Fx Trading Report 2014

FX Trading and Technology Survey 2014

EXECUTIVE SUMMARYRegulation is a top concern and major catalyst for change in the FX market.

This view reflects the uncertainties and pressures placed on businesses as a result of the sheer volume of new regulation introduced over the last year and still to come over the following twelve months and beyond. Regulation has narrowed spreads, forcing firms to seek out operational efficiencies while promoting new market structures. Market participants must adapt, adopting new technologies and adjusting business models to operate in the future paradigm. This is not necessarily a negative, as many who anticipate impact from regulation see it as a genuine opportunity rather than a threat.

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KEY FINDINGS

• Significant concern and focus on improving market surveillance and compliance capabilities, auto-hedging, and risk management.

• General satisfaction with existing liquidity aggregation systems.

• Higher satisfaction with single bank trading platforms than multi-bank platforms.

• Indications that multi-bank platforms need to focus on pricing issues above all else.

• Barclays Capital, Deutsche Bank, and Citi are the most used single bank platforms, with Goldman moving up a few places to take fourth position.

• Bloomberg saw a surge in popularity this year among the multi-bank and independent platforms, with a clear lead of around 60 percent of buy-and sell-side firms voting it their favorite. Coming in far behind were FXall, Thomson Reuters, Currenex, CME, ICAP, and Hotspot, all of which featured among the most used multi-bank platforms.

INTRODUCTIONEach year since 2009, StreamBase has conducted a survey of trading and technology trends in the global foreign exchange market. Now acquired by TIBCO Software, we continue our strong interest in the FX market with our latest annual survey.

AUDIENCE PROFILEA total of 147 qualified respondents who actively engage in currency trading participated in the study. Some 63 percent identified themselves as buy-side firms, 29 percent as sell-side, with the final eight percent being platform providers, consultants, and others. (See Figure 1.)

Over half of respondents are from North America, with a third from Europe, some 10 percent from Asia, five percent from Latin America, and one percent from Africa. (See Figure 2.)

Figure 1. Survey Respondents by Type of Firm

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Figure 2. Survey Respondents by Region

Our survey results were the subject of an online roundtable discussion moderated by Sang Lee, Co-founder and Managing Partner of Aite Group. Participating in the discussion were James Sinclair, CEO of MarketFactory; Patrick Miles, CTO of Caplin Systems; Derek Sammann, Senior Managing Director, FX, Metals and Options Solutions for CME Group; and Richard Tibbetts, CTO of Event Processing at TIBCO Software. This report incorporates commentary from the discussion in addition to the survey results.

Similar to our survey results and report last year, FX trading volumes and volatility remain somewhat depressed, coming under pressure from the slowness of global economic recovery and regulatory uncertainty. Cost cutting continues to be an important priority for firms in an environment of intense competition. At the same time, the search for liquidity is also a priority as FX markets continue to fragment among a wide variety of different liquidity pools.

FX PRODUCTS AND CURRENCY MANAGEMENT

Figure 3. FX Instruments Traded by Survey Respondents

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There is little change in trading currency pairs; some 97 percent of respondents trade the majors, some 59 percent trade crosses, and some 27 percent trade emerging market currencies. (See Figure 4.)

Figure 4. Currency Pairs Traded by Survey Respondents

HEDGING STRATEGIESThe usage of different hedging strategies remains the same in comparison to last year; 71 percent of respondents claim to apply active management strategies, 45 percent use dynamic approaches, and about half of all respondents use passive strategies. There is a 13 percent rise in the use of active strategies among sell-side firms. (See Figure 5 and Figure 6.)

Figure 5. Hedging Strategies Used Among Buy-Side Respondents

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Figure 6. Hedging Strategies Used Among Sell-Side Respondents

ELECTRONIC FX TRADING The use of electronic trading has remained at around 80 percent in the past two surveys. Although the industry agrees that the adoption of electronic trading will continue to grow, the use of voice trading is still common among certain participants, such as corporate treasurers, particularly during stressed market conditions. (See Figure 7.)

Figure 7. Execution Methods

In this year’s study, we have updated our categories for execution methods inline with new definitions from a research paper authored by Aite Group. We now break down the electronic FX market execution venues into five subcategories including 1) Direct – Single Bank Platforms, 2) Direct – Non-bank Operated Electronic Broking Systems, 3) Indirect – Electronic Broking Systems, 4) Indirect – Multi-bank Platforms, and 5) Others. Direct signifies FX trades are executed over an electronic medium but not intermediated by a third-party platform. Indirect connotes that FX transactions are intermediated by a third-party electronic platform, such as a matching system.

