The Outlook For FX

Posted on November 25, 2009 by Ian

As the markets start to weather the storm of the great recession, what does the future behold for FX ?

FX has always persisted itself as a robust and growing asset class. According to the last Bank of Operational Settlements survey, the FX markets were accountable for $3.21 trillion of revenue globally.

At the recent FX Europe conference in London, Holger Neuhaus (HEAD OF FRONT OFFICE DIVISION, EUROPEAN CENTRAL BANK) painted a luck lustre picture of the storm that FX has weathered.“We are just starting to come out of the biggest financial meltdown that the modern world has encountered” he told the conference. The current recession far eclipses the great depression that happened in the 1920s. The term unprecedented is over used, but the current markets are in uncharted waters, the depths of which we have never encountered before.

Historically, the FX markets have always been well positioned to make money on both side of the currency flow in both bear and bull markets. This has allowed FX to flourish as both a transaction asset class as well as a speculators instrument of choice in volatile markets

As Ian Stannard (HEAD G10 CURRENCIES, BNP PARIBAS) explained “recent growth figures have been better than expected quarter on quarter”. This along with the quantitive easing programmes of the US Federal Reserve, Bank of England and European Central Bank has driven asset and commodity prices to an all time high this year.

As Ian Stannard went on to explain, the recovery has been driven by 3 factors :-

o Inventory rebound driving commodity and asset prices higher.
o Global fiscal stimulus and quantitive easing packages
o Rebound of exports due to introduction of new export finance programmes.

The picture of a market recovery is still very fragile with market sentiment debating if this will be a straight ‘V’ recovery or if the market will follow a double dip or ‘W’ profile , suffering a second re-alignment as recent gains are unwound.

From looking at the economic data available over the last 2 quarters,  the rate and speed of exit from the current recession far exceeds all previous recessions including the Great Depression in the 1930s. This angle of recovery is being driven by the global quantitive easing programmes from the Fed, Band of England and the European Central Bank.

How sustainable is the recovery ?
The ECB has stated that their repo funding programme will cease in December and that both the FED and Bank of England will be withdrawing Cash for Clunker / Car scrap page schemes in March 2010.

According to both Ian Stanndard and Holger Neuhaus, the FX markets have an inbuilt resilience to adapt to market supply and sentiment as the global quantitative easing programmes are withdrawn over the coming months. This will result in growth projections for next year being revised in early 2010 as recent asset and commodity gains are unwound and the markets find a new level.

As we look to what 2010 beholds, the only uncertainty is how you choose your currency risk and which side of the bid / offer spread you choose to sit on.

IAN ALDERTON
Email : ian@IanAlderton.com
Tel : +44 (0) 7702 777770

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Challenges for High Frequency Trading in 2010

Posted on November 20, 2009 by Ian

I read an interesting article in the FT earlier this week entitled High Frequency Trading (www.bit.ly/4J9ERj).

The main points were that High Frequency trading now accounts for 42% of US equity volume. This has been driven by co-location strategies, placing servers within an exchange data centre in addition to unfiltered or naked sponsored access to gain faster access to exchange system.

Specifically, this involves piggy backing on a brokers id to place orders directly into the market without the broker conducting pre trade checks, reducing latency by 400 milliseconds.

The key challenge for brokers is :-

(i) how to supervise 1000s of trades per second, many of which are conducted faster than the blink of an eye
(ii) balance the need for systematic Risk Management as well as ensuring that there are no potential breaches of credit and capital limits

Natural Evolution
It is my view that the whole debate around High Frequency trading needs to be embraced. What we are seeing is the natural evolution of the markets to lower execution costs and seek out the best price possible. We should remind ourselves that this is a natural evolution of the equity markets. It is only 10 years ago that total transaction costs were 1.1% compared to the 0.33 to 0.64% that is delivered today. These changes have only been achieved through technology innovation and market evolution.

Arbitrage Opportunity
HFT provides much of the liquidity in today’s market, trading arbitrage opportunities and bringing markets such as futures and cash along with Exchange Traded Funds (ETF) and net assets, into tighter alignment. In addition, HFT increases market efficiency, closer pricing gaps and overall tighter bid /offer spreads.

