Investigating electronic FX trading in Australia

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Technology developments

Many recent developments in FX offerings may appear nuanced but can have a significant benefit for buy-side firms, hedge funds and broker dealers alike. As is often the case, the devil is in the detail, says James Alexander, chief commercial officer at 26 Degrees Global Markets, an Australia-based prime of prime.

“One development that we see gaining momentum is an increased acceptance of vendor hosted technologies in the areas of core price generation and risk management capacities. In the past, many liquidity providers have relied on proprietary technology to perform both core components such as pricing and execution, and non-core components, such as dealer platforms and TCA, of their eFX workflows.”

The cost of maintaining and optimising such systems has often proven challenging, says Alexander. “This is especially true as refresh rates for FX pricing increase across the street and quote loads on infrastructure and networks continue to rise as a result. This effect places an increasing onus on capacity planning and management. The result is that liquidity providers are looking at ways to partner more seamlessly with vendor technology’s that can deliver cost efficiencies without increasing operational risks,” says Alexander.

“Intermediaries such as the non-bank prime brokers and prime of prime providers, have a significant opportunity to leverage ever more powerful trading technologies to provide a highly customised client experience combining credit and liquidity solutions with a range of value-add services such as customised quote filtration, flexible order routing and algorithmic execution. When supported by low latency vendor technologies such solutions, can represent a simple yet highly effective alternative to traditional prime broker solutions,” says Alexander.

“The recent interest in trading in precious metals has seen a number of liquidity providers looking to offer an expanded range of precious metals such as gold, silver, platinum and palladium against a wider range of currencies in a bid to capture a slice of the significant increases in precious metals by within Australia and abroad,” says Alexander.

Retail FX in Australia

The retail FX market is also evolving in Australia, partly due to the work that ASIC has done to regulate the market, says  Alexander at 26 Degrees Global Markets. “The regulator has been proactive in recent years in oversight and enforcement when it comes to retail traders, especially where leverage is involved. Product intervention orders have been enacted and additional enhancements to regulation introduced via the likes of design and distribution orders. Leverage restrictions, negative balance protection, standardisation of margin-close out rules are all but a few examples of the proactive approach being taken by the regulator,” says Alexander.

“Many of these regulatory enhancements emulate similar moves by regulators in other major jurisdictions and there are perhaps some insights that we can glean from the impact of these regulatory changes in other major developed jurisdictions. In the Japanese market, long considered one of the largest and most mature markets for retail trading, the introduction of leverage restrictions has an interesting effect,” says Alexander.

“Initially retail participation and notional volumes fell but then rose in the years following as retail traders turned to more automated / algorithmic trading strategies and systems. With advancements in trading interfaces and programable trading, we may well see a similar pattern evolve in Australia.”