With Richard Turner, Senior Trader, Currency Solutions, Insight Investment
Briefly describe your professional background and your current role/responsibilities at Insight Investment?
When I left school, I did an apprenticeship for Rolls Royce. It quickly became apparent that engineering was no longer going to take place in the northeast of England, where I’m from. So I left engineering to train as an agricultural commodity trader. Following that, I did a treasury role, and I moved to FX. In my current role, I specialize in electronic trading and head up a trading technology team which helps solve problems for Insight traders across asset classes.
Another part of my job is to ensure the best execution and compliance with regulatory requirements. I specialize in TCA, so I’m very interested in market microstructure and how markets work.
How would you define FX execution connectivity – what is it and why is it important?
When we want to trade lines on our blotter, we look at what is the best thing to do with that trade. We link pre- and post-trade analysis into a decision tree – what is the best thing to do with this trade at this moment? So in essence, we look at a rules-based method of trading, and we try to learn as much as we can from previous trades.
Another part of FX execution connectivity is making trading workflows more connected. Which ultimately means more automation and less stress for traders - I use the analogy that it allows a trader to be more like a pilot overlooking the autopilot when flying a plane.
Another element is future-proofing execution. What can we do better in the future? Do FX traders need to stand alone? I think not, rather I think we should be looking at cross-asset solutions – what can we learn from the nuances of other asset classes, and what can they learn from us.
How does an institutional trader optimize FX execution connectivity?
At Insight we pride ourselves in understanding all aspects of the trade, from raising the trade to booking it.
Another important aspect is learning from previous trades. What elements of a trade are different that may change your opinion on how to proceed? Is it a different underlying currency pair? What does that have on the impact, the time of trade, the time of day that you trade, and the underlying market conditions, and how do you measure all of those?
You need different approaches for different trades. If it’s a quick opportunistic trade, you want to be done very quickly. Whereas, if it’s a long-term value strategy, you want to ensure that you’re taking your time over that execution to get the best possible outcome over time.
There’s also streamlining processes to make execution truly non-touch. Across the industry there are still different workflows that require manual processes. Should we automate them, and how do we automate them? For very small trades, perhaps those can be automated to a degree where you just have an RFQ and it hits the best price automatically.
And there’s the cost of trading. When a counterparty quotes, do you know all the aspects of the cost of the trade? What do your counterparties pay for market access? You should want to know what is in the price they give you, which is a key element around transparency and challenging your counterparties.
What is unique to execution connectivity in FX versus other markets, say equities and fixed income?
There are often very similar workflows across asset classes – the uniqueness of FX is hard to define, but there are a few very interesting things.
One is that it’s very fragmented with regard to liquidity providers. You have a lot of different players, ranging from the top four banks to retail. Relative to other asset classes, FX is cheap to trade, and it’s a very deep market at times. Of course you don’t know how deep it is until you’re actually trading it, but ultimately, a huge amount of volume goes through the FX market.
You spoke on the topic of FX execution connectivity at the FIX EMEA Trading Conference in March. What do you recall were key takeaways from the panel?
One key point covered was that there are other methods of communication, other than FIX at the minute, that are coming into the fold.
Also, the day-to-day job of the trader has changed, and continues to change. I used to purely execute on a trade-by-trade basis every day, whereas now I spend a lot of my time analyzing data and helping coders to code for me.
What are the advantages of using FIX in FX, swaps and forwards?
The key is standardization of messaging. Take algos, for example – when you’re trading an algo and you move, you’re changing limits, you’re trading aggression levels, you’re changing the interaction with the market, and the FIX messages are there sending the changes backwards and forwards. That ultimately changed the characteristics of the algos. So if you can analyze those FIX messages across different algos and between the counterparties who are providing the algos, then you can do cross-comparisons of behavior. The standardization element allows for a fair comparison, which is important.
“Last Look” - when a market participant receiving a trade request has a final opportunity to accept or reject the request against its quoted price - has been much-discussed in FX trading. How is this topic being re-addressed?
It’s about the standardization of reject codes, and it’s about asking the questions of your liquidity providers. Are they last look? What are the hold times? Are they asymmetric? And then you need to have a chat with your fellow traders about whether last look is something you want to interact with.
The rise of bilateral connectivity, why is it important?
There has been a rise in connectivity – whether or not that’s bilateral can be debated, as there are nuances. In general, bilateral connectivity improves trading workflows, as you can trade more with less risk as flow is potentially more automated. We try to improve workflows with bilateral connectivity where we can, and I think building this connectivity ultimately strengthens relationships with your counterparties. It also focuses your relationship to be more transparent and more accountable, because whether things are going wrong or right, it makes it easier to flag and discuss.
What is the future of FX execution connectivity?
There will be more automation and more transparency around cost and outcomes. The market is definitely moving toward more rules-based trading, with checks and balances in there to make sure you’re doing the right thing and all your regulatory and best execution requirements are satisfied. This will allow the trader to focus on the most important aspects of the job, looking at the real risks, rather than stuff that shouldn’t need that much attention. Ultimately, execution connectivity is about challenging the way we do things. there are a lot of challenges out there that demand focus. And that’s what we should be looking at.