How Has Technology Changed the Dynamics of FX Trading?

  • Alan Dweck, Chief Operating Officer at BidFX

  • 19.11.2020 08:00 pm
  • FX

These strange times have created many challenges for both foreign exchange (FX) markets and their participants. But they have also highlighted how vital technology has become to our trading activities. Now that working from home has become common practice due to COVID-19, our reliance on technology is greater than ever.

The merging of the home and workspace is a direction we have been travelling towards for a while, especially when markets became truly 24-hour affairs. With skyrocketing trading volumes, participants need technology to react swiftly to market changes that occur outside standard office hours. Besides secure access, speed of access and reliable performance are also essential to keeping funds intact in the event of unexpected news in the middle of the night. Remote logging into work computers from home is possible but prone to performance issues, and without an Infosys team on standby, it becomes necessary for office trading systems to penetrate the home.  

I cannot remember a time when technology has ever been more vital. The challenges of working from home with little or no office-based support have shown us that markets are heavily dependent on technology to provide solutions to modern trading problems. Let’s look at trends that are shaping the FX trading industry.

Raising value via automation

There has been a fear of automation rendering humans obsolete in workplaces; however, in the case of financial services markets, I do not think technology can replace the instincts and experience of a good trader or the excellent service that many forward-looking liquidity providers (LPs) provide to their clients. Instead, I believe backend automation opens more possibilities for traders by enabling them to concentrate on providing the most value whenever and wherever they are. Flexible yet controllable automation is the key: automated minor, routine processes save you time and energy, but also provide oversight and control if something goes wrong. 

For example, a modern buy-side institution requires different systems to be talking to one another, and this was traditionally achieved through integration and communication protocols like FIX. Today, you can use an application programming interface (API) to let a program talk directly to your FX execution management system (EMS) and automate order workflows. The FX EMS can interpret orders as they arrive and understand what to do, monitor market conditions and automatically handle and execute smaller orders at the best prevailing price if the conditions are right.

A buy-side institution may also want some orders to be sent to more sophisticated algorithms (algos). With automation, the system can automatically distribute algo orders fairly across an LP panel – according to ratios under the institution’s control – and monitor fills from each bank’s algo, allowing the algo’s performance and subsequent value to be impartially evaluated and reported to investors.   

One aspect where automation makes a significant difference is in preventing information leakage. While often framed in terms of last look and stream versus Request for Quotes (RFQ), the fundamental problem is really about telegraphing your intentions to other entities ahead of completing execution. In FX markets, there is a unique dichotomy where the entity that is traditionally used to ‘leave instruction’ for a trade is also the ‘counterparty’ to the trade. That is a bit like asking a lion to look after a meat store. There were few alternatives to manual execution in the past, but now, traders can use an automated solution that works stealthily across all available LPs 24 hours a day.

Streamlining with web technologies

Online technologies are a game-changer because they provide a simplified user experience and universal access without having to download and install complex applications. You simply need to log in from a browser to begin. On the back end, the benefits are more pronounced: the overhead costs to run, support and offer trading services from these systems are significantly reduced. It also enhances business continuity as staff can still access the systems from any device with Internet connectivity even without being in the office.

What is perhaps most interesting is that there are now technologies available that make a commonality possible between different systems using similar web-based technologies; a secured ‘bus’ that can be used for applications to communicate with each other. Such technologies offer the prospect of integration and communication happening across applications on the desktop without the need for the traditionally large, backend project that often involves bespoke connectivity, software integration and complex security considerations.

Tapping into mobile technology advancements

Devices and their technologies also play a significant part in this digital transformation of FX trading, and there is perhaps no greater agent of change than the smartphone. Mobile technologies are rapidly altering the way we interact with each other and with the markets by providing constant, seamless access to markets while we are on the go. When coupled with proper use of biometrics such as face recognition, which are now a common feature of mobile phones, they become a safe, secure trading environment that offer unparalleled ease of access.

Mobile apps and web platforms make trading possible even without access to a laptop or a computer; simply open your phone, log in to the app or platform, select your trade and execute it. Checking the market status is even easier and can be done within minutes anywhere. In the meantime, compliance controls and limits are all still working to protect the trader, investor and firm – creating a win-win situation for all parties.

If we think about it, it is amazing that despite financial centres having to shut down more or less overnight due to the pandemic, we can continue trading and running complex strategies without missing a beat because of all these different technologies and solutions. Zero downtime in some of the choppiest market conditions we have ever seen; this is something that would have been completely unthinkable just 10 years ago. I think I speak for all my colleagues – in the widest sense of the word – when I say that I personally am proud to have had a very small part in enabling that to happen. 

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