Alan Martin Lucero, Gregory Armon-Jones

Specifically, the speakers claimed two sides of a coin – either that the traders of the future will speak the language of software engineering first and foremost (Lucero) or that coding skills will be irrelevant as AI solutions will fill that need and traders will go back to the phones (Armon-Jones). 

The audience vote prior to the discussion swayed 69% in favour of Lucero’s hypothesis, with all to play (argue) for.

“We have a pretty good idea of how the trading desk of the future will look,” asserted Lucero, highlighting that it is only natural for the role of the trader to evolve in the same way Excel has moved on to Python and other tech. 

“Let’s be honest about it, at least for the buy-side asset managers, we’ve become merely algo DJs at this point. We read the room – the mood of the market, we pick a track – the currency pair, and we play the album […] market developments will give rise to a new kind of role, some sort of Jack of all trades and master of none, or master of few – being a market expert alone will probably not be enough.” 

Following this, argued Lucero, these ‘DJs’ will evolve further into conductors of an orchestra of AI.

“The future is exciting, and I think we are going from being just traders to architects of extremely complex workflows. Our value will be largely enhanced going forward.”

Armon-Jones countered that whilst tech is good for repetitive tasks and scalability, when it comes to market hiccups, a human touch and gut feeling remains valuable, asserting that – unfortunately – there is not enough historical data available for every eventuality and that the trader of tomorrow needs to have the experience of yesterday. 

He added: “Traders need to be able to have a view. They need to be able to have a kill switch or have a gut feeling and portfolio managers want to speak to traders, they want to have someone who’s got an edge.” 

However, delving deeper into how volatility could play into each’s respective prediction on the make-up of a future trader, Lucero suggested that going forward, the significant impacts of volatility will be much less of an issue as innovation ramps up.

Read more – Trader and PM relationships: A holistic approach is key to success

[10:50] Annabel Smith

Elsewhere, Armon-Jones, speaking from the headhunter perspective, asserted that many fund managers request macro traders who’ve experienced turbulent markets, if that comes with the smell of “cigarettes and booze”, the more reassuringly human, the better.

Assessing this from a different angle, the panel considered whether the pervasive presence of voice traders is a so-called self-fulfilling prophecy, wherein the traditional trader continually looks to hire people who resemble themselves. 

“A lot of people have made it and part of what we do is we look is look at data […] there are a lot of successful voice traders out there. These guys are valuable because of the market they’ve been covering, they know the ins and outs and know how to play the book,” said Armon-Jones.

Read more – “They’re the perfect trader”

Ultimately, both things can be true – but in an ever more technological market, as always, the unavoidable truth was staring the audience in the face. 

Following a lively debate, Lucero’s argument lost 8% of the vote, however the sentiment of the room indicated the expected, that though the future is full of potential in a world wherein technological innovation can and will never slow down, traders’ roles will indeed be irrevocably changed. However, the human touch factor is unlikely to go extinct.

The post The desk of the future: ‘AI conductors’ vs the traditional trader? appeared first on The TRADE.

Kenza Medjkane

Ramon Puyane, head of FX trading at IMC, explained: “There’s a lot of volume going through FX options and that’s partly driven through interest rate differentials, central bank diverging policy, and a lot of geopolitical unrest.

“The non-banks can have a look at what’s currently happening in FX OTC, which is historically very voice driven, very manual and see how they can leverage their technology to provide liquidity for the end customer either directly through the banks or through multi dealer platforms, agency brokers, that kind of thing.”

Read more: FX derivatives trading can be streamlined through electronification, but data quality must be assured, say experts

When it comes to how the market sentiment is potentially shifting, John Rothstein, UK managing partner and global chief operating officer at Optiver, asserted that it is the new age traders who are most open to alternative liquidity providers, and thus driving potential change.

“I think some of those folks see alternative liquidity providers as very natural, they see use of technology as very natural and so when they’re looking for partnerships, it makes sense that there’s not as much convincing and that alternative liquidity is something that’s [perceived as] additive and valuable to a market […] we’re sort of seeing a turning point.” 

Puyane agreed, highlighting that as the new generation continues to approach alternative liquidity in an ever more natural way, the rate of adoption is likely to increase soon. 

“It’s like a generational shift so it’s going to take time, but we’ve seen quite a decent growth in a relatively short period of time,” he said.

