Spot FX Gets Walloped!

The BIS triennial survey, the most comprehensive data point, indicated that overall FX volume shrunk 5% from $5.36 Trln in 2013 to $5.09 in 2016. However, FX spot fell by a whopping 23.7%. London maintained overall geographic leadership but saw its share move down to 37% from 41% in 2013. APAC trading centers saw growth from 15% to 21% market share.  Overall, FX swaps and currency swaps grew, and cross currency swaps grew sharply, while FX option volume nosedived.

Spot fell across the major currency pairs Euro 12.5%, Yen 12.5%, Swiss Franc by 13.6% with Sterling rising by 2.6% as the lead up to Brexit caused considerable repositioning in Sterling assets.  No surprise as the Chinese Renminbi rose 41% and became the 8th most traded currency pair.

Capital constraints, digestion of regulatory change in the US and impending global regulation, changes in traditional liquidity provision, scandals and market disruptions since the last survey in 2013 are the main causes of the drop in spot. Additionally, the impact of the SNB’s surprise move in 2015 dislocated active FX trading and had many prime brokers reevaluating  their risk considerations. Creating challenges for smaller and riskier trading shops and hedge funds in maintain FX prime brokerage probably moved some of the FX spot volume onto exchange trade FX futures.

The market structure in FX continues to change quickly with acceleration in the adoption of digital models for trading and analyzing data in the FX market at the same time as major changes in FX market making and liquidity provision which has impacted spot FX trading.



Human and Machine-Rise of the Cyborg: The Cycle of Voice Trading

Celent has explored voice trading in Human & Machine-Rise of the Cyborg: The Cycle of Voice Trading, published yesterday. In this piece, we look at the power of voice trading as well as the business drivers, challenges and forces that are driving change in voice communication, collaboration and voice market engagement.

Celent believes that voice is a key channel that will remain relevant and will work more seamlessly with electronic and data channels in the coming years. A move toward unified communication approach and advances in technologies, combined with a challenging business environment, are reshaping the modern trading desk. Cost cutting, front office effectiveness, gleaning better insight into customer behaviour combined with digital automation are pushing this frontier forward. Voice trading remains the major channel for transferring risk, across asset classes, yet remains a challenge due to the difficulties in leveraging this unstructured data set.

Advances in both preparing and leveraging data for advanced analytics are creating a demand for business insights-the demand for better data is ever growing. Firms are beginning to leverage advanced data tools for not only risk mitigation and regulatory requirements, but are creating front office opportunities for better counterparty engagement and communication.

Fintech continues to advance in the capital markets and the implications are profound for incumbent players. Firms that effectively leverage the full spectrum of innovation available are becoming more streamlined and more effective. The overarching need for business model evolution and the importance of technology in the markets continues to ramp up. As one example,last week alternative dealer Citadel Securities hired Microsoft COO to be the new CEO of it electronic market making business.

We are surrounded by advances in voice technology for interacting with machines in our life in general. We are getting comfortable with Apple’s Siri on mobile, and Amazon's Echo in our homes. Similar technologies have advanced in areas outside the capital markets, but leading firms are trying to leverage voice data for better insight, engagement, and automation. While we are nowhere near Robotic Stingray Powered by Heart Cells from Rats published in last week’s WSJ, in merging machine and biological elements we are heading more into an era of the cyborg-where capital market participants will increase their direct engagement with machines via voice interaction.

Run, hide, partner, or buy: Fintech, automation, and disruption in wealth management and capital markets

Readers of a certain age may remember Frankfurt's aspirations of surpassing London as the world’s leading banking center. While that vision has not come to pass, Frankfurt remains a powerful hub for global finance. Home to Deutsche Bank, the European Central Bank and the Deutsche Börse exchange among others, Frankfurt’s importance is reinforced by its location at the very heart of Europe.

With this in mind, Research Director Brad Bailey and I are excited to bring the next Celent Wealth and Capital Markets roundtable to Frankfurt on Tuesday, May 10th. Of particular interest will be the role played by fintech firms in disrupting an ecosystem long dominated by large financial institutions. Brad and I will share ideas and examples from recent research, while senior executives with banks and asset managers and other large institutions from Germany, Switzerland, the UK and Italy will offer their perspectives on the disruption and the technology strategies they have adopted in response.

