Amsterdam is a city that I haven’t visited for a while. I’m glad to say not much has changed since my last visit: the rain (yes, I seem to pick the worst days to visit), the canals and more. It’s one of those large cities, which somehow manages to retain a small town feeling, and it feels unique as far as capital cities goes. Yes, of course, its streets are dotted with global brands like Starbucks and so on, but walking alongside one of its many canals, it remains very distinct.
I recently attended and also took part in the recent TradeTech FX Europe event, which was held in Amsterdam. It was my first time joining the event since COVID, and I’m glad to say that things do appear to be back to normal. Whilst online events can be very useful, you do miss the networking opportunities. So what were the main themes of this year’s event? Many themes such as the electronicifcation of FX have become more predominant, and how they’ve already had a big impact on FX trading desks. Whereas before electronification was purely around FX spot, now it’s moving to areas like FX NDFs and also FX options.
The fragmentation of liquidity was a talking point on the market structure panel. Jay Moore (FX Hedgepool) noted how liquidity is becoming fragmented given the number of venues and how each has their own constraints. The result was a recycling of liquidity. Electronification as a theme came up several times in the discussion. David Tanner (Blackrock) pointed out that across G10 spot desks in banks, and they are already very light on numbers compared to the past. It was noted how the changing skillsets are needed to navigate these markets. At the same time, it was valuable to get trader’s views. Junior traders tended to have more quant skills, but ultimately, when things get volatile, experienced traders are key. Execution style also came up. Buy side clients are using more passive algos, essentially willing to take their time to match orders, noted Carolina Trujillo (SEB).
What has been noticeable in recent years has been the increasing focus on crypto. Around 10 years ago, when I first attended TradeTech FX, crypto was very much an after thought. There was the odd panel on the subject, but that was about it. This year round, it’s clear how much crypto has become part of the FX world. One of the key issues is institutional adoption, and it was around this subject that Eva Szalay (Bloomberg) was interviewing David Mercer, whose firm LMAX whose firm has venues for FX and crypto David noted that BTCUSD was now their 8th biggest traded asset, so still relatively small compared to the most liquid FX pairs. It is still a retail driven market with prop trading firms. There’s currently an absence of banks and asset managers in this place, hampered by a lack of regulation and credit. However, David noted they are getting ready for the crypto summer. I suspect come next year, there will be more banks making markets in crypto.
A panel on liquidity providers proved particularly illuminating. Given that it was under Chatham Rules, I’ll endeavour to summarise the panel, rather than pick out quotes. One point of agreement was the labels bank and non bank market makers, which seems somewhat of a misnomer. In a sense, there shouldn’t be such a distinction, because ultimately they are both operating as liquidity providers. There was also a discussion how TCA has moved on from beyond the basic metrics, noting innovations such as Tradefeedr’s peer universe on algos. Often in isolation a single client may not execute a sufficient number of trades using different algos to make a comparison between their performance. However, when this data is pooled amongst many clients, it becomes easier to make statistically significant observations.
Also on the subject of TCA, I interviewed Tjerk Methorst (PGGM) on how the advances in TCA were helping to trade FX swaps. He noted that it was important to look not just at single executions, but on the bigger picture, on whole orders. Data was also a key issue for FX swaps, with much less data available, although there is for example a dataset now available from CLS.
There was also a panel looking at liquidity aggregation from a more buy side and vendor perspective. One point discussed was that it wasn’t necessarily always the case that having more liquidity providers in your panel would provide better pricing. Using automation could be particularly useful for dealing with smaller orders, allowing traders to focus on the biggest tickets and adding value elsewhere. In terms of analysis, it needed to be done in some sort of feedback loop.
Whilst in FX spot, electronic trading is predominant, one area where it has lagged is that in FX options. Alexandre Dube (Total), Mark Suter (Digital Vega) and Eva Szalay (Bloomberg) discussed some of the key developments in trading FX options recently. Digital Vega is an electronic trading venue for FX options. Suter noted how systematic funds were keen the platform. However, Dube noted that their trading was done manually for FX options. One aspect of trading manually, is clearly that it’s more relationship driven. Another point is that pricing is not necessarily always better when streaming. With a sufficient number of banks in a panel, it can be possible to get axes as well.
Whilst much of the conference was about execution, there was also an interview of Umberto Alvisi (Millennium Global Investment) by Helen Thomas (Blonde Money) around the topic of FX systematic strategies, and these strategies fed in global asset allocation. Alvisi noted how there has been increasing demand for these types of strategies, given they are liquid and uncorrelated. He noted that when the lack of FX hedging became painful, interest in actively hedging became more pronounced. He discussed how smart beta strategies in FX (ie. carry, momentum and value) have added to diversification, but not necessarily to alpha. Returns now needed to come from something else, namely timing skills, portfolio allocation and risk management. He adopted a multi factor approach, combining many different dimensions, with different drivers and frequencies, using machine learning for regimes. There was information content in forward looking measures such as the vol surface, which included information on future events.
The topics of discussion at TradeTech FX have evolved rapidly over the years. What has become quite interesting is how electronification has moved to areas such as FX options and NDFs. Maybe in another few years, these areas will become as electronified as FX spot is today? Let’s see what happens! What is clear is that automation will continue, and the skillsets required for this are also changing.