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Market Evolution: Predictions for the Future

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Presentation on theme: "Market Evolution: Predictions for the Future"— Presentation transcript:

1 Market Evolution: Predictions for the Future
James Sinclair CEO, MarketFactory Market Evolution: Predictions for the Future ACI Denmark September 20, 2012

2 Tonight Why is FX different? Where are we now? Where are we going?

3 Why is FX Different?

4 Global, Dispersed, Fungible
Asia $375bn per day Chicago $100bn per day Americas * $400bn per day Europe $725bn per day * Excludes Chicago

5 Also…. Natural interest: real needs
Cross-border capital markets, FDI, trade Lightly regulated: can differentiate Strong credit model (CLS, Prime Broker) Well established (Biblical references)

6 Resilient 1,039 Banks; 580 Buy-side Banks; 300 Prop Funds;
euro, mergers consolidation euro, mergers, consolidation 1,039 Banks; 580 Buy-side Banks; 300 Prop Funds; Real Money; Hedge Funds; Corporates 6

7 Retail Aite Group

8 Equities and FX Market Structures are Inverted
Millions msgs per second Thousands Real-time broadcast Tick by tick – every tick! Thousands / second Centralized markets Heavy – e.g. Reg NMS Standardized NBBO Established; low difficulty Full depth of book None b/c of CCP Order routing from point of order submission Attribute Throughput Symbols MD Frequency Order Submission Fragmentation Regulation Market Structure Price Discovery TCA Transparency Price Filtering Order Routing OTC FX Millions msgs per day 20 pairs; 66% of FX in 6 pairs Real-time custom snapshots Max 100 orders per second Globally fragmented venues Light – isolated venues All non-standard; all bespoke Venue specific Difficult – lack volume info 1-3 levels of depth common Heavy b/c of bilateral credit Complex decision process Complex Easier Easier Complex

9 Where are we now?

10 CLS FX Spot Volume Flat recently
CLS data indexed to July 2010

11 CLS FX Spot vs. US Equities But better than other markets
CLS, US Consolidated A, B, C tape

12 CLS FX Spot vs. Europe Equity Similar in Europe
CLS, Thomson Reuters Monthly Market Share – all lit, hidden, auction, dark, off order books

13 FX, US Bonds, US Equities Clearly correlated
CLS, US Consolidated A, B, C tape, SIFMA primary dealer treasury, corporate>1 yr, agencies

14 Playing the Scale Game But is it the only game to play?
Greenwich Associates

15 Customer FX Growth

16 Interdealer FX Market in 2003
CME EBS Reu Not shown: Futures brokers Retail DB Citi Prop Shop Prop Shop Prop Shop Prop Shop Barx Prop Shop HS BoA JPM UBS Dres-dner Integral FXall CX Com-merz FXall CX Execution through ECNs, banks and some funds Real Money, Corporates Structure akin to US treasuries: Interdealer: Brokertec, eSpeed; Customer: Bloomberg, Tradeweb Still similar + GovEX.

17 The HFT Riddle Their liquidity “lowers costs for users”
They make millions of dollars How do they do both at once? Some hold for μsecs; have no customers

18 Pragma: They may raise costs
The highest volume US stocks are the most expensive to trade! June 29, 2012 market. Red dot indicates 10% with longest queue length. HFT and the Hidden Cost of Liquidity, Pragma Securities, July

19 Pipping: Repeat of Sub-Pennies in Equities
Source: Tick Size Regulation, Intermarket Competition and Sub-Penny Trading Fig 1. Sabrina Buti, University of Toronto, et. al. June 1, 2011

20 An Opinion HFT additive if: Always there in many pairs;
Use info from other asset classes; or Hold positions for material time But can we choose? A slippery slope

21 Major ECNs and CME Trends are converging

22 CLS vs. Established ECNs Established ECNs are losing share

23 Low Volatility, Low Volumes

24 FX Options BIS Survey; Aite Group

25 FX Options BIS Survey; Aite Group

26 So, where are we going?

27 Predictions The Easy Ones
Emerging markets (RUB, CNY) New platforms, new exchanges (e.g. CME Europe) Asset managers seek better FX access TCA

28 Predictions The Harder Ones
Volume Fragmentation / Consolidation Which products? How traded? Retail US elections; fiscal cliff; eurozone economy Basle III, MIFID II, Dodd-Frank, EMIR

29 Tighter Spreads Equities Market Turned Agency
Aite Group

30 Modest Net Consolidation
FINRA Customers value relationships

31 Fragmentation US cash equities: 13 exchanges; 50 dark pools; plus broker-dealers European equities: 28 lit books; 2 hidden; 20 auction markets; 13 dark books.

32 Many Platforms will Succeed
Bring New Segments Enable hedges not economic before Grow market

33 Democratization of Options
BIS Survey; Aite Group

34 Electronic FX Options Hybrid Broker-backed RFQ Order books
Major single bank platforms: UBS, Deutsche Autobahn and BARX 34

35 CME FX Options A model for options?

36 How Will Traders Execute?
Revival of direct market? Fragmented platform market Block trading – four ways to trade: Transfer risk to a Bank Algorithmic Trading (chop it up) Dark Pools/Order Types (akin ITG Posit, Liquidnet) Shop through a Voice Broker

37 Trader gets an ‘assist’ from the computer.
Algorithmic Trading Trader gets an ‘assist’ from the computer. Can give it to customer

38 DMA The Agency Model New Participants, More Participants Next Phase of Market Growth

39 In Summary FX is special: real need; global; dispersed
Increasing fragmentation. Modest net consolidation Emerging markets, options. Regulation helps Banks have customer relationships. Scale is a strategy, but not the only one Banks increasingly empower their customers: algorithmic trading, DMA

40 Greenwich Forecast Our best days are ahead

41 Appendix In case of questions on these topics

42 High-Frequency Trading
Choose your definition: Systematic; Quant; <1 day holding High volume; Low inventory CFTC (US govt) defn. 25% of volume, but highly visible Irene Aldridge – Estimating Proportion of High Frequency Traders, July 10, 2012

43 Growth by Geography

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