AWARDS JP Morgan claims best FX bank title

JP Morgan’s climb to the top of the currency trading tree has been a long time coming. The US banking giant has seen enormous success in the foreign exchange space in recent years, investing healthily in the business during a period when several of its competitors chose to hold steady.

As a result, the ranks have reshuffled and JP Morgan currently reigns supreme. The firm has been voted the overall winner at the 2017 FX Week Best Banks Awards, as well as bagging wins in the Best Bank for E-Trading and Best Bank for Spot FX categories, among others.

“Our breadth of clients globally and ability to connect to them through multiple FX execution venues gives us a real edge,” says Scott Hamilton, head of FX & rates sales in Emea at JP Morgan. “In addition, our ability to service clients throughout the trade lifecycle is a key differentiating factor. We obsess around the client experience, and continually challenge ourselves to improve service levels and increase efficiencies.”

Hamilton notes the bank’s client franchise in foreign exchange has been robust in 2017, building on the momentum of the previous year and maintaining the diversity of customers it services, whether they are asset managers, hedge funds or corporates.

Clients have been continuing their drive towards electronic execution, broadening their use of algos and executing a growing share of FX options trades on electronic channels.

“Use of algos, transaction cost analysis and the electronification of FX options were three major trends in 2017 from an e-trading perspective,” says Richard James, co-head of macro markets execution at JP Morgan.

Our breadth of clients globally and ability to connect to them through multiple FX execution venues gives us a real edge

Scott Hamilton, JP Morgan

In March, JP Morgan published the results of a survey it undertook in late 2016, asking some 200 clients about their plans for future algorithm engagement. Customers based in North America were the most keen to increase their share of algo execution, but appetite was also strong globally, with some 38% of those surveyed planning to use these tools more. 

On a global basis, respondents said they use algos to execute trades about 12% of the time, with 83% of flows going through click-and-trade execution. In the year ahead, three-quarters of volumes are expected to go through e-trading channels, with click-and-trade set to decrease by 2%, while the use of algos is expected to grow by more than one-third.

“But starting to use algos can be a leap of faith for new users, especially if they lack the tools to fully evaluate and understand what the algo does before they choose to use one,” says James.

Clients consider FX a data problem

Such analytics tools are becoming more widely and easily available, with several specialist providers starting to zoom in on the inner workings of algorithms. JP Morgan was one of the first banks to offer its clients third-party TCA solutions this year, in partnership with BestX, to give them a better understanding of their execution outcomes when using algos.

“Demand for TCA has grown a lot over the last year,” James says.

This deeper understanding of execution performance is also changing the way clients interact with dealers and the decisions they make. While a year ago, a client might have tucked their TCA report firmly away in a drawer, people are now studying these results and feeding them back into the trading lifecycle.

Changes to the frequency of primary market data feeds has created a more granular level of data, says James, which has improved the quality of analytics. Meanwhile, FX trading platforms have stepped up efforts to develop TCA tools for clients or provide the data needed for customers’ analysis.

“People are starting to look at FX as a data challenge and that’s great because viewing it as such helps clients assess the quality of execution,” says James. “Clients are asking really interesting questions and are engaged more with us about their execution decisions.”

This means more transparency as clients can come back and look at their execution choices, and the impact of their trading on liquidity. The deployment of TCA tools is driving the trend of clients re-evaluating the number of counterparties they require in aggregation.

Use of algos, transaction cost analysis and the electronification of FX options were three major trends in 2017 from an e-trading perspective

Richard James, JP Morgan

JP Morgan has also gone to great lengths to increase transparency around the way it handles customer orders and last look. In May 2016, the bank published its execution policy for clients, in which it publicly stated it does not apply discretionary latency buffers, or so-called hold times, when pricing last look streams.

In its disclosures, JP Morgan was undoubtedly ahead of its competitors, especially in regard to last look. The bank also invested in its technology and infrastructure to provide the fastest possible response times and highest fill ratios, and to give clients the least possible market impact when trading.

