Last week, I moderated a panel on Fixed Income, Currencies and Commodities (FICC), at the FIX Americas Trading Briefing in New York, which yielded some great insights into market trends. The event got underway with a keynote in which new Goldman Sachs CTO, Michael Blum, spoke about how emerging technologies were changing the financial industry.
In addition to the evolution and continued innovation of automated trading technologies, at Corvil, we have seen recent initiatives among the largest investment banks to consolidate trading infrastructure across asset classes. Many smaller, agile prop shops pursued this approach some time ago and Michael confirmed that his organization is pursuing the same. He set a tone that carried on throughout our panel discussion.
With experts from both FX and Fixed Income, it quickly turned into a lively debate about what sort of an edge technology can provide for both the buy side and the sell side. All agreed that we are going through an evolution in electronic FI as algorithms and AI become more prevalent in trade execution, order/quote management and data analysis.
Here are four key takeaways from the event:
The importance of having the ability to follow the lifecycle of each electronic transaction is obvious and the need to have a machine to do it is now unequivocal. In today’s FI world where algorithms trade on your behalf, where machines automatically hedge your risk and calculate pricing, the room for error grows exponentially as transaction speeds escalate. The human eye can no longer police such highly sophisticated electronic environments, mandating sophisticated monitoring and oversight.
Challenges around the big data we need for data analysis are not just about the collection process or running specific analytical scenarios. A bigger problem is organizing the data. So a more intelligent, high-level approach is needed to ensure data is properly normalized, stored and collated. It has to be easily accessible and available at your fingertips while offering scalable pivoting and drilldown.
Any sort of benchmarking in FI is practically non-existent due to market fragmentation. We all agreed that standards would help and that further collaboration among the dealers is necessary to provide better levels of service. The absence of standards around Transaction Cost Analysis (TCA), was another concern. Certain platforms try to be transparent and provide clients with as much insight as possible, but there are still grey areas in this newly trending asset class as firms rely more and more on technology to find the path that offers the lowest cost.
Market participants want access to all-to-all markets, a central limit order book, and streaming quotes. They know that they need a more proactive approach to TCA, less ‘rearview mirror’ that is inevitably reactive, and they know that technology is the key to becoming more efficient and that the days of the three-quote rule are numbered
Overall, the tone at the sessions was optimistic but with a real sense that change was needed. We have to take advantage of a new wave of high-speed trading technology and learn from both the progress and mistakes of more mature electronic asset classes (equities and FX). Recent events have reignited volatility in the market and FICC is riding its wave. Adapting to latest trends in technology may be essential if you want to be competitive or avoid a wipe out. [IC3]