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Approximately half of all respondents use single bank platforms to execute their FX trades electronically, which is very similar to the numbers in our prior surveys. Some 51 percent trade through non-bank operated electronic broking systems directly, with 36 percent trading through electronic broking systems indirectly and 53 percent trading through multi-bank matching systems. (See Figure 8.)

Figure 8. Electronic FX Trading Platforms

According to our latest survey, Barclays Capital continues to be the most used single bank platform, closely followed by Deutsche Bank and Citi. These were the top three ranked single bank platforms last year as well. (See Figure 9 and Table 1.)

This year, Bloomberg has moved into a strong leadership position as the most used multi-bank and independent platform among respondents, followed by FXall, Thomson Reuters, Currenex, and Hotspot (see Figure 12). Bloomberg’s strong performance is in no small part due to the existing infrastructure of screens on client desks, enabling expansion beyond core areas. At the same time, Bloomberg appears to be attracting entirely new players into the market—such as asset managers wanting to take more responsibility for their FX trading—enlarging the pie for everyone but taking much of the new business for itself.

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Figure 9. Primary Single Bank Platforms Used by All Respondents

Figure 10. Primary Single Bank Platforms Used by Buy-Side Respondents

Figure 11. Primary Single Bank Platforms Used by Sell-Side Respondents

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2012 RANKING 2013 RANKING

BARCLAYS CAPITAL

1 1 =

DEUTSCHE BANK

2 2 =

CITI 3 3 =

GOLDMAN SACHS

6 4 ã

JPMORGAN 4 5 ä

UBS 5 6ä

CREDIT SUISSE

8 7 ã

MORGAN STANLEY

6 8ä

HSBC 10 9 ã

BNP PARIBAS 11 10 ã

RBS 9 11ä

Table 1. Proprietary Bank Platforms Used by All Respondents

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BARCLAYS CAPITAL

1 1 =

DEUTSCHE BANK

2 1 ã

GOLDMAN SACHS

4 3 ã

JPMORGAN 4 4 =

CREDIT SUISSE

8 5 ã

CITI 3 6ä

UBS 4 6 ä

MORGAN STANLEY

7 8ä

HSBC 10 9 ä

BNP PARIBAS 11 9 ã

RBS 8 10ä

Table 2. Proprietary Bank Platforms Used by Buy-Side Respondents

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CITI 5 1 ã

BARCLAYS CAPITAL

2 2 =

DEUTSCHE BANK

1 3 ä

GOLDMAN SACHS

8 4 ã

JPMORGAN 3 4 ä

MORGAN STANLEY

3 4ä

UBS 6 4 ã

HSBC 10 8 ã

BNP PARIBAS 9 9 =

CREDIT SUISSE

6 9 ä

RBS 10 9 =

Table 3. Proprietary Bank Platforms Used by Sell-Side Respondents

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Figure 12. Primary Multi-Bank and Independent Platforms Used by Respondents

Figure 13. Primary Multi-Bank and Independent Platforms Used by Buy-Side Respondents

Figure 14. Primary Multi-Bank and Independent Platforms Used by Sell-Side Respondents

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CUSTOMER SATISFACTIONIn general, respondents indicate slightly higher satisfaction towards single-bank platforms than multi-bank platforms, but it is clear that neither type of platform can rest on its laurels because a significant number of clients see serious room for improvement.

Over 60 percent of respondents are satisfied or very satisfied with the service they receive from single bank platforms, which may reflect additional investment that the banks have put into improving user experience and service. Banks have devoted a lot of energy to building relationships with clients and branding their services, all of which contributes to client satisfaction. Nevertheless, it is notable that eight percent of buy-side respondents are dissatisfied with the single-bank platforms they currently use. High costs are likely the culprit. (See Figure 15 and Figure 16.)

While multi-bank platforms have a substantial segment of satisfied users, it is striking that some 80 percent of survey respondents believe prices can be improved. This is a significant increase in dissatisfaction since last year, suggesting that multi-bank platforms need to focus on pricing issues above all.

