Best Banks Awards: JP Morgan

JP Morgan has come a long way since electronic trading gained a real foothold in foreign exchange markets in the early 2000s. At the time, its large bank rivals were busy building and investing in electronic single-dealer platforms, correctly predicting that putting technology at the heart of products and services was the future.

By the mid-2000s, JP Morgan’s market share in currencies was slipping, nearly dropping out of the list of top 10 largest FX dealers at one point. Today, the bank reigns supreme in currency markets, dominating its rivals, both in terms of market share and electronic capability.

The bank started a big investment cycle in its technology and systems in 2015, partly in preparation for Mifid II, but also as its leadership made electronic trading a top priority.

In 2016, JP Morgan moved David Hudson into the role of global head of markets execution, from his previous post of chief financial officer for the global markets business, and it reorganised the structure of its trading arm to position it for further electronification across asset classes.

Hudson’s brief is to ensure JP Morgan never has to face rivals jumping ahead of it in the use of innovative and disruptive technologies, and instead work out strategies for leaving them in the dust as a result of superior infrastructures and systems.

JP Morgan has been voted the winner of the 2018 FX Week Best Banks Awards, collecting nine titles, including Best Bank Overall for Foreign Exchange Dealing, which the dealer has won for the second time running, and Best Bank for e-FX Trading.

“The question of scale has really become an issue in FX this year. Infrastructure costs are continuing to rise, fragmentation shows no signs of abating, and spreads remain extremely competitive to the point where we have seen compression in some markets,” says Chi Nzelu, head of CEM automated trading strategies at JP Morgan.

As a market-maker, the client experience is of the utmost importance and it’s a necessity to be accessible on venues where required

Chi Nzelu, JP Morgan

Concentration among market-makers has always been relatively high in currencies trading, but if prevailing trends continue, the iron grasp of the top three to five banks and non-bank market-makers could tighten even further.

“Liquidity providers that have invested in scale of franchise will likely increase their footprint as technology and infrastructure costs are of increasing focus, including market data distribution,” says Nzelu.

“FX distribution may not be particularly expensive compared with some other asset classes. However, in today’s world, offering a complete suite of market-making services and algorithmic products does require scale, and an efficient customer franchise to sustain the recurring investments,” he adds.

Cost pressures are intense across both sell- and buy-side market participants. Nzelu expects that while a handful of the largest market-makers will continue to deploy capital to the market as principal liquidity providers, others may find the agency model more commercially attractive.

“As a market-maker, the client experience is of the utmost importance and it’s a necessity to be accessible on venues where required. Given ongoing market structure changes, this requires commitment to both research and development to maintain relevance. Some providers may be limited in the ability to do this, and for these dealers the agency route will likely be more sustainable,” he says.

Spread compression

Despite market participants often forecasting – or perhaps wishing for – spreads to widen from the extremely tight levels that have prevailed for nearly a decade, the opposite has happened.

“If spreads were kept constant over the year, the larger players may have lost market share. There has been a spread compression in emerging markets currencies, as well as in Scandinavian FX and this will likely continue,” says Nzelu. “So competition is extremely fierce and, yet again, scale is essential for maintaining both market share and profitability.”

Clients are also feeling the pinch in profitability. At the same time, the rapid adoption of execution analysis tools in the past two to three years has allowed clients to evaluate their counterparties with a more quantitative mindset.

A deeper understanding of execution outcomes has also led to changing behaviour, while previously little discussed issues such as last look have had a comprehensive airing in the industry over the past two years, resulting in a much improved understanding of the practice and its impact across the market.

Market participants and liquidity takers are also much more conscious of the potentially negative effects of aggregation, as well as the impact of information leakage on their overall trading outcomes. Reject rates, holding times, fill ratios and market impact have become watchwords for clients as the use of analytics has spread.

“Clients are much more aware of costs, and they are better informed about different trading practices and protocols. As a result, they are seeking to deepen their relationships with their banks,” says Nzelu.

“Rather than adding liquidity providers into their counterparty mix, they’re looking to trade with liquidity providers that can offer a full FX service with consistent and high-quality liquidity, as well as pre-trade tools and workflow solutions,” he adds.

Asking for algos

On top of all that, clients are increasingly moving towards cross-asset trading, placing more demands on dealers’ infrastructures, as well as looking to increase the share of their execution done through algos.

Banks in FX have reported a huge increase in the use of algos by their clients this year. While algos have been around for a number of years, it was only this year that the trickle of interest grew into a wave of demand.

Last year, the bank published the results of a survey of 200 clients on their plans for using algos. At the time, customers based in North America were the most keen to increase their share, but appetite was also strong globally, with some 38% of respondents 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.

