Pivotal moment in time: Automation, Electronification & What This Means for FX
‘The Electronic Road Ahead in Multi Asset Trading’
Automation of Market
“The pandemic accelerated the adoption of electronic trading, and with that, there has been a greater appetite for innovation. Firms are looking for more ways to access liquidity, whether it’s through new trading protocols or expanded integration with solutions providers like Bloomberg” [Derek Kleinbauer, global head of fixed income and equity e-trading at Bloomberg]
Non-automated transactions were slow and complicated; they involved telephone conversations, writing tickets, various communications between the agent and the buyer or the seller, and the settlement process would last two if not three days. Technology can offer more than automated and faster transactions. The regulatory changes introduced in the past five to ten years have exponentially increased the amount of information that must be captured. They are now part of a company data ecosystem. That data can be put to work to analyse processes (for instance, transaction cost analysis), use big-data algorithms to analyse client behaviour, or help in the automation process (for example, liquidity analysis). Artificial Intelligence algorithms can help manage liquidity or search for the most liquid market for a specific instrument.
Overall, automation trends point towards two complementary directions; automating standard transactions to leave more time for traders to deal with complex requirements and using captured data to provide more information to facilitate dealings in more complex situations.
“To keep focused on client relationships and revenue generation we expect to see a lot more emphasis on the right technology for the right job, that can be scaled. Investors will need to keep focused on their day jobs, while technology plays a greater role in supporting their needs.” [Alex Ehmann, asset management industry sector manager at LPA]
In secondary markets, where electronification is already well established, trading options will continue to expand, giving traders more choice to execute the right trade at the right time. Greater control of data and information will drive this evolution; both the buy and sell side can route their liquidity to the most suitable protocol. The combination of ongoing electronic improvements across primary markets and the flexibility to execute a variety of trade types, whether influenced by larger size, complexity, or market conditions, will have a notable impact on how fixed-income traders operate.
Image Source: https://www.bloomberg.com/asia
Looking forward
“…there will continue to be an increased demand for solutions that effectively use data to help inform trading decisions, and to overlay that intelligence across electronification and automation. An example of that would be our launch of Portfolio Trading Basket Builder, incorporating reference to Bloomberg’s Evaluated Pricing Service (BVAL), thereby enhancing our offering with the data and analytics Bloomberg is known for.” [Derek Kleinbauer, global head of fixed income and equity e-trading at Bloomberg]
Cloud computing has helped make the most of the massive explosion of data in the fixed income markets. Systems delivered via a Web browser require less hardware infrastructure at the point of delivery, relying on fast internet and web server to carry the “load” needed to deliver the service. Buy-side firms have increasingly adopted cloud-deployed systems to manage portfolios, orders and execution. For instance, hosted portfolio management solutions have been around since 2005. Those solutions allow a small to medium sized firm to access technology without a considerable investment in infrastructure. Sell-side firms use cloud computing for risk management calculations that help trading desks make faster and better capital allocation decisions. API routines can give dealers access to trading protocols such as auctions, matching platforms, firm prices, two-way pricing/request for markets (RFM), PT, and central limit order books (CLOBs). Cloud computing allows IT teams to deliver “light” clients to dealers via API routines and fast internet connections; the clients are supported by powerful remote servers and large data banks. Large sell-side firms also prefer solutions that provide pre-trade transparency and execution certainty. The most efficient structures also address data leakage, confidentiality and security concerns.
Image Source: https://www.forbes.com/sites/bernardmarr/2020/11/02/the-5-biggest-cloud-computing-trends-in-2021/?sh=6a1b910d12d9
The increased reliance on automation is not just due to technological advancement. Electronic trading helps meet regulatory obligations, and compliance with local and international rules is usually built into the trading systems. Also, automation allows traders to concentrate on transactions where the human element is essential, leaving straightforward transactions to be executed, managed, and controlled by technology. The rise in trade volumes in Asia is not matched by a comparable increase in the number of traders; this clearly indicates that the most straightforward fixed-income transactions are usually left to automated systems allowing traders to invest more time in high-value complex transactions.
Increasing volumes of transactions in instruments like ETFs will also increase the reliance on technology for everyday programmable transactions. Only technology can ensure that assets in an ETF match the underlying index daily. Any trade to maintain the match usually happens at the end of the session; a manager may need to make many transactions in a relatively short time to execute all of them accurately without the help of technology. These trades are now mostly automated, enabling the manager to focus on strategic challenges.
“Continuing market pressures – from low interest rates, rising fixed costs, increased regulatory demands or new competitors – means that fixed income, commodity and currency traders will increasingly seek opportunities to achieve more, in a more efficient way, with the same resources.” [Alex Ehmann, asset management industry sector manager at LPA]
As demand for automated platform increases more software vendors will bring to the market solutions that can automate standard transactions in more trading environments.
Striking the balance
There are several risks behind an increased reliance on technology, and the risk of service breakdown (whatever the origin) is not the most serious one. Cyberattacks, “flash extremes” (either flash crashes or flash peaks), taking the outcome of decision support systems (basically advice or suggestions) for results of equations (therefore firm answer), and coping with different applications that have problems talking to each other, are all inherent risk associated with a strong dependence on using computers.
The growth of technology in a financial firm needs to be coordinated as much as possible irrespective of the company’s size; it is the only way to manage all the issues described above effectively. The best possible scenario would be an EMS that covers many types of financial instruments (equities, fixed income, FX, derivatives, etc.), many trading protocols (exchange-based transactions, RFQs, CLOBs, auctions) and provide support for complex OTC transactions.
New financial instruments, regulatory change and, in general, new ideas bring constant changes to the trading landscape. EMS vendors must be aware of this ever-moving target and offer innovative and adaptable solutions.
Conclusion
Asia has several financial centres, all in different jurisdictions. The regulatory landscape is not uniform, and the markets are not always comparable. Some markets show a considerable prevalence of exchange-traded securities; others have a wider range of instruments traded using different logic. Cloud technology can offer a relatively straightforward way to deploy similar clients into different trading environments. The rapid increase in automation triggered by the pandemic has brought the percentage of electronic trading to a level closer to the most sophisticated markets in the world at a much faster pace. This rapid growth comes with challenges; some are related to how technology is used, and others depend on the way technology is sourced, supplied and implemented. Vendors need to provide innovative and flexible solutions that can cope with the introduction of new rules, new instruments and new trading practices. Ideally, these solutions should include a common core (e.g., database) and several modules coping with different instruments and different trading practices but all consistent with one another and able to communicate with each other.