Despite the numerous technological advances in the FX industry in recent years, panelists at Profit & Loss Latin America emphasised the significant role that humans, and human relationships, still play in regional markets.
However, seemingly juxtaposed against the importance of human relationships is the inevitable drift towards further automation of FX trading activity.
As John Ashworth, CEO of Caplin Systems, explained: “The thing that separates regional markets from mainstream markets is that there’s still a very strong focus on relationships in the sales function, where human beings want to talk to human beings.
“And yet, there is a tremendous need for this industry to take cost out of itself and there’s a tremendous availability of new automation. So what we’re seeing in markets around the world is firms honing in on which are the really profitable customers, we’re seeing customers take onboard mobile technology to eliminate some of the manual processes around notifications and amendments and we’re generally seeing banks requiring sales people to do more with less human beings and encouraging their customers to do a little more self-service.”
The solution to these seemingly conflicting requirements, said the panellists, is finding a balance between automated technology and human interaction that is appropriate for each specific market.
“I actually think that as it relates to some products the US market has moved a little faster than some people would like in terms of automation, partly because of regulatory reasons, partly because of transparency reasons and partly because of cost reasons. As with anything else, sometimes the pendulum can swing a little too fast in one direction but over time we get to the right place,” said Alan Schwarz, CEO of FXSpotStream.
He continued: “But at the same time, it can be difficult to make a spot trade profitable so it makes sense to just automate that process. In fact, if a trader in Mexico has to call someone to ask where USD/MXN is by the time they get off the phone the price could have moved. So what firms need to do is find a balance between having the right amount of coverage, spending the right amount of money and having the right amount of technology. It’s also important to remember that one size doesn’t fit all, what works in the US and Tokyo and London doesn’t necessarily work in Mexico, so you have to be sensitive to the specific needs of each market.”
The idea of providing technology that is specific to the requirements of firms in different geographical markets was a recurring theme on the panel. Firms looking to implement new FX trading technology in Latin America have a “late mover” advantage because they are able to access the latest iteration of the products that have been tested and proven in other markets, but the speakers warned that in many cases the most highly evolved products aren’t yet needed in Latin American markets.
“A lot of vendors want to sell an expensive system with lots of functionality, but there’s a danger of selling the customers something that they don’t need. For the client it’s like purchasing a Ferrari when you don’t have a street to use it on,” said Schwarz.
Implementing new technology in markets that have traditionally been very driven by human interaction can be challenging because there can be internal resistance at financial services firms from individuals who are concerned that this technology could erode their client relationships.
Or as Jack Linker, head of hedge fund sales for the Americas at 360T, succinctly put it: “The sales trader in Latin America is not excited about the prospect of putting a GUI in front of the customer.”
Linker argued that the way to overcome this resistance is to convince these sales staff that the implementation of technology will reduce the amount of time they have to spend working through basic trades with their clients, freeing up more time to focus on more profitable activities.
Developing on this theme, Darren, CEO of MarketFactory, commented: “Successful technology moves with the market, not against it. Even in a market like Mexico where some firms have a big sales trading staff and there is a lot of voice trading activity, I guarantee you that if you interviewed this sales force you’d find that they would love to have a tool to deal with that one customer who calls every day to get market colour, but only trades occasionally and in small size. That’s the first thing that you automate because it’s free money once you put that in place.”
Regarding the attitude of individuals within financial services firms towards technology, and in particular towards how it shapes their view of commercial relationships, Ashworth pondered whether generational changes will eventually lead to significantly less human interaction.
“Let me hypothesis that relationships are not necessarily just a function of regional markets or a particular culture, but are also massively a function of age. Age can be a controversial issue to talk about, but the fact is that the younger generation is fully conversant in interacting with a device. Their social life is controlled by access to social media and they’re completely comfortable with having a device welded to their left or right hand as they go about their business,” he said.
Despite this generational change, Ashworth rejected the idea that this could lead to the complete automation of financial markets, pointing out that there will always be scope for humans to process items like structured products and complex derivatives transactions or to trade in highly illiquid markets.
In addition, Linker noted: “There will always be a basic human desire to have contact with another person as part of a financial relationship. And at a time when there have been a lot of headlines about firms getting regulatory fines for their FX practices, its important for a lot of firms to know who is on the other side of their trade. Then sometimes there’s just a need for advice, or guidance, or sometimes the customer just wants to hear someone confirm a decision they’ve already made. Technology does what any tool does: it makes people’s job simpler, giving them more time to do other things.”
The panellists all strenuously advocated for technology as a means of ultimately improving and developing relationships, citing a broader trend in the FX market towards disclosed trading as evidence of this.
“For all the talk of technology in FX, only 25% of the FX market trades anonymously, the other 75% is disclosed and in fact we see more activity shifting towards disclosed trading. So as the use of technology increases, the market is becoming more relational, not less, and this is because technology is enhancing those relationships,” said Jer.
He added: “As long as people still hug and kiss each other at Profit and Lossconferences, this will remain a relationship-based industry.”
Schwarz said that the sharp market moves that occurred when the Swiss National Bank (SNB) suddenly stopped pegging CHF to the euro, following the UK’s Brexit vote and after the election of Donald Trump as the President of the US, have all accelerated this trend towards disclosed trading, because it is in stressed market conditions when relationships prove their importance. He added that a growing concern about market impact when trading is also driving this trend.
“Anonymous venues are not going to disappear, they have their time and their place. But because people need to communicate with their counterparties and they need to know whose credit is on the other side of the trade we’re seeing an interesting shift – going counter to what you might expect – back towards relationship trading. Firms want to know who is on the other side of a trade and know that if there is a problem they can pick up the phone and talk to the counter party,” he said.