THETRADETECHFX DAILY from the floor
FX Voices : From the Floor
Peter Welsby , senior multi-asset trader , Manulife Investment Management
Manulife ’ s main FX Trading objective for 2023 is to continue to improve the best-in-class execution that we achieve for our clients . Some key areas to focus on will be how market infrastructure and liquidity patterns are evolving and how capital requirements impact our liquidity providers . From a spot trading perspective , market infrastructure is starting to converge between developed markets ( DM ) and emerging markets ( EM ). For a while now DM volumes have been moving away from primary ECNs and toward bank client matching pools , mid-matching venues and secondary ECNs . For deliverable EM and NDFs however , it has been a slower move away from primary ECNs . At the start of 2021 , the majority of NDF flow was on Primary markets , however , new entrants have been gaining traction , with mid-matching venues and secondaries growing their market share . We may be starting to reach critical mass in terms of liquidity pools in DM , but it doesn ’ t feel we have gotten there yet in EM . With signalling becoming particularly noticeable on lit ECNs for EM currencies , alternative liquidity sources can be helpful to reduce market impact and improve slippage , especially in volatile markets with thin liquidity . One evolving liquidity pattern is related to off-SEF and on-SEF fragmentation . During Asian hours , most trading is done off-SEF whereas during US hours , most
“ At the start of 2021 , the majority of NDF flow was on primary markets , however , new entrants have been gaining traction , with mid-matching venues and secondaries growing their market share .”
The TradeTech FX Daily caught up with a selection of senior buy-side traders and dealers to discuss their key themes , priorities , strategies and expectations for the future .
trading is on-SEF . Historically , many banks have either been set up to trade on-SEF or off-SEF . Whilst this is becoming less of a problem , as more banks can now do both , certainly not all have this ability yet . Those that don ’ t have had to find more innovative ways to deal with it . For example , access to onshore helps banks to hedge flow if off- SEF is a struggle . But once onshore is shut , it becomes harder . Equally , not all banks have access to onshore in each country . The time of the day also needs to be considered when optimising execution . It seems natural that Korean Won would trade more volume off-SEF during Asian hours than on-SEF during US hours . However , once off-SEF starts to dry up at 10am , there is a dark period until the US starts trading after midday London hours . Equally , there are drops in liquidity over ‘ lunch breaks ’ for EM currencies . CEEMEA pairs see a far greater dip in liquidity between 11am and 1pm London hours than G7 pairs do and similarly CNH and HKD see a dip between 4am and 6am London time . Essentially , once outside the majors , it becomes difficult to maintain execution costs at a similar level around the clock . Improved liquidity in these dryer periods is something the market can work on going forward . An additional challenge that the market has experienced more recently is related to forwards liquidity and pricing . SA-CCR has been causing RWA challenges for some banks , with the consequence of balance sheet premium often being wider forward spreads from a select group of banks at the same time . All of this highlights the need for the buyside to pick wisely which banks are on their panels .
16 THETRADETECHFX DAILY