Foreign exchange
Building a modern
FX desk
Elliott Holley, Head of Global Buy-side Research
In foreign exchange, the main concerns highlighted
by the buy side in the second half of 2016 include
relationships with counterparties, broker selection and
relationships with custodians. In Europe, there is frustration
on the buy side that platform vendors sometimes don’t
understand the banks and banks don’t understand the
platform vendors, leaving a void of knowledge between
the two that can leave the buy-side trader in a difficult
position with no clear source of help. Some participants
are doing more FX hedging than previously, and there are
also more hedge funds active in FX than before. The buy
side is concerned about being ripped off by custodians;
however, one participant at the 5thAlpha Trader Forum in
London in October said his experiences with custodians
have been better than with third parties, in terms of fewer
trades being declined.
In terms of relationships with the sell side, banks are
sometimes reluctant to stream to platforms; there is a
perception that they would rather stick to the Request For
Quote (RFQ) model. In terms of automation, the buy side
has expressed a preference for automating smaller trades
and spending more time on the larger trades that can
make the biggest difference for the firm. One obstacle
to automation is that those using an algo should know
who the underlying client is, but most participants don’t
so they use a prime broker instead. However, doing so
often involves using Electronic Communications Network
(ECNs), some of which may no longer exist in the near
future due to competition. That presents a risk.
As for venues, some players expect to see a price war
between the ECNs and the prime brokers. For example,
if the prime brokers feel that their trading is being
undermined, they could increase the fees to the ECNs to
get the flow back.
In Asia, buy-side dependence on the sell side is expected
to decrease with the increasing transparency and
electronification of the market. The buy side has also
highlighted that trading with a dedicated trading desk is
a significant cost saving in Asia as custodians charge a
high number of basis points in auto FX. The buy side also
believes that netting is preferable compared to increasing
the number of counterparties to gain access to additional
liquidity.
In London, the buy side are dissatisfied with the number of
algorithms available in FX and especially with the names
such as Sniper and Guerrilla that are applied to these
algos. Such names are considered inappropriate and