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Foreign Exchange

Dedicated FX trading reserved for best-in-class asset management firms

Key findings from: the 6th Alpha Trader Forum Foreign Exchange June 2017

It is always inspirational to host the Alpha Trader Forum (ATF) for the industry’s top foreign exchange buy-side trading talent. It never stops surprising us that the buy side who participate in our ATF foreign exchange debates put so much thought and excellence into their firm’s foreign exchange trading process and that there are still a large proportion of firms that outsource this process entirely to custodians. From an overall best execution process, one could question if the rarity of inhouse foreign exchange trading functions may be a neglected area of potential performance improvement for funds.  
One major concern of the buy side at the 6th European ATF foreign exchange was to identify the behavioural trends of the market in order to determine the right time to trade and the appropriate strategies by trade size. With an electronic market for Spot, there are already possibilities to leverage technology to automate and make better informed decisions.   

Banks who want to serve the foreign exchange market well will need to have an appropriate level of investment and demonstrate trust to survive. There is a risk that alternative sources for liquidity like non-bank counterparties and buy side-to-buy side or buy side-to-all trading may soon gain further traction if the buy side are not satisfied with their sell side services. One particular area of interest is how the sell side are going to adhere to the recent FX Global Code and Last Look guidelines. A call-to-action is that each buy-side firm should review their counterparties execution policy wording for Last Look to evaluate if it is acceptable. The broker review process should also include an analysis of the rationale for rejections and the rate of order rejections.   

It is not only counterparties that are scrutinised by the buy side. The buy side are also reviewing the performance and hidden excessive charges to the sell side from their trading technologies. Not surprisingly the buy side are keen to understand which are the best in class TCA brands and how they can use it to improve their trading performance.

As inhouse FX trading is all about best execution, most of the attending buy-side firms have already progressed, revising their best execution policies to satisfy the upcoming MiFID II regulation. 
Other areas for improvement are how to gain further efficiencies for Swap and Forward trading. In particular the need for unique ISINs before crucial derivative types can be traded electronically.

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