In 2018, a set of MiFID II regulations came into play, resulting in the emergence of a new set of FX markets characteristics.
Subsequently, the functioning of FX markets is being shifted, with MiFID rules combining with other industry dynamics.
Buy and sell FX professionals are being significantly impacted by a relentless push for automation, new regulated trading venues, and best execution requirements. FX liquidity now varies by instrument and geographic location, along with the trend of regulatory driven FX fragmentation that currently exists. There’s now a change in the status quo of a once global, over-the-counter and unregulated market.
FX trading venues
Participants on the buy and sell side of the market would have to decide on where they provide and source FX liquidity. Regulations would be perceived by some to increase costs, while others might find them encouraging transparency. Most buy-side institutions might decide to move from their jurisdiction, so as to circumvent these regulations.
Choice of derivatives
The trends in peoples’ choice of derivatives would likely remain the same, although newly regulated trading venues would surely influence participants’ location of FX trade in 2018. Keep a look out for features such as exchange-traded FX futures, as well as swaps and forwards, which would indicate continued growth in traditional OTC FX instruments.
Irrespective of these new regulations, these instruments will remain attractive, with their unique qualities such as clearing for futures and broken dates in OTC.
Transaction cost analysis
Substantial changes in trading workflows would be introduced by the adoption of new voluntary FX Global Code and new best execution requirements. Justifying liquidity decisions would increasingly continue to be traced back to the buy-side, while best execution practices would have to be established by many companies, either by regulations or due to the FX Global Code.
Banks would also need to provide services in FX liquidity, which would now have to include transparent reporting tools, necessary to demonstrate how prices are compiled for clients.
Also, buy-side firms would need to examine selection criteria and counterparty relationships, whilst looking more closely at their trading process. Those with many counterparties could need to consolidate to drive efficiency, while companies with fewer counterparties would need to expand to trade more, as a result of the increased scrutiny.
FX technology solutions
When accessing and distributing FX liquidity, institutions will have to rely heavily on technology solutions to drive efficiency, as a result of intense cost pressures across the industry. New regulations would therefore relentlessly drive the need for automation across trading workflows. The small portion of FX traded over the phone would also be influenced by increased requirements for transparency.
Many participants might need to rely on platforms, which would allow users to easily access off-venue and regulated liquidity pools through a single interface. The evaluation of effectiveness and trade decisions would subsequently require data and analytical tools.
There would soon be an increased use of execution algorithms, as trade decisions become more and more automated over time. Traders would also evolve in their own roles, as they would need to learn how to monitor and optimise automated transaction flow. They could also profit from price fluctuations in multiple global markets via binary options. Here are a few Binary Options Trading Tips which might come in handy.
Ready for change
It’s no news that markets have been able to adjust to new regulations in the past. The new unprecedented changes in FX markets in 2018 are not expected to be any different. Participants would adjust to the new characteristics without any decrease in the importance or size of FX markets.