As regulators place more scrutiny on best execution policies and transparency in OTC markets, institutions trading foreign exchange in Asia Pacific are watching closely. Hedge funds and asset managers are facing indirect pressure from investors to monitor the performance of their brokers and venues in FX spot, forwards and NDFs.
In Part II of the Q&A: FX Trading in Asia Pacific, Vinay Trivedi, Senior Vice President, Strategic Initiatives and Head of FX Sales, APAC at FlexTrade Systems, discusses how the regulatory push for best execution is impacting FX trading in Asia, and why it’s driving demand for transaction cost analysis (TCA) through the execution management system (EMS). At the same time, hedge funds are gaining access to dark pools with anonymous trading. As electronic trading in FX evolves, institutions trading across multiple funds are also seeking tools that automate and streamline allocations.
Q: Given the regulatory focus on best execution and transparency into OTC markets like FX, what impact is this trend having on asset managers and their adoption of transaction costs analysis (TCA) for FX in Asia Pacific?
Trivedi: Because of the way regulation is progressing in America and Europe, it is important for asset managers in Asia to know what’s available in the market in terms of best execution. As such, they are getting more focused on benchmarking execution and conducting TCA. This is why there is an intent and a pressure to move FX trading away from the custodian. Under new circumstances either the custodian will start providing the best price in the market, or asset managers will be forced to look in the market for best execution.
Asset managers have a responsibility towards their investors to provide best execution. Traditionally, while asset managers have been focused on getting best execution for equities, they tend to leave money on the table in FX when trading with a custodian only. This is not in the best interest of the client. Hence asset managers have started trading with counterparties other than the custodian to hit FX dark pools to achieve best execution.
Q: What role are dark pools playing in currency trading on the buy side? And, how accessible are these venues to asset managers and hedge funds in Asia
Trivedi: Since FX has been OTC in nature, there is no central avenue to trade. Over the years many institutions have tried to create a centralized pool (dark or lit)/order book, but it is still very fragmented. For instance, a few years back Reuters and EBS were the two preferred venues where most of the trading was happening for the interbank space. Reuters was strong in commonwealth currencies while EBS for G3. But they were only active in the interbank space. Obviously there was a need to create similar order books/pools which can be tapped by non-bank players. That process was started by firms such as Currenex, FXall Order Book, Hotspot, etc.
Now dark pools are giving access to real money [asset management firms] and hedge funds to clear their ‘exhaust’ in anonymous fashion.
Which is why FlexTrade designed its FX EMS to give clients the flexibility to access the liquidity pool comprising direct banks, non-banks and ECNs (dark pools) to get the best execution.
Q: What innovations has FlexTrade developed for the Asian FX market? For example, how has FlexTrade leveraged the EMS’s multi-asset trading capabilities into the FX market?
Trivedi: FlexTrade has years of experience deploying multi-asset trading set-ups, which gives us flexibility to cross-leverage features of one asset class into other. A very good example is FX basket trading, which is an idea we applied in FX from our experience in equity and ETFs trading and now this is one of the most popular feature for us in hedge fund space. About two years back, we realized how funds were trading manually all the individual legs to execute an FX index or basket such as SGD NEER. We launched FX basket trading for such funds where they can execute multi-leg FX with a single click.
This has helped funds to realize more trading opportunities with less hassle and more operational efficiency. So you can see how FlexTrade is different from a traditional only FX technology provider.
Q: We’ve been talking about the value of an EMS in FX trading. What kind of demand is there for the order management system (OMS) in Asia?
Trivedi: There is a demand for the OMS because, like the sell side, the buy side also has to manage their orders, run compliance rules, manage broker restrictions, etc. Traditionally FlexTrade has focused on the sell side OMS and buy side EMS, but now, with the recent release of our buy-side OMS – FlexONE, we are making a strong foray into this segment. For the sell side, we already have lots of client using our multi asset OMS or FX-specific OMS.
Q: One of the buy side’s workflow challenges in FX trading relates to allocation of trades across multiple funds. What tools or functionality is FlexTrade developing in this area?
Trivedi: FlexTrade has had allocation capabilities for many years in the equity space. Recently, we have extended the same idea to FX for hedge funds trading across multiple funds, and asset managers trading across brokers/accounts.
Traditionally in FX, a typical hedge fund would trade over a voice or single bank portal. Traders would tell the voice sales dealer, “Here is my $100 million order and you have to split this across five funds.” Then the trader would provide the ratio and the sales dealer/broker sends the five tickets to the hedge fund’s back office.
This process is very manual and cumbersome. So we automated the whole process for our clients to make it more efficient and less error-prone
As such we now offer hedge fund traders allocated trades on a pre/post-trade basis with the conversation with the sell-side brokers occurring electronically. Traders can also change the ratios on the fly to change the allocation before sending the trades.
Similarly, for our asset management clients, we have deployed a post-trade allocation tool – FlexMOS, which helps to negotiate rates with sell-side brokers for roll-overs, forwards and account allocations to ensure proper auditing of rate negotiation, transparency and operational efficiency.
Again, the idea is to automate the process to streamline the workflows, save time and effort, and ensure there is an audit for every trading activity.