Historically market structure in foreign exchange (FX) has lent itself to ISDA-based, direct bilateral trading, meaning buy-side firms – in particular real money firms who don’t have the capabilities to use a prime broker model – are often locked into these relationships with banks based on credit lines.

However, buy-side institutions have become increasingly keen to diversify their access to liquidity outside of these relationships. And this has only been exacerbated by the introduction of new liquidity providers into the market, a reduction in warehousing by banks in recent years and market volatility on the back of macro events – such as the Yin carry trade unwinding in recent weeks.

“What if a bank channel is blocked?” said Tjerk Methorst, senior trader manager at PGGM. “We then need a new route. My role is to ensure tooling is sufficient to access liquidity via different routes.”

Given the challenging environment participants find themselves within, traders have become increasingly keen to explore how new liquidity providers and sources could help the industry to better prepare for similar events in the future.

However, in order to do so the untangling of liquidity and credit must take place, panellists said, speaking in discussions exploring various solutions including peer-to-peer liquidity and the prime brokerage model used by by hedge funds.

“Historically speaking, market structure has required two things to happen in bank relationships and those are pricing and credit. Without both you’d have no relationship and no liquidity,” said Jay Moore, co-founder and chief executive officer of FX HedgePool, a peer-to-peer liquidity platform.

“Hedge funds can access deeper and more specialist pockets of liquidity through prime brokers, but the real money space is not in the prime broker world because of the complexity of their fund ranges. A prime broker at the centre of their credit universe doesn’t make sense.”

He also noted that given real money asset managers are reliant on the ISDA relationships that they have this can sometimes be limiting to what they can access.

“You might have a fund manager with 15 banks on the panel but perhaps not SEB and they want to access specialised Scandinavian liquidity but they can’t today,” added Moore. “Asset managers should be able to access the best liquidity in the world. Separating credit from liquidity will open up specialist LPs [liquidity providers] to help where needed most.

“Big banks want to do more trading but they’re capped out at capacity. This is where other specialised providers come in with other pockets of liquidity. The credit story is changing.”

New protocols and greater transparency were called for by panellists in order to overcome this reliance on traditional providers and “bridge” the gap amid the decoupling of credit and liquidity.

“It’s about new protocols. All to all will increase transparency. Decoupling [liquidity and credit] will mean a better price for both parties,” said Alvin Chopra, chief operating officer and co-founder at SpectrAxe, an all-to-all FX options trading platform.

“Banks are crucial. They’ll make money elsewhere. It’ll be a migration from risk transfer services to algo trading. The client to dealer relationship will be better.”

Methorst concurred: “This will spur innovation in other ways to solve credit through platforms.”

New liquidity providers

Given the shifting dynamics, panellists speaking this week explored the potential for new liquidity providers. The overall conclusion was that while new liquidity sources are of course desired, ensuring that relationships are meaningful enough to prove fruitful is essential. Finding the “right mix of liquidity providers” is paramount, but the question is, what is that?

“More liquidity providers is not the way to go,” said Jonas Virtanen, global head of spot trading at SEB. “You need fewer but stronger relationships and you need to make sure it works for both parties at all times. The client also needs to behave as the taker and look after liquidity.”

Panellists were united in their stance that communication is central to maintaining the strong relationships required in today’s environment. Like Virtanen, Anthony Brocksom global head of sales at FX Spotstream reiterates that this is the responsibility of both the liquidity provider and the client.

“You want a liquidity provider to take the call. You need open dialogue. Clients have to behave too,” he explained. “They have to be honest with how they’re going to be trading. For example, if you tell them off the bat you’re going to sweep the book then they know to expect it.”

When asked how a participant might go about identifying a new liquidity provider to use, speakers agreed that having a natural franchise connected to it would make it favourable.

“Is there a franchise behind it that makes sense? Non-bank LPs don’t have the same shape for them you have to ask what’s the model? What drives the additional benefit?” said Sam Johnson, managing director at iSAM Securities – a new liquidity provider.

“If the story makes sense, it’s compelling. Clients need more novel analytics tools that simulate the market. We need that dialogue.”

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Desks are always seeking the best talent, and panellists agreed that more and more candidates are arriving well-equipped and ready to take on challenges, more aware than ever of the importance of coming prepared.

They are now demanding more and having a greater say in what they want to learn and how they want to grow, said Carolina Trujillo, head of e-FX distribution at SEB.