These predictions have been largely born out in 2018.

We have seen a real shift away from the simplistic, TWAP-type algos towards more sophisticated strategies that take advantage of internalised liquidity

Chi Nzelu, JP Morgan

“Algos have been around for a while, but this year we’ve seen a huge increase in interest from clients. We are having much more detailed conversations and we have started to see new customer segments such as corporates adopting algos,” says Nzelu.

Algo volumes executed through JP Morgan’s FX business in the first half of this year increased by about 30%. Meanwhile, clients are also getting a better understanding of the different types of strategies available to them and increasingly upping their expectations for these tools.

“We have seen a real shift away from the simplistic, TWAP-type (time-weighted average price) algos towards more sophisticated strategies that take advantage of internalised liquidity, as well as external venues. New technologies such as artificial intelligence and machine learning are also beginning to filter into the equation,” says Nzelu.

Liquidity flow

Utilising banks’ internal liquidity pools that arise from the flow originating from the overall client franchise is a big boon from a liquidity point of view, especially as large dealers’ internal liquidity pools often exceed the volumes traded on primary venues and ECNs.

“JP Morgan always has liquidity to offer, and when we offer our liquidity that means no latency buffers, no external providers and minimal information leakage,” Nzelu says.

Being able to offer a risk price is still key, but algos also have to be part of the toolkit that banks provide to their clients. As the use of analytics broadens, clients are able to evaluate the performance of different strategies and execution choices with relative ease.

“We’ve invested a lot into our algo product suite and we think we have managed to distinguish ourselves from our competitors,” Nzelu says.

“We are fully committed to providing value to customers throughout the value chain and we have all the products that clients need for their trading. We see a lot of exciting opportunities to further broaden our offering,” he adds.

Workflow solutions on its single-dealer platform, Execute, are being targeted by JP Morgan for 2019, while algos will continue to be in the foreground. The bank is looking to launch a new suite of algos next year, aiming to bring these tools into the realm of emerging markets and on-deliverable forwards trading as their electronification continues.

Artificial intelligence and machine learning applications in algo trading will also be areas of interest. Clients want data from their banks to enable them to build their own algos or evaluate execution quality.

“Client demand for market data will increase and they want as much data as possible from their banks so they can do their own analysis,” Nzelu says. “Market-makers have to adapt to structural changes without passing rising costs to clients.”

Further market structure changes are also looming, as exchanges continue to expand their footprint in currency markets through the acquisition of trading platforms and ECNs. These deals could lead to a significant shift in market structure in 2019, to which market-makers will have to adapt.

“We have been investing in the business for a long time. Our objective is to be the best market-maker in the business, and to provide liquidity and solutions to clients as well as we possibly can,” Nzelu concludes.

Interviews with the 2018 FX Week Best Banks Awards winners

JP Morgan

Best Bank Overall for Foreign Exchange Dealing

Best Bank for FX for Banks

Best Bank for FX for Investors

Best Bank for Spot FX

Best Bank for FX Forwards

Best Bank for EUR/USD

Best Bank for USD/JPY

Best Bank for EUR/JPY

Best Bank for E-Trading

Citi

Best Bank for FX for Corporates

Best Bank for Currency Options

Best Bank for Structured Products

Best Bank for FX Prime Brokerage

Best Bank for FX in North America

Best Bank for Emerging European, Middle Eastern and African Currencies

Best Bank for FX Research and Strategy

HSBC

Best Bank for FX in Asia-Pacific

Best Bank for Renminbi

Best Bank for Emerging Asian Currencies

Deutsche Bank

Best Bank for FX in the Eurozone

ANZ

Best Bank for Australian Dollar

Barclays

Best Bank for GBP/USD

Best Bank for EUR/GBP

Best Bank for FX in London

UBS

Best Bank for Swiss Franc

NatWest Markets

Best Bank for FX Post-Trade Services

360T

Best Professional e-Trading Venue

Best Vendor for Dealing Technology

Refinitiv

Best Broker for Forward FX

Best Broker for Emerging Markets FX

LCH

Best FX Clearing House

EBS

Best Broker for Spot FX

Bloomberg

Best Market Data Provider for FX

Danske Bank

Best Bank for Scandinavian Currencies

Standard Bank

Best Bank for South African Rand

Best Bank for African Currencies excluding ZAR

BMO Capital Markets

Best Bank for Canadian Dollar

Banco Santander

Best Bank for Emerging Latin American Currencies

kACE

Best Vendor for Risk Management/Options Pricing Software

Saxo Bank

Best Prime-of-Prime House

BGC (no interview)

Best Broker for Currency Options