Speaking about her approach from a trader perspective, Kenza Medjkane, senior FX and rates trader at Total Energies, explained that though the firm currently does not use non-bank liquidity for FX options, this move would “probably be soon”.

“Currently we are using mainly OTC through bank providers, but are more and more thinking about non-bank liquidity providers because they are offering better pricing, competitive pricings and maybe more agile platforms as well.”

Expanding on the aspect of how to access non-bank as opposed to bank liquidity in FX options, and how this would differ, Medjkane explained that for banks this is around 60-70% done via voice, however she added that the alternatives offer “some agile services [and] it’s something we’re looking at more and more”.

The post The new generation is seeing FX options through a different lens appeared first on The TRADE.

Buy-side panellist Gordon Noonan, head of FX and rates trading at Schroders confirmed that the firm only uses bank algos as the team seeks to “do more with less people” and highlighted the importance of connectivity and full functionality.

Similarly, Patrice Guesnet, co-head of fixed income trading at Pictet Asset Management, also shared that many bank algos are used at Pictet, explaining: “Major algo providers can take an algo and customise it to your needs […] connectivity is very important for us as well – the banks already have all the different types of clients we want and they can basically internalise a lot of flows.” 

With this in mind, Kimiya Minoukadeh, head of eFX quant trading at ING, highlighted that though connectivity is indeed a key driver, ultimately if the name of the game is to get a better price at the end of the day, more is not necessarily beneficial. 

Minoukadeh shared that on ING’s side the firm internally used algos before beginning to offer this out to clients also, having seen the benefits first hand. However, she highlighted, though bank algo benefits are clear, less can often be more.

“Obviously, there’s been a lot of conversation in the past years about the fragmentation of the market so that does give a big benefit, but if the ultimate reason to use algos is to get improved slippage, a better price, etc. I think everybody is aware more is not necessarily better.”

She added that it is important not to forget the prevailing fact that often one does not know how risk is managed behind the scenes. 

“You really have to do a lot of the analysis yourself and that’s what we do […] we advise clients whether they could hit our internal pool or hit the external venues as well […] we’re able to have that visibility on where there is impact and we can sort of manage that for them as well.”

Jeremy Smart, global head of distribution at XTX Markets, concurred, asserting that how liquidity interacts is the bottom line. 

“It’s not about understanding whether you’re connected to lots of people, but how your liquidity actually interacts with all of those venues and all of those clients […] for example, understanding how you show skew, to which clients you show skew, to which ECNs you show, and how you interact with those markets – that is what’s actually critical.”

Read more – Reliability and access to dark pool liquidity the main priorities for the buy-side when it comes to selecting algo providers 

Addressing where firms are finding algos proving most effective, Guesnet was quick to highlight emerging markets, asserting that that is where Pictet uses these most and where the firm “sees the most value”. 

He added: “Even with a small size you see you can tighten the spread.”

Smart agreed, but added that from his perspective, algos can definitely be equally effective across emerging markets and the G10, with the key being to look specifically at how individual currencies trade with the markets, and focusing on where skew if being shown. 

He added: “The amount of alpha you have as a market maker is also very important in the process of avoiding adverse selection in the market and actually picking good trades to do, rather than just trades to do.”

Read more – Beyond the Data: Long-only managers more optimistic than ever when it comes to their algo providers 

Elsewhere, the panel addressed the differentiating aspects of algo providers, and what stands out when it comes to selection.

“A few things but data is important, including pre- and post-trade analytics […] every different provider has their own opinion when it comes to their approach,” said Guesnet, while Noonan affirmed: “For us with algos, and the smart order router and the analytics the different banks provide with regard to access – that’s key for us.”

“Another thing we lean on as well is the banks natural franchise which is quite important.”

The post ‘Focus on picking good trades to do, rather than just trades to do’ appeared first on The TRADE.

Oskar Wantola, Bart Joris

“If we solve a problem for one in our data flow, how does that reflect on scalability of another? These things are very siloed and that creates inefficiencies between all of your asset classes. Now the next evolution is merging all together to make them more scalable as a whole rather than individually, especially if we go more multi-asset on the buy-side.” 

Panellists were quick to point out that the answer is not to have a surplus of systems to bolt-on to, but rather focus on being structurally sound by going back to the base factors, particularly important in the face of market disruption. 

