Foreign Exchange: What a Difference a Year Makes

Volatility in the foreign exchange market is being driven by a number of factors, but post-trade data issues are still lingering.

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John considers how the foreign exchange market is still suffering from a lack of post-trade data in more volatile conditions.

This time last year I was putting together my monthly feature for Waters on developments in the foreign exchange (FX) market, where electronification was driving daily trading volumes of $5 trillion across the world and venues were taking full advantage of the situation.

There were still issues to be resolved however, such as a lack of post-trade data that hampered analysis efforts, while the consolidation of venues that many believed would occur is still most likely to happen. But from a wider perspective, the state of play has definitely changed since 2015.

This year is one that will come to define much in terms of Western politics and economic markets, and foreign exchange players are experiencing levels of volatility few would have predicted just 12 months ago.

As the news of last week's pound crash unspooled, my US colleague Dan DeFrancesco has written that patience is required in dealing with the fallout and investigation into the likely cause(s).

Electronification has clearly been one of the primary driving forces behind the FX market into the position it currently resides, but that issue of post-trade data is still there, according to the source quoted:

"It's definitely a frustrating element of FX as an asset class. With something like US equities, you've got a consolidated tape you can go look at afterwards and see what happened (such as the KCG blowup)," the source says.

The "KGC blowup" is, perhaps a little unjustly, my favorite of the "go-to" bad scenarios often used as examples when I speak to people across this industry, but it's one that has been put down to technology faults. "Fat finger" and algorithms have been mentioned as possible causes for last week's pound crash, but the difference now is also stormier conditions in European politics to contend with as well.

A call for greater investment in post-trade data capabilities would be welcome news for broker ICAP at least, having acquired London-based regulatory reporting specialist Abide Financial earlier this week, to add to its portfolio of investments, which also includes OpenGamma and Cloud9 Technologies, both of which have just received substantial funding.

Dan's call for patience is absolutely right and hysteria serves no good purpose; but there will be firms out there hedging strategies on the back of uncertainty. Greater transparency usually begins with better data.

Data issues were also a topic of discussion at this year's North American Buy-Side Technology Summit, held yesterday in New York, alongside a C-level talk on the future of the buy-side back office (spoiler alert: it's still automation).

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