Figure 15. Satisfaction Towards Single Bank Platforms

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Figure 16. Satisfaction Towards Multi-Bank Platforms

ALGORITHMIC TRADING IN FXThere is little change in the use of algorithms for FX trading; about 47 percent of all respondents currently use algorithms, 27 percent currently do not use algorithms but plan to do so, and 27 percent don’t plan on using algorithms at all.

Among those who use algorithms, the percentage of those using in-house developed algorithms and bank-provided algorithms both increased, especially on the buy-side. (See Table 4.) The rather surprising number of respondents claiming to develop their own in-house algos is likely to be—at least in part—the result of a difference in terminology. In the FX market “algo” often seems to mean almost any kind of electronic execution process rather than quantitatively based trading execution as in the equities market. However, the fact that it has become significantly cheaper to develop algos through the use of technology platforms such as TIBCO StreamBase® rather than via custom coding has likely contributed to the growth of in-house development.

On the sell-side, the most used FX algorithmic functionalities are liquidity aggregating and VWAP, with half of sell-side respondents applying these two strategies. On the buy-side, the most used FX algorithms are floating and liquidity aggregation. (See Figure 17.)

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2012 2013YEAR-OVER-YEAR

IN-HOUSE DEVELOPED

FX ALGOS

All 75 Percent 81 Percent ã

Buy 75 Percent 85 Percent ã

Sell 74 Percent 74 Percent =

BANK PROVIDED FX ALGOS



Sell 31 Percent 22 Percent ä

THIRD-PARTY PROVIDED FX ALGOS



Sell 18 Percent 17 Percent ä

Table 4. Internal or External Algorithmic Development

Both buy- and sell-sides care most about liquidity aggregation, but it is a far higher priority for sell-side firms. In a noticeable change from last year, buy-side firms claim to be much higher users of other common execution algorithms than prior.

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Figure 17. Primary FX Algorithm Functionality

Only 40 percent of respondents currently have benchmarks in place to measure the quality of execution. This is slightly below last year’s result, suggesting the market has made no progress in the development and deployment of benchmarks. Among those with benchmarks in place, 74 percent developed such tools in-house, an 11 percent increase from last year.

There is no change when it comes to determining the quality of execution. The ability to obtain tight spreads and minimize market impact is still top of the list, followed by speed of execution and fill rates. Respondents seem less concerned about the explicit fee charged. On the sell-side, speed of execution is named the most important criteria to measure execution quality.

FX MARKET DATAGiven the fragmented nature of the FX market, it is not surprising to find among survey respondents a deep concern for accurate information—after all, an algorithm is only as good as the information fed into it. “Reliability and Consistency of Sourced Data” is viewed as the biggest challenge for algorithmic trading this year (Figure 18). This narrowly surpasses “Access to Low Latency Sources for Algorithmic Trading,” which was last year’s top concern, and

“Integrate Feed/Data Formats from Different Liquidity Providers.” Tying these concerns together is the underlying structure of disparate liquidity sources and types of trading platforms in the modern FX market.

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Figure 18. Biggest Data Challenge for Effective Algorithmic Trading in FX

FX TRADING SYSTEMSThe majority of both buy- and sell-side participants are satisfied/neutral with their current “Liquidity Aggregation” capabilities, which does not differ from last year. This is just as well, considering the fragmented liquidity of today’s markets and the efforts firms have made to find ways to maximize liquidity. On the other hand, given the rapidly changing regulatory structure, it is perhaps expected to find “Market Surveillance and Compliance” as an important area of concern for all respondents.

“Auto Hedging and Risk Management” ranks low in satisfaction (Figure 19 and Figure 20), with “Algorithmic Order Execution” and “Auto Hedging” ranking top priority for improving FX trading capabilities over the next year. (See Table 5 and Table 6.)

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Figure 19. Satisfaction Towards Existing FX Trading Capabilities Among Buy-Side Respondents

TOP FX CAPABILITIES TO BE ADDED/IMPROVED BY THE BUY-SIDE

1 Algorithmic Order Execution and Management

2 Algorithmic Signal Generation

3 Auto Hedging and Risk Management

4 Time Series Modeling

5 Connectivity to More Venues

Table 5. Top FX Capabilities to be Added/Improved by Buy-Side Respondents

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Figure 20. Satisfaction Towards Existing FX Trading Capabilities Among Sell-Side Respondents

