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What is liquidity in the FX market like in light of the current economic landscape ? The market has been extremely volatile . We ’ ve had big movements , particularly in dollar strength , and trading activity has been very elevated . I think most market participants would say it ’ s been a big year for FX and FX trading . Liquidity is broadly measured by spreads in different sizes , but the way that people are executing is changing . We ’ ve seen a significant shift towards electronic and automation from the more traditional execution , and there has been a concurrent growth in algorithmic orders . What that means is that the notional sizes of the individual transactions keep getting smaller , meaning the bulk of the transactions are now in tiny amounts . That doesn ’ t mean the overall volume has decreased however – in fact , if anything , volumes have increased , it ’ s just that it ’ s now mainly happening electronically . The FX market is still very deep and very liquid and especially in developed markets , it ’ s remained fairly robust . However , EM currencies have had a tough time this year , particularly anything associated with Russia and Ukraine , so there have been significant disruptions in this space that have caused some massive distortions – and that ’ s had a ripple effect across the board , which all contributes towards volatility in the market . Interest rates are of course also having a noticeable effect – they ’ ve been free for several decades and now suddenly we ’ re seeing serious quantitative tightening . Because interest rate differentials are a big influence on currency direction , that too is influencing the market .
Scott Wacker , managing director and global head of FICC e-sales at JP Morgan , talks to The TradeTech FX Daily about the strength of the bank ’ s franchise , the exciting work being done in creating new liquidity , and the new tools being developed to help clients leverage this .
How can liquidity providers service clients during these market conditions ? JP Morgan is focused on ensuring that our distribution network and franchise are as large as they can possibly be – not just this year , but as an ongoing process . As part of this , we ’ ve moved towards curating an electronic ecosystem that manages all the various and often disparate goals of the different stakeholders : from traders , high frequency traders , hedge funds , corporates , asset managers , market makers looking for liquidity for other clients – it ’ s a broad church . What we ’ ve learned over time is that our franchise and the technology that we ’ ve built around that allows us to internalise a lot of the flow . Internalisation is , we believe , very beneficial both for the market and for our clients , because every time you can match up in a cell you can collapse the spread , and reduce the charge . Our ambition from here is to focus on market share , so the more we can compress our spreads the bigger our franchise ; the more we can internalise , and that creates more liquidity and better pricing for our clients . However , when you ’ re making markets electronically , the danger is that other entities in the distribution network can use our information to make their own markets . That ’ s not an issue in itself , but it leaks information from our ecosystem to other players . If that information is used to develop trading models or develop counter positions , that ’ s a problem as it can make it harder for us to exit our own trades without moving the market , which goes against our own client ’ s interest . So in the last year , we ’ ve been focusing on building the technology to identify who is using the signals from our franchise against our clients , and shut that down . We ’ ve been removing the skew and removing our information from those who aren ’ t using it appropriately . What that means is that our clients are getting a much better result , and that ’ s been the biggest change to our ability to make markets – getting better prices , with no leakage .
How can technology service the market during this period ? We ’ re not the only bank that offers electronic solutions , and different financial
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