Foreign exchange market . Everything above 50 million should by definition be traded by an algorithm .” The background to Fleur ’ s electronic evangelism comes from the realisation that the traditional trading model , based on brokers providing liquidity to the buy side , no longer necessarily applies in the 21st century . As the sell side comes under increasing regulatory pressure due to MiFID II , Basel III and the global regulatory agenda set out at Pittsburgh in 2009 , the buy side has found it increasingly difficult to source liquidity from brokers . “ It ’ s no longer possible to rely on the broker ,” he said . “ The role of the broker started to change the minute venues like Lava came along . The biggest was EBS which enabled me as an asset manager to have the same liquidity as the traditional liquidity providers , the banks .” While some asset managers have been cutting broker lists in recent years , others have been adding niche specialists , especially in emerging markets , as a way to ensure access to the coverage they need . Overall however , the number of brokers has decreased substantially in Asia , Europe and North America . A bifurcation is taking place as asset management companies pare down their lists to the large global houses , plus the smaller niche players in markets such as Brazil that have the relationships necessary . However , Fleur points out that the cost of adding new banks can be significant – and given the increasing electronification of the market , in some cases it may not be cost-effective . “ Banks are only responsible for 30- 35 % of total turnover and liquidity ,” he added . “ So the way to respond is not by onboarding more banks . It absorbs enormous amounts of resources in the onboarding , and the additional liquidity is limited . Instead , it ’ s better to look at new ways of finding liquidity which means onboarding non-bank liquidity providers to create all-toall platforms where I can cross with similar entities to myself .” However , the adoption of more advanced trading technologies in FX is a challenge , particularly since in many cases FX was traditionally traded as a side-effect of transactions in other asset classes . K & KGC research indicates
that the majority of buy-side firms have not yet adopted FX trading algorithms . Some firms do use electronic venues such as FXall and others . According to Fleur , it ’ s partly a question of mentality . “ There needs to be a change in behaviour before it becomes successful , as the buy side moves to become liquidity provider rather than pure liquidity taker ,” he said . “ This is why we are using algos because roughly 70 % of what we do is nonaggressive , meaning we post liquidity to different cut-offs . It ’ s a change in attitude .” There has been much talk in recent years of ever-increasing automation and the relative decline of high-touch services . Despite the focus on trading low-touch , PGGM does not believe that executing electronically is the best choice . In some circumstances , especially with lower sized orders , other options may be preferable . The essential argument comes down to the cost versus the benefit of transacting algorithmically . “ If I have to transact $ 5 million , there ’ s no need to have the algo execute because the time it takes to implement and the risk you run in the meantime is higher than the . 00001 spread I have to cross ,” said Fleur . “ Best execution is a process , not a best price , measured over a longer term , to decide who you trade with . Best execution is about evidence .” One of the major challenges for traders in all asset classes in Europe and worldwide is the need to adapt to new regulation , including but not limited to MiFID II , Basel III and EMIR as well as Dodd-Frank in the US and local initiatives in individual countries . In Europe , much of the European Commission ’ s efforts in recent years have been focused on improving transparency . Yet despite this push , one of the most critical components of a transparent market – the creation of a consolidated tape – has not been achieved .
“ I ’ ve been pushing to create a consolidated tape which helps you not only with TCA but to create transparency around where the market is "
“ I ’ ve been pushing to create a consolidated tape which helps you not only with TCA but to create transparency around where the market is ” said Fleur . “ It should be created by enforcing an obligation for every market participant to give up their transactions which already happens of course in the forward space under EMIR . But the bigger liquidity providers are holding back because they don ’ t want to disclose information .” Regulation is often seen as a cost or a burden which market participants have to endure . In some contexts , principles such as greater transparency are praised , while in others , draconian requirements and poorly thought out plans within MIFID II have been criticised . “ People are afraid of change because it ’ s new and unknown ,” he added . “ I try to look at the upside of what new regulation can bring , rather than look at what it costs me to do so . To me , best execution or MiFID II should be part of a logical framework , for example not only the transparency and implementation of transaction reporting , but what is the intention of transaction reporting ? Transparency . So , you build a scalable model which can be reusable in the future when the next new regulatory framework comes around .”
With over two decades of experience in the financial markets , Fleur also represents the buy side on a number of industry committees including :
The BIS Market Participants Group FMSB Board Market Practitioners Panel for FX ECB FX Contact Group ACI FX Committee
December 2016 www . buysideintel . com
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