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Foreign Exchange

E-trading boosts emerging market inflows, say market participants

Electronic trading is one of the biggest drivers of emerging market FX inflows, according to Mike Burton, Société Générale’s global head of FX sales.

Speaking at a webinar hosted by Financial News yesterday, Burton said the broader and deeper liquidity provision offered by e-trading had allowed emerging market currencies to become more established. “It’s definitely helped emerging market inflows,” he said.

And it will only get better, says Deutsche Bank. Neville Bulgin, Deutsche’s co-head of London investor sales, thought emerging market trading volumes were likely to increase during 2011: “Partly that’s down to access.”

Bulgin also thinks e-trading tools have given managers greater transparency and ease-of-use when dealing with EM currencies. He fingered straight-through processing as particularly important, pointing out that it allowed managers to book trades more easily.

Asked whether emerging market inflows represented genuine cross-border growth or only a reallocation of funds from existing mandates, Michael Huttman, chief investment officer at Millennium Global Investments, was unequivocal: “From a management point of view, this is here to stay. This is a long-term structural shift of capital.”

Thanos Papasavvas, head of currency management at Investec Asset Management, argued that it was important not to take a one-dimensional view of currency investment. Papasavvas said Investec’s focus on strategies and valuations for emerging market currencies runs on two-year cycles, in contrast with G10 currencies, where the action is in intra-day, high-volume trading based on short-term price movements.

Which led onto a discussion on high-frequency trading. Colin Harte, head of the fixed income scenario team at Baring Asset Management was insistent that large algorithmic traders were not yet acting as serious market makers to the buy-side.

“They have no impact whatsoever,” Harte said. “Sometimes they might add some liquidity, sometimes they might detract from it. On an intra-day basis, they just add to short-term noise.”

The banks fought their corner too, keen to differentiate bank price provision from that of the start-up HFT firms. “[HFTs] are very sensitive to one pip price movements,” said Deutsche’s Bulgin, claiming that withdrawal of liquidity in the face of big price movements by HFT traders was common. “Liquidity can therefore appear deeper than it is,” he warned.

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