Christopher Purves, Head of FRC Strategic Development Lab at UBS and Rebecca Thomas, Executive Director, UBS Client Office – FX, Rates & Credit discuss the latest technological, regulatory and cultural shifts within FX.
Almost a year on from MiFID II – how has it changed the FX markets?
Chris Purves: So far it has not had a major impact on the FX markets. It has however taken an awful lot of work and resources for firms to become MiFID II compliant. This has consequently slowed down the number of new products that have come to market. There have of course been changes in terms of how we do our record keeping and reporting. It has also precipitated a move away from voice trading as a channel to electronic trading because the reporting is more automated and less error prone.
Expanding on that point, studies have shown that electronic trading has significantly increased – how do you see it developing?
Chris Purves: From what we see, electronic trading has definitely increased but probably because people want straight through and seamless trading. If you break FX down into spot and swaps by volume I would guess that around 80-90% of both are being traded electronically and that number will only increase over time. The electronic FX microstructure is challenging though, because there are around 12 to 14 venues, all of which you need to interact with. This requires the type of execution tools that are also used in equities, such as smart order routers and algos to get optimal execution.
One of the problems with trading via the ‘old school’ telephone is that it can be difficult to capture an accurate timestamp for a trade. It is certainly less painful to do TCA (transaction cost analysis) and best execution reporting when trading electronically. We have seen this trend in equities and FX, and even credit, which was the last bastion of voice, is starting to go electronic.
How is TCA in FX evolving and how can it enhance execution and trade analyses?
Chris Purves: The conversations about TCA were already taking place before MiFID, However, the process was more manual and now it is becoming much more automated. We run TCA on our side and the clients conduct their own and together we can change the execution style to get the best outcome for the client. We have a variety of ways with which to execute, including principal which is the largest in terms of percentage of volume, and agency which is growing. It depends on the client. Some prefer agency because of the anonymity, while others are happy to disclose their name in order to get a tighter spread.
Rebecca Thomas: We also provide execution consulting services to help clients navigate their way through the electronic markets. Business models at asset management firms are changing because of cost pressures and they want advice on the best ways to execute their orders. However, we have many different client segments and the advice will depend on what type of firm they are and where they are located because executing trades could differ depending on the geography and other liquidity factors.
What impact has the Global Code of Conduct had? How much does it matter to clients?
Chris Purves: To date I believe all large sellside firms have adopted the Code which is not surprising as it provides a consistency of approach, a golden standard if you like, to ensure you are up to scratch. A more interesting question perhaps, is the extent to which the buyside have signed up. The very largest firms have likely signed it, but many of the smaller ones have not and do not particularly see why they should. It’s important that as an industry we find a way to increase sign-up over the coming months.
Rebecca Thomas: I have been in a number of conferences and forums recently where the transparency that the Code provides around participants has been well supported. It has also been suggested that to gain broader adoption, that platforms display which liquidity providers or participants have adopted it, so you can challenge either by not trading with those who have not, or at least have an awareness and potential discussions as to why they have not adopted it.
What role do you see blockchain playing and where do you see crypto currencies fitting in.
Chris Purves: There has been a lot of hype but I think we are on the other side of the hump now and I believe that over the next three to five years, distributed ledger technology (DLT) will have a role to play in FX. I do not personally believe that cryptocurrencies will have a role to play although this is not to say that there will not be digital forms of currencies such as the dollar, euro and sterling. I can see them being used as digital tokens for post-trade efficiency and in the settlement process. For example, at the moment, the FX markets are closed at weekends but with digital tokens settlement could be 24/7 and at low cost.
At UBS we are firmly in favour of DLT and are part of several collaborations such as R3. We also launched the Utility Settlement Coin which now has 17 members. The aim is to create a commercial bank digital representation of cash backed by central bank money, which could ultimately allow market participants to transact and settle wholesale payments using tokenised versions of different currencies on a distributed ledger.
What other technological developments are changing FX?
Chris Purves: Machine learning based algorithms are certainly popular today. We recently launched Orca-Direct which is an FX Spot trading tool that uses a machine learning algorithm to source the best liquidity across multiple external venues for immediate market orders. We are also looking at launching Netflix style recommendation engines to help trading and sales match our interests with those of our clients.
Rebecca Thomas: In the past, a sales trader would cover 10 clients in the traditional way whereas the technology is able to cover 100+ clients with the same quality. However you can’t just rely on signals and need to overlay the technology with human expertise and insight.
In terms of diversity challenges, how have things changed in terms of opportunities since you have been in the industry?
Rebecca Thomas: There are no magic beans to change things overnight and it will take time but we have taken great steps to attract a much more diverse talent pool. However, it’s not about applying a sticking plaster, or hitting quotas, but requires a culture shift. For example, we have widened our recruitment and look to hire people from career breaks, the armed forces as well as offering support for the BAME (black, Asian, and minority ethnic) and LBGT communities. We also offer shared maternity and paternity leave as well as flexible working hours. It means giving line managers training on how to be more inclusive leaders and surveying people when they leave in order to gain a better understanding of our working practices.