Back in 2004, I visited a trader on a New York spot desk at a major bank. He was angry at both Reuters Matching and EBS, who was my employer, for having introduced API dealing. This trader can have been no older than 30 but made a comparison that stunned me. He likened API trading to NAFTA, the North American Free Trade Agreement (of which he also disapproved). He felt his days and those of his colleagues, like those of the American worker, were numbered.
The reality is, however, that manual traders are alive and well. As I observed in the presentation I gave to the BIS Markets Committee in January, which you can see here, there are more manual traders than there were a decade ago. They are, however, in different places.
In 2003, Reuters had 17,000 conversational Reuters Dealing customers – and in those days they had few if any FX APIs. By 2013 they had 18,000. I understand that 8,500 of them have Thomson Reuters Matching enabled meaning they are truly inter-dealer, which is much higher than a few years ago. I increasingly see FXGO on manual Bloomberg workstations at banks where there was none before.
In fact the proportion of manual traders to API traders has fallen dramatically. However, there are vastly more participants trading actively overall and taking short term risk. I felt remiss at the BIS for not being able to give a full segment-by-segment breakdown – which I shall in time construct.
One territory where I see it personally is in Japan, where I lived through the 1990s working first for Citibank then for EBS. In those days there were 15 major Japanese banks. Today, there are three plus one investment bank. Many of the people I knew in those days are, however, still trading – but not all at banks. They work at a range of retail brokers, regional banks, hedge funds, prop funds, non-bank market makers and even, in one case, a life insurance company taking at least some short term risk. Long gone are the days when only the major banks took risk and traded.
As well as diverse and more numerous market participants in the developed markets, we see rapidly increasing emerging market players. BRICS and other acronyms short change the range of nations where participants now manage their own risk actively.
The great enabler for this is of course prime broking. We see an increasing range of innovative prime-of-prime models, technology and advisory services offered, for example, by Saxo Bank.
In summary, risk is being taken by ever expanding diverse types and numbers of participants in a greater number of geographies. As one part of that, the manual trader still has a role. To serve these participants, there are an increasingly orderly, established set of agency protocols such as prime broking to support them. FX is not a closed system, but the second law of thermodynamics seems alive and well.
… Oh – and the manual trader I mentioned at the start of this post? He is still around and now the global spot trading head for a bank with a well-developed e-FX capability.
‘Thoughts on Basel’ Series – Part 2 of 3
Catch up on the whole Series:
Part 3 – Into Darkness – Expressing our darker purpose – visit here
Part 1 – It no longer pays to be the reference rate, visit here