This year's third annual StreamBase survey on technology trends in the FX trading market had some interesting findings. The survey was conducted from March to May 2011, drawing 135 FX industry respondents, 55% sell-side and 36% buy side. 43% of the respondents use algorithms for trading, and of those 64% actually use their own in-house developed algorithms (that is, they don't use algorithms supplied by a vendor or bank). The survey was designed with input from the TABB Group and AITE Group. Here are the three main areas that leapt out to me as the CEO of StreamBase - many of our customers using CEP as part of their FX technology platform.
1) Increased Regulation is the Leading Fear, and Real-Time Risk Management for FX Will Soon Emerge
52% of the respondents said they believe regulation will have the biggest impact on their business, and 37% of buy-side firms expect to see an increased call for market transparency as a result of recent lawsuits regarding FX transaction costs. But what are the implications of this expectation of increasing regulation?
In the past 10 years, the FX markets have lagged the equities market in terms of technology adoption. In many cases, innovation spreads from equities groups to other asset class such as FX - In the past 18 months, pre-trade risk management has become a leading initiative for equities trading groups – but will it soon become common for FX trading? Sang Lee, cofounder and managing partner of Aite Group, thinks so: "it's critical that firms manage their risk in real-time," said Sang, in reaction to our survey results.
2) FX Liquidity Aggregation is Becoming Increasingly Complicated
94% of the survey respondents said they are doing some form of FX liquidity aggregation, up from 65% last year. This finding was initially surprising to me; but we see a lot of innovation in FX with CEP, and plenty of firms are adding new aggregation functionality with more connectivity to banks as well as the ECNs. This is undoubtedly leading to more sophisticated real-time aggregation of FX liquidity sources. A skeptic might say, “that sort of result is to be expected from a CEP vendor”, yet less than 10% of the survey respondents were actually StreamBase users, so we believe that this is reflective of an industry trend, not our sample.
What’s more is that 34% of firms are planning to improve or add aggregation functionality - this suggests continued innovation in aggregation applications and platforms – such as demands for new FX sources, direct bank connectivity, and new features to be coming from FX venues. So, keep watching the FX space for more sophisticated aggregation technology and techniques.
3) It's Better to be (a Little) Slower and Right than Fast and Wrong
The need for speed is always paramount in trading, but this year the survey revealed that speed is no longer job #1 in FX trading. #1 in FX, is the ongoing struggle with the complexity of integrating and normalizing FX data formats, and #2 is accessing low-latency sources. The votes for #1 and #2 were totaled over half of all respondents.
This finding is consistent with what a head of FX trading recently told me, that "it's better to be a little slower and right than fast and wrong." The point he was making wasn't that it's OK to be slow, only that getting smarter algorithms deployed given the complexity of pricing and trading FX is just as important, if not more important, than being the fastest.