Weathering the storms of market turbulence

 

Refinitiv considers the requirement for FX traders in Asia to refine their liquidity strategies, and explores how it is able to leverage its technological advantages, platform scale and access to multiple venues to allow Asia-based clients to thrive despite turbulence and uncertainty

Right at the start of the year, FX traders in Asia were made keenly aware of the need to refine their liquidity strategies. The flash crash on January 3, although not a major event, saw the Japanese yen sharply rise against several other Group of 10 currencies – a problem exacerbated by low liquidity between the close of New York and the opening of Tokyo markets. In the context of geopolitical uncertainty, including a looming Brexit and an ongoing trade war, market participants are feeling the pressure to ensure they are connected to consistent and reliable liquidity to weather the storms of market turbulence and increased volatility.

In light of these developments, it is no surprise that Refinitiv is well positioned to help clients in the region survive and even make the most of the turbulence. Selected as the Best FX technology provider in Asia and the Best G10 FX trading platform in Asia in the FX Week Asia FX Awards 2019, the firm is leveraging its technological advantages, platform scale and access to multiple venues to offer a clear competitive advantage.

“Over the past few years we’ve seen a bigger appetite for data feeds, open access and different order types – and we’ve certainly been responding to that,” says Nigel Fuller, performance director for FX venues, Asia, at Refinitiv. “We’ve continued putting in the investment to offer similar kinds of things – more order types and the ability for clients to execute the way they want to execute.” 

In Asia, the firm is seeing significant growth in terms of volume, with more participants coming on board the Matching and FXall platforms, while clients are also expanding their utilisation of the systems to manage risk and get business done. 

 

Smarter trading in a fragmented market

Regulatory-driven changes in recent years have led to greater market structure complexity and an increasingly fragmented market landscape. In recent years, there has been an explosion in the number of FX trading venues, making it challenging to find the right-sized pools of liquidity for the desired currency pairs.

 “The buy side is becoming more sophisticated amid pressures to find smarter ways to navigate this complex and changing liquidity landscape, as well as smarter ways to achieve operational efficiencies and lower costs,” says Jill Sigelbaum, head of FXall trading at Refinitiv.

At the same time, the FX global code of conduct is seeing increased levels of adoption, raising standards of conduct and encouraging best practices around the world, including in Asia. Such changes are meant to enhance transparency, fairness and market accessibility but, at the same time, have often resulted in additional costs that must be factored into decision-making. It has also been marked by consolidation in trading technology, with an increase in merger and acquisition activity.

As part of its commitment to digitisation in the region, Refinitiv has also launched the first electronic trading of US dollar (USD)/Vietnamese dong (VND) on its Matching platform, as well as launching FXall in Vietnam, indicating growth potential for electronic trading platforms in emerging markets. More than 30 major market players have signed up to trade USD/VND thus far through Matching, which offers price discovery, real-time credit screening, efficient execution and concentrated liquidity. 

 

Execution gets a boost from technology

While many FX deals in the region are still executed by telephone orders, many are finally realising the benefits in costs savings and access to liquidity that an advanced electronic platform provides. Initially making headway in major FX centres in the region, the company sees opportunities for growth in emerging markets, particularly during times of volatility, with solutions that cater to a variety of requirements. “We really do help clients manage volatility themselves,” says Fuller. “We help them to cover all business needs, however they may change.”

While the platforms as a whole allow for continual innovation across the board, algorithms are a key feature that allow users to take a passive rules-based strategy, resulting in significant cost savings. Algorithms have proven particularly useful to corporate treasuries when it comes to currency hedging – a critical tool for industries that rely significantly on international trade, where hedging needs are more predictable and benefit from breaking down orders executed over time. 

Compared with the second quarter of 2018, algorithmic trading on FXall was up 41%, while trading volumes by corporates increased by 56% year-on-year for Q2 2019. It marks a significant trend driven by consistent market demand for innovation. “Liquidity providers are continuing to invest heavily in algorithmic trading capabilities, helping investors access the FX market in more efficient ways,” says Sigelbaum. 

Meanwhile, continual demand for cost reduction is driving cloud adoption for post-trade work, along with a move away from manual processes. Human error tends to amplify mistakes in FX trades.

Algorithmic trades provide a clear audit trail for demonstrating best execution. As a requirement in Europe under the revised Markets in Financial Instruments Directive – known as Mifid II – it represents best practices in Asia and gives traders more control over their workflows. “By leveraging FXall’s market-leading connectivity to 22 bank algo providers and more than 150 algos, these institutions benefit from pre- and post-trade workflow, as well as a single interface and user experience across all 22 algo providers,” says François Lamy, strategy director for FXall. 

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