CHICAGO 2018
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The P&L Armchair Debate: "Is Pre-Hedging Front-Running?”
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L-R: Colin Lambert, Managing Editor, Profit & Loss • Bob Savage, CEO, CCTrack
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Panel 1: Is the Global Code of Conduct Working?
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L-R: Moderator: Lisa Shemie, Chair, Policy Committee, FXPA; Chief Legal Officer, Cboe FX and Cboe SEF, Cboe • Chip Lowry, Senior Managing Director, State Street Global Markets; Chair, FXPA • Michael DuCharme, Director, Currency Solutions, Mesirow Financial • Vikas Srivastava, Chief Revenue Officer, Integral Development Corp • Adrian Boehler, Co-Vice Chair of the GFXC; Global Co-Head of FXLM Commodity Derivatives, Global Markets, BNP Paribas
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Panel 2: The Future of Liquidity Provision – Part 1
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L-R: Eddie Wen, Managing Director, J.P. Morgan • Mike O'Brien, Global Head of Trading, Eaton Vance • Alan Schwarz, CEO, FXSpotStream • Tim Cartledge, Global Head of FX and Head of Product NEX Markets • Fred Allatt, Director, FX Sales, INTL FCStone
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Knowledge is Power FX liquidity providers that use technology and data analytical tools are becoming more powerful in FX markets, but liquidity consumers are becoming better informed.
The role of data and the empowerment it brings FX market participants was a key theme of the first panel looking at liquidity at Profit & Loss Forex Network Chicago. Panellists agreed that generally speaking, liquidity in FX markets is fine, there is always a price; however, the question liquidity consumers need to ask is: “How high is that price?” “The biggest change in the nature of liquidity has been how LPs are much more clever about how they manage liquidity by using analytics,” observed Eddie Wen, managing direct, macro markets, JP Morgan. “Firms that have invested in the tools and technology to better understand their business have gained market share and this in turn has given them more data and allowed them to become even better at what they do. “There has been more consolidation of LPs as one group has got better at this and the nature of liquidity has changed as a result,” he added. The use of data to better understand business is a two-way street, however, for it also allows the buy side to better understand how their LPs are handling their flow. Michael O’Brien, global head of trading at Eaton Vance, explained how the buy side having better access to tools and analytics that were once the preserve of the sell side is at the same time, an opportunity and a challenge. “Figuring out what to do with the data is the biggest challenge for the buy side right now, because it informs how they approach the market,” he observed. “There is a wider range of tools available and lots of data, but it is not always appropriate to every situation, which means there can be an overload of data. How we execute is not a black and white issue – it is not just about using an anonymous or disclosed channel, whether the market is liquid or not, the reality, as the buy side has discovered, is that it is rarely that straightforward. “The role of the buy side trader is changing and much of the value they bring is in the pre-trade where they use these tools and technologies,” O’Brien says. “The decision making over what channel to use is significantly different to what it was 10 years ago and the data and analytics can help that process.” Data has also meant much more open discussions, which has in turn raised
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transparency levels. “We see so many more conversations taking place thanks to the data,“ said Fred Allatt, managing director for INTL FCStone in the Americas. “The technology is enabling these discussions, but importantly there is still the human interaction piece, which means our team can help the clients understand what the data is telling them.” Market participant behaviour was at the forefront for Tim Cartledge, global head of FX at NEX Markets. He argued that how data was being applied was changing traders’ approaches to the market. “The data is shining a light on the behaviour of both LPs and LCs and leading to improved behaviour on both sides,” he said. “We publish everything we can that the data shows us around behaviours and it has led to a discernible improvement in both last look times, which have gone down from around 90 milliseconds on our disclosed channels to around 30ms, and reject rates which are down from around 5% to around 3%. “The data is having an impact for two main reasons; firstly, it establishes a benchmark for LP behaviour and secondly, if an LC’s execution style is having market impact, it will show up,” he added. “There is no doubt that the level of the sophistication in the dialogue between us and our customers has improved,” agreed Wen. “This is good for the community overall because it helps build more sustainable relationships.” Alan Schwarz, CEO of FXSpotStream, agreed about the power of data in improving relationships in the market, but also noted that sometimes the behaviour being highlighted by the data is unintentional. “We have clients who may be having market impact but they don't even realise it,” he said. “The data allows them to have conversations with their LPs and, if they wish, and change how they execute. These types of conversations just didn't happen before because people did not have the facts. “There has been a shift from anonymous to disclosed channels in the FX market and this has also helped drive a healthier and more open dialogue. We started seeing this shift post-SNB and the availability of better data and analytical tools is accelerating the change,” he added.