“Gone are the days where you would come into a position and have a steep learning curve for a few months and then sit comfortably for five years. The young talent definitely want to be challenged and wants to grow continuously.

“Which is great because the demand from employers are quite high as well. We need great specialists, but we also want them to have many complementary skills. We want those people to learn and grow and be much more adaptable and be able to move across different paths.”

David Turner, head of EMEA FX trading at Blackrock highlighted that from a managerial perspective, understanding what these candidates want and where they want to go is important when it comes to helping them get there and what the next steps are.

Turner added: “Through internships you really get a feel for the people and the way they work and the way they learn – it’s a way of going deeper into that recruitment process.”

When asked what, aside from firm reputation and career development, are the main focus areas for incoming professions looking at market opportunities, panellists agreed that it came down to “meaningful roles”.

Expanding on this, trading and innovation expert, Liakos Papapoulous, explained that increasingly candidates are looking for jobs that matter and are having a societal impact: “It’s a trend that you see more and more […] SRI, personal development, career development and being challenged are the most important topics for candidates in my experience”.

Turner added that this factor can lead to difficulties in terms of retention as individuals move rapidly in search of this angle.

The panel also highlighted the importance of incoming traders being flexible in terms of their growth opportunities and approach when it comes to developing their skills, agreeing that the optimum mix is a high performing quant individual with a good grasp of data, combined with a sociable attitude.

Read more: Amidst the transformation of trading, technology and talent, where does the balance between versatility and specialised expertise lie?

Speakers agreed this is hard to find, but that mindset is key. One must want to develop skills, and managers must want to foster this.

In terms of flexibility, the panel also addressed this in the scope of work-life balance, as well as career-wise, highlighting the importance of allowing employees to have a say in their day-to-day set ups.

Papapoulous suggested that the buy-side was better placed to empirically follow this through: “The buy-side actually has a better proposition here than a lot of the sell-side because from what I’ve understood, especially in the US, on the sell-side everyone’s being pulled back into the office five days a week again but if you can have a proposition with some freedom to work one or two days from home […] giving them the option is something that you should definitely have on the table.”

On the other hand, Turner explained that what works very much depends on individuals, asserting that in his experience juniors are not moving towards remote working. 

“That’s where they’re learning most quickly, and when we talk about them wanting to be challenged and move on, team members want to be in the office.” 

Elsewhere, all panellists agreed that diversity and inclusion was an important aspect of building a successful team, with the diversity of experience highlighted as key in reaching successful outcomes and ensuring a complete overview of the market.

Trujillo made clear that from her perspective, tokenisation needs to be avoided at all costs and that the optimal percentage of representation – whether that be gender, race, or any background factor – needs to be at 30%, as research suggests.

“You need to make sure you have role models all the way up […] really it’s hard work because 30% is a lot when you start from zero. It’s about structure at each level in order to really have an impact, to ensure that that group of people can feel comfortable and get included and finally get a sense of belonging and therefore have an impact on your organisation.”

Panellists agreed that this aspect was something that should not be overlooked by firms, or else risk being left behind. Papapoulous suggested that a desk with completely identical backgrounds will only serve to limit outcomes.

Trujillo further warned that firms must be wary of not being too naive in believing that hiring junior individuals with diversity in mind will directly result in diversity at the top levels.

Looking from a top-down perspective, she brought another notion to the table, the idea that taking care of existing resources – i.e., older, established team members – should not be overlooked.

“Age diversity is important […] be mindful not to discriminate based on age, respect knowledge as even at the end of their careers, individuals can give so much by involving them in their own succession plans – it brings out new engagement and energy from them.”

Speaking to the recent changes to work set-up, including home working, Trujillo advised that when managing a team, the key is to find solutions that work for as many as possible, recommending an approach which is as creative as possible.

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The Scandinavian bank was onboarded to the platform following increased client demand for more specialised and local liquidity. Following growing interest from Nordic financial institutions, BidFX said that clients specifically requested SEB as a counterparty to provide bespoke liquidity through streaming rates and request for quote (RFQ).

“With such demand across our range of clients for SEB it will further enhance the liquidity on offer to our institutional clients both in the Nordics and around the world. We look forward to working closely with them, and other Liquidity Providers, to ensure we keep business as normal as is possible in these tumultuous times,” said John McGrath, CRO BidFX.

