Outlook 2017: Ruben Costa-Santos, ITG

This entry is part 11 in the series Outlook 2017


Ruben Costa-Santos, head of foreign exchange at ITG.

What will 2017 be remembered for in the long run?

Regulation and its impact on market structure are the central themes for the new year. Buy-side and sell-side firms are continuing preparations for MiFID II, with extensive infrastructure and governance requirements, while the market is looking for indications of how the US regulatory environment will evolve under the new administration. The new regulatory requirements, coupled with competitive pressure on returns, will increase the demand to realize efficiencies across trade execution, workflows, and organizational structures.

The interplay of regulatory requirements and the search for efficiencies will have a lasting impact in market structure, and 2017 is a testing ground for these changes.

What changes do you expect to see in FX institutional trading in 2017?

The buy side is very focused on improving its governance model around trade execution across all asset classes. This provides an opportunity for firms to evolve their trading approaches and to optimize their workflow and infrastructure footprint.

Ruben Costa-Santos, ITG

Ruben Costa-Santos, ITG

On the sell side, the FX market has changed substantially. We have seen the rise of non-bank liquidity providers, increased fragmentation, and diversification of liquidity sources, while many banks reduced their use of balance sheet for both market making and credit extension. These structural changes, coupled with questions about market practices, provide a strong motivator for buy-side firms to re-evaluate their approach to FX execution.

We are seeing many of our buy-side clients evolving their FX execution model from risk transfer trading towards accessing liquidity in a number of ways, with relationship trading still playing an important role, but increasingly including also algo execution and trading on ECNs. This evolution has been faster with the largest firms who took some of their equities trading practices into FX but it’s a wider trend that will affect most of the buy-side.

How do you see financial analytics and TCA evolving in 2017?

The increased regulatory focus on execution costs and transparency means that transaction cost analysis, as well as trading analytics, are becoming a key component of both buy- and sell-side firms’ governance models.

Buy-side firms are using TCA to measure and manage their trade execution process. Most firms realized early on that simple off-the-shelf regulatory reporting solutions cannot replace an internal governance policy, supported by trade execution metrics, that is aimed at continuously improving trade execution and eliminating workflow inefficiencies. Sell-side firms are using TCA for their compliance controls and also to support new client reporting capabilities developed to address clients’ demands for transparency.

The use of TCA to fulfill regulatory requirements is accelerating a shift from in-house analytics to third-party analytics providers who are broker and platform independent. This makes it more likely that we’ll see further partnerships between analytics providers and platforms and brokers to streamline client access to third party analytics. We’ll also see increased demand for fixed income TCA as the buy side builds a consistent approach to execution policies across all asset classes.

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