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Panel 3: The Future of Liquidity Provision – Part 2
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L-R: Laine Litman, Global Markets Group, Virtu Financial • Mark Bruce, Head of FICC Business Development, Jump • Jeremy Smart, Head of Sales, XTX Markets • Giovanni Pillitteri, Portfolio Manager, HC Technology • Moderator: Colin Lambert, Managing Editor, Profit & Loss
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Non-Bank Firms Continue to Go Mainstream
FX market structure changes are behind a change in approach on the part of several non-bank market makers, and the direction of travel is very much the mainstream.
“The market structure has changed and our model has definitely changed with it,” said Laine Litman, head of Virtu Financial’s customised and disclosed liquidity offerings in FX and fixed income, in kicking off the second panel on liquidity provision at Profit & Loss Forex Network Chicago. “What liquidity consumers needed two or three years ago has changed and with that, we have had to look at our models as well as at how we interact with markets. And it doesn’t stop, it is a continuously changing dialogue – for example, two years ago people were simply not talking about full amount trading, but now it seems to be what all the venues are talking about, so as LPs we have to evolve and learn how to make markets in these larger amounts, and learn how we warehouse that risk and hedge without causing market impact.” If there was one overriding theme from the panel, which featured non-bank firms only, it was how these firms had evolved their business, indeed as Giovanni Pillitteri, portfolio manager at HC Technology observed, “Had we had this panel three years ago, talking about risk warehousing and larger tickets, then there would have been a bunch of banks up here rather than four non-bank firms.” Pillitteri agreed that the market has changed “dramatically”, adding that the Swiss National Bank event was probably the main catalyst. ”We have a more open market now and this means that firms like ours can leverage their technology and smart order routing expertise to try to solve problems for liquidity consumers. “Technology is why we have the opportunity to grow,” he added. “On the bank side, technology still tends to be siloed, but on firms like ours we are able to move more nimbly and bring innovation to the table.” Jeremy Smart, head of distribution at XTX Markets, observed that while the core model of the non-bank firms had not changed, at places like XTX it is the core distribution model that has. “If you go back a few years, our model, under the GSA guise, was to distribute liquidity on public venues to banks and then have them filter it down,” he explained. “Now we are making a much bigger effort to get closer to the end clients directly. “This comes with challenges and opportunities,” he continued. “The opportunity is to create a great dialogue with our customers – which we generally have now – about how they execute, what value we can add, and how their business is being absorbed into the market. “The challenge is that every client has a different set up in terms of their liq-
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uidity pools and how they manage their technology,” he added. “This means we end up in a more bespoke relationship – which is probably the biggest change I have seen – that is more open and transparent, but also involves the development of a much broader range of approaches.” The broader change in the market structure has also represented a challenge to the non-bank firms. Mark Bruce, business development, head of FICC at Jump Liquidity, observed that the firms on the panel all grew up in a non-disclosed environment. “Jump’s genesis, philosophy and focus for many years was the open, transparent central limit order book environment,” he said. “It remains our fundamental bread and butter, but we have also made the shift towards the disclosed channels because the reality of the market is that’s where it’s heading. “So we have had to scale our distribution in a different way, but that also provides opportunities to play a bigger role as an LP,” he continued. “We are all principal trading firms on this panel who have to go after opportunities and that opportunity is currently in providing disclosed liquidity.” Bruce also pointed out that the opportunities in the CLOB environment are “diminishing right now, and I do not think that is healthy for the market overall”, however he reiterated the importance of a firm being able to interact with customers via multiple channels. The biggest remaining challenge for the non-bank sector was seen as gaining meaningful and direct access to the true end consumers of liquidity in the real economy. Although Smart did reveal that XTX is providing liquidity to asset managers and hedge funds as well as regional banks and retail brokers, the general consensus was that credit remained a significant obstacle to overcome in engaging with asset managers and, ultimately, corporates. “A lot of end users are hard to get to because of the credit issue,” acknowledged Litman. ”Until there is more evolution in that space and we break down the credit barriers, it will remain that way.” Significantly, the panel did not think governance would ever be an obstacle, Bruce noting, “Our compliance framework has grown significantly in recent years, both regulatory and discretionary such as the FX Global Code. We know the importance of going through our procedures and processes and making sure we do things right. There is an assumption in some quarters that the non-bank community has a light compliance regime, but that’s wrong – it’s a huge part of our business.”
