The analytics edge: Transforming the FX market

The steady rise of electronification in FX markets has ushered in a new era of data-driven decision-making. As the FX execution workflow becomes digitised, data analysis has become an indispensable component of the ecosystem.

With more data at firms’ disposal than ever before, Transaction Cost Analysis (TCA) is playing a crucial role in helping them fine-tune their strategies.

John Stead, Director of Sales Enablement, Strategy, and Marketing at SmartTrade, emphasises the importance of analytics. “FX analytics are pivotal in delivering competitive advantages by transforming vast data into actionable insights,” he says and illustrates this with a recent example.

“One of our regional bank clients told me that their sales team noticed through our analytics that a key client had significantly reduced their trading volume in EUR/USD pairs,” Stead says. “Recognizing this shift, they proactively reached out to understand the client’s changing needs and offered tailored solutions, retaining the client’s business.”

This example just scratches the surface of what analytics can offer FX market stakeholders. From traders to risk management, analytics are changing how firms manage their workflows. Here’s how.

Analytics increasingly playing a central role in FX

With FX witnessing a significant transformation as analytics takes centre stage, market participants are changing how they operate, make decisions, and interact with clients. Daniel Chambers, Head of Data & Analytics at SGX FX, underscores the critical nature of this change.

“The market participants that do best will only be those making use of analytics,” he says. “This has been clear to see from sell-side, buy-side, vendors, etc. Those that apply an analytical approach have shown to outperform those that do not.” This observation highlights the growing divide between firms that have embraced analytics and those that have yet to fully leverage its potential.

The power of analytics lies in its versatility across various aspects of FX operations. Chambers elaborates on this point, noting that, “Analytics assist whether it be on strategy, execution, pricing and processes. There is a wealth of data within FX and the ability to make use of that data with analytics is improving.”

This improvement is helping firms uncover new opportunities, optimise their operations, and gain a deeper understanding of market dynamics. Analytics application currently spans the entire trade workflow, from pre-trade analysis to post-trade evaluation, allowing firms to refine their strategies continually.

Analytics is also having an impact on client relationships, as Stead explains. “Analytics [can] also help uncover upsell opportunities by analysing client portfolios,” he says. “Suppose a group of clients trading in Asian currencies shows interest in hedging during volatile periods, the bank can target these clients with educational materials on options trading, addressing specific needs and increasing revenue.”

This targeted approach demonstrates how analytics can drive both client satisfaction and business growth by identifying specific client needs and proactively addressing them.

Stead also highlights the role of analytics in optimising trading execution. “For traders, analytics provide deep dives into LP performance,” he explains. “If, for instance, analytics reveal that a particular provider consistently has higher latency during peak hours, traders can adjust strategies to engage alternative providers, ensuring efficient execution.”

Of course, analytics doesn’t emerge from nothing. Firms need high-quality data and a robust framework, something Paul Lambert, CEO at NCFX, emphasises.

“Leveraging a common data framework for analytics allows all stakeholders to assess transaction values more effectively,” he says. This approach benefits both price makers and price takers by creating a shared understanding of market dynamics.

“For price makers, transparency in their pricing and transaction data not only builds trust but also provides a competitive advantage,” Lambert continues. “Those who are open about their profit margins can foster stronger relationships with clients, outpacing less transparent rivals.”

Diving into AI’s role in analytics

The role of AI in FX analytics is becoming increasingly prominent, opening up new possibilities for data interpretation and decision-making. However, despite the interest and hype around the technology, AI-driven analytics are not uniform across the industry, Lambert says.

Despite the current limited uptake, Lambert sees growth potential. “As firms begin to grasp the potential of this data, the march toward automation will likely accelerate, though widespread adoption remains distant,” he says.

When asked about examples of AI adoption, Stead is quick to point to a client example. “One of our clients employed machine learning algorithms to analyse client behaviours and discovered that clients who frequently trade certain currencies during volatile markets also show interest in options trading,” he says. “Recognizing this, the bank introduced tailored options products to similar clients who hadn’t yet adopted them, enhancing client value and generating additional revenue.”

But AI’s potential extends far beyond this. “AI also detects patterns in trading behaviours, generating alerts when deviations occur,” Stead says. “If a corporate client known for steady monthly transactions suddenly increases trading volume significantly, AI systems can flag this anomaly. This might signal shifts in the client’s business operations, prompting timely engagement to address new needs or potential issues.”