Market impact has been a crucial element of focus for clients in understanding their trading outcomes and a key driver of changing client behaviour – as liquidity takers better understand the effect of information leakage in the highly fragmented landscape of foreign exchange, especially as trading sizes tend to be relatively small on electronic venues, meaning clients take on duration risk as well during their execution.

Due to these factors, customers have been increasingly keen to understand the outcomes that trading on individual venues have across the overall market.

“Clients’ understanding of liquidity has really changed for the better. The longer-term problem for them is to determine how much liquidity they need because there is a growing realisation that there is more to liquidity than the best bid/offer,” James says.

Internalisation is not a dirty word

JP Morgan’s FX algo suite includes execution strategies whereby the order uses both the bank’s internal liquidity pool and the broader external pools to find a fill. While internalised flows are simply the available price stock at the bank from all the clients it can cross and fill without working external markets, customers have traditionally tended to gravitate towards agency-only offerings.

“A couple of years ago, pure-agency algos were in vogue, but now the picture has completely changed and clients’ approach to liquidity has also changed,” James says.

Rather than develop a set of agency-only algos, JP Morgan wanted to offer clients the ability to execute with a hybrid strategy that seeks both internal and external liquidity pools. While not so long ago, internalisation seemed to be a dirty word, deeper understanding of market impact has flipped this conviction around.

“The benefits of using algos have encouraged clients, as it is easier to assess their impact through TCA and other execution metrics. They have an advantage over agency-only offerings because they factor in smart order-routing across both internal and external liquidity sources,” he adds.

Options for options

Throughout the tumultuous events of 2016, when the UK’s vote to leave the European Union and the election of US President Donald Trump brought a spot of liveliness into FX markets, the importance of keeping on the very top of risk management became crystal clear.

Over the last six months, JP Morgan has concentrated on investing in and developing its e-trading capabilities for derivatives on its platform. James says FX venues in general have done a poor job of providing clients with workflow solutions that deliver the same tools as single-dealer platforms.

Meanwhile, the second Markets in Financial Instruments Directive (Mifid II) has helped shine the spotlight on the need for better automation of workflow processes, some of which James describes as incredibly inefficient, because until recently all efforts were aimed at optimising pre-trade factors and execution.

He says JP Morgan decided to view the lengthy process of implementation in the run-up to January 3, 2018, as an opportunity to evaluate processes in a bid to become more efficient, rather than just aiming to achieve regulatory compliance.

“We attempted to do all the work of streamlining and enhancing our internal sales to trader workflow processes while continuing to run the business, which has been a challenge, but we have got there,” James says.

Consolidation of LPs on horizon?

Foreign exchange revenues at banks struggled in 2017 due to very low volatility in markets compared with the bursts of record-breaking activity last year around the UK’s vote to leave the EU and the US elections. For now, it seems the lack of volatility is set to remain a feature of FX markets in 2018, at least in G10.

“With central banks signalling a slow approach to official rate adjustment, the environment is likely to remain benign for volatility, so clients are likely to seek alternative sources of income or yield. Emerging markets currencies are likely to benefit from this tailwind of high-yield seekers,” he notes.

In a landscape where the game of volume chasing has been forgotten and abandoned, banks have become more selective in the business areas in which they want to compete in terms of regions and client types. As a result, regional banks have staged a comeback to fill the gaps left by global banking giants.

At the same time, non-bank market-makers have increased their footprint in the currency trading business, chipping away at the dominant position of traditional bank market-makers.

“I don’t think we ever saw global banks pull back from the FX business. It remains a great business and highly competitive market, with new emerging entrants adding to the number of liquidity providers,” Hamilton says.

But next year could see consolidation in the liquidity provision space, especially in Europe, as firms struggle to satisfy Mifid II requirements, Hamilton notes. This trend could be further accelerated as clients become more selective in their counterparty choices, relying on data and analytics to evaluate outcomes. “As we see it, the bulk of liquidity offered to clients is still from banks,” he adds.