Oskar Wantola, head of execution technology at Man Group, explained: “We try to build the best solution for structural challenges and we want to have a stop loss solution for events so we always look at a combination of both.

“So we have the structural challenges– solving for inefficiency, handling the data, building the trading solution with smart routing solution – and then on top of that, we need to make sure that as you automate trading, if there is an event, you can stop it from losing your money.”

Read more: Shift to T+1 set to intensify the need for automation in FX

“During a market event, you expect volatility, you expect more data, you need your system to hold up in that period – you can’t have it go down, you have to start thinking about your liquidity […],” said Eugene Markman, chief operating officer (FX) at ION Markets.

“So, when you’re building a system, you have to think forward, to the future. Future proof it and start thinking about not only would it function on a day-to-day basis, but how will it also function during an event like a flash crash.”

When it comes to the specifics around manual supervision and oversight versus automation, the panel agreed that internally there’s a lot of conversations taking place as to where responsibility falls and essentially this encompasses various teams – thus leading into the ever-feared ambiguity factor.

Roberts explained that figuring this out is a “huge” aspect for his firm from the machine learning side.

“From a dealing side of things, if I haven’t built the tool and then the tool is doing things for me, is it my fault if it goes wrong? Is it compliance? Is it the fund manager? You can teach [machine learning] to repeat patterns and learn from yourself, so that’s straightforward, but then […] who is essentially going to get called by the client once it goes wrong.”

The panel agreed that priority-wise, figuring out the element of risk management in the automation game comes first, before beginning to run down that road.

Bart Joris, head of FX sell-side trading at LSEG, added that from the exchange’s perspective building controls makes up a large part of what they do: “We try to automate the ancient workflow and to do that we obviously need to have automated controls that will trigger stop trading – trigger kills. Building controls is part of our research process which has quantitative traders involved.” 

“[…] We have generic controls across asset classes and specific controls. We work with our partners on that. It’s very much collaboration between trading researchers, technology and compliance within the company.”

When asked which of these parties does receive the call in the event of something going wrong, Joris confirmed ultimately it is the head of trading risk. 

He added: “One of the big things which I always say to everybody is that an AI model will not go to jail, the CEO will go to jail.”

Read more: Workflow automation is non-binary, say experts 

Addressing the current state of play when it came to the challenges and inefficiencies, Wantola asserted that “the definition of the inefficient market is a lack of information and delay reaction to markets,” and that this should be front of mind.

“From a technology point if view, in order to increase your chances of having the correct information and correct prices, you would ideally increase the number of LP’s that you trade with [and] you would like to build your solutions that are fast, low latency.”

Steve Totten, managing director, head of institutional and quantitative products at oneZero concurred, asserting that while vendor solutions can help, it is ultimately down to making the increase in data actionable for the buy-side – real and empirical usability.

“What I do next? How does that help me choose when to execute? The next generation of analytics is very much around providing practical information.”

In conjunction with this comes the ever-relevant interoperability point – essential to bear in mind when it comes to addressing specific inefficiencies. 

“We have a lot of systems that are available in the market and there’s a combination of clients who either build or buy – sometimes build and buy – and the interoperability between them is sometimes lacking. The data flow isn’t necessarily how you want it to be, as well as collecting a tremendous amount of data so your storage costs go up – how do you manage that to get useful benefits out of it,” said Markman.

The post Before you board the automation train, make sure the brakes are working appeared first on The TRADE.

Torsti Silvonen, Philippe Lintern

Philippe Lintern, head of the foreign exchange division at Bank of England, asserted that checks are essential to ensure continued efficacy and to “keep the code alive”.

He confirmed that though the consensus is that it’s working well, some updates and revisions are being made based off the back of feedback from industry working groups.

“If the code is something that someone in your compliance department, a predecessor, signed off 22 years ago that’s not very useful. It’s important to kind of keep people coming back to it.”

Specifically, the panellists shared that the updates are set to be centred on three key themes: the enhancement of adherence on the buy-side, FX market data (in particular what to do with it for delegated execution), and FX settlement risk – the discussion revealed the fact that recent market data suggests that somewhere between 10 to 15% of the daily turnover in FX is set up growth without any risk mitigation. 

“[…] Really have that idea of waterfall of risk and trying your best to mitigate risk in any way possible because the risk is still material at the market level,” said Lintern.

