More FX market data is being collected than ever before. This is being put to a variety of uses, but the data available remains fragmented and incomplete. If the growth of electronic trading and buy-side pressure for transparency do not fill in the gaps then regulation may be necessary.
This is one of a series of articles based on panel discussions at Sibos 2019, where industry figures came together to examine the issues impacting FX markets.
Why do market participants need better data?
Almost everybody in the FX market is interested in more and better data. FX dealers want to use data to find liquidity for their clients and then capture data to check their shares of the market (in particular in currencies and instruments).
Asset managers, especially of the quantitative variety, want to filter data for signals to buy and sell, while high frequency traders are seeking latency arbitrage opportunities. Corporates want data to tell them the best time and place to trade and databases to benchmark the rates they achieve through transaction cost analysis (TCA).
“If you look at the disclosure (document) of a bank, it will say, ‘Sometimes we may do this, sometimes we may do that,’” explained Neil Penney, managing director and co-head of trading at Refinitiv. “Technology allows you to embed information at trade time about whether this is one of the times the bank is doing this or one of the times the bank is doing that. That, built into a buy-side system, may enable them to trade differently for that trade or afterwards to collect statistics about their bank’s behaviour and compare it to other banks’ behaviours.”
Central banks, regulators and policymakers, on the other hand, hope access to real-time and retrospective data will disclose changes in structure and shifting trends within the market, so they can manage exchange rates and systemic risks.
The BIS FX survey
The starting point for all these interests is the triennial FX survey by the Bank for International Settlements (BIS). This survey endeavours to pick the right mix of reporting institutions and jurisdictions in order to obtain an accurate picture of a highly fragmented market.
The most striking findings of its 2019 edition, published in September, were a two-thirds rise in prime broker intermediation (reflecting the recent rise of non-bank liquidity providers) and a one-third surge in daily turnover since 2016 − to US$6.6 trillion (driven mainly by swaps).
The increase in swaps activity is not well explained by the BIS survey but is thought to reflect both increased funding needs and increased hedging of positions by investors perturbed by geopolitical developments.
The BIS survey, which aggregates data, can be supplemented from other sources such as feeds from banks and trading platforms.
Saeed Amen, a quantitative FX trader and founder of the Cuemacro advisory business, noted that he added news feeds, central bank announcements, mobile phone tracking and satellite images to FX datasets to explain developments in the markets.
The advantages of greater data transparency
The FX market has not yet been included in the post-crisis push by regulators for on-exchange trading and clearing or the need for full reporting to trade information warehouses.
Andreas Schrimpf, secretary to the market committee of the BIS, liked the idea of regulatory mandates for data reporting, provided that the private sector saw benefit in it, and the data collection could be standardised and automated. “It is, in a way, a ‘public good’ that is being provided here, and one issue is that, if you just leave it in an uncoordinated way, that public good might not be delivered,” he said.
Richard Turner, a senior trader at Insight Investment, applauded the idea of standardised forms of disclosure. He had found “incredible” differences between the reporting of trade flows by different counterparty banks.
“If you have a disclosure that says one thing and a technology that provides evidence that is not true, then you can have a decent conversation to say, ‘What on earth is going on with my counterparty bank?!’” explained Turner.
Price transparency in major currency pairs in Europe has already improved somewhat since the second iteration of the Markets in Financial Instruments Directive (MiFID II) came into effect in January 2018, with trading venues now offering prices for trades of all sizes.
Though large trades posted on trading platforms are still being broken into smaller pieces to reduce market impact, electronic trading is now spreading from the spot market to encompass forwards and swaps, further increasing price transparency.
But, Richard Turner insisted that buy-side consumers of liquidity did not have to wait for trading venues to dispel the opacity created by bilateral voicer trading. Instead, they should challenge counterparts which refused to share data.
“I call it my Ace of Data,” explained Turner. “All our data has to be accurate, consistent and evidential. That is a huge thing for us in order that we can evidence our best execution policy when we trade – and that’s pre and post-trade. It also helps us make better decisions throughout the life of our trading, he concluded.”