Speak Up

Despite Rise of Computer Trading, the Phone Isn't Dead Yet

Electronic broking and trading of foreign exchange now exceeds voice trading, 30 percent to 27 percent, for banks and other dealers in foreign exchange, according to Celent.

The remaining 42 percent? Customers making communications directly to banks, often through electronic channels.

In spot FX trading, where $1.5 trillion of currencies change hands every day, 60 percent is handled electronically, through automated systems, according to marketing agency PropelGrowth.

And the number can be as high as 85 percent when banks, dealers and their customers are dealing in the G-10 currencies: the legal tender of Belgium, the Netherlands, Sweden, Germany, Japan, France, the United Kingdom, Canada, Italy and the United States.

But is the use of the telephone-so-called voice trading-dead?

“I’ve seen a very big swing toward electronic trading and electronic risk management where the voice trader ceases to be really involved in the process at all,” said Peter Atkinson, FX product manager for smartTrade Technologies, a New York supplier of what it calls liquidity management systems.

Now, he said, the voice trader “tends to sort of monitor the machine and make sure the organization is (establishing) sensible prices” on transactions.

But, Atkinson said, by and large, quantitative analysis teams and electronic trading experts “have pretty much taken over all the management of those tickets now.”

The voice trader has to find ways of focusing on “higher-value, higher-margin aspects of trading,” said Matthew O’Donnell, director of product management at IPC Systems, which markets trading turrets and trading desk communication gear. Tasks, like sales traders in stocks, such as building long-term relationships with customers for bigger, more consequential trades.

Right now, there is a threshold or almost a dividing line between the tickets large enough to warrant personal attention and those that aren’t. Atkinson puts the break point at about $20 million in the value of the trade.

Spreads are compressing as well, he said, and ticket sizes are getting much smaller. That means more tickets get pushed to automated systems.

Where voice trading still holds sway is in emerging markets, outside the G-10, where automated systems may not be able to handle the very big tickets anyway. Atkinson said he doesn’t know of a platform big enough to handle more than $50 million in a particular currency, for instance.

Electronic platforms also can just be partly automated. In emerging markets, you may send out a request for quotation, and a trader will pick it up on the other side, make a manual quote, and put it back into the system, at which point the original party has to reject or accept it. There is not an automatic match or execution.

The use of automated systems, particularly in the largest markets, is almost an imperative, said Christian-Ivan Bacic, first vice president for foreign exchange trading at Bayerische Landesbank in Munich.

That’s because traders are being asked to serve increasingly large numbers of clients at once. “You have to have now basically two or three traders maybe cover or take care of 50 or 100 clients,” Bacic said. “Without electronic trading, I’m not sure if this would be possible.”

Where going back to using voice-putting a human in charge of the trade- really matters is when movements in markets matter, he said. For instance, if a firm places an order to sell a particular currency at $8.20, automated systems will wait until a bid arrives at $8.20. But the voice trader can work at $8.20 to clear part of the order, clear more at $8.19 and then see where prices start to move.

“At the end of the day,” said Atkinson, “you will always get a better price if you go out via voice.” Your counterparty “might show you a better bid order, a better offer. You can hit him or just say nothing there and move to another one.”

But be careful how you approach that, Bacic said. You have to treat your counterparties, the liquidity providers, properly. And that typically means working with one provider on the full amount of a trade. Particularly a big trade.

“When people are not trading full amounts and when they are hitting simultaneously five or 10 platforms at the same time and things like that, (they) can harm a relationship in the long run,” said Bacic. “You can get away with it once or twice, maybe even three times, but at the end you will lose the support from your liquidity providers. This is a big issue.”

If you’re working a large position, Atkinson said, you also need to let a liquidity provider-a foreign exchange bank-know if you are using a platform that aggregates prices from a wide variety of sources.

If the provider thinks “you’ll only ever trade with him when he’s the best price,” you may see that provider start widening bids and offers presented to you, he said. Then, “you’ve actually lost liquidity from one of your preferred liquidity providers.”

Sensitivity is required, Atkinson said. And, he notes, in a relationship maintained by that old voice technology, “there’s always space for negotiation.”


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