To maximize the participatory nature of this event, Celent is capping attendance at 20 individuals. At present, we have a few seats still open and would love to hear from other clients interested in joining us.

Proof of artificial intelligence exponentiality

I have been studying Artificial Intelligence (AI) for Capital Markets for ten months now and I am shocked everyday by the speed of evolution of this technology. When I started researching this last year I was looking for the Holy Grail trading tools and could not find them, hence I settled for other parts of the trade lifecycle where AI solutions already existed.

Yesterday, as I was preparing for a speech on AI at a conference, one of my colleagues in Tokyo forwarded me an Asian newswire mentioning that Nomura securities, after two years of research, would be launching an AI enabled HFT equity tool for its brokerage institutional clients in May –  here it is: the Holy Grail exists, and not only at Nomura. Other brokers have been shyly speaking about their customizable smart brokerage, e.g. how to use technology so that tier5 clients feel they are being served like a tier1. Some IBs are working on that, they just don’t publicly talk about it.

Talking to Eurekahedge last week I realized that they are tracking 15 funds that use AI in their strategy, I would argue there are even more than that because none of those were based in Japan (or Korea where apparently Fintech is exploding as we speak).

All this to reiterate that AI is an exponential technology, ten months ago there were no HFT trading solutions using AI, and we thought they were a few years away but no, here they are NOW. And the same with sentiment analysis, ten months ago they were just a marketing tool, now they are working on millions of documents every day at GSAM. Did I forget to mention smart TCA that’s coming to an EMS near you soon?

Stay tuned for more in my upcoming buy side AI tools report.

The future is here

The pressures are well known in banking and the capital markets. Each month there are front page articles of scaling back, overhauling, reorganizing, or closing major bank lines. A continued reworking, a forging of a new business is occurring. Old models are shrinking and being replaced by new business models or being cast aside. Since the 2008 crisis, wave after wave of pressure has made this perfectly clear. Capital constraints, on-going regulatory pressures, and an ultra-low interest rate environment have all struck hard at the existing banking & broker/dealer system. Nearly all players-big and small- are rethinking the very core of their businesses. And this is a multi-threaded problem across all businesses: equities, FX, fixed income, and derivatives. Banks and broker/dealers are trying to balance their existing franchises against the pressures they are facing to create a lean profitable business that supports their clients. There are no easy answers, given the strong interdependence between the wealth, asset management, and capital markets businesses across all products. Many of the solutions are moving from efficiency, or cost-cutting to effectiveness. Costs are being cut-there are improvements in risk, compliance, processing. The cost side is getting better but the challenge remains on the revenue side. This drive for effectiveness is driving business models that support internal and external clients from a compliance, transparency, regulatory, fairness and cost perspective are driving more automation and electronic trading solutions. Celent will be discussing the evolving landscape of innovation in automation and technology at two upcoming roundtables. On September 15th in London we will be looking at changes in the US and European fixed income markets and how new technologies are driving change. Then on September 22nd in Zurich, we will be looking at wealth management and the capital markets and the many changes that are occurring in Swiss banking.

FX ECNs 2.0 getting gobbled up?

It looks like a couple more of the second wave of institutional FX ECNs might become part of large exchanges. Last month unsubstantiated rumours circulated about 360T running a sale process-receiving bids from several parties, including Deutsche Boerse-and on Monday rumours circulated about Intercontinental Exchange (ICE) and FastMatch ECN. Generally, where there is smoke there is fire, but it is likely that in both situations, it is nothing more than market speculation, or wishful thinking. However, exchanges are the most likely strategic buyers; they are able to consummate deals in the current business and regulatory environment. Moreover, global exchanges need to scale across products, and they have ample currency to get large FX FinTech platform deals done. There are still other FX ECN platforms available. In recent years, the last of the first wave FX venues have been acquired. Earlier this year BATS picked up Hotspot, and in 2012 Thomson Reuters acquired FXall. Considerable discussion has taken place around valuations for these deals. The valuations reflect the allure of asset class expansion, the scarcity of major independent e-FX venues, and overall FinTech valuations. Furthermore, foreign exchange, like all flow products is at a major inflection point. The gathering forces of regulation, transparency, combined with the necessity of many FX players to further automate their pricing and trading makes this trend inexorable. And of course, scandal- $5.5 bln in fines already –a huge number. The foreign exchange scandal has been a major distortion in the FX world: creating an unusual opportunity to see change on a major scale. The scandal has been very expensive in terms of money and resources, but is producing a clear roadmap to a more open, transparent and automated FX market.