As shown by a recent report by the Aite group, the latency benefits of HFT against convention Direct Market Access is significant

o Naked / Unfiltered access               250 to 300 microseconds
o Sponsored Filtered access               550 to 750 microsecond
o Direct Market Access (DMA)          4,000 to 8,000 microseconds

Key Challenges
In today’s environment, the SEC is seeking a level playing field for both retail and institutional market participants. Key to this is seeking a balance in how privileged sponsored market access is managed in both providing liquidly and driving down best execution price.

In addition, the sponsoring broking community need to look long and hard at how to monitor trades in real time and prevent erroneous trading. In an environment where thousands of trades are conducted per second, brokers need to ensure that the potential systematic breaches of both credit and capital limits are avoided at all costs. The consequence of not achieving this is that the SEC will move towards prohibiting HFT which a highly functional and effective equity market does not need.

IAN ALDERTON
Email : ian@IanAlderton.com
Tel : +44 (0) 7702 777770

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What Role Does Innovation Play In A Downturn Market

Posted on November 19, 2009 by Ian

Innovation means many things to many people.

For me, Innovation is centred on introducing changes through new methods, ideas or products to drive competitive advantage and gain market share.

Boom To Bust
Historically, in boom years, the trend of innovation has been to focus on doing things quicker, cheaper and faster. One has only to look at technology innovation across the trading environment, from program and algorithmic trading through to Direct Market Access (DMA) and Smart Order Routing, where speed has been king and latency has sounded the death knoll for an organisation.

There are no prizes in business for coming second. In the current climate, being the quickest and fastest is no longer a sure fire way to gain market share and improve the bottom line. Innovation in the current market may not feature at the top of the CEO’s agenda, but current conditions dictate innovation as a key element to introduce operational efficiency and remove cost from the bottom line.

Current Role Of Innovation
Gone are the days when Innovation was hailed as the new messiah to part the balance sheet and propel the P&L on a climbing wave. The new wave of Innovation is typically tactical in nature and focused on cost efficiencies to retain market share against the adage of doing more with less.

These initiatives, by their very nature, are small innovative steps funded as part of existing operating technology or project budgets. Only when these individual innovation accomplishments are knitted into a cohesive roadmap can the CIO prove his true worth. Central to this is turning standalone innovation achievements into a cohesive Innovation roadmap that delivers true value to an organisation.

Selling The Pitch
While everybody else is hunkering down in the current environment and discretionary funding a distant memory, the temptation is to stop innovating but nothing could be further from the truth. Innovation needs to continue to sustain the corporate entity. In tough markets, it becomes ever more critical to increase innovation to grow market share. As markets have shrunk along with the revenue per customer the only winner is the one that continues to innovate to grow market share and remove costs from the bottom line.

For an organisation to innovate, the correct culture needs to be in place to foster an environment where innovation can evolve unhindered to envision and create new business products and services. It is the CIO’s role, as a leader of change and driver of Innovation, to lead initiatives to support flexibility and agility for rapid business change. As the Innovation champion, the CIO requires courage to know when to pull the plug on an innovation project that is not delivering. Key to this is not punishing failure.

The correct environment needs to be in place to support a blame free culture to enable innovation projects to be canned without blame and repercussion when they don’t hit the mark.

History has told us that the greatest innovations in time such as the Apple IPod or Cisco Telepresence would not have happened in a kill / blame culture.

Why not share your success stories with me?

IAN ALDERTON
Email : ian@IanAlderton.com
Tel : +44 (0) 7702 777770

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The Next Big Thing in Innovation – Complex Event Processing

Posted on September 29, 2009 by Ian

As reported by the FT, Vendors and customers alike have it as an article of faith that investment in data processing technology can impart competitive advantage – or “Vorsprung durch Technik” as Audi the carmaker has been telling us in another context for the past 20 years…. www.bit.ly/qXpYT

IAN ALDERTON
Email : ian@IanAlderton.com
Tel : +44 (0) 7702 777770

 

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