Read more: Inside the FX cut-off conundrum sparking animosity between the buy-side, CLS and custodians as T+1 looms 

Torsti Silvonen, deputy director general at the European Central Bank, made clear the real opportunity available to market participants to have agenda-setting power through this review, as well as empirically benefit from it.

Being part of workshops and local FX committees provides key insight on how counterparties are behaving, and how to minimise market impact – “Whatever your role is in the FX market, you want to conduct your activities in that best possible using best possible practices. So I think there’s something for everyone,” said Lintern. 

Elsewhere, Silvonen highlighted the important benefit of the global code being principles based, as opposed to rules based currently, asserting that this approach “it makes you ask the right questions,” as Lintern added an indiscreet warning: “If we as the markets don’t fix it ourselves, at some point our good regulatory friends will […] which will probably be considerably more expensive.”

The post Key updates to the FX global code to be revealed in October appeared first on The TRADE.

The post TradeTech FX 2022 Round Up appeared first on The TRADE.

What impact will monetary policy divergence, geopolitical events and heightened volatility have on global financial markets? This was the question put to leading market commentators including Schroders’ chief economist Keith Wade, Invesco’s global macro strategist Arnab Das, and global head of economics and strategy for Allianz Global Investors Stefan Hofrichter, on Day Two of TradeTech FX.

“The only way to solve the problem at this point may be to have a recession.”

“The only way to solve the problem at this point may be to have a recession,” admitted Wade. “Monetary policy is beginning to work its way through, but it’s like a brick on a piece of elastic – you keep raising rates and raising rates and suddenly it bounces back and hits you. I think the Fed will keep raising rates for the time being, and I do think we may at some point still end up in a recession.”  

Will we see a hard landing in the US? “I think the chances are getting higher,” said Das. However, he pointed out that despite the current pressures, the US is in fact under less pressure than other global markets due to a stronger dollar and other policy advantages. “The US is relatively straightforward,” he noted. “It’s no longer an energy shock or an issue of international prices, it’s a demand issue – inflation is coming through in domestic prices. Europe, on the other hand, faces a different set of challenges.” 

Hofrichter elaborated. “The issues in Europe are not just about energy. It’s part of the story. But we also had very strong demand due to stimulus during Covid crisis. We have had some structural supply shocks, longer term, that are putting up prices. A tighter labour market on a global scale, the greening of our economy, all these are inflation factors.”  

Different markets have responded to this in different ways, but the UK this week would appear to be a salutary example of what happens when things go wrong. With the currency crashing, a credit negative rating, and asset managers begging the Bank of England to step in to avoid a gilt crisis, it begs the question – what could have been done differently?  

“The UK is a leading indicator for what could happen in other parts of the world: the pressure to provide fiscal stimulus is increasing to avoid recession. We hope it won’t come to that, but as winter continues the energy pressures will get worse,” said Das.

“There is a concern that monetary and fiscal policy are pulling in different directions, and the scale of that has produced this extraordinary volatility.” 

“There is a concern that monetary and fiscal policy are pulling in different directions, and the scale of that has produced this extraordinary volatility,” explained Wade.  

“We went through a tipping point yesterday with what was happening in the gilt market, the pressure on pension funds – it exposed a weakness that the Bank of England had to address. That was made worse on Sunday by [UK Chancellor Kwasi] Kwarteng saying he would continue to cut taxes – it showed no respect for what the markets were saying and the problems that it might create. 

“It’s hard, when you’ve lost credibility, to get it back. And that’s a great pity when the UK has spent so much time rebuilding credibility after the financial crisis – an independent Bank of England, the Office for Budget Responsibility (OBR) – all thrown out the window in one go. I think Liz Truss might need to start thinking about who could be an alternative chancellor.”  

Das added that what’s happening in the UK right now should be an “object lesson” for the EU. “There is potential for contradiction in the Eurozone as well,” he warned. “They might have to loosen the balance sheet to prevent fiscal instability, even as they tighten monetary policy to address the inflation problem. The answer perhaps is to target fiscal policy very tightly, rather than try to address it on a macro level, as the UK has done.”  

Looking ahead, what is the likelihood that we might see rates come down at any point in the near future?  

