How have the buy side reacted to FX workflow disruption and volatility caused by Covid-19?

In a nutshell – very well. Or so said the diverse group of North American and European buy side FX traders who have joined The Finance Hive for our digital boardroom series over the past few weeks.

Trading at home: the forced hand

With participants from asset owners, real money shops, hedge funds and private equity; the group represented a cross section of an industry that has far from embraced flexible working culture. Even amidst previous disasters that were referred to in the sessions such as 9/11 and Hurricane Sandy; execution desks moved to disaster recovery sites, but few, if any, worked from home. There were even stories shared of traders braving treacherous conditions to make it into their respective offices.

Without much experience of supporting their clients working from home and the incumbent EMS providers reputation among some of being quite slow to innovate, the idea of a mass migration to remote trading conditions alongside unprecedented levels of volatility might have sounded more than a few alarm bells in the FX ecosystems collective head.

Brendan McMurtray, eFX analyst at T. Rowe Price was impressed with FXConnect and FXAll’s response. “Both our EMS platforms have been very reliable during this time, and they were very quick to get in touch with us and explain their own business continuity plans which we found to be very helpful”.

“Making sure we were in constant communication with our clients was an incredibly important part of how we responded to this situation” said David Newns, Head of GlobalLink Execution Services which includes the FXConnect and Currenex platforms.

Besides a few hiccups here and there, the participants in the boardrooms have been impressed by and large with the robustness of the industry and none reported any significant workflow issues, as a result of the stellar work that their IT teams and technology provider partners were able to do.

Both our EMS platforms have been very reliable during this time, and they were very quick to get in touch with us and explain their own business continuity plans which we found to be very helpful”

eFX analyst at T. Rowe Price

On a scale of 1-5 with 1 being very easy and 5 being very hard, how difficult was the transition from the office to remote working for your firm?
1 – very easy33%
33%
228%
28%
323%
23%
410%
10%
5 – very hard5%
5%

(Data was collected from an anonymous survey posted to buy side members of The Finance Hive at our “US West Coast Virtual Members Meeting” which saw 50 head FX traders join a zoom call on April 23rd 2020)

The tech stands up

Jason Lenzo, Managing Director, Head of Trading at Russell Investments commented, “Our IT team had plans in place to be able to deal with a situation like this for over five years. We started off moving about half of the trading desk to home and had the other half in the office. Then we started rotating and there were very few issues at all.  During that time about 95% of the rest of the company pivoted seamlessly to working from home.”

For US based managers, relying on business continuity plans and the preparedness of their IT teams was essential, but some had the benefit of forewarning and experience from their Asian and European Offices. “We got a good start on being able to transition our trading desk to home from our London office” commented Joseph Rothwell, Senior FX Trader at Manulife Asset Management. “It was pretty smooth for us. We were able to get a lot of support from our IT team because they had helped moved the London trading desk and had that opportunity to trouble shoot. Other parts of our business had already started to work from home a fair amount over the past 12 months, so trading got a lot of attention.”

During that time about 95% of the rest of the company pivoted seamlessly to working from home

Head of Trading, Russell Investments

Replicating the trading room floor virtually

Rather than any IT or tech concerns, the main pain point the buy side identified was maintaining strong communication channels among the trading team itself and with the other functions of the business. The most effective cadence of team/inter-department meetings was hotly debated in the boardroom, but the participants found common ground on the importance of such catch-ups; both from a business perspective and a social perspective.

Ideas were pitched that included virtual happy-hours and yoga sessions to maintain morale and motivation among trading teams. “Volatility and working from home are just two of our worries. This crisis is unique in the sense that it touches every single aspect of our lives. People are scared and having to work like this while it has become harder to access to essential supplies, and we are worried for the health of our friends and families, it is a real perfect storm” says Ronan Cosgrave, Managing Director at PAAMCO PRISMA. The importance of putting an arm around colleagues and peers in the industry and uniting to get through this time on a personal level was unanimously agreed in the boardrooms. “I think you can see a change in how people are behaving, both in society as a whole and in the industry” continues Cosgrave. “There has been a lot of camaraderie which is great to see since this has probably been the most challenging trading month of a lot of people’s careers.”

Lenzo agrees, “There is a lot going on from a business perspective, an IT and Infrastructure perspective, a markets perspective and as a human perspective at the moment. We are very focused on not overlooking this side of the situation we find ourselves in. We are in constant communication with our teams and making sure everyone stays motivated and focused. We are very conscious of ensuring we support the team’s mental health, and I think all management at Russell Investments are focused on this, while continuing to deliver for our clients.”

Plugging the communication gaps

Despite video calls and regular catch-ups keeping traders in the loop with what their colleagues are working on, and helping to maintain positive mindset; there was a universal acknowledgement that they could only go so far when it came to plugging the gaps that casual conversation, and subconscious absorption of information in the trading desk environment enabled.

At Manulife, Rothwell’s team attempted to use an ongoing video call to plug this gap, but found this still didn’t replicate the benefits being together in person had offered. “PMs put orders on our blotters and then give us a call. There are a few of us who can pick the orders up, so transitioning from this workflow to a chat-based method of communication hasn’t been that easy.”

McMurtray agrees, “It’s those little things that you used to take for granted that we miss. Queries that used to take a matter of seconds can now take a couple of minutes to resolve.”

Executing orders and TCA

Overall, there has been a general acceptance that executing orders will take a little bit more time than expected, as both buy and sell side are pivoting into less agile and streamlined workflow. Keeping Investment teams and other stakeholders in the loop when it comes to rising transaction costs and execution times was deemed an indispensable part of the ongoing communication challenge that was thrust upon the buy side.

