Head of foreign exchange trading at T. Rowe Price, Toby Baker, began his career in trading like most young traders looking to start out in this industry – grafting for work experience wherever he could and then capitalising on an empty seat on a desk as soon as one arose.
He first caught the trading bug after doing work experience at the London Stock Exchange when he was 14, solidifying his desire to work within the markets when he finished school. After landing a role at the London Stock Exchange and subsequently working in settlements and middle-office roles at various firms, he finally arrived at T. Rowe Price 24 years ago.
“Back in the day, you could jump from one job to another quite quickly by temping. It’s a shame because there is less of that nowadays,” he says. “I started at Japanese bank Daiwa in a settlements role and one day their trader decided to leave quite quickly and they looked around the desk and saw me sitting there and gave me my opportunity.”
FX as a linchpin
For Baker, joining the foreign exchange markets was a no-brainer as the largest and most liquid market in the world.
Sat in T. Rowe Price’s Paternoster Square offices, with the backdrop of St Paul’s Cathedral spread out behind him, he explains that foreign exchange is the linchpin between the equity and fixed income markets.
“If we buy an international asset at T. Rowe Price and you can’t pay for it in the local currency, then the equity or the bond isn’t going to settle. And so, having FX that works efficiently means that for any other asset we buy internationally – we’re based in dollars – we would have to swap dollars into that currency to cover for the asset that we’re buying,” he explains.
“If that falls down, then the whole process falls down.”
What’s more, given how liquid the FX markets are in comparison with other classes, for example equities, Baker explains that the end of the trading day is cleaner cut.
“I like to have a clear blotter when I arrive at work and I like to have a clear blotter when I leave. Other asset classes may have to warehouse or work orders for longer.”
Tenure at T. Rowe Price
Baker’s 24-year stint at the real money asset manager is a testament to its culture. As the third person to join fixed income international at T. Rowe Price and the first trader to join fixed income, he’s seen many of the team through from their first day.
“I like to say that I’ve trained everyone in FX along the journey.”
The FX trading team favours a mixed approached of high or no touch when it comes to execution. High touch being algorithmically traded and no touch being auto priced and executed, with no intervention bar the necessary tolerance checks.
“The idea being that trades arrive on the traders’ blotters and we can seek to gain alpha. If we can’t then they’re going to get put through the automation route,” says Baker.
“There is not a great deal of value we can add on that [automated] ticket. The high touch orders are the ones where we use algos. They’re probably something that is a larger size than we deem auto priceable. With an algo, the buy-side trader is in complete control. You’ve only got yourself to blame if it’s a good or bad performance. It’s a bit like going to a restaurant with a hot plate, cooking your own steak and then moaning afterwards that you’ve overcooked it.”
“The risk now for the industry is that no one wants to pick up the phone anymore and you lose the edge of speaking to a salesperson or a trader and hearing their voice on what you’re trying to give them. We’ve made it so ‘push button’ that we’ve lost the trader’s edge of understanding what we’re trying to give to the street.”
Workflow optimisation
Baker, like many in his seat, spends a large portion of his time assessing how the desk might further optimise its workflows to give traders more time to spend on the trades that generate the most alpha for their clients.
“I’ve been trading the same way, buying and selling for the last 30 years and we will continue to do that for the next hundred years, but there are different ways of executing and getting different outcomes,” he says.
As a real money shop that trades on behalf of clients as opposed to its own book, T. Rowe Price isn’t able to use some of the workflows that other firms on the street, for example hedge funds, leverage to simplify their operations. But, in an ideal world, this is something Baker would like to achieve to speed up the counterparty onboarding process.
“I would love T. Rowe Price to have the ability to trade like a hedge fund, not in the way that they execute, but just have the ability to trade with who they want, when they want,” he says.
“Hedge funds have it easy because they can trade in their own name and they have prime brokerage. Whereas T. Rowe Price trades on behalf of our clients and we have to have tri-party relationships with the clients and the counterparties in terms of ISDA (International Swaps and Derivatives Association) documentation. Anything that involves an ISDA generally involves legal counsel. That slows the speed of [counterparty] onboarding.”
Like many heads of trading, Baker is responsible for keeping tabs on new innovations coming to market that may simplify workflows on the desk. His mantra? Try before you buy.
“Never be afraid to try before you buy, and you don’t have to buy,” he explains. “There’s a lot out there doing the same thing. It’s important to try and differentiate and not to waste too much time. We do a lot of peer evaluation on the platforms and the liquidity providers. Rather than just talking about things, we need to be able to kick the tyres.”
Playing for volatility
T. Rowe Price collateralises its FX forwards and swaps flow and this is something that Baker explains sets the institution apart from its peers, particularly in times of volatility. And, given the tariffs saga that has followed ‘Liberation Day’ in the US, markets have been extremely volatile as of late.
