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SEP 15, 2023
The Trade covers the TradeTech FX Europe 2023 panel on FX derivatives trading where our CEO Paul Lambert was on the panel.
Speakers highlighted the importance of accessing liquidity amidst development as they compared spots and derivatives; agreed automating a bad process must be avoided.
The next step for FX swaps is set to be further electronification, but the key considerations when looking at this empirically need to be looked at closely, said panellists.
Putting the topic into context, John Rothstein, chief executive of Optiver UK highlighted the core differences in options as compared to spot, explaining that there are three key areas.
Firstly, the fact that options are very highly regulated as compared to spot was highlighted, with a second consideration being the fact that connectivity is still very high touch for things like expirations and negotiating prices.
The third point linked to data: “[…] the last thing is that the data that comes out of the options market is very light, sparse for everybody – which makes things like TCA and knowing where the market is and knowing who the liquidity providers are very difficult to come by.”
Elke Wenzler, head of trading at MEAG, agreed with Rothstein, asserting that having access to liquidity on the options side is very different and that the main consideration for swaps is to have access to the right liquidity.
Sana Horrich, senior FX trader at Banque de France, shared that from her perspective the next step is for FX swaps to move to a higher electronification.
In terms of the challenges facing FX swaps, she pointed to the risk of signalling for large amounts, further highlighting: “Today what we expect from the market is to have new tools, such as price streaming and algos for FX swaps to help us enhance our trading outcome.”
Paul Lambert, chief executive of New Change FX, suggested that when it comes to the electronification of the swaps market, you have to break it down into its parts: “Foreign exchange is a market where the price that you pay depends on where you are and who you ask.”
“With swaps this is even more true because of the credit element so you need to break it down into its elements for that market to really truly move forwards – what’s the neutral rate and what’s the credit element.”
Wenzler made clear that from her perspective, automating huge amounts of the swaps market is not the way forward, while Lambert asserted: “The worst thing you can do is automate a bad process – it’s like making a wonky wheel.”
Importantly, Rothstein made sure to highlight that the issue of automation of vanilla FX options has already been solved by some exchanges, further adding that this is something for OTC players to keep in mind.
When asked to compare the tools which are used in spot and derivatives, panellists agreed that there were key differences and as a result bases that still need to be hit in order to facilitate use.
“We want to use the same tools but it’s a different set up you need to have the axes the same on the spot side, which needs a lot of involvement from other teams. A lot of problems you have to solve,” said Wenzler.
Rothstein highlighted the role that platforms and those with the tools can play, suggesting that the priority lies with these entities trying to connect as many dots as they can.
“They can’t necessarily solve all of the underlying problems in getting that access to credit, but they can at least allow some pass through of the requesting of price and the giving of price – which makes it so at least one or two of the steps for users accessing liquidity.”
The Trade article can be found here.
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