Most participants in the boardrooms considered TCA to have “gone out of the window” when it came to drawing insights for execution decisions but said that data could be used to prepare for future volatility as and when it came. It is was also highlighted that TCA could be a useful tool for managing expectations and explaining transaction costs to relevant stakeholders.

Wide streaming prices and the communication between the buy and sell side were some of the challenges faced by David Biser, Head of FX Trading at Campbell and Co. “One of the biggest challenges for us was adjusting the way in which we communicated with our counterparts.  With wider streams it was important for us to be able to get a hold of our contacts, regardless of their physical location, to discuss pricing and spread conditions.  We needed to work out the best communication channels as it obviously differed significantly from pre-crisis.” Biser found the banks that were pro-active in telling his desk how to contact them and the best ways to access their liquidity especially helpful.

Biser noted that the wider streamed and RFQ spreads on the electronic platforms were difficult to rely on, an observation that was noted by a majority of boardroom participants. There were anecdotal cases of significantly higher reject rates and sometimes prices freezing on platforms as a result of the rate that banks were updating their prices.

This led to a number of buy side increasing their algo usage and interaction with voice desks, with reduced reliance on streamed prices being the most cited reason for this. Surveying FX trading leads at our Virtual US West Coast Members meeting, where over 50 heads of desk dialled into a series of concurrent virtual roundtables, 51% increased the proportion of high touch trading, with 41% remaining the same.”

PMs put orders on our blotters and then give us a call. There are a few of us who can pick the orders up, so transitioning from this workflow to a chat-based method of communication hasn’t been that easy.”

Senior FX Trader at Manulife Asset Management

How did your trading strategy adapt to significant FX Volatility in March 2020?
Stayed the same51%
51%
More high touch41%
41%
More low touch8%
8%

Rothwell noted that he would have expected to see less algo usage in high touch markets for his desk. In actuality, Manulife Asset Management “Cut down the size of our orders and used more dynamic liquidity seeking algos, as opposed to large voice orders or simple algos (we) would have used in less volatile conditions.”  McMurtray observed more use of algos as well at T. Rowe Price. “The most significant way we changed our trading style was by moving away from RFQ. Bank’s pricing streams were so dislocated and spreads so wide that we preferred to rely on algos and high touch execution. If you think of it as a scale with high touch on one side and low touch on the other, the changes we made probably cancelled each other out.

What does the future hold?

Turning their attention to how this difficult and challenging time, traders identified several areas where the industry might change for good.

It was suggested that those yet to embrace electronic trading, or in the early stages of doing so, might have had some experiences that could make them more comfortable executing via lower touch channels. One anonymous head trader from London commented “Scaling up our use of algos for our FX execution was a key priority for 2020, and that definitely remains the case given our experience in the last 2 weeks of March – the value of turning to desktop tools to execute an order quickly and effectively has been demonstrated to us in this time.”

There could also be a shift towards buy rather than build for some firms. As mentioned earlier, McMurtray found FXAll and FXConnect to hold up very well during the centre of the disruption. However, T Rowe Price encountered a few issues with their proprietary automated trading system. “Using vendors can give you a few benefits in scenarios like this” says McMurtray “We had to go through the guts of the system and work with the banks to troubleshoot some issues, which was quite a challenge. But if we had been using a vendor supplied system, we could have tweaked some of the configuration settings at it would have been a much simpler process”

Newns expects that the demand for EMS platforms automation features may develop significantly. Automation in FX has been on the for buy side desks over the past couple of years, with traders embracing the ability to not worry about vanilla trades and focus on value-add tasks being a commonly cited reason. “This has been brought into focus even more so in this environment” says Newns. “Especially with the volume of trades and the level of volatility, we are seeing buy side clients make great use of FXConnect’s automation features to add efficiencies to their workflow.”

“We had to go through the guts of the system and work with the banks to troubleshoot some issues, which was quite a challenge.

eFX Trader, T.Rowe Price

A unanimous prediction among the boardroom attendee’s was that the buy side front office might be more willing to embrace working from home after employee’s return to the office on a “full-time” basis. Chris Maxmin, Director of Capital Markets at Deutsche Private Bank commented “I wouldn’t be surprised if there was more flexibility when it came to working from home. You might even see disaster recovery sites being used way more than they were before this started. We have a colleague who lives an hour and a half from our office but 20 minutes from one of our disaster recovery sites. Why would he not use that office a few days a week?”

Flexible working conditions can only be to the advantage of the industry. Not only do they do wonders for encouraging gender diversity as woman returning to work from pregnancy have more options available to them, but they could help encourage more tech savvy graduates into buy side roles by reducing the temptation to turn to the “big-tech” firms that typically offer a less restrictive culture.

It was also suggested that firms in financial centres that pay expensive rent for real estate might consider downsizing and splitting up parts of their business to cheaper parts of their respective countries. This is true for both buy and sell side. “It will be interesting to see how the sell side desk evolves after this” muses Rothwell. “Maybe they will move to rotating schedule with smaller teams present in their offices”

This does come with downsides, concludes Cosgrave – “while you might be able to save on costs from splitting up the workforce and downsizing the office, you permanently lose access to the productivity benefits of being in a room and building rapport with colleagues in the office.”

We have a colleague who lives an hour and a half from our office but 20 minutes from one of our disaster recovery sites. Why would he not use that office a few days a week?”

Director of Capital Markets, Deutsche Bank Private Bank

Menu