Battle of the messaging systems, and more

The introduction of the Symphony messaging service, backed by 15 large banks, should make things interesting in a space that has long been dominated by Bloomberg and to some extent Thomson Reuter’s Eikon. It is another example of cooperation between large banks after the recent introduction of an OTC derivatives collateral management utility, which was discussed in an earlier blog by this author. Banks are increasingly moving onto the turf of players such as Bloomberg and large IT firms involved in the capital markets through such ventures. It is an interesting business models where the buyers of services are coming together to create or back service providers, which would reduce prices of these services, put more competitive pressure on the other service providers in the space and create greater synergies and efficiencies for the industry overall. It does make things a little tougher for regulators, as the traditional boundaries of which firms are the service providers and which ones are the consumers are changing. But overall, it seems to be a positive move for the markets. The rising costs of complying with financial regulations and the tough market environment have possibly been important drivers for banks to cooperate in this manner. Having the backing of large banks in itself does not guarantee success to Symphony. However, its open source platform offers it a strong chance of being a contender in this space, as it allows its users to add their own features to the messaging platform. What would also be interesting for the neutral observer is the reaction of players such as Bloomberg and Thomson Reuters. These have long dominated not just the messaging, but also the terminal space, and now there are efforts to break their stranglehold on this market. These are large technology-oriented firms that offer a wide gamut of services to the banking and capital markets industry. Their response (if any) to the launch of Symphony could give us valuable insights into how they would react if their control of the terminal space is challenged. Interesting times ahead for sure!

NYSE glitch hurts, but no one felt it

Shooting yourself in the foot has to be painful. Thankfully, I have not done the fundamental research on this; Let’s just assume that it really hurts! The important thing about shooting yourself in the foot is that the pain is your own. We do not have to look very far to see some very notable examples of self-inflicted pain at companies with their technology. Software and hardware are glitchy and things go wrong. Nothing is better, though, when things go really wrong and no one else is hurt. Other technology failures in the financial markets have hurt many other companies, as well as many individuals. In some of these cases, pain rippled out from some point in a firm’s technology infrastructure and gained strength, as others in the networks were run over by the particular software or hardware failure. That is not really the case with the 3+ hour NYSE halt on Wednesday (July 9, 2015). The NYSE went down, and I am not saying it was not a big deal for NYSE. That’s a lot of nanoseconds to be off-line. However, it was just the loss of one small node in the entire U.S. equity trading network. There was concern at first that it might have been part of a cyber-attack (which is really scary, and who knows, what will be found out as forensic analysis continues but we will leave that to another discussion). A single point of failure in a robust network of dozens of equity trading venues, did very little to change trading. And it was a busy day, with Grexit and Chinapocalyspe in full swing. Plus, the Fed minutes were released while this was all happening! I was busy with a client when Bloomberg News reached out to ask me what was going on at the NYSE, minutes after the halt began. My mind began reeling – was it a cyber-attack? I quickly started thinking about the many experiences I have had with these types of situations: flash crash, failed IPOs, destruction of a firm. I reached out to my network to see what was happening. Yes, NYSE was down, but the other exchanges: (NASDAQ, BATS) were up; the network of darkpools, broker crossing engines, buyside crossing engines were trading. Even NYSE ARCA was up. This is what to I expressed to Pimm Foxx on Bloomberg TV. Something happened, but it was not a disaster, and people could still trade stocks. The robust and competitive web of interconnected venues can be a model for the market structure in other asset classes. The gun went off and wounded one small part of the system, but the fragmented network held.

RegTech: is there an artificially intelligent Big Brother watching you?

