James Binny, Global Head of Currency at State Street Global Advisors talks about how regulation, technology and now Covid‑19 is leaving its mark on the FX market.
James Binny is global head of currency and head of investments Ireland. He joined the company in January 2016 as head of currency for EMEA. Binny has worked in the industry since 1990, predominantly in investment management of global fixed income and currency. He has worked on or led teams at firms including Brevan Howard, Gartmore and County NatWest. He also managed a currency manager of managers product at ABN AMRO Bank. He is well known as an industry innovator, and was one of the first individuals to work on Currency Factor processes over a decade ago.
What has been the impact of Covid-19 on FX?
We trade spot and forwards and in general, spot trading has increasingly become more electronic and when volatility blew out as economies shut down because of Covid, it remained an efficient market. Spreads widened but that reflected the overall market. The systems have become more sophisticated and we were able to get prices from our counterparties throughout. This is in contrast to 2015 when the Swiss National Bank let go of the three-year cap on the Swiss franc.
By contrast, forwards are more dislocated and in mid-March when volatility was high, the spread in cable (referring to the sterling/dollar pair) widened five times while it was 50 times in the forward points. The problem is that forwards are related to short term interest rate movements which were suffering from a dollar funding crisis but also, they are also more bespoke and difficult to commoditise. People want different dates and credit requirements depending on their own requirements. This mean there is more manual intervention which makes it difficult to get streaming prices.
How did you manage from an operational perspective in terms of traders working from home?
Automation and communication. In Sydney we have portfolio managers who instruct traders in Hong Kong through automated systems and processes. In London, the portfolio manager would sit on one side of the room and traders on the other so there is a closer proximity but they use the same systems, so that part was already in place. However, now that everyone is working from home, we have made sure that they had the technology they needed. Traders were the most reluctant to work from home but the transition has gone smoothly for them and they were still able to get the best price for our clients. We also had tested the surveillance systems and were recording phone calls because before lockdown we had a trader who lived in Brighton and wanted to work from home occasionally. So fortunately, we already had the systems in place.
What about communication?
Maintaining the same level of communication is also a main priority. We have always had a morning call with traders and portfolio managers and that call is more important than ever. Also, because many people are not commuting, you can spend more time on videos which helps with human interaction and in making sure that everyone is doing ok because it can be difficult living and working from home when you are on your own.
One slight concern though is while teams are working well together, we are seeing less communication between teams. For example, the fixed income desk sits next to the currency team and the danger is that they become more siloed. We also have to make sure there is greater communication between portfolio managers and sales and distribution teams – there is a danger that they can operate in parallel universes and so we have instigated increased calls and market updates.
Looking ahead, what long term impact will Covid have on FX trading desks?
It is still early days and people in the industry have been surprised by how efficiently things have worked. In many ways it has given us more resilience but has also shown us the value of automation. If this had happened five to ten years ago, the market would have seized up and the industry would have had difficulty coping with the volatility and volumes.
What technologies, algos and strategies will help teams navigate the current and potential landscape?
There is a lot of talk about algos and TCA (transaction cost analysis) but that is all about the spot market. Of course, we use them. However, forwards have the biggest impact in terms of hedging cost and as I mentioned earlier, they are the most challenging. For example, we can demonstrate best execution to clients more easily in the spot market but it is more difficult in the forward market, as it can be harder to define the benchmark price, and that is why I think there needs to be a greater push towards automation.
In general, pre Covid how has MiFID and other regulations changed FX trading and investing?
The general trend has been to increase transparency which suits us because we have always explained the costs of the transaction to clients. We have also always sought best execution for our clients but now we also have to demonstrate it. TCA has become more important and we have become more sophisticated in our calculations.
One of the biggest impacts for us of MiFID II was unbundling research from execution. It was easier to define the cost in equities where there are commissions, than in spread markets such as FX and fixed income. I see the justification for the change; for instance, we are managing $112 billion in currency and $100 billion of that is in passive. The rest is active which is where most of the research is focused. Like most of the big firms, we are paying for the research ourselves.
What changes have you made since joining at the end of 2017?
In general, the market has become more automated and so have we. As index managers, for example, we get very busy at the end of the month with index rebalancing. This leads to a huge number of transactions but technology has made the process much more efficient and cost effective. The same is true with TCA in the way we measure it and the cost savings we can achieve for our clients.
We increased our focus to become more resilient whatever the time zones our clients were in. We are a global organisation with Currency portfolio managers in Sydney, Boston and London, and we wanted to ensure that we were able to manage our clients’ portfolios and maximise their opportunities, regardless of their location or asset classes they were investing in while at the same time complying with the different legal constraints.
What skillsets do you need today in FX and how do you see AI machine learning being applied to help portfolio managers and traders?
When I started 30 years ago, there was less computing power so you had more time to think about the opportunities. Today, you have to be able to process information quickly and analytical skills have to be much tighter. I think artificial intelligence can help accelerate the decision-making process but it is hard to let it control the process completely. From a fiduciary responsibility perspective, it is very important to understand what exactly is driving the AI model that you are using to take positions for your clients.
What other challenges and opportunities do you foresee in the future?
Looking at forward markets, I think we will see more opportunities in peer to peer or buyside to buyside trading. We have some of this kind of non-bank activity in the spot market and it has the potential to grow further. There are firms who are considering how we can develop this in the forward market.
In terms of challenges, we are looking at going back to the office and the issues involved with maintaining social distancing. We will learn from what our Sydney office has done and how we can reconfigure our space in our other offices. We plan to gradually increase the number of people back in the office during the rest of the year and that will depend on the country and particular government restrictions. However, we are inviting, not ordering, people back and we can continue to do what we have been doing because we have not come across any serious operational difficulties.