“For the time being, I don’t anticipate any easing,” said Hofrichter. “Given the current pressure, there’s much more need for central banks to hike rates. I think the market would be mispositioned to anticipate a pivot from the Fed or any major central bank any time soon.” 

Wade had a slightly different perspective, believing that the process in the US is now on track to bring inflation down to 2%, which if achieved, could mean rates are eased slightly by the end of next year.  

However, all panellists agreed that the US was ahead of the game on this, with other major central banks some way behind. “The Fed might look at cutting rates around 2024,” predicted Das. “But the UK and the Eurozone and, further behind, the Bank of Japan – everyone else is trailing the Fed by quite some distance.” 

The Eurozone, suggested one speaker, has a little more time to work on it – inflation is spreading, but it can approach the issue in a “more considered way”.  

“We think the ECB will keep rates pretty much as they are through 2023,” said Wade. “We’ve got them going to about 3%.”  

The UK, on the other hand, is more entrenched, and rates are already higher, so it’s likely to take longer to bring those back down and things are likely to get worse before they get better. “The Bank of England will have to do something sharper, given the current turmoil and the crisis of recent weeks,” warned Das.  

The session finished with a poll of the audience, asking traders their preferred (long) currency. Unsurprisingly, the US dollar took the lead with over 65% of the room, followed by the euro, and a small (and brave) proportion choosing pound sterling.  

The post TradeTech FX: Macro perspective – “The only way out of this is recession” say market experts appeared first on The TRADE.

After decades avoiding the regulatory spotlight, the FX industry has been rocked by not one but two major recent regulations that have had a significant impact on the way the market operates. The final phase of the Uncleared Margin Rules (UMR) came into force in September, while the Standardized Approach for Counterparty Credit Risk (SA-CCR, the capital requirement framework under Basel III addressing counterparty risk for derivatives trades) had its final implementation in January 2022. Between them, they’ve had a cataclysmic impact on operations, requiring participants on both sides of the Street to implement whole new systems and procedures in order to account for and comply with the new requirements.

“It’s been a big headache,” said Kirstie MacGillivray, CEO UK of Aegon Asset Management. “UMR only impacted a small proportion of our clients, yet we had a huge infrastructure to build. I’m glad to say we’re now regulatory compliant, but it took a lot of work.”  

Elke Wenzler, head of trading at MEAG, agreed. “It was clear that we were in scope, and to get the resources in place, the operational set-up for variation margin, for clearing, to get all that done – it really did take a lot of effort. We asked all our counterparties to get involved and push that forward. It’s now in place, and I’m looking forward to seeing how it will develop.” 

“We’re getting a lot of requests for help, from both the buy and sell-side,”

But players are still not entirely sure where they stand – or what they need to do. “We’re getting a lot of requests for help, from both the buy and sell-side,” said Ben Tobin, head of Europe/portfolio optimisation at Capitolis, a platform driving financial market optimisation.  

And optimisation is the key word here – and perhaps one of the biggest pain points. “SA-CCR is probably the hottest topic this year in terms of optimisation,” said Mattias Palm, business manager at triReduce FX, OSTTRA. “It impacts the whole industry, although banks are the worst hit right now.”  

“SA-CCR is really the first time FX has been front and centre of global regulation. Banks are finding it very hard to get this off their books. FX as an industry hasn’t really been known for its proactive optimisation, because it’s never really been in the front line, so banks are now suffering a lot. Even today, we’re optimising from dealer to client. More and more, the buy side are going to have to work with their liquidity providers,” added Tobin.  

This is already happening, and relationships are becoming of paramount importance. “We looked very carefully at our list of counterparts,” said MacGillivray. “We don’t see them as liquidity providers, we see them as liquidity partners. We need that interaction with them.”  

But the pain of SA-CCR is already filtering down to buy-side execution desks. 

“Banks at least have full visibility. We don’t,” pointed out MacGillivray. “A while ago we started to notice a change in pricing. We had several meetings with counterparts to determine what was happening. It took six meetings for them to finally admit that SA-CCR was behind it – they wouldn’t admit to us what was going on. That’s not partnership. We’re happy to work with them to solve issues, but they in return have to be transparent with us. Our job is to get best execution, and we can only do that by having a full dialogue with our counterparties.”  

“Our job is to get best execution, and we can only do that by having a full dialogue with our counterparties.”

So what trading strategies can the buy side use to help banks deal with this challenge? 

