FX debate participants
JT, Clientknowledge Variety – both in terms of users and in terms of execution possibilities – is the name of the game in FX today. Which channels are the buy side around the table using, and why?
IB, Russell Over the next six months, we plan to compare what the various portals can deliver. Our main selection criteria for the portals we use is their ability to reduce trading costs, offer expanded liquidity and improve our post-trade functionality, all while improving transparency.
MG, GAIN Just about everything we do is electronic. We are both a price maker and taker on various portals. The majority of our business is done through single-bank relationships, and we also trade on EBS. As our business is based around electronic trading, when we need liquidity we go electronic.
UL, AG Bisset We do most of our large deals with client-specified banks so we don’t move the market against us. However, we do our small deals through electronic trading. Our currency overlay strategy is totally model-driven, so we have selected FXall. It allows us to prepare all our trades in advance, load them up into spreadsheets and send them off, which simplifies back-office procedures.
| Ian Battye, Russell: as trade size increases, you need to interact with the trading platforms differently |
 |
JT, Clientknowledge Do voice trades have less measurable market impact? How does everyone avoid the hazard of increased price impact when dealing electronically?
UL, AG Bisset It’s easier to use voice trades for larger transactions because your traders work with you to distribute them rather than you dialling up and trying to get rid of half a billion electronically.
MG, GAIN Our trades are probably a bit smaller. We do a lot of five million and 10 million dollar trades; $50 million would be a large trade for us. The electronic markets can absorb a $50 million trade relatively easily whereas two years ago $50 million was a difficult trade to do on most electronic exchanges, apart from EBS. When you get to half a yard, it’s a different story.
DO, HSBC The empirical evidence suggests that average ticket size has not increased in the past two years, while volume has. A proliferation of smaller programmes have migrated to the electronic media, whether through an ECN, a multi-bank portal or single bank portal.
JC, FXall At FXall we’ve seen average ticket size continue to grow but there’s also a very wide range. One of the key reasons for using an electronic channel is to benefit from workflow efficiencies and integration into other systems. A customer looks for those benefits for all of their trades, regardless of size. The fact that you are doing a large trade, on a multi-dealer system, does not necessarily mean it’s done in competition. By asking one bank to manage a large trade, the customer might get better results and less market impact. That can be done on FXall, and we provide, as part of the trading message, an indicator that the trade is not in competition. Then the bank can manage it accordingly.
LO, Market Media So instead of picking up the telephone, ringing a bank and saying: “Can I have a price in a hundred?”, somebody’s just putting it into the system and saying: “Can I have a price in a hundred”? Isn’t that a different type of trading to one where you have streaming prices coming into an electronic marketplace?
JC, FXall Some 98% of our trade requests are executed off automated streaming prices. But even for the largest block trades that might be priced manually, you can have that conversation entirely electronically and achieve the benefits of all the workflow efficiency tools and straight-through processing. Execution methods differ greatly depending on the time and the currency. One of the keys to success in electronic trading is to avoid the one-size-fits-all approach.
IB, Russell One significant issue for the trading platforms is whether the party requesting the price is anonymous or not. For a platform offering streaming prices, knowing the identity of the party accessing the stream is an important determinant of the risk profile in offering that liquidity. That is increasingly so as trade size increases. The sell-side want to protect themselves when they don’t know the identity of the client. Russell’s experience has been that platforms offer tighter prices in a larger amount if they know who the counterparty is. Therefore we tend to be driven to executing significant size trades directly with our bank counterparties in a disclosed environment.
MG, GAIN I think electronic trading is keeping the average deal size lower. Because liquidity at the lower range – call it five, 10, 20 – is so good and because the record-keeping is all done for you electronically, it’s easy to take a large order, spread it over time and piece it out at your leisure instead of trusting a bank to do it for you. The last I heard was that the average trade with EBS was under $3 million, but the minimum trade on EBS is $1 million. So there are lots of small trades in the marketplace and e-trading is facilitating that.
JT, Clientknowledge The average trade size has not moved that much but the standard deviation has increased materially. We have a lot of typically algorithmic traders doing ones and twos who can make a penny out of a trade but have very little cost associated with execution. Does that throw out new cost management challenges to the sell side?
SF, Bank of America I think it highlights the need for us to continue to invest in the space, focusing primarily on our infrastructures. How do we price and how do we risk manage? How do we pool it? How do we distribute it back out to market? How do we warehouse it? Some of these tools increase these challenges.
With new technologies, application programme interfaces, fixed connections and lots of smart people trying new short-term strategies, we spend a lot of time figuring out how to extract value from all types of clients. We struggle to extract value from multi-bank platforms – that’s no great secret. But we look at clients holistically. We’re extending our balance sheet, we’re processing other valuable products and services – research, strategy, capital introductions, prime brokerage – and it’s part of the overall relationship.