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The Armchair Debate: Should I Stay or Should I Go?
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L-R: Simon Wilson Taylor, Head of EBS Institutional, NEX Group • Mike Harris, President, Campbell & Company • Galen Stops, Editor, Profit & Loss
Fireside Chat
L-R: Justin Slaughter, Managing Partner, Mercury Strategies • Maggie Sklar, Senior Counsel to Chairman J. Christopher Giancarlo, CFTC
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Panel 4: FX Supermarkets
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L-R: Moderator: Ken Monahan, Greenwich Associates • Matt O'Hara, CEO Americas, 360 Trading Networks • Bryan Harkins, Executive Vice President, Co-Head Markets Division, Cboe FX • Kevin Wolf, CEO, FastMatch • Andrew Ralich, CEO, OneZero
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Panel 5: Two Worlds Collide
L-R: Gil Mandelzis, CEO and Founder, Capitolis • Dave Reid, Global Head of FX Prime Broking, Deutsche Bank • Paddy Boyle, Global Head of ForexClear, LCH • Paul Houston, Global Head FX Products, CME • Moderator: John Shay, President, FXPA
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The P&L Armchair Debate: “Does Crypto Need a Global Code?”
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L-R: Rumi Morales, Partner, Outlier Ventures • Justin Slaughter, Partner, Mercury Strategies • Moderator: Galen Stops, Editor, Profit & Loss
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Panel 6: Fiat Meets Crypto
L-R: ?? • ?? • David Mercer, CEO, LMAX Exchange • James Radecki, Global Head of Business Development, Cumberland • Moderator: Galen Stops, Editor, Profit & Loss
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P&L Peer2 Peer: “Blockchain: Can we close the innovation labs now?”
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L-R: Cristina Dolan, Co-Founder and COO, InsureX; Founder, Inside Chains • Adrian Patten, Co-Founder and Chairman, Cobalt • Moderator: Galen Stops, Editor, Profit & Loss
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Panel 7: Data, Data, DataÂ
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L-R: Roel Oomen, Global Co-Head of Electronic FX Spot Trading, Deutsche Bank • Stuart Farr, President, Deltix • Ron Klipstein, Global Head of Foreign Exchange E-Commerce, Northern Trust • Mike Suppa- Director, Market Development • John Ashworth, CEO, Caplin Systems
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The New Learning Curve: Using the Data Data permeated several panel discussions at Forex Network Chicago, but in the dedicated session, it soon became clear that while data was important, how you use it is even more so. The paradox of data is, as observed by panellists at Profit & Loss Forex Network Chicago, while the data itself is becoming cheaper and more easily accessible than ever before, the resources that need to be allocated to analyse it are increasing, bringing with it increased costs. “The core fundamental cost of collecting data and storing and processing it is cheaper than ever,” observed John Ashworth, CEO of Caplin Systems. “The premium is going to be on the labour force that will be doing the work on the data.” Stuart Farr, president of Deltix, agreed: “The idea that accessing data is cost prohibitive for some firms is very wrong – it is very affordable and the technology to support these operations is also going down in price. The cost is the people cost – it is having access to people who understand the value of the data and can extract it. People with computer and data science smarts that are able to do this work is where the cost is going up.” Mike Suppa, director, market development, North America, at Thomson Reuters, acknowledged that the cost of data is “not going up”, however he also observed, “There are just a lot more sources, so the people that want to play in this space have an overall larger data spend in order to compete. They need to take in more data today than they ever did. “Not everyone will have the pockets to compete in this environment,” Suppa added. “But those that do have the budget will thrive.” Roel Oomen, managing director, e-FX spot trading at Deutsche Bank, argued that ultimately, taking data from multiple sources comes down to a commercial decision. “It is evident that electronic liquidity provision has come to rely on a growing set of data sources, and you’d therefore expect investment in this area to increase, but it doesn't necessarily mean individual data sources are becoming more expensive or inaccessible to certain participants,” he said. “The increased spend across the data infrastructure now accounts for a substantial part of overall costs, and it focusses the business decisions to selectively invest in data sources that are adding value to the offering,” he added. “We’ll regularly pass on new data offerings, but equally, if we believe