Chambers offers additional insight into the future applications of AI in FX analytics. “It [AI] will likely play a part in venue selection, price discovery, and more,” he says. “It will also potentially allow those that want to see things in a unique way to build tools that would have previously required more resources.” AI could democratise certain aspects of analytics like this, allowing smaller firms or those with limited resources to compete more effectively in the market.

As the FX market continues to evolve, the integration of AI into analytics processes promises to enhance these capabilities further, potentially reshaping the competitive landscape of the FX market in the years to come.

For now though, most analytics use cases centre around improving client relationships, managing risk, and TCA.

Improving client relationships and managing risk better

Analytics are significantly impacting how firms interact with clients and navigate market uncertainties. The ability to leverage data for customised solutions and proactive risk assessment is transforming both client relationships and risk management practices, setting new standards for service excellence and operational efficiency in FX.

Stead illustrates this with an example of analytics aiding personalisation in client communications. “A bank used machine learning to identify that clients frequently trading AUD and NZD during specific market conditions could benefit from specialised research and trading strategies,” he says. “Providing these clients with tailored insights enhanced engagement and satisfaction.”

This customization can extend beyond trading strategies to the interface clients use to interact with platforms. Stead draws an interesting parallel. “Drawing inspiration from the gaming industry’s personalization trends, FX platforms can adopt similar customization in screen design and interfaces,” he says. “A trading platform might adjust its dashboard to highlight currency pairs and tools most relevant to each user based on their trading history, increasing efficiency and user satisfaction.”

Chambers extends the customisation theme to liquidity provision, highlighting a nuanced approach to analytics application. “Liquidity is not a one size fits all solution,” he explains. 

“Analytics helps to ensure efficient service, but hopefully not at any party’s expense. Analytics are not only used to be more cautious, but with SGX FX liquidity provision data and analytics tools also helping to highlight where a change could benefit all market participants. It provides the transparency to make decisions that are bespoke to a client, explain why they’re made, and monitor for their impact.”

Analytics ultimately help firms become more proactive when managing client relationships, Stead says. “This proactive approach fosters stronger relationships, increases loyalty, and positions the firm as a forward-thinking partner in the client’s trading journey,” he says.

Analytics are also transforming risk assessment and management. Stead provides an example from SmartTrade’s Commercial Banking and Payments (CBP) solution that illustrates how analytics can enhance security and risk management.

“If a corporate client suddenly initiates a high-value transfer to a new international beneficiary, analytics can flag this as unusual, prompting a review to prevent potential fraud or errors,” he says. This capability to detect anomalies in real-time can be crucial in preventing financial losses and maintaining the integrity of transactions.

On the trading front, advanced analytics can detect subtle changes in client behaviour that may indicate shifts in risk profile. Stead explains, “Our LiquidityFX (LFX) platform leverages AI to segment clients based on behaviours. If a client typically trading low-volume transactions suddenly places large orders in exotic currencies, the system generates an alert. This could indicate a shift in risk profile or unauthorised activities, enabling swift risk management adjustments.”

Chambers highlights the dual role of analytics in risk management, emphasising its impact on both macro-level trends and micro-level execution decisions. “Analytics assist at both macro level and at the execution level,” he says. “Changing market conditions will certainly impact client activity, but for many traders who don’t have a choice when to trade FX, the analytics will assist more on what time of day to trade, whether to add time-risk or not, etc. and this is possible on the SGX FX platform with the data and analytics made available to a wide range of different market participants, each with their own levels of sophistication and execution flexibility.”

Interestingly, Chambers also points out a potential consequence of widespread analytics adoption that market participants should be aware of. “Some of this analysis can lead to a self-fulfilling prophecy,” he says. “Everyone trades this time of day [and] I’ll do the same as an example.” Firms must use analytics to think critically about the insights they provide and their potential market-wide impacts, keeping broader context in mind.

Returning to risk management, Stead points out that real-time processing capabilities in analytics systems enable early detection of market anomalies. “If sudden spikes in volatility are detected in a currency pair, traders can adjust positions accordingly,” he says. “Integrating these predictive insights allows FX participants to anticipate risks and opportunities more effectively.”

