Buy-side panellists at this year’s TradeTech FX USA conference offered opposing viewpoints on the importance of pre-trade analytics for risk mitigation in foreign exchange (FX) trading.
Discussing how technology is changing the way in which buy-side firms manage and mitigate risk, Paul Shahied, head of FX trading at Fidelity Investments backed the use of technology when deciding on appropriate levels of risk.
“It comes down to good, smart pre-trade analytics, to at least give the trader a visual and a clear understanding of what is two standard deviation move, intra-day for that timeframe in that currency versus what is a good estimate of risk transfer, what is that slippage?” he said.
“When you are confronted with the options, let’s say a voice risk transfer, an electronic risk transfer versus something a little more passive, such as a two standard deviation move, it will become clear what the prudent decision to make is.”
On the other side of the discussion Jason Fromer, head of FICC trading at Manulife Asset Management, instead a reliance of human understanding of market conditions, particularly in the face of changing daily circumstances and market conditions.
“A lot of what it has to do with is experience and skill. We’re all in the environment of Twitter now so we really have to understand and asses the market or the day that we are in. It becomes more about what is going to happen in the next two or three hours that anything else,” he commented.
“It’s not about the analytics, per se, it’s about what you want do, where you want to go, and how you want to make that trade work, and think about what you are going to be doing that day and laying a roadmap. It’s about knowing who your counterparties are, who is good at those trades and who is he right person to use for certain currencies. You get some of that out of pre-trade analytics, but it’s not the be all and end all.”
While he did recognise the importance of the technology tools available for risk mitigation, Fromer explained there was a danger of firms placing too much emphasis on pre-trade data analytics for such operations and that his firm had not taken this approach.
“There is so much data that you get paralysed by it and sometimes it’s just intuition, or knowledge. We are looking to see what can add value for us but I have not found a lot yet”, he said.
Fidelity Investment’s Shaheid agreed that traders’ understand and experience does also play a vital role in risk mitigation, particularly due to the nature of FX trading conditions.
“If you are bringing up a junior trader or someone from another asset class, that is where pre-trade analytics becomes more critical; they might not be as familiar with the volatility and the moves within the market,” he commented.