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they offer substantial incremental value, we’ll invest – this is no different to any other products, it is a commercial decision.” From his perspective Ron Klipstein, global head of FX e-commerce at Northern Trust, argued that different data needs dictate each firm’s spend. “It depends upon what you are looking at,” he explained. “If you are looking at a consolidated data feed, sure it’s cheaper. If you’re looking at publicly available sources, they have also become cheaper. We are cross-connected in data centres around the world and have over 50 different end points – this connection has definitely not gotten cheaper, it’s more expensive. “We use the cloud a little, but mostly we use our own servers and maintaining them is also expensive, as is maintaining all the cross-connects we use for trading – that has gotten exponentially more expensive,” he added. The good news for those seeking to enhance their data handling capabilities is that technology continues to improve. “The technology is being generated and enhanced at a terrific rate,” said Ashworth. “The challenge is that it has out-stripped the ability of the universities to produce people with the skill sets to normalise, cleanse and analyse the data. At the moment there are not enough skilled graduates to fill the gaps in the industry, however that will change in the coming years particularly given the rate of graduation from tertiary education in China and elsewhere in the Far East.” The idea of data being an area divided between the “haves” and “have nots” generated no little debate on the stage, for while it was accepted that larger players with deeper pockets would inevitably have a resource advantage, smaller players could compete because of the valuable data within their own institutions. “There is a huge amount of valuable, static data, in lower tier banks,” observed Ashworth. “So while they are customers of the top tier firms, they remain in an incredibly powerful position thanks to the data they have on their customers – and not just in FX. The big players will inevitably thrive in a data-driven environment, however for the smaller firms, if they can tie up the various databases across the asset classes, they can undoubtedly compete.”
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Afternoon Keynote
Andy Busch, Chief Market Intelligence Officer, CFTC
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Panel 8: Geopolitics and the Investor’s Dilemma
L-R: Peter Azzinaro, MD, Global Macro Strategist, Portfolio Management, Manulife • James Mackenzie-Smith, director, Record Currency Management • Mo Grimeh, CIO, Mogador Capital Management • Moderator: Bob Savage, CEO, CCTrack
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The Champagne Roundtable: The Twists and Turns of FXPB
L-R: Noel Singh, Head of eFX Business Development, Sucden Financial Limited • Sanjay Madgavkar, Managing Director, Global Head of FXPB, Citi • Matt Fetta, Director of Trading Operations, Global Fixed Income and Macro Strategies, Citadel • Pierre-Emmanuel Pomès, Service Head for Risk & Documentation, NEX Optimisation • Peter Plester, Head of Prime Brokerage, Saxo Bank A/S
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Re-Imagining the Prime Services Ecosystem On a panel discussion entitled “The Twists and Turns of FXPB”, speakers at Profit & Loss Forex Network Chicago discussed the possibility for technology to radically re-shape the prime services ecosystem.
Technology’s impact on prime services was the jumping off point for the last panel at Profit & Loss Forex Network Chicago. Peter Plester, head of prime brokerage at Saxo Bank A/S highlighted the impact that technology had already in terms of risk management in this segment, pointing out that the traditional plumbing for starting up a prime broker was to connect to NEX Traiana and the various ECNs and have STP for tickets, but that the central risk system internal to the PB was fairly manual. “You would type out a designation notice and send it to the liquidity providers for that client, but if you had to stop that client from trading with a particular liquidity provider, you would have to literally phone up that LP and ask them to stop quoting that client and tell them that you’ll send a cancellation for the designation notice. That was the traditional plumbing and model,” he said. By contrast, Plester said that by the time Saxo set up its prime services business five years ago, the risk management could all be automated, the margin engine could be plugged into vendors with risk management tools and there were kill switches that could be implemented. As a consequence, he said, the firm was able to support clients that traditional FXPBs perhaps couldn’t support due the client’s lack of balance sheet. However, some of these risks tools are not without their drawbacks, as Pierre-Emmanuel Pomès, service head for risk and documentation at NEX Traiana, pointed out. “So let’s just state the problem clearly here first. A prime broker has to manage both a client’s overall limit but also a flurry of liquidity limits, both on the liquidity provider and the ECN side, which means that for a given client, a PB may have to manage 50+ limits. So where technology can help is by providing a link between the overall client’s limit, which is what the PB cares about, and those liquidity limits, which is the only thing that can stop the client from trading,” he explained. Kill switches are one way of doing this, and have been around for some time. These kill switches are effectively on/off buttons for trading that can either be placed in the client’s technology stack, to create a pre-trade limits systems, or in the post-trade technology stack at the PB, so that once a client has exe-