“All our positions are fully cash collateralised – it’s a fairly straightforward answer,” said MacGillivray. “Talking to our counterparties, that’s what they want. Also, when is the optimal time to trade to suit their book? We’re happy to talk about things like this, but it needs to be an open dialogue.”  

Actually though, suggests Palm, under SA-CCR it could be easier now to optimise than it used to be. “It used to be either gross-notional related, or by end-date. SA-CCR is only about spot, and that’s a much larger number,” he said. “There is a netting effect in it already, and to offset those exposures requires less operational activity – which means fewer trades.”  

Even if you’re not impacted yet, it’s worth paying attention, because you soon could be. 

“The banks who are really hurting are having to widen their spreads, but over time, everyone will fall under the SA-CCR remit and everyone will see the same struggle,” warned Tobin. “This is very new for FX, we’ve not really had to deal with anything like this before, and people may be struggling with their systems. If you’re a bank not yet under SA-CCR, you’re probably getting a lot more flow right now, but I would urge you to look at your systems in advance, and make sure they are ready, because it’s coming.”  

The Nirvana would be to achieve an all-in estimated cost for optimisation, an all-in system for everything, but most panellists agree that right now, that is more of a pipe dream than a realistic goal.  

“Many of the banks want to do it, but don’t have the time to even think about it,” said Tobin. “Most banks are struggling to calculate the numbers they need for their business and their regulators right now as it is. I think we should focus more on solving today’s issues first, and we’ll keep working towards Nirvana as we go.” 

“It’s a headache, but we have to pick our headaches, we can’t get rid of them all at the same time, so some of them you just have to deal with,” agreed MacGillivray. 

And now the buy-side are also starting to participate in optimisation. For banks, it’s capital cost-related. “The metrics for the buy-side will be different, but the same types of tools can be used,” said Palm. “Reducing counterparty exposure, reducing line items, reducing balance sheet, being able to cash out, compress risk.”  

“Optimising collateral management – when I started on the trading side, I didn’t expect it would be such a big topic for me!” said Wenzler.  

The post TradeTech FX: Life after regulation appeared first on The TRADE.

Crypto is big news – and while it’s not all that everyone’s talking about at TradeTech FX, there’s definitely a buzz around digital assets that’s impossible to ignore. Not everyone is on the same page with regards to adoption rate – some feel institutions are being left behind, while others advocate caution until we see which way the wind is blowing. But after the crypto winter we saw in recent months, one thing seems for certain – the sun is once again coming out. The industry consensus is that crypto is here to stay, and if you’re not yet on board, you might have missed the boat.

“There will be a new crypto summer, and everyone should be getting ready for that.” 

Mercer believes there is no doubt that crypto assets will eventually pervade traditional assets – the only question is how long it will take. “The two things holding it back are the lack of regulatory determinism, and the lack of conventional credit mechanisms,” he said.  

But the growth of the asset class is undeniable. “This year we expect our activity to be around 80/20 FX to crypto, which is about where it should be. But don’t forget that the eighth biggest currency pair last year was BTC/USD. It’s already a traded asset class. You can trade Bitcoin against most other assets on the Street already – and in five years from now we’ll be trading against even more – from BTC/S&P, BTC/gold, and much more.”  

However, there are still some barriers to institutional adoption.  

“In traditional finance you have an ecosystem, you have traditional customers, bank intermediaries, brokers, exchanges, prime brokers, custodians,” explained Mercer. “Not all of that exists yet in the conventional space.”  

Elodie de Marchi, head of operations and corporate strategy at digital assets data provider Kaiko, agrees. In a panel discussing ‘Crypto for institutions: how will the new crypto wave impact FX markets and what are the barriers that need to be overcome to ensure mainstream institutional adoption,’ she stressed that: “We urgently need to see more maturity in the infrastructure space. We also need to improve access to data and education. If you don’t have high quality data, you simply can’t operate.  

“We urgently need to see more maturity in the infrastructure space. We also need to improve access to data and education.

“Crypto is a highly fragmented system – you have centralised exchanges like Coinbase, alongside decentralised ones like Uniswap – and these are now seeing around 50/50 in terms of activity. Only looking at centralised exchanges is like only looking at the tip of the iceberg. You need data for rebalancing, for risk management – and you need specific solutions for crypto. We do see institutional adoption, but big banks and largescale projects really need better infrastructure and better data to really drive real adoption.”  