By leveraging advanced analytics, firms are deepening their understanding of client needs, anticipating market shifts, and managing risks more effectively. 

This data-driven approach enhances client satisfaction and loyalty, and positions firms to navigate the complex and dynamic FX market with greater agility and confidence.

The state of execution analytics

Aside from risk and strengthening customer relationships, analytics are playing a significant role in execution analytics too. When asked about this, NCFX’s Lambert highlights the need for a paradigm shift in how firms approach and implement analytics.

“The next wave of execution analytics will need to move beyond manual pre- and post-trade processes,” he says. “In today’s fast-paced environment, this is akin to bringing a Checkers set to a Chess tournament. The solution lies in real-time data processing and actionable insights that can be automatically fed into the trading process as it happens.”

This shift towards real-time, automated analytics represents a significant leap forward in execution capabilities. Lambert reveals that such advanced real-time analytics capabilities already exist, albeit with limited accessibility. “NCFX’s Data Engine is already capable of this level of complexity, offering real-time, in-flight pre- and post trade analytics, but for now, it remains accessible only to a few highly sophisticated clients,” he says.

However, Lambert suggests real opportunity lies “…with the buy side, where innovative firms could bridge the gap between real-time data analysis and execution. This integration is now materialising for the leaders of the pack.”

When asked about the specifics of in-flight execution analytics—actionable insights that feed into the trading workflow in real time—Lambert is quick to point out its advantages.

“First class data is essential in levelling the playing field between buy-side and sell-side participants and enabling workflow automation,” he says.”To give a few examples, our Forwards365™ data, where we publish a live, granular, independent benchmark swaps curve out to one year, allows buy-side and sell-side to use the data as guardrails for auto-execution.” 

“Another example is the use of our regulated spot benchmark data which is already used in a number of workflow automation processes such as auto-expiries in FX options and as reference rates for FX options clearing,” Lambert notes. 

The shift towards automated, real-time analytics is not just a matter of keeping up with technological advancements; it’s becoming a necessity in the face of the growing complexity and speed of the FX market. “The notion that a human trader can effectively process analysis and apply it in real time is becoming increasingly unrealistic,” Lambert says. “Automated, real-time analytics are the future of execution, and firms that embrace this shift will be better positioned to succeed in the evolving FX landscape.”

The trend in execution analytics is clear—the future belongs to real-time, automated analytics that can keep pace with the speed and complexity of modern FX trading. As these technologies become more widespread, they promise to level the playing field and provide significant advantages to firms that can effectively implement them.

Future developments in analytics products

Looking ahead, Lambert notes that the swaps market is an area of growth. “The FX swaps market is seeing growing demand for improved data and analytics, particularly with NCFX’s 

Forwards365 product, which has garnered significant engagement,” he says. “This shift is driven by the need for more sophisticated analytics in swap transactions—especially given that over 70% of buy-side transactions are non-spot and most involve non-standard tenors.”

He mentions that while swap data has historically lacked depth, this picture is set to change as new products aim to offer benchmarks around key events. 

“NCFX is set to launch Basis365, which will break down swap prices into their individual components, enabling even more refined analysis,” Lambert notes. “For instance, our Forwards365™ pre-trade tools have put the power into the hands of buy-side firms to optimise their roll dates along the swaps curve, where this information was previously unavailable to those firms, reducing significant costs of trading out to a less optimal roll date.”

The future of FX analytics appears to be moving towards greater automation and accessibility. 

“The next frontier in FX analytics involves empowering clients with AI-driven tools that simplify data interaction without coding expertise,” Stead says. He notes that these technologies are being integrated into trading platforms for real-time decision-making, representing “truly intelligent order routing powered by machine learning.”

However, the path forward is not without challenges. Data security, compliance, and the need for explainable AI are key concerns that providers must address. Chambers suggests a potential solution: “The market will potentially become less fragmented and more normalised with joint initiatives between market participants.” This collaborative approach could help streamline analytics adoption while ensuring robust standards for data integrity and model transparency.

As we look to the future, it’s clear that FX analytics will continue to evolve rapidly. From improved swap analytics to AI-driven insights, the industry is moving towards more sophisticated, accessible, and comprehensive analytical capabilities. Firms that can effectively leverage these tools will be well-positioned to thrive in the increasingly complex and data-driven FX market.