counterparts can also reap rewards from better flow analysis and from more efficient market engagement than phone contact provides. They can also get the same synergies from systems integration and from reducing the likelihood of human error. Productivity gains are similarly to be had. Technology can put sales teams in touch with a broader customer base, with whom they can spend more time thanks to the efficiencies automation provides, from pricing to compliance activities and other rote tasks.
New technology for audit and compliance
The global regulatory environment continues to become more complex, forcing a sea of change in the way that markets behave. Last year, MiFID II was the big driver. While it was targeted at European firms, it caused a global push to raise market transparency, track trade details, and rationalize the decisions made around trade execution.
For FX, it means it means that firms may want to capture additional data surrounding the execution, as it relates to RTS 25 and RTS 27 of MiFID II, including time stamps for trade request, when the price sent, and whether the client traded or passed.
Some electronic trading platforms can provide end-to-end solutions that digitize the execution process throughout the lifecycle of a trade. This information can then be passed seamlessly to accounting, reporting and settlement processes.
Incorporating due diligence compliance into trading workflows can achieve vital efficiencies by automating the compliance procedures of these ever-changing demands. FXGO can track changes to a customer’s specific sectoral and jurisdictional regulatory obligations and seamlessly apply their operational requirements into the full trading process. It means buy-side traders can continue their hedging strategies without fear of interruption no matter how frequently the regulatory horizon changes.