Trading through electronic trading platforms has surged since the recast Markets in Financial Instruments Directive (Mifid II) came into force on January 3, according to officials at JPMorgan, dampening concerns that the new rulebook might cause trading of in-scope instruments to slow down.
“In some ways it is not surprising that electronic trading is rising so sharply, given the products that are now in scope of Mifid II,” says Scott Wacker, global head of e-commerce sales and marketing at JPMorgan. “The stronger requirements for transparency, reporting and recording of information are mostly done for you if trading on an electronic portal.”
Although still too early to draw definite conclusions, Wacker says the bank has seen a measurable increase in electronic trading of in-scope foreign-exchange instruments, including swaps, forwards, options and non-deliverable forwards.
“We saw marked growth in our spot business during the first three weeks of the year versus the past three years, driven by the macro environment, and rising daily volumes on electronic channels in other products as Mifid II drives lasting changes in the FX market,” says Wacker.
JPMorgan recently published the results of its second annual fixed income electronic trading survey, which questioned more than 400 institutional traders across FX, rates and commodities in October 2017.
Mifid II was a central focus of the study, with 61% of respondents expecting a day-to-day impact from the regulation.
Even beyond the European Union, 47% expected an impact in the Americas and 45% in Asia-Pacific. This is largely because market participants outside Europe still need to comply with Mifid II when trading with European organizations, but there might also be an element of voluntary adoption as institutions look to replicate best practice.
“There is probably some of what we call best-practice osmosis, because it is hard to argue with the objectives of increasing transparency and pursuing best execution so some firms might decide to apply the rules globally rather than trying to split up in-scope and out-of-scope activities,” says Wacker.
In terms of exactly how Mifid II will affect the business, 40% predicted it would alter usage of electronic portals, while 33% said it would alter the types of execution orders used and 32% said it would provide enhanced transparency. Just 13% of traders expressed a belief that the rulebook would strengthen the services received from banks, while only 7% expected it to increase their efficiency.
Beyond Mifid II, the survey delved into the popularity of different types of electronic platforms, algorithmic execution tools and mobile trading. It clearly showed increased interest in mobile trading, with 61% of respondents describing themselves as extremely or somewhat likely to use a mobile trading app in 2018, up from 31% last year.
Asked to name the top two barriers to using a mobile trading app, 50% said company policy prevents trading on mobile, while 34% said company policy prevents any mobile usage at all.
However, 53% of respondents cited the ability to synchronize orders with their desktop as one of the most important mobile app capabilities, while 50% cited market data.
“We are not yet seeing a sudden surge in volume of trading on mobile platforms, but this shift [in the survey result] from 2017 to 2018 underscores the increased comfort with the security of mobile trading and that a rising number of market participants are at least thinking about it,” says Wacker.
Meanwhile, the study also looked at the popularity of different types of platform and found that 31% prefer only single-dealer platforms and just 12% prefer multi-dealer platforms. Over a 90-day period last year, institutional traders used an average of 4.7 trading platforms.
“As the business becomes more and more electronic, most firms will want more than one way of accessing liquidity,” says Wacker. “Single-dealer platforms give users direct access to internalized liquidity with great pricing and high certainty of execution, but they can’t rely on one platform for everything, so an average of 4.7 seems about right.”
On algo execution, only 24% of respondents plan to increase algo usage in 2018, down from 38% last year. While the headline reduction suggests declining appetite for algos, Wacker believes there is still widespread demand and the bank has continued to develop its technology in this area.
“Adoption has not been as quick as we had expected last year, but we think algo execution will continue to grow,” he says.
“Much of this is about awareness of what can be achieved with rule-based orders, but once individual firms start using them, we see a rapid increase in the volume of their business executed algorithmically because everyone is looking for more efficient execution and the ability to benchmark execution.”