FX Volatility Here to Stay
Volatility in the foreign exchange spot market will persist into next year and beyond, according to industry professionals who spoke at Tuesday’s FX Trading Network, co-hosted by Markets Media and Aite Group.
“Based upon what we’re seeing, we have wound the spring enough,” said Harpal Sandhu, CEO of Integral Development, which operates an FX trading platform. “Volatility is out of the cage, and it’s going to continue to grow.”
Liquidity is another major consideration for FX market participants.
“Liquidity will be just fine for any institution that believes it can be a market maker by holding on to risk,” said James McGeehan, co-founder and CEO of FX Transparency. “This will also happen in non-banks with balance sheets that are willing to put up capital.”
The challenge lies in sourcing liquidity. Although banks will continue to make markets for their clients and FX ECN participants, they will bifurcate the market by increasing their activity in the most liquid currency pairs while widening their spreads for everything else, according to Soren Haagensen, managing director and head of e-commerce Americas, Société Générale. “If I cannot run derivative risk, I likely won’t participate as much in the spot market.”
But McGeehan does not see market volatility being a major issue for banks that have enough a natural flow coming in. “They sort of have their holdings subsidized by their customer,” he added. “I think that they will be totally okay.”
Meanwhile, new non-bank market-makers will likely take up the slack in providing liquidity, added Fulinda Malone-Rouse, regional head of liquidity management, EBS BrokerTec. “We continue to see a rise in non-bank participants and market makers, but the bank relationship model is still important and that is not going to change.”
Yet Integral’s Sandhu questioned the conventional wisdom that banks provide their tightest spreads for their best clients and noted that buy-side firms could not be the best client in all of their banking relationships.
“Significant clients might have a very good top of book, but once you get past that layer, then liquidity provisioning will become more expensive to trade,” he said. “I expect that my TCA data that half of the bid-ask spread plus any markup that a bank attaches will be more expensive in 24 months.”
Featured image by James Thew/Dollar Photo Club
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