John McGrath is Chief Revenue Officer, BidFX.
What were the key theme(s) for your business in 2022?
Interest in clearing OTC FX, and more specifically, non-deliverable forwards (NDFs) has been on the rise, as institutional asset managers looked to reduce the amount of margin they needed to post under the final version of the uncleared margin rules (UMR) back in September. A more evolutionary, rather than revolutionary, approach was adopted. FX is, after all, a by-product for the real-money asset management community. As opposed to trading currency markets for alpha, the vast majority of money managers are looking to manage risk around their currency exposures.
What was the highlight of 2022?
The continued electronification of streamed pricing enabling the immediate benefit of being able to determine the best method of execution. This included from how much it costs to trade a specific amount at a given point in the day, to which liquidity provider is offering the best pricing at that time, and which tenor(s) offer the tightest spreads. These pre-trade decisions help facilitate greater automation that, in turn, reduce operational risk, which have had a significant impact on achieving provable best execution this year.
What surprised you in 2022?
While not surprising per se, electronic pricing has continued to be supported by strong trading systems that are processing more and more complex NDFs trades, and not just more simple spot transactions. That includes features such as staging incoming orders pre-trade and straight through processing (STP) after the trade.
What are your expectations for 2023?
Over the course of the next year, more and more financial institutions will begin shifting away from TCA, towards another three-letter acronym called LPA, or Liquidity Provision Analytics to give it its full description. LPA moves away from measuring to see what has happened, to investigate the underlying reasons why a trade even happening. Take the example of an FX trader struggling to execute an order efficiently. As a consequence of their struggles, there may well be a very big difference between the expected price of a trade, and the price at which the trade is executed (slippage costs). Now it is one thing knowing the slippage costs, it is another thing understanding exactly why the costs are slipping.
What trends are getting underway that people may not know about but will be important?
Historically, firms have geared their technology and operational decisions towards achieving best execution when it comes to FX trading. However, we are increasingly seeing the focus for 2023 moving towards a more data driven approach, with market participants demanding more detailed information around the relative benefits and drawbacks of dealing with particular liquidity providers.
