The Rise of The Machine: Could Human Intuition in FX trading become a thing of the past?

We are living in an increasingly digitized world. Technological changes and advances have driven key industry shifts over the last few years and buy-side fixed income trading in Asia Pacific is no different.

Increased digitization and automation have been gradually occurring over the last few years, but the recent COVID19 pandemic greatly accelerated this trend. To better understand the opportunities and challenges of electronification, WBR (Worldwide Business Research) and Bloomberg conducted a study by surveying 100 executives in the Asia Pacific Region (report accessible here).

Survey respondents were in Singapore, Hong Kong, and Australia and hold positions of Head of Fixed Income Trading, Head of Trading, or Head of Technology. Bloomberg’s subsequent report reveals the strategic priorities coming out of the pandemic, how the role of traders is changing, and what the future of electronification looks like.

Strategic Priorities in 2022

The COVID19 pandemic rapidly changed how organizations and firms operated. Regulatory demands, work-from-home, and market volatility resulted in constrained capital resources, reduced liquidity, and the inability to perform risky trades. Firms had to adapt quickly and produce new strategies to stay solvent.

Electronification and automation were already important trends before the pandemic, but the conditions that happened in 2020 were the perfect accelerator. Institutions were forced to become more flexible and adopt electronification just to stay on top of the regular workloads while employees were scattered across the region or world. In that adoption, companies are realizing how effective automation is to increase profitability and maximize efficiency.

For example, when employees started working from home, the need to embrace automation became evident. Routine tasks and small-ticket trades were both time-consuming and prone to error as traders adapted to working from home. This made companies prioritize adopting automation platforms to help speed up small-ticket trades.

Automating small-ticket trades frees up traders’ time to focus on high-ticket items. This was reported as a priority for 29% of respondents in the Bloomberg report. Other notable priorities for 2022, as identified by respondents of the Bloomberg report, include:

1. Using automation to free up time for high-touch orders
2. Focusing on data collection through electronification to maximize cost-effectiveness and efficiency. Strong data collection and analysis is also important for risk management
3. Optimizing the user experience and communication through electronification.

The main strategic priority will come down to the balance of man vs. machine: how do we use technology to optimize results for the people it’s meant to serve?

In the summary of an Asia Risk webinar panel discussion, it’s stated that “the benefits of automated trading include a boost to all-around efficiency, tighter markets, and faster response times from the sell side.” All of this helps with the routine legwork of processing trades, giving traders more time for high-touch transactions that require customized and personable attention.

Electronification provides better data, more efficiency, and—when used well—a better user experience. The key priority for firms will be how to effectively leverage it in their context and financial or geopolitical climate.

How the Role of Traders is Changing

Traders faced a significant shift in their daily routines and work priorities when the pandemic started. As they began to work from home, companies realized two things:

• Working from home was a viable solution, though technology and IT infrastructure upgrades were needed
• Traders struggled to execute some tasks and low-ticket trades were time-consuming

Both factors contributed to the adoption of electronification and automation to save time to focus on high-ticket, high-touch trades.

But not everyone is ready to move to electronic trading platforms. Some respondents from the Bloomberg report indicated hesitation for electronic trading because it would change the client experience that they are used to. There were also concerns about the implementation and integration of platforms into current systems.

Despite this, the role of traders is changing. To keep up with changes in the future, firms will need to start automating. It will become a key factor in talent acquisition, too. Bloomberg concludes, “As the inherent value in electronification becomes apparent, traders will be drawn to firms that embrace automation technology.” (p. 17 of the Bloomberg report).

As traders adopt automation technology, there will be some key changes to their roles. Traders will need to:

• Leverage data collection to manage risks
• Use technology and electronification to interact with clients; will need to strike the balance between efficient communication and personalized support
• Shift attention to high-ticket trades that cannot be automated
• Learn new platforms and technologies to best serve clients; educate and inform clients on new platforms and systems

Traders will need to adopt new technology at a rapid pace, becoming comfortable with it, first, before transitioning clients to new platforms and technology.

The Future of Electronification

Electronification will continue to shape the buy-side fixed income trading industry. As firms and clients alike realize the benefits, it will become an increasing priority over the next few years. The future of electronification will be marked by:

• Data-driven decision-making. More automation means better analytics, predictive models, and data-driven decision-making
• Flexible trading systems. As world markets continue to be unpredictable and volatile, flexible trading systems will continue to be important
• Technology improvements. Electronic trading platform vendors will need to keep investing in their technology, ensuring performance issues are managed.
• Growing adoption. Despite rapid electronification and automation, the Asia Pacific region still lags behind the rest of the world. 83% of survey respondents said that APAC is automating at the same rate or less than other regions. Moving forward, we will see continued automation in the region to catch up

There are still hurdles to overcome during this onward march towards electronification. This article outlines two of them: the fact that some assets cannot be traded electronically (i.e. local sovereign bonds or emerging market corporate bonds) and that the pace of change may be too fast, with participants facing innovation fatigue.

Despite this, the future of electronification is bright, as companies know they need to adapt to changing times to stay competitive. Electronification and automation are key drivers of profitability, namely for two reasons: increased cost efficiency and better decision-making through data and analytics.

Conclusion

The fixed income market has been shifting towards increased automation and technology adoption for some years. The COVID19 pandemic accelerated this trend with the move to remote working, which forced firms to heavily invest in IT infrastructure and processes.

Buy-side firms are adopting automation and electronic trading because of the increased efficiency it brings. Traders can focus on high-ticket trades while automating low-ticket, low-touch trades. Automation also increases profitability levels using strong data analytics and data-driven decision making.

To effectively compete in the global marketplace, the Asia Pacific region needs to keep up this rapid pace of automation to maximize efficiency and profitability as well as retain talent in the future.