FLASH FRIDAY: Spotlight on FX Trading

FLASH FRIDAY is a weekly content series looking at the past, present and future of capital markets trading and technology. FLASH FRIDAY is sponsored by Instinet, a Nomura company.

Howard Tai

Howard Tai has had a long career in capital markets industry, starting as a sell-side FX trader at Citibank New York in 1986, working at various banks since, before moving on to the buy-side at American Century Investments in 1995, where he spent 16 years in various roles there. In 2011, he moved onto consulting working for Aite Group and in 2018 launched his own firm. Tai is regarded as an industry subject matter expert on all matters involving foreign exchange, equities and equity derivatives risk management topics.

Tai was quoted in a 2012 Traders article about his report “Buyside FX Outlook: In Search of Best Practices,” where he looked into FX trading attitudes and practices.

Traders Magazine caught up with Tai to see how the FX market has evolved and what the future holds for the next 10 years.

Howard, please tell us about your current role.

I manage my own company, Frontline Global Markets, a capital markets microstructure and fintech solutions consultancy, focusing on solving capital markets microstructure, and securities industry front office workflow logistics across multiple asset classes and derivative instruments.

How has your career evolved over the past 10 years?

When I left American Century Investments in 2011, the next opportunity that opened up and of interest was Aite Group, an advisory firm providing mission-critical insights on technology, regulations, business strategy, and operations consulting to the financial services industry. They valued my hands-on experience in this industry before that (15 years on the buy-side and 10 years on the sell-side). I had some fresh thoughts and perspectives on how the industry is moving forward amidst regulatory and technology changes, on topics such as electronic (algorithmic) trading, best execution obligations, and transaction cost analysis. As I grew in that job, I became more appreciative of the financial technology revolution and the roles various fintech solutions vendors go about solving these challenging problems. I also learned the importance of regulation, and how over time, regulatory changes, especially big ones, such as Dodd Frank and MIFID II change market participants’ behaviors.

In 2018, I decided to open my own consultancy. I work on a project-by-project basis, providing consulting and research from both a former market practitioner’s angle, but also from an industry observer/analyst’s and thought leader’s point of view. I coached industry executives on what they should do and how they could execute their business plans, while also manage product launches and come up with innovative technological solutions.

In your 2012 study, you said: “FX is something that the buy-side has historically treated as an afterthought, and until recently, has been looked at from more of an operational standpoint than from a markets best practice perspective.” Has your view changed since then?

Yes and no. Although there are more progressive buy-side firms who now have moved ahead of the curve, but reluctantly there is still a number of them that don’t understand that FX can be both a risk and a source of alpha when managed prudently as I highlighted in another report back in 2015. Sadly, the majority of buy-side firms today still look at FX from a purely operational or transactions standpoint. They still haven’t woken up to the fact that currency valuations inherent in their underlying foreign assets’ portfolios can and do make a difference in returns.

You also believed that “buy-side was looking more closely at execution quality for FX”. What’s your view on that?

Absolutely, the progressive firms are getting better at it. If you don’t pay attention at the transaction level in detail, which includes who you deal with and the how, where and why, you leave a lot of money on the table. That type of TCA level scrutiny on the buy-side first came from the equity side of the business, which dates back more than 25 years ago when electronic trading began to take shape. Today, the more forward-looking firms are still doing that, but they have given credence to TCA in FX, with its rising level of electronic trading, by further enhancing the analysis beyond mere execution monitoring, as some of them even start building their own algos to better capture alpha opportunities as well as manage risk.

How has the FX market evolved since 2012, from your perspective?

The FX market has always been a 24-hour market, five and a half days a week type of market, so it hasn’t changed much. However, now because of increased adoption of electronic trading, with its associated rise in algorithmic trading, players have more flexibility over different world time zones in which transactions can take place around the clock. In addition, there are some people that are starting to use artificial intelligence to place orders that could trigger algorithms to react and trade to news automatically, regardless when/where it happens. Because of that, there are more trading opportunities, which leads to volatility compressed in shorter time frames in the global FX marketplace, where different liquidity pools from various electronic trading platforms can be aggregated. The end result being FX market is not as sexy, nor as volatile, when compared to its ‘good old days’ when phone or Reuters Direct Dealing was its principal means of transaction from one time zone to the next.

This overall reduction in FX market volatility puts a damper on returns, for participants trying to extract alpha from this asset class that deploy trading strategies like the carry trade, trend following, or options replication. Another contributing factor is lackluster performances and subsequent reduction in AUM of global macro hedge funds in recent years.

What has been most surprising/unexpected development to you in the industry since early 2000s?

I’m surprised that not that many FX people have exited their businesses and have gone into crypto, yet. I thought there would be a lot more by now, because if you think about all the different cryptocurrencies that got rolled out in this market, there is a close resemblance to the FX market structure- highly fragmented liquidity traded across so many different platforms. Since there are many new crypto currencies that didn’t exist until very recently, each having its own characteristics, volatility, trading patterns and price points. Just the way FX market used to be, with many currency pairs and crosses- especially before Euro came into existence.

How do you expect the FX market to evolve over the next 10 years?

For the FX market to come back in the limelight in the next 10 years, the crypto market has to crash and burn at some point. If it doesn’t, even less attention is going to be on FX as an asset class by industry participants. Imagine if crypto growth continued to go gangbusters? The next part of that evolution is going to be for a digital currency like Bitcoin suddenly becoming a lot more important than the US Dollar as the preferred medium of exchange around the world, that will be more than a little bit scary to me and others.

What’s in your future?

I’m planning to continue to challenge the status quo in the global capital markets, by bringing thought-provoking ideas. I can also contribute by helping executives in this industry to overcome their business obstacles, especially in my areas of knowledge, experience, and expertise.