I just came back from sabbatical (it was great, but you knew that already). I’ve come back charged up and with stars in my eyes from what some of my colleagues call a sect, Singularity University. Well true that the founders want to make the world a better place, and that some of them could become god-wannabes when they will have artificial intelligence implanted in their brains and will have been able to fight ageing through DNA nano-modification and thousands of top notch anti-oxidant pills but to me right now they are just great crazy people who hope to make a difference through the exponential power technology has – and I am proud to be one of their alumni. So… what’s in it for you? Well FinTech, I guess. I am currently trying to look at what Artificial Intelligence (AI) will change in capital markets. The good news is: you already all know what AI is, even though some of you may be scared by it. But here I am not going to look at what AI will do in your bodies, just in your day-to-day jobs (not that scary, or so you may think). What many of our clients (buy side, sell side, exchanges, info providers, tech providers) have been trying to figure out in the past few years is what are they going to do with all the data they have. They have built or bought Big data softwares that parse, recognize, organize data and create products thanks to this data, whether algorithms that find trading opportunities through structured and unstructured data or corporate investor relations service that highlights where in the world is there a bad news about a specific company and what to do about it live via a data push, or even just create trade pairs when there are no matches in illiquid markets. So far, so good. What our clients are facing now at an increasing (did I say exponential?) pace is something bigger than this, what we call RegTech. Think of the current regulatory environment where you all have to adapt to MiFID II and EMIR and T2S and CSDR etc. at the same time. You all have to create new business models, technology or operations systems that will enable your company to abide by these new regulations. But RegTech is more than that: it is also the technology that you have to use to force change within your organization so that you can prove your bankers are acting in the best interest of their clients, say even in FX, where there are no real regulatory changes, but a lot of regulatory willingness to change things right now. These could be artificial intelligence machine learning algorithms that know how a typical FX trader acts and how the computer should block the non-compliant tentative trades or even just do the trades in a compliant way instead of the trader itself? You can’t really fire all your FX traders in one go and replace them all with AI computers, but you get my point. Even further than that, and I think where it gets scary, regulators, governments and supranational watchdogs are building (or have built already? Brownie points for who knows the answer to this one) big machine learning type AI to monitor what all the buy side, sell side, exchanges, trading platforms and hedge funds do on the markets, and off the markets through BIC accounts, every day, every minute, every second. When these smart systems see that somebody out there is not doing what he/she is supposed to be doing, even just from a simple compliance stand-point, his/her company will be in deep trouble. Of course I don’t expect the SEC or FCA or Consob telling us that they are building them, but there is more than meets the eye, get ready for this change to arrive at a watchdog near you.

Evolution of trading technology for exchanges in the Asia-Pacific

Several Asian economies and capital markets have witnessed rapid growth in the last few years. This has led to an expansion in the market infrastructure and a string of notable investments by the leading regional exchanges in trading platform technology. The exchanges in Asia-Pacific have adopted varying strategies to meet their technology requirements. Some exchanges have used their in-house capabilities to develop trading platforms. Others have used a mix of in-house platforms and technology from third party providers. Finally, some have relied mainly on outside technology, using best-of-breed solutions. The objective has been to modernize exchange infrastructure and ensure that the exchange remains competitive in the face of pressure from leading global players as well as other regional exchanges. An interesting feature of the Asia-Pacific markets has been the linkages and tie-ups between the regional exchanges, as well as those with leading global exchanges. The market is exhibiting a unique mix of cooperation and competition. The most notable recent inter-linkages have been the Shanghai-Hong Kong Stock Connect and the ASEAN Trading Link. Both are still in early stages of being set up and there are some inevitable glitches before we see significant volumes. But what is important to note is that this kind of connectivity is spurring other exchanges to also try and increase access to their products from outside markets and exchanges. While there are certain advantages for exchanges in the Asia-Pacific, there is nevertheless room for improvement. There is potential to turn the market data function into a significant profit center. Some exchanges are already successful in this, but others need to follow suit. Also, there needs to be greater emphasis on market surveillance and tighter regulation in what is a fast-evolving market landscape. I have been working on an upcoming research report that looks at the issues discussed here in further detail.