Panellists also emphasised the need to learn from what’s been done in the traditional finance sectors in order to see a convergence.  

“We need to look at how can we take the benefits of traditional finance and overlay that into the innovation occurring in the crypto space. For example, there was probably an over-extension of credit in the crypto space in the summer, and we could perhaps benefit from the checks and balances of traditional finance,” said Nicola White, CEO of digital asset liquidity provider B2C2.  

“There was probably an over-extension of credit in the crypto space in the summer, and we could perhaps benefit from the checks and balances of traditional finance.”

“Crypto exploded spectacularly this year, creating a messy credit event,” agreed Edd Carlton, institutional digital asset trader at Flow Traders. “It highlighted the importance of counterparty risk – who is on the other end of your trade? We work to create what I call the path of least resistance –we try to make the pre- and post-trade set up as similar as possible to what people are used to.”  

One thing is for certain – the market is rapidly evolving, and the pace of growth is by no means slowing. “Eight years ago, crypto trading was very hi-touch, very voice-driven, based around RFQs,” explained Carlton. “Now, I’d say 90% is done electronically. The evolution in terms of market structure has been very rapid – in fact, it’s been a carbon copy of the evolution in the FX space, just over a much shorter time span.” 

Everything is now moving forward – and new issues are coming to the fore. “We’re also focusing right now on what crypto can bring to the traditional finance space,” said White. “For example, settlement. In traditional finance you’re looking at a day, maybe two, before you exchange on the back of a trade. In crypto, we settle 70% of trades within 15 minutes and 99% within 45 minutes. If you think of the events in June this year, you’re substantially reducing that credit risk in a very short period of time.” 

Luke Brereton, senior VP at State Street Global Advisors, went further: “We need to get rid of settlement risk – it’s not fit for purpose for the crypto market. It traditionally consumes a huge amount of capital because of intra-day cost of funding. We want to achieve atomic settlement at the point of trade. That’s what we need in order to achieve institutional involvement.”  

“We want to achieve atomic settlement at the point of trade. That’s what we need in order to achieve institutional involvement.”

Another option is to extend outwards from crypto and flip technology back to the more classic analogue asset classes. For example, last year State Street Global Advisors did an FX forward, traded on the blockchain as a smart contract – with micro processes embedded in the contract enabling them to review it automatically every few minutes. “Here’s a way of using blockchain to take on traditional markets and make them more efficient,” stressed Brereton. “That’s the way that we’re going to see broad institutional adoption of this trend – not just by trading crypto, which realistically is just another risky asset class.”  

But when it does come to trading institutional crypto, where next?  

“Now that we’ve moved through the credit issue, the trend is in execution,” predicted White. “We’re bringing algos into the crypto space – how do I vwap, how do I twap?”  

“We starting to talk about issues like liquidity management, pricing, latency, cross-connects,” added Carlton. “These conversations are bread and butter in the FX world, and they’re now starting to happen in crypto as well.”  

Another trend is, unsurprisingly, derivatives – particularly crypto futures, and perhaps it is here that the true potential lies.  

“Treasury groups in June were sitting on massive positions in Bitcoin, in Ether, and hadn’t hedged it – they hadn’t thought about the chance that the asset class would go down,” noted White. “Now, the conversations are all about options, about hedging. There are more and more institutions finding themselves involved.” 

“It’s going to be interesting to see the derivatives space grow, and whether it grows faster than spot,” agreed de Marchi.   

For now, the mood is one of cautious optimism.  

“We believe crypto adds value to a portfolio, but there are reasons to take it with a pinch of salt,” said Sven Schubert, head of FX strategy at Vontobel Asset Management. “The added value will change over time, just as it did for gold once the gold standard changed. In five to 10 years, we will have a very different perspective as to whether it adds value to a portfolio or not.” 

But don’t get too excited, there’s still some way to go.  

“Participating in a crypto risk trade is not a top priority for most of our clients right now,” admitted Brereton. “There are people looking at it, they’re interested, it has potential, but it’s not happening quite yet.” 

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Toby Baker, T. Rowe Price

Toby Baker, head of FX trading at T. Rowe Price, and Ian Packer, senior FX trader at UBS Asset Management, launched the first day of TradeTech FX in Amsterdam with a detailed discussion of the key themes impacting FX traders today – and how they can be addressed.  

