The structure of foreign exchange markets may have been permanently altered by the global pandemic, according to a new study – Ad Hoc Responses to COVID Shock Will Continue to Shape FX Market Structure – from consultancy Greenwich Associates.
“Though the pricing and the flows are returning to normal, the way in which those prices are discovered and the flows are channelled have shifted significantly during the COVID-19 pandemic,” said Ken Monahan, author and senior analyst at consultancy Greenwich Associates.
He added that the pandemic rattled FX markets, interrupting market participants’ access not only to liquidity, but also to basic workflows that were upended by the sudden shift to working from home. “The good news is that the market structure was flexible enough to accommodate rapid changes in execution methodologies and other areas, allowing market participants to adapt on the fly,” he added.
Monahan notes that the pandemic triggered increased volumes through single-dealer platforms and voice trading as investors pointed to relationships with dealers and others in the forex market as increasingly important as perceived liquidity declined.
FX investors also increasingly broke up larger trades and delayed the execution of trades, behavioural shifts which many said will likely last once the global crisis passed..
Nearly 20% of the 147 forex investors polled globally said they increased their use of voice trading during the pandemic, which the study called “amazing in context,” because the FX markets are among the most electronic across the world.
Another significant finding was that 67% of respondents pointed to relationships within the FX market. “This is perhaps also a healthy reminder that even in a market as disaggregated and electronic as [forex], individual relationships between firms and between people are still the basis of all business,” Monahan said.
However, while many investors moved from the electronic to the phone, the use of algorithms was also on the rise during Covid-19. The study found that 38% will increase their use of algos as result of their Covid-19 experience while only 11% said the higher level of voice trading would continue, and 10% said delayed executions of trades would likely persist.
“Firms were very reliant on relationships, but they were also using every tool in the toolbox,” Monahan said.