FX Liquidity Transformation Post SNB – Q&A with Sucden Financial

LeapRate is pleased to present the following Q&A session with Wayne Roworth, co-head of e-FX at Sucden Financial in London.

I believe that FX liquidity has changed fundamentally post SNB. It may not be obvious to the casual observer but there’s been a considerable reduction in liquidity supply combined with higher volatility.

What are the main causes for this shift?

There are two principal reasons; since the events of January both bank and non-bank liquidity providers have been actively evaluating the effectiveness of their pricing algorithms during volatile market conditions.

sucden_logoA new framework for liquidity distribution during illiquid markets and high volatility events has been established. In practical terms sell-side providers have revised the speed and sensitivity of pricing streams to reflect this new regime.

Another cause is risk appetite reduction, with many market-making banks being castrated by changes in regulation. Although this pre-dates January’s event it’s been a further catalyst for risk seeking firms to revisit their strategy. The consequence of risk aversion is less internalisation and subsequently higher trading costs.

A more conservative view on warehousing risk means there is greater demand for liquidity but due to higher volatility, trading costs have increased. This leads to a cycle whereby market-makers in the primary markets are forced to reduce the amount/size of liquidity they are streaming to their buy-side takers.

We’re left in a state of instability, where demand for liquidity is ceaseless and accessibility easy but dependability is diminishing. The distribution of available liquidity around the price has lessened and buy-side clients are moving towards OTC derivative products to express their market views.

What is the future for FX liquidity?

Although the Swiss event was a game changer for the FX market and the current regime will likely remain in force for at least the medium term, there is some positive change happening. Exchanges have a renewed interest in FX as an asset class and although I don’t believe FX will move entirely to exchange trading, I do see their participation and market share continuing to grow. Sucden Financial is well placed to take advantage of this development; as a member of many of the world’s major exchanges the firm manages a large futures business. When client demand shifts towards exchange-traded FX and clearing we will be ready.

With the exception of a handful of tier one banks I see a trend towards a more specialist offering from market-makers. Resources are limited and a focus on franchise currency pairs is a subject that’s coming up more frequently. Typically banks have a specialist region and therefore a competitive advantage in a specific sector rather than trying to be everything to everyone.

What approach does Sucden Financial take?

Sucden Financial has been unaffected by the liquidity changes, in fact we’ve seen an overall reduction in our spreads this year. I put this down to several factors; firstly, we have a great relationship with all of our liquidity providers (LPs), we operate in a clean and transparent fashion, we provide regular data to LPs and work hard to ensure we maintain an optimal number of LPs.

We have a great selection of tier one bank providers, augmented with specialist non-bank hedge funds. The goal is to remain meaningful to our bank and non-bank LPs and to provide a comprehensive service to our clients. Sucden Financial provides extremely competitive pricing, high fill ratios (98.9% in September) and a wide range of products.

Consistency and sustainability are the two factors our clients are most interested in. We are not in the game of offering short-term deals to attract new clients and then not being able to deliver on those promises. We see our clients as long-term partners and work closely with them to continually improve the quality of their pricing. These principles form part of Sucden Financial’s DNA and are one of the key reasons for our growth and success during the past 42 years.

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