Reliable liquidity in FX markets is not as available as it once was. Consolidation in the industry is leading to a huge demand for scale and risks which were negligible are now becoming a priority. The space is also due to see a paradigm shift for EUR and GBP as corporates hedging activity is exploding, and funds or asset managers are also being drawn in by the volatility and macro implications of what is happening.
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Reliable liquidity in FX markets is not as available as it once was. Consolidation in the industry is leading to a huge demand for scale and risks which were negligible are now becoming a priority. The space is also due to see a paradigm shift for EUR and GBP as corporates hedging activity is exploding, and funds or asset managers are also being drawn in by the volatility and macro implications of what is happening.
“Geopolitical factors will continue to drive volatility which directly impacts demand for FX trading,” comments Eric Donovan (pictured), global head of institutional FX at StoneX, “Obviously the situation in Ukraine is in the spotlight, but the EU and UK are undergoing fiscal and political issues unrelated to Ukraine as well. In addition to market action, evolving regulations continue to migrate demand across various regions and jurisdictions.”
FX markets have been very sleepy for about a decade. This drove out many brokers, liquidity providers, and technology vendors. However, now that reliable liquidity is less available, the demand for scale has risen. “This means larger ticket sizes, trading volumes, overnight positions, and physical settlement amounts,” Donovan observes.
The market environment has meant that risks which had been considered negligible for many years are now become a top priority. This is a direct result of double-digit moves in major pairs which was considered highly unlikely until it happened.
Donovan comments on these developments: “Risk models that had been relied on for years can fail in this environment, so from the StoneX perspective we have to continuously prove that our assumptions are still accurate regarding counterparty credit or the potential for intraday and overnight market moves.
“We’ve also been very proactive in managing our systems to insure we have excess capacity and can handle the increased traffic. This is another key area that firms often overlook when focusing strictly on market and credit risk.”
Looking ahead, Donovan witnessed a very large uptick in fund activity this year and expects that trend to continue. This seems to be driven mostly by indirect FX activity in muti-asset funds, rather than direct position taking in FX markets – although that is happening as well.
“Increased trading activity in global equities and fixed income has been resulting in FX trading volumes as funds seek to reduce back to their base currency for most strategies,” notes Donovan, “The potential P&L risks associated with holding foreign currency exposures resulting from investments in other asset classes has risen, so traders are much more likely to lay off those amounts in the FX markets in the current environment.”
From a firm perspective, StoneX aims to drive growth in Asia and LatAm, building on its strong emerging market business. The firm is also now putting a lot of resources into Europe as well and have established our team in Frankfurt.
