- Bitcoin: the truth will be told.
CME will launch futures on bitcoin on December 18. It will then be possible to short sell bitcoin attracting a new cohort of traders. There are parallels here tof the Japanese equities markets in the late 1980s (I lived in Japan at that time). Read my recent blog post..
- Major Prime of Prime providers will be increasingly innovative.
As discussed at the FX Week Europe conference, prime-of-prime providers are particularly well positioned in the customer value chain to provide a one stop full service to clients. They are able to access credit from multiple major prime brokers and bundle service with technology and financial services for their clients. They have been restrained in recent years by tight limits at the major prime brokers on whom they rely. However, prime broker credit is becoming more available and there is a pent up demand waiting to be fulfilled.
- Asset managers will hedge more actively
A number of factors are causing asset managers to become more active traders. In previous years, asset managers were reluctant to take prime brokers. This is changing in part because of the margin requirements for uncleared derivatives that were introduced last year, providing an incentive to use one or two prime brokers as counterparties and gain the netting benefits. Other reasons include improved TCA which can demonstrate the benefits of active versus passive hedging.
- Central limit order books (CLOBs) will enjoy increased volumes
Perhaps in contrast to previous years, ECNs that operate central limit order books will see an increase in volumes. CLOBs provide a simple way to show you achieved best execution for small orders.
- Last look will not die
The windows will get shorter; symmetry will become the norm but will not be mandated. Market participants who forecast last look’s demise tend to be those who can choose their customers. While all market participants can, in theory, choose freely the customers with whom they will do business, in practice FX dealers at many banks are required to quote prices on the basis of a broader relationship. Furthermore, foreign exchange remains one of the few – perhaps the only – asset class that quotes two-way prices in size and over the internet with indeterminate latencies.
- The market will continue to fragment.
I have said this every year and turned out to have been right. The world, not just in FX, is becoming more unbundled, peer-to-peer and networked. FX is no exception. There will continue to be more platforms and more innovative ways to obtain credit.
- Discontinuities or flash events that are impactful will become more common
Given increasing market fragmentation, some algorithms seek corners of the market where they can obtain reasonable execution yet cause low market impact. This is possible because of information asymmetries. When those asymmetries are resolved there may be a flash move. Secondarily, an increasingly complex market makes it increasingly difficult to detect bad actors. We should note that some studies do suggest that flash events are not increasing. However, such studies treat all moves equally at all times of day, irrespective of the effect on the dealer. Additionally, such studies include reversion as as a criterion, so a market gap would not qualify.
- Pre-trade risk management will become the norm.
It has become so in other asset classes. Full disclosure: MarketFactory provides pre-trade risk management with our product called Reflector.
- The market will seek alternatives to fixings
They are just too much trouble and too much risk. Note that there was an active foreign exchange market before fixings.
- The Global Code of Conduct will be adopted widely.
To paraphrase David Puth of CLS, good conduct is cheaper than the fines.
