EXPECT THE UNEXPECTED.
Muamar Behnam, Head of Sales HQ at Swissquote Bank, shares his thoughts about the state of FX trading in 2019 and looks forward to the start of the new decade.
At the beginning of 2019, a survey by JP Morgan said that liquidity, or ‘the ability to buy and sell currencies whenever needed with minimal market impact’, was seen by currency traders as the biggest challenge for the year ahead. Was that, in your opinion accurate, and will that also be the case for 2020 and if so why?
Definitely. Overall 2019 has been an average to good year in terms of volume, especially considering the periods of quite low volatility we faced. We, and I imagine quite a few other market participants, faced some tricky moments during the year. January 2nd and the flash crash on the Swiss Franc (CHF) springs to mind, when prices went wild and few liquidity providers (LPs) were still in. Thankfully, we could rely on some very strong LPs during these events who provided us, and our clients, with the requested volumes. 2020 will be no different in my opinion. Even if volatility remains average to low, we will still face these moments where the market will be impacted by huge volumes being sent simultaneously, and prices will be hundreds of pips away from the requested ones.
What impact have geopolitical tensions had on the liquidity landscape?
If we accept that political uncertainties have reduced market volatility, and have thus impacted the volumes in H1 2019, the effect of geopolitical tensions has in my opinion, remained relatively limited. The trade war between the US and China went on all year, as have the endless Brexit discussions, and even the attack on the Saudi Oil facilities have had limited impact. These events, like others of the same kind, have an immediate impact on the market but I’m not sure that any of our liquidity providers were unable to deliver during these times. Geopolitical tensions create trading volume but they don’t change the fundamentals of the liquidity landscape.
What are the technological changes that have affected behaviour and the full trade cycle?
Algo trading is making monetisation of the FX trading flows more and more difficult. As with many FX brokers, we sit in the middle of a game where on either side we deal with market participants who are becoming more and more technologically prepared to make the most of every tiny market move. Sharp algos and trading pattern detectors on the traders’ side, and smart instruments, monitoring tools, last look and speed bump features on the LPs’ side make it a more and more competitive game. It’s a given that we must always do our best, left and right, so that all participants are happy at the end, which makes it for me a fascinating game to watch. We have definitely entered the era of ‘Champions League’ FX trading!
What are the different liquidity needs of the various institutional players – asset managers, hedge funds, pension funds, etc?
The needs are as a various as there are participants. Some focus on specific instruments where high volatility allows them to keep shorter-term positions, some are still ‘news’ traders so we must be able to guarantee liquidity during those times. Others (usually larger ones) just want to make sure that we are always available to offer them the depth they need in case they need to cover their exposure. But, we’ve also noticed a trend among the largest partners that positions are kept much longer than they were in the past, and all these clients use just a fraction of the available leverage. The demand on ‘Full Amount’ has definitely increased. Both makers and takers understand that trading larger tickets against one counterparty helps in reducing the market impact, as well as improving spreads, since a provider is not required to hedge quicker.
What is the level of fragmentation in the market and how are market participants such as Swissquote Bank addressing this issue?
I believe it has never been as fragmented as it is right now. We have retail clients trading like institutional ones; the level of knowledge and the flow they send is sometimes more challenging than the flow we get from institutional partners. Technology has empowered everyone. Money managers have strategies that are incredibly well-designed. The spectrum of clients is getting always larger. The institutions are always more demanding, but every demand is more specific, down to the finest detail, and we always try to come up with an answer to their requests. At Swissquote, we have fine-tuned our liquidity pools to serve every type of client in the best way possible. Our institutional partners have access to dedicated liquidity pools because that is the only way to match their demands, the “one-size-fits-all” approach is no longer viable. Customisation of our systems, of our liquidity pools, of our platforms, and of our risk management systems is a must-have now, and we’ve worked in that direction these last two to three years.
What role is data playing and how can it be better harnessed?
It is extremely challenging to improve what you are not measuring – the industry cannot go blind anymore. Analytics are key for providers to understand the quality of flow and where and/or how to route it. We are just at the beginning of exploiting this incredible resource that are the terabytes of data we collect every day. It allows us to enhance the service we provide by understanding how the clients trade, what are their needs, when do they trade, what do they avoid, and what triggers trading in a low volatility environment, etc…
What are your strategic priorities for the year ahead?
We will continue to develop our offering by connecting to more electronic communications networks (ECNs), diversifying our institutional liquidity pools, and by bringing in new actors who have a different risk appetite. Our institutional liquidity pools have improved a lot these past two years, but we want to push to the next level in 2020. The ECNs are the marketplaces for institutions and we must be present, not only on all the major ones but also on the new and innovative ones. Our specialists are continuously screening the newcomers in this segment and looking for opportunities. But beyond that, 2020 will definitely be an exciting year, with the upcoming US elections and the aftermath of the UK General Election and Brexit. As much as you can prepare a strategy, defining this and that parameter, we must above all be ready to adapt to any kind of situation should the unexpected occur… again.