Andy Maack, global head of FX trading, Vanguard
What impact have global politics, such as Brexit or Donald Trump, and other macro-economic indicators had on FX trading in recent months?
Andy Maack: Much of the impact has been centred around best execution and trying to find ample liquidity in the FX market. There has been a lot of uncertainty which definitely changes the amount of volatility in the market and also increases the overall volatility of trading. Ultimately, this can then increase some of the trading costs around implementing different strategies.
In our case, we are typically trying to implement and execute large positions and increased volatility can certainly make trading a little bit more expensive. But we are fortunate to have traders in three key locations around the world that can manage liquidity concerns and conditions within those regions, which gives us the ability to pass our orders around the globe and really take advantage of that. There’s a heightened awareness around the levels of risk that we’re managing and we are taking great care to minimise any potential slippage that may arise when we are executing an order.
In a period that might not be as liquid, there is the risk that there might be an announcement after the close which may cause the markets to move significantly. We’re actually seeing that scenario a lot at the moment, especially given the current levels of trade tensions and the potential for a risk-off environment. For example, the Japanese yen is extremely volatile outside of the main periods of liquidity and we’ve seen some significant movements. Uncertainty is the main theme here, which in turn requires us to have a heightened sense of awareness around the potential pitfalls in our trading strategies and to proactively try to mitigate those pitfalls.
What are the broader trends currently shaping how FX is traded?
AM: There is still a tremendous amount of interest in the potential for disintermediation, whereby trading would be decoupled from banks and price discovery could potentially happen in outside platforms where there might be better facilities to enable peer-to-peer matching. That is pretty intriguing, especially for the foreign exchange markets which only really started to seriously explore this topic in recent months.
How are buy-side firms adapting to these changing market conditions?
AM: The buy-side and real money space is continuing to evolve and is now really starting to embrace the electronification of the FX markets. We are increasingly seeing the buy-side utilising more of the trading tools that are available, such as voice or request for quote (RFQ) or by using FX algorithms to execute. Previously shops were using a maximum of maybe one or two such execution methods, but now we’re really seeing them starting to increase the breadth of tools that they have available.
Which current trends are likely to be seen over the coming year which will have the biggest impact on the FX landscape?
AM: From my perspective it’s going to be automation, looking at how we can automate more of our trades where a human cannot add any value to the process. This then frees up our traders to focus on the larger orders that we handle and enables them to focus more on where they can add value by making those important trading decisions around that flow.
Using FX algos also aligns to our best interests and those of our shareholders, particularly where we don’t necessarily have any alpha in the currencies that we’re trading but we are just trying to minimise the market impact. Algos allow us to reduce the execution costs of those very large orders by chopping it up into much smaller pieces. By being extremely passive with those orders we’re able to significantly outperform what the risk transfer price would have been at the time of trading, so we’re able to warehouse these trades over a longer period of time. These orders tend to be very large, but they’re small as an overall percentage of the portfolio that we’re trading which makes them a perfect fit for algo execution. And then the other major theme again is going to be peer-to-peer matching in the forward market space.
What are the most pressing topics you are looking forward to hearing discussed in more detail at TradeTech FX this year?
AM: The topic I’m most looking forward to hearing about is the diversity and inclusion panel, which I’m excited to be taking part in. What we’re able to do in this industry to encourage under-represented groups is extremely important as this allows us to continue building great working environments and effective trading teams. Ultimately, diversity and inclusion are essential to extracting the most from teams and it will be really great to hear what other shops are doing to address this.
I’m also very interested to hear more about distributed ledger and blockchain and how our industry might be able to employ these technologies to potentially make settlement easier or to make collateral movement easier, as well as how FinTech in general is going to potentially going to change FX market structure.
The opportunity to talk to other European real money managers that are using FX forwards to hedge flows back to local currencies will also be invaluable as the industry now needs to figure out a way that we can use peer-to-peer matching to find and execute better prices in our forward swaps.
What are you most hoping to take away from this year’s event? AM: It’s always a great learning experience to see and hear what all of the different clients around the world are doing and thinking about and focusing on. It is also a great opportunity to catch up with all the sell-side and vendors all in one place and to know that you are really hearing and seeing the forefront of what’s happening in the FX market from its best and the brightest.
This article was originally published in the TradeTECH FX Daily magazine, produced by The TRADE, which was distributed to attendees of this year’s TradeTech FX Europe conference.