“That [collateralisation] puts us in a strong position in comparison with some of our peers that don’t collateralise,” he says. “There is nothing wrong with not collateralising, it’s just that when a bank looks at clients A, B or C, and if there is a lot of market volatility, they’re more likely to give stable pricing to the counterparties that do collateralise versus the ones that don’t.”
“People probably went into the tariff announcements with a long dollar position and they’ve probably gone to a more neutral position now. Volatility has actually gone up, but that opens up opportunities in other instruments such as FX options where you’re literally playing for volatility.”
FX options is one area that Baker notes is ripe for innovation through further automation, and this has been an area that T. Rowe Price has been exploring in recent months.
“We’ve been working with Digital Vega and we’re looking at a few other option providers to enable us to be able to trade an FX option the same way we would be able to electronically trade EUR/USD,” he explains.
“That is holding back a lot of real money clients. It still feels like the ‘back of a cigarette packet’ in terms of technology but if as an industry we can get better, then that should mean we can automate more as well.”
The importance of diverse counterparties
For Baker, success in trading, in particular foreign exchange trading, lies in having a diverse roster of counterparties to work with in any given situation. This isn’t unique to foreign exchange, but, given the size and the speed of these markets and their susceptibility to volatility, this becomes ever more important in this sphere.
“You can’t put all your eggs in one basket. Banks may have their own internal restrictions or issues going on,” he says.
“If a bank is constantly streaming pricing and it stays the same if volatility goes up or down, then that is absolutely fantastic. But they will most likely alter their pricing accordingly to what volatility does. They will also alter their pricing potentially depending on regulation issues. With Basel III and risk weighted assets (RWA), banks that have large balance sheet restrictions may not price as aggressively as someone with less restrictions.”
Given that the foreign exchange markets are still largely bilateral in their nature, pricing is less consistent for the buy-side, in particular during times of volatility as Baker notes, but moves are being made to introduce a more central limit order book (CLOB) like structure for some instruments.
“The 360Ts of the world have got some really forward-thinking products out there where effectively they’re trying to build a central limit order book for swaps,” explains Baker. “That could be really good. There is another question however, as to whether banks want to show all of their liquidity on an open forum or do they like to keep some for certain clients?”
More and more, the buy-side are relying on transaction cost analysis (TCA) and analytics to help determine their counterparty selection processes. This is particularly prominent in asset classes like foreign exchange where relationships tend to be more bilateral.
“Our job as buy-side traders is to sheriff the pricing we get back from our counterparties. As long as it’s all in a nice tight range everyone’s happy. It’s trying to understand where we sit on the bank’s panel, whether our flow is deemed as good flow or problematic and does pricing to us change accordingly? That’s where we rely on trade cost analysis,” explains Baker.
“You might receive a trade on your pad and if you’ve got the luxury of two or three hours, you can do some fantastic pre-trade TCA, but realistically you’ve got two or three minutes before you can start to go to market. It’s about giving the traders the ability to know in advance where they should be pointing the trade. We’ve started doing more machine learning.”
The benefits of TCA are not limited to execution, affirms Baker. T. Rowe Price, like many of its peers on the street, is also exploring how this information can be used to understand and potentially change how decisions are being made upstream of the trading desk.
“We’re working with our market structure team to do a deeper dive on the cash team that raised the tickets. Can they improve the process prior to that? When are PMs giving us the trade tickets? Is it during the best liquidity time of the day?,” he says.
“If not, are you then inhibiting the trader’s performance by giving them something that they know is difficult but they need to get done? You can’t always avoid that, but if we can find better ways of enlightening everyone involved in the process that there are better liquidity windows and we can access them, then it gives us the ability to speed up, slow down, or hold a trade for a longer period of time.”
The future
Looking ahead, Baker is clear on the innovation set to make the greatest splash in foreign exchange: instantaneous settlement. While North America moved to T+1 for its post-trade cycle in May 2024, Europe, the UK and Switzerland have set out plans for their own shifts to take place in October 2027. The next step would be instant settlement via blockchain, as seen in markets such as crypto.
“T. Rowe Price did a test trade on the blockchain trade in the sand pits. Anything that can reduce trillions of dollars getting pumped around on a daily basis is going to be a cost and efficiency saving,” says Baker.
“There’s going to be less chance for erroneous trades going off and not being able to be pulled back. The technologies of blockchain will drive all assets going forward. It’s how we start to implement that in the EMS’ and our general workflow.”
Like many in his seat, Baker is continuously assessing what might improve the trading desk’s workflows in order to optimise outcomes for their clients. In his 24-year tenure he has helmed the foreign exchange desk through many storms and will likely see them through many more.