The TRADE predictions series 2023: Foreign exchange, part one

Participants across CME Group, Integral, DIGITEC and Tradefeedr explore the most impactful trends in the foreign exchange markets for the year to come.

By Editors

Chris Povey, executive director, CME Group: Year-on-year FX option block volumes have risen over 50% this year, with increased participation from the asset manager community who often crave the certainty of just getting a large trade done at one granular price, instead of working an order or breaking a trade down into smaller multiple orders. While block trading is not always going to be the primary option for trading listed FX products, activity across 2022 shows that it is an additional workflow some asset managers want to use as a mechanism that closely matches their OTC behaviour heading into the New Year.

Stephan von Massenbach, chief revenue officer at DIGITEC: The latest FX triennial survey data showed continued growth of FX swaps, despite this part of the market still being very manual. The overall theme for 2023 will be the continued automation of FX swaps, which will drive electronification and volume growth, with technology playing a key role. One of the main drivers of electronification is the need for banks to more accurately price FX swaps in the volatile interest rate environment and the need to capture and use high quality market data. As FX workflows become more automated, more data than ever before is being analysed in search of better trading and execution. Systems must be capable of managing vast amounts of data at higher levels of intensity. In the past this was usually done using Excel, but increasingly those spreadsheets are being replaced with more robust systems. Another driver is the growth of the cloud, where powerful cloud-based FX applications are more accessible, meaning that an increased number of smaller banks can support more currency pairs and efficiently make more accurate prices. As more firms participate in the FX Swaps and NDF market we expect to see increased trading volumes and an acceleration towards a more electronically traded landscape.

Balraj Bassi, co-founder at Tradefeedr: As FX firms focus on increasing efficiency and demonstrating best execution, data analysis continues to be important for all sizes of trading organisations. Where 2022 saw the majority of buy-side firms use data analytics for transaction cost analysis (TCA), 2023 will see more advanced functionality including, for the first time, the analysis of different trading algos under different market conditions. The FX market continues to be highly fragmented, which used to limit the effectiveness of data analytics, with multiple different data formats coming from a wide variety of venues and liquidity providers. During 2023, we will see more buy-side firms demanding a single, consistent and independent view of their trading data, irrespective of where they trade – a trend that has been growing over the past year. With this better-standardised data, market participants gain new insights and ultimately make better trading decisions.

Vikas Srivastava, chief revenue officer at Integral: The return of meaningful volatility to the FX markets, perhaps for the first time in over a decade, has made it much harder for firms to obtain optimal pricing. Investment managers, particularly those heavily exposed to sterling/dollar (GBP/USD) and euro/dollar (EUR/USD), have had to deal with significantly higher levels of volatility. Those with broad connectivity to liquidity sources and automated workflow have found the recent volatility to be quite manageable. In order for the fund managers to achieve best execution in 2022, they need advance technology that enables them to minimise both the explicit and the implicit costs of trading. With market volatility is unlikely to go away, cloud-based technology provides flexibility and resilience in accessing the right liquidity even in turbulent times, allows for optimal netting and comprehensive execution methods tailored for different currency pairs and trade sizes.