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cuted and reached their limits, the PB can stop them from executing further. “Both have value,” said Pomès. “The pre-trade kill switch might seem to be the right approach to credit checking, but it adds latency and, because it lives in the client stack, it may pose some problems for prime brokers. However, the kill switch in general is actually a very blunt instrument and usually stops clients trading at the worst time, and even as prime brokers, you want your client to actually reduce their exposure when they hit their limits rather than just stop trading.” One solution for this that exists today, according to Pomès, is to have a dynamic credit distribution solution that functions as a “dimmer” rather than as an on/off switch. “So once a client gets closer to their utilisation, you basically take credit out of their lines rather than turning them off and turning them on,” he said. Pomès then added: “Ideally, instead of offering some automatisation of the complexity, we'd like to actually just wipe this out and have some form of distributed network where the same limit is applied to all of the nodes of the network. But I think we're still quite a few years away from such a solution at the moment.” Noel Singh, head of e-FX business development at Sucden Financial, agreed that the current binary nature of most kill switches, where clients can either trade or not, needs to be refined going forward. “I think that if we start to understand the makeup of a client’s NOP better then we can produce better solutions. It could be that a client has hit their NOP limit when in fact selling EUR/USD would have no impact on their NOP, so instead of having a binary solution let’s look at what currencies and in what direction clients should still be allowed to trade and make the process a little more dynamic,” he said. Providing a client perspective on this issue, Matt Fetta, director of trading operations, global fixed income and macros strategies, at Citadel, said that kill switches can be a helpful mechanism in the marketplace, especially in times of distress. But he then added: “There needs to be a mechanism that alerts market participants as they approach a credit limit, so that they can divert the next trade away from that counterparty. Being in a position where an externally operated kill switch prevents you from putting through your next trade and affects your ability to deploy capital or manage risk is problematic. It is important that kill switches are implemented in areas that make them effective and not disruptive.” Sanjay Madgavkar, managing director and global head of FXPB at Citi, agreed that kill switches are useful in certain use cases, with systematic traders being a clear example of where they can be important, but stated that the risk profile for macro hedge funds that are well capitalised is different than the smaller, more thinly capitalised entities where kill switches
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need to be prioritised. “I think that a good way to think about this is to imagine if you had to create a prime brokerage ecosystem from scratch,” said Madgavkar. “You’d create different utilities: you'd create a risk utility which has designation notices and all the credit allocations that are currently done through emails and bilateral communications, you'd have a utility that would follow kill switch rules which the entire industry has agreed to, and you’d have more protocols and a central utility for novations and other post-trade activity, which has become very important given the current environment.” He continued: “So I think what we're doing at the moment is strapping on these tools to a market that already operates in a different legacy manner. But if you had to start from scratch, I think it would look quIte different.” Building on this idea of designing a whole new prime services ecosystem, Singh highlighted the credit risk methodology on a lot of the different platforms as one particular friction point that he would like to see addressed in the future. “I know there’s technology out there that normalises a lot of this risk, but fundamentally, that’s just a fudge. I think that we need to start looking at building a solution from scratch and I find it encouraging that there are initiatives out there that are using distributed ledger technology where there is a connection between a client’s available credit and their existing positions and the limit that’s provided to those execution venues. And so it’s the dynamic allocation of risk directly to the venue so that the limit check is done at the venue according to available credit, rather than being done with a pre-trade risk limit on a third party venue. That’s where I really want to see this going,” he said. Fetta, meanwhile, said that the first thing he would like to see made available in the prime services space is a robust process for checking available credit across every executing counterparty that hedge funds trade with through their prime brokers. “The prime brokers that we work with are constantly on top of monitoring limits, but having a real time mechanism and a pre-trade process that allows us to see exactly how much NOP we have available with a given counterparty and updated to include the last transaction that we've done would be extremely helpful,” he explained. Fetta added: “Looking further down the transaction lifecycle, I think what's really important now is how market structure is evolving to support posttrade market events in the FX space. Historically, because the FX market has been short dated, there hasn’t been demand for post-trade processes that support active management of portfolio size. However, given the increase in capital charges and balance sheet costs, the ability to manage the gross notional of the portfolio has become more important. These post-trade processes and supporting technology don't really exist yet.”
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