Looking at how firms can ready their FX desks for heightened volatility, interest rate uncertainty and the rise of electronification, the conversation kicked off with an evaluation of the enormous changes occurring in the market right now.  

“So much has changed – this year has been huge,” said Packer. “Covid still rattling on, we’ve seen huge geopolitical risk, high inflation – it’s creating enormous volatility, and this is changing our world this year. Everyone wishes for volatility and then when we get it, we worry about it!” 

“So much has changed – this year has been huge.”

“It’s been an amazing year,” added Baker. “Not a great year in terms of performance, but the fact that we’re all even still here is great. Last year, we were talking about what tools we could use to take advantage of potential volatility – and now that volatility has arrived. Liquidity is everyone’s concern right now, and that’s why I’m here – to find out what tools and channels we can use to get access to better liquidity, and to view what liquidity is actually out there.”  

Expect the unexpected 

A key challenge right now is the continued arrival of the unexpected. For example, in the last couple of days the pound sterling has tanked, and that has caused flash crashes that were not foreseen. “When a major market gets talked about like an emerging market, then we have a problem – and we need to adapt to that,” warned Baker. “I think the worst is yet to come.”  

SA-CCR has also been a big issue this year. “It’s hit the US banks harder, but trying to navigate that is still a challenge,” said Packer. “Who’s got the balance sheet, who can take it?”  

As SA-CCR amendments roll in, some banks are getting even tighter on pricing. “There are different options but ultimately, all of them still rely on some form of credit,” said Packer. “There are various routes for banks to put it on their balance sheet, so you just have to work together to see how you can work that out.”  

Liquidity is key 

Relationships are now central – whether with banks, providers, or venues – and they are increasingly crucial to being able to source liquidity.

“Peer to peer can also help with liquidity issues,” suggested Baker. “When it comes to trading venues, you just have to kick the tyres and see who can help you. We’re in an environment now where people have to be proactive – you can’t just sit back and wait for people to help you. 

“We’re in an environment now where people have to be proactive – you can’t just sit back and wait for people to help you.”

“We all need to understand liquidity: how much liquidity is available in each market, and how much we can do without leaving a footprint. We all want a fair price for a fair trade – if you can beat a spread great, and we all want to outperform – but we also need to be a bit careful about how much we’re putting through the pipes.” 

Automation efficiencies 

Automation is of course another ongoing trend, and according to the keynote speakers, it’s gaining momentum.  

“We automate about 50% of our tickets,” revealed Baker. “Mainly the small tickets that don’t add a great deal of value. We rely on TCA to spot the outliers – about 95% goes through, and traders get alerted on the dashboard when there’s an issue. That works really well. Predominantly it’s the time value – all of us need more time, and automation helps make us more efficient. No one wants to automate themselves out of a job, but I don’t think that’s going to happen. Will we be trading a yard of something automatically? Probably not – automation just helps clear the smaller tickets off the dashboard, allowing the traders to focus on the larger stuff.”  

No one wants to automate themselves out of a job, but I don’t think that’s going to happen.

But be warned – just because the markets are going one way right now, doesn’t mean traders shouldn’t be preparing for yet another reversal.  

“There will come a point where interest rates may turn, when central banks double back, especially if we go into recession. What happens to risk in that environment? You’d imagine it would do very well, but we’ll have to wait and see,” said Baker.  

Future outlook 

FX futures have a role to play, and are likely to have a bigger role in the future. However, Packer warned that: “I’ve found them too inflexible in the past – in terms of sizes, and pairs available. I’m not saying never, but when I’ve looked at them in the past, they don’t really fit.”  

And crypto is also on the radar – although perhaps not in the most immediate of terms. “We’ve hired someone who specialises in digital assets,” revealed Baker. “Are we trading in crypto yet? No, but I hope we will have the ability, should clients want to trade it in the future.” 

Packer agreed: “We’ve looked at crypto, in case we get client demand, but we haven’t seen much yet.”  

In the uncertain future, however, there is one thing the panel agreed on.  

“Budgets are going to get cut everywhere, including for tech spend,” warned Baker. “There are things you might want to look at, but you have to be aware of costs. Kick the tyres, but be aware of what tyres you’re kicking.”  

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