TOP FX CAPABILITIES TO BE ADDED/IMPROVED BY THE SELL-SIDE

1 Pricing and Rates Engines

2 Algorithmic Order Execution and Management

3 Auto Hedging and Risk Management

4 Liquidity Aggregation

5 Connectivity to More Venues

6 Algorithmic Signal Generation

Table 6. Top FX Capabilities to be Added/Improved by Sell-Side Respondents

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ONGOING REGULATIONS IN FXChange in the regulatory environment has been a high priority in FX for some time but with key legislation such as Dodd-Frank, EMIR, and BASEL III coming into effect, survey respondents on both the buy- and sell-sides agree that “Ongoing Regulation in the FX Market” is the single most important factor for change in 2014. Buy-side respondents are also concerned at the potential impact of increasing market volatility. Although “High Frequency Trading” dropped down the list of concerns last year, it is interesting to see it back up again this year in second place (Table 7).

“The Growth of Emerging Market Opportunity,” which was the second most urgent concern last year, has dropped to fifth place in this year’s list.

RANKING

1 Ongoing regulation in the FX market

2 High frequency trading and increased adoption of algorithmic trading

3 Increasing market volatility

4 Increasing market fragmentation

5 The growth of emerging markets opportunity

6 The growth of retail market

Table 7. Biggest Impact on FX Business Ranked by All Respondents

None of the dire predictions about the disruptive impact that new regulations would have on the FX market have so far come true. However, one of the chief impacts of new regulation and the greater transparency it brings is likely to be narrowing spreads, which will result in a whole sequence of likely effects. Firms will be forced to implement significant operational efficiencies and ultimately adjust their business model to adapt to the new paradigm.

Regulatory uncertainty, as the new rules take shape and are implemented, will also affect the way firms position themselves. This is likely to lead to a significant investment in software as technological flexibility and agility as well as an ability to scale to handle growing volumes of data will be prerequisite for successful adaptation. Technology that can easily and cost effectively be adapted to comply with changing regulations will provide a significant advantage. Many FX market participants have already started down this road, but it is clear from the survey responses that the process still has a long way to go.

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TIBCO Software Inc. (NASDAQ: TIBX) is a global leader in infrastructure and business intelligence software. Whether it’s optimizing inventory, cross-selling products, or averting crisis before it happens, TIBCO uniquely delivers the Two-Second Advantage®— the ability to capture the right information at the right time and act on it preemptively for a competitive advantage. With a broad mix of innovative products and services, customers around the world trust TIBCO as their strategic technology partner. Learn more about TIBCO at www.tibco.com.©2014, TIBCO Software Inc. All rights reserved. TIBCO, the TIBCO logo, TIBCO Software, and TIBCO StreamBase are trademarks or registered trademarks of TIBCO Software Inc. or its subsidiaries in the United States and/or other countries. All other product and company names and marks in this document are the property of their respective owners and mentioned for identification purposes only.

07/02/2014

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LOOKING FORWARDThe move towards electronic trading in the FX market is being accelerated by new regulatory structures globally. This has led to a multiplicity of new trading platforms—not just more of them, but many different types—which, in turn, leads to greater competition. One important question for the market as a whole is how many of these new businesses will survive? Is the market large enough to accommodate all players? And, if not, which will last and which will go to the wall?

It is easy to assume that the attrition rate will continue to be high because liquidity will be spread too thinly across too many platforms, but this may be too simple an explanation. With big banks being forced (by the Volker Rule, among others) to alter their business model and pull back from their traditional risk-taking role, their place is being taken by a wider range of different risk-takers, which are often more specialized and therefore able to meet the unique needs of different kinds of customers. This may undermine the assumption that FX market liquidity is inelastic; though everyone pushes for more speed, speed for its own sake is not a business model. The trading platforms most likely to survive will be those that provide specific services to meet specific needs at lower cost to bring new participants into the market. Within reason, the market may turn out to be big enough for a large number of new players and platforms.

For individual companies, increasing sophistication and complexity of the market will create new demands on technology capabilities and infrastructure. For example, the necessity for firms to accurately track their activities via quant analysis and trading, hedging, liquidity management, and performance monitoring will likely oblige them to bring a number of operations in-house. Roughly a third of survey respondents said they plan to do so, leveraging Excel as a primary method. This suggests a great need for solutions and platforms substantially more advanced than a spreadsheet, but not substantially more complex to implement. To use the information gathered effectively, businesses will need real-time visualization technology that is flexible, consistent, cost effective, and easy to build—ideally, based on a single system able to support multiple front-end technologies.

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Fx Trading Report 2014