Carolina Trujillo, head of e-FX distribution at SEB, added that becoming a liquidity provider on BidFX allows the bank to extend its reach to existing clients, while gaining access new clients.

“As the leading liquidity provider in Scandinavian currencies, we want to be able to reach out to a wide variety of clients and offer access to our unique flow franchise,” Trujillo added.

News of SEB’s onboarding follows BidFX’s recent upgrade to its mobile trading app for institutional clients. Users can manage and trade spot FX, forward and NDF positions at anytime and anywhere in the world on the app, with trading functionality in real-time via a secure framework.

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The tool allows brokers acting as SIs under the MiFID II regulatory regime to comply with the requirements around quote management, pre-trade transparency, reporting and best execution.

ULLINK’s UL QUOTE service enables brokers to receive cross-asset request for quotes (RFQs) to then be directed to a source of liquidity, while Itiviti’s SI provides auto-quoting and support with order and RFQ interactions. The pre- and post-trade quote publication, capture of data, record keeping and reporting is automated.

Christer Wennerberg, product manager for equities at SEB, said the bank worked closely with ULLINK and Itiviti to ensure the SI service met the needs of the business. “Our decision to register as an SI under MiFID II was greatly facilitated by the timely availability of the combined turnkey solution,” he added.

SEB has had a long-standing relationship with both ULLINK and Itiviti, after it chose ULLINK to support its equity trading activity through market connectivity, and order and execution management across dealing desks in 2004.

The bank also uses Itiviti’s trading platform Tbricks for its equity cash and derivatives trading, as well as its market making operations.

“The changes in market structure due to MiFID II presents challenges as well as opportunities for brokers,” commented Richard Bentley, chief product officer at ULLINK. “SEB has embraced these changes to innovate solutions and realize new business opportunities.”

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Speaking on a keynote discussion panel at TradeTech in Paris, panelists from ITG, Goldman Sachs, SEB and SIX Swiss Exchange agreed that significantly higher costs have crippled margins at sell-side firms.

“The sell-side has huge costs and these are continuing,” said David Shrimpton, managing director of the securities services division at Goldman Sachs. “It costs a lot of money to put the infrastructure in place to route to all systematic internalises (SIs), with data or analytical costs, connectivity, testing, audit trails.”

He added: “For a firm like ours where we have reasonable market share in equities we need to optimise our value chain at every level, but for someone running an equities business with less than 3% market share, we will see deeper partnerships as we look at margin erosion throughout the year.”

ITG’s managing director and head of electronic sales, Duncan Higgins, added that the amount of work needed to be carried out from a connectivity and development standpoint has a major impact on costs at sell-side institutions.

“The flip-side is there are always new entrants in the technology space with new products to make those tasks a little easier,” he countered. “You can have a combination of outsourcing some of those activities or buying and developing internally. I think it’s that which is stopping massive consolidation or the shutting down of broker businesses as quickly as people think it will happen.”

Simon Taylor, head of equities electronic execution at SEB, also explained that the costs of regulation in terms of implementation of the technology are extremely high, but regional institutions are far more challenged in this aspect.

“The barriers to entry from a electronic trading perspective do not cease , and my concern is the drive toward outsourcing which is a given,” said Taylor. “Regional players in particular will face challenges about what they will outsource but that will come down to the core clients. My fear is that despite regional players create a unique value, they will become smaller as that value proposition becomes mixed.”

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Falkengren is set to join Swiss wealth and asset manager firm Lombard Odier Group as a managing partner. She will leave SEB at the latest by July 2017.

“I have spent my entire professional life in SEB,” said Falkengren. “After all my years at the helm of SEB, it was not easy to take a decision to pursue a new career and role.

“However, I have come to the conclusion that now is the right moment. With its strong culture and committed people with clear values set on delivering a great customer experience, SEB is well positioned to meet future challenges and opportunities in a rapidly changing banking landscape.”

Falkengren’s first contact with SEB was as a summer intern at the bank’s Stockholm branch office. From there she would go onto various positions within the company including global head of trading and head of merchant banking, head of division corporate & institutions and executive vice president of SEB.

She spent 11 years as president and CEO.

“Annika Falkengren has with her longstanding commitment to SEB and its customers,” said Marcus Wallenberg, chairman of the board of directors.

“She successfully navigated SEB through the global financial crisis and set a clear strategy forward on which she and the whole SEB team relentlessly has delivered.”

SEB said it will now initiate the recruitment of a new president and CEO.

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