THETRADETECHFX DAILY in-depth the trader to all really be working together in order to get the best execution and make sure that you have the best liquidity ,” says Akshay Singal , head of Citi ’ s short term interest rate trading ( STIRT ) team for EMEA . “ That partnership becomes a lot more important and valuable as a result of the increased volatility .”
Larger trades are typically done through voice or through RFQ in this market , with pricing streamed by the majority of liquidity providers 24 hours a day five days a week . However , according to Citi ’ s Singal , the volatility and unpredictability of the economic landscape globally has some meant some clients are leaning more heavily on voice trading in some cases to ensure each order has sufficient oversight until completion .
“ Clients are deciding between voice and electronic execution , balancing a bespoke price from trading and the speed of execution from platforms ,” he says . “ We ’ re seeing more differentiation as some clients have a strong preference for speed while others want to engage with the traders .”
Amid the uncertainty , Singal notes that speed had become more important than ever to clients , as well as the ability for liquidity providers to offer a reliable price . Volatility has significantly marked up the value of hedging for clients and this has
“ The European Central Bank opted for its largest rate hike since in two decades in the first week of September . The last time it hiked by 75 basis points was 1999 .”
meant those banks able to show prices quickly have become the preferred choice for buy-side firms who want to minimise their risk and exposure . However , with the liquidity landscape the way it is , showing a price is more challenging and has led to a differentiation in the ability for various providers to service the market . Some institutions , for example , have chosen to offer up pricing but only in smaller sizes because they ’ re not as willing to hold the same amount of risk as usual .
“ We have seen a lot more interest from the client side in not wanting to wait around and instead wanting to just hedge because the pricing is so much more volatile that they need to be able to transact and move on to their next trade ,” he says . “ The last thing they want to do is spend a couple of hours trying to execute a simple trade . They ’ re of course quite busy in the current environment , and they want to be able to have their preferred dealers who will show them fair pricing for the liquidity and the sizes that they need .”
The spot and non-deliverable forwards ( NDFs ) markets tell a different story . The way spot and NDFs trade are more akin to the equity cash markets , making a reversion to manual trading less likely . Instead , clients are leaning on adaptive algorithms , choosing to trust that they will have a better response to the constantly and quickly shifting market environment .
“ Adaptive algos respond to market activity and market conditions . We offer a few of them in our algo suite . Conditions can vary very quickly ,” says JP Morgan ’ s head of core e-FX trading , Arnaud Floesser . “ Things might be slow and suddenly there ’ s news or a new view on inflation or Ukraine . In such conditions , adaptive algos will perform better than a more static execution model . It is still a challenging market to compete in : even though the liquidity environment is extremely challenging , all the usual LPs [ liquidity providers ] are still competing fiercely for client flow .”
While client trade size has not changed materially , volatility has diminished liquidity and this in turn has caused risk to go up in relative terms despite it being the same trade size . Liquidity providers generally across the board want to internalise risk as much as possible to minimise their market impact .
Looking to the future Amid all the uncertainty in the market , one thing can be guaranteed - volatility is here to stay . Revisions to inflation predictions are happening almost daily and this has huge implications on interest rates globally and subsequently the foreign exchange markets . While no one can predict what is going to happen in the world , the markets will remain hyperactive but as things plateau there is potential to see the light on the horizon .
“ We ’ re coming out of a once in a lifetime pandemic which has created a lot of uncertainty that people have not seen before ,” concludes Singal .
“ As we move away from that , and as the supply chain disruptions and the inflation picture becomes a little bit clearer , the volatility and the range of outcomes will become smaller again . When that happens , I think volatility will start reducing . Whether that happens in one year , two years or even longer is pretty hard to call right now .”
All rate hike figures were accurate at the time of going to press .
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