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Insights from the FX Markets eFX Forum: Embracing Innovation for Client Value and Sustainable Profit

The FX Markets eFX Forum, held in London on the 10th of July 2024, offered a wealth of insights, highlighting emerging trends and innovations in the FX front office space. As an industry leader, smartTrade remains at the forefront of these developments, constantly seeking ways to leverage them for the benefit of our clients. Below are the key takeaways from the forum, reflecting our commitment to adding value and driving sustainable profit in the FX industry.

Bank Algos: Leveraging Internal Liquidity

One of the critical discussions centered on the use of bank algorithms and the importance of leveraging internal liquidity. Larger banks possess substantial quant resources and a well-established internal franchise, both crucial for developing and running efficient algos. Regional banks, however, may struggle to achieve economies of scale and equivalent sophistication independently. Partnering with the right technology vendor or white-labeling algos from a global bank partner can bridge this gap.

At its most basic the fundamental approach for most bank algos involves dropping risk onto an eBook and using a skew to discover offsetting positions. This method is more cost-effective than aggressive market moves and avoids brokerage fees. Additional tools for algos include placing orders on primary venues, accessing other bank liquidity, dark pools, and even other asset classes such as futures liquidity.

Moreover, conducting thorough KYC on clients accessing an algo, as well as on liquidity feeds, is essential to ensure optimal interaction with algos and best execution practices. In our experience, regional banks with at least some two-way flow can compete effectively with global banks in terms of internalization. Leveraging local knowledge and inventory can generate competitive prices for their clients, although the scope of effective internalization may be concentrated in regional currencies and specific active market times.

Disrupting the Status Quo: Opportunities Amid Spread Compression

While spread compression was viewed as a common challenge, it was stressed that it should be seen as an opportunity for innovation. Advances in AI and technology offer new avenues for efficiency in trading and sales, such as allowing users to interact easily with complex data. On the administrative side, automating onboarding and completion of ISAs, for instance, could streamline operations. Historically, new platforms emerge approximately every decade, such as EBS, Reuters Matching, and FXSpotStream. The current climate may be ripe for a new platform providing commoditised services for Tier 2 banks, offering early movers a chance to capture additional market share.

At smartTrade, we have not seen demand for a common distribution platform. Our clients prefer the security and flexibility to innovate with microservices and proprietary code, which a one-size-fits-all platform may struggle to achieve.

Strategies for FX Market Makers: AI and Client Value

AI chatbots that facilitate easy interaction with data were highlighted as significant innovations. These tools enable traders and sales teams to focus less on routine tasks and more on improving trading strategies. A key point raised was the paramount importance of always bringing discussions back to how innovations in our industry add value to clients. By prioritizing client value, profits are generated as a natural consequence, ensuring long-term sustainability.

The Future of FX Derivatives Electronification

The forum underscored the need to consider the full value chain, including pricing, risk management, regulatory requirements, and RWA. While single dealer platforms offering options are not new, their diffusion to Tier 2 platforms marks a significant trend. The goal is to free sales teams from manual tasks through automation, allowing them to focus on consulting and advising clients on risk execution aligned with their targets.

Electronification of options and derivatives is more about achieving the right price automatically rather than delivering ultra-low latency, as opposed to spot electronification, which focuses on speed of delivery and internalization. This transition of options from voice to electronic reduces operational errors, enabling a seamless client experience across various platforms, whether single dealer, multibank, API, or chatbot.

At smartTrade, the notion of automated e-options distribution is a value add that our clients have embraced for some time now, based on demand from end clients. Our banks see adding additional products to the existing SDP and MBP offerings as strengthening their competitive edge. The automation of options delivery enables sales to focus on more value-added activities. We are now building on our existing options suite and branching out further into structured products such as TARFs, TARN, and Accumulators.

Reducing Operational Risks to Protect Profit

A notable point raised by a speaker from a leading bank was the significant impact of operational risks on profit margins. The speaker highlighted that errors such as sales keying in client orders incorrectly or traders mis-hedging risk amounts can lead to a loss of between 1-4% of profit. To mitigate these risks, the bank has implemented measures to automate as much of the process as possible—from client order entry to risk hedging—ensuring minimal human involvement. This automation is a key factor in reducing operational risks and protecting profit margins.

smartTrade recognises the market’s clear trajectory towards further automation of numerous processes. This shift is driven by several factors: the need to minimize operational risk associated with human intervention in routine tasks like data entry, the ability to scale volume without corresponding cost increases, and the reduction of latency across onboarding, trading, and all facets of client interaction. Furthermore, as discussed in other forums, increased automation yields additional benefits, such as generating data that can be analyzed for insights, thereby enhancing and refining workflows and services offered.

Commitment to Client Value and Sustainable Profit

In summary, the e-FX Forum reinforced the critical link between innovation and client value. We are dedicated to leveraging the latest technological advancements to enhance our service offerings. By automating processes and reducing operational risks, we ensure that our clients receive unparalleled value, which in turn drives sustainable profit for the industry.

Our very low attrition rate is a testament to our success in this endeavor. At smartTrade, we remain committed to leading the way in innovation while never losing sight of our ultimate goal: adding value to our clients.

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