Market Evolution: Predictions for the
Future
ACI DenmarkSeptember 20, 2012
James SinclairCEO, MarketFactory [email protected]
Tonight
1. Why is FX different?
2. Where are we now?
3. Where are we going?
WHY IS FX DIFFERENT?
Global, Dispersed, Fungible
Europe$725bnper day
Asia$375bnper day
Americas *
$400bnper day
Chicago$100bnper day
* Excludes Chicago
Also….
• Natural interest: real needs– Cross-border capital markets, FDI, trade
• Lightly regulated: can differentiate
• Strong credit model (CLS, Prime Broker)
• Well established (Biblical references)
Resilient
1,039 Banks; 580 Buy-side Banks; 300 Prop Funds; Real Money; Hedge Funds; Corporates
euro, mergers consolidation
euro, mergers, consolidation
Retail
Aite Group
Equities and FX Market Structures are Inverted
Equities– Millions msgs per second– Thousands – Real-time broadcast
Tick by tick – every tick!– Thousands / second
– Centralized markets
– Heavy – e.g. Reg NMS– Standardized – NBBO– Established; low difficulty– Full depth of book– None b/c of CCP
– Order routing from point of order submission
Com
ple
xEasi
er
Attribute
Throughput
Symbols
MD Frequency
Order Submission
Fragmentation
Regulation
Market Structure
Price Discovery
TCA
Transparency
Price Filtering
Order Routing
OTC FX– Millions msgs per day– 20 pairs; 66% of FX in 6 pairs– Real-time custom snapshots
– Max 100 orders per second
– Globally fragmented venues
– Light – isolated venues– All non-standard; all bespoke– Venue specific– Difficult – lack volume info– 1-3 levels of depth common– Heavy b/c of bilateral credit
– Complex decision process
Com
ple
xEasie
r
WHERE ARE WE NOW?
CLS FX Spot VolumeFlat recently
CLS data indexed to July 2010
CLS FX Spot vs. US EquitiesBut better than other markets
CLS, US Consolidated A, B, C tape
CLS FX Spot vs. Europe EquitySimilar in Europe
CLS, Thomson Reuters Monthly Market Share – all lit, hidden, auction, dark, off order books
FX, US Bonds, US EquitiesClearly correlated
CLS, US Consolidated A, B, C tape, SIFMA primary dealer treasury, corporate>1 yr, agencies
Greenwich Associates
Playing the Scale GameBut is it the only game to play?
Customer FX Growth
© MarketFactory, Inc. 2011
Interdealer FX Market in 2011Interdealer FX Market in 2003
ReuEBSCMEDB
Structure akin to US treasuries: Interdealer: Brokertec, eSpeed;Customer: Bloomberg, TradewebStill similar + GovEX.
Prop Shop
BoA JPM
UBSDres
-dner
Citi
Prop Shop
Prop Shop
Prop Shop
Prop Shop
HS
Real Money, Corporates
CXFXal
l CX
Integral
Execution through ECNs, banks and some funds
Not shown:Futures brokersRetail
Com-
merz
FXall
Barx
The HFT Riddle
• Their liquidity “lowers costs for users” • They make millions of dollars
How do they do both at once?
Some hold for μsecs; have no customers
Pragma: They may raise costs
June 29, 2012 market. Red dot indicates 10% with longest queue length. HFT and the Hidden Cost of Liquidity, Pragma Securities, July 27 2012
The highest volume US stocks are the most expensive to trade!
Pipping: Repeat of Sub-Pennies in Equities
Source: Tick Size Regulation, Intermarket Competition and Sub-Penny Trading Fig 1. Sabrina Buti, University of Toronto, et. al. June 1, 2011
An Opinion
HFT additive if:
• Always there in many pairs;• Use info from other asset classes; or• Hold positions for material time
But can we choose? A slippery slope
Major ECNs and CMETrends are converging
Major ECNS and CME
CLS vs. Established ECNsEstablished ECNs are losing share
CLS, Major ECNS
Low Volatility, Low Volumes
FX Options
BIS Survey; Aite Group
FX Options
BIS Survey; Aite Group
SO, WHERE ARE WE GOING?
PredictionsThe Easy Ones
• Emerging markets (RUB, CNY)• New platforms, new exchanges
(e.g. CME Europe)• Asset managers seek better FX access• TCA
PredictionsThe Harder Ones
• Volume• Fragmentation / Consolidation• Which products?• How traded?
• Retail• US elections; fiscal cliff; eurozone economy• Basle III, MIFID II, Dodd-Frank, EMIR
Tighter SpreadsEquities Market Turned Agency
Aite Group
Modest Net Consolidation
Customers value relationshipsFINRA
Fragmentation
US cash equities: 13 exchanges; 50 dark pools; plus broker-dealers
European equities: 28 lit books; 2 hidden; 20 auction markets; 13 dark books.
Many Platforms will Succeed
• Bring New Segments
• Enable hedges not economic before
• Grow market
Democratization of Options
BIS Survey; Aite Group
34
Electronic FX OptionsHybrid
Broker-backed Order books RFQ
Major single bank platforms: UBS, Deutsche Autobahn and BARX
CME FX OptionsA model for options?
CME
How Will Traders Execute?
• Revival of direct market?• Fragmented platform market• Block trading – four ways to trade:
– Transfer risk to a Bank– Algorithmic Trading (chop it up)– Dark Pools/Order Types (akin ITG Posit, Liquidnet)– Shop through a Voice Broker
Algorithmic Trading
Trader gets an ‘assist’ from the computer. Can give it to customer
DMAThe Agency Model
• New Participants, More Participants• Next Phase of Market Growth
In Summary
• FX is special: real need; global; dispersed• Increasing fragmentation. Modest net consolidation• Emerging markets, options. Regulation helps• Banks have customer relationships. Scale is a
strategy, but not the only one • Banks increasingly empower their customers:
algorithmic trading, DMA
Greenwich ForecastOur best days are ahead
APPENDIXIN CASE OF QUESTIONS ON THESE TOPICS
High-Frequency Trading
Choose your definition:1. Systematic; Quant; <1 day holding
2. High volume; Low inventory
3. CFTC (US govt) defn.
25% of volume, but highly visibleIrene Aldridge – Estimating Proportion of High Frequency Traders, July 10, 2012
Growth by Geography