The Last Look…

A few weeks off does wonders for the mind, helps you focus and, often, come back to work with a more mellow, chilled-out, perspective…or…

It can also be business as usual, so let’s kick off with a broad, sweeping statement; all these firms banging on about how they are going to change the FX world can shut up shop now – it’s not going to happen.

This is not to say that all are going to fail, rather those that set their goals too high are likely to be first on the scrapheap, unless they are making so much money trading crypto they can afford to fund their folly to their hearts’ content.

Having been in FX a long time, and more pertinently written about for the past 20+ years rather than traded it, if there is one abiding thought in my head about market structure change it is that it is very, very, slow. An old friend of many of us, James Sinclair once corrected me on a panel (it wasn’t the first, or last, time that he, and others have had cause to do so) by observing market structure change is not a revolution, it’s an evolution, and not a particularly quick one. He was right of course, it’s just it doesn’t sound as dramatic for those writing the press releases!

If this world changed every time someone unveiled better technology, the FX industry would be in a constant state of flux wherein the tech stacks would change as often as the price, and anyone in the business would be receiving extensive medical help. This is, to a degree, what I hear too often from those in the digital assets world, however, as they eye (enviously, no doubt, given the volumes), the FX space.

Does the FX market’s technology need an overhaul? In certain areas, possibly, but even there we have a fair case in arguing that fast enough is good enough (ignoring that most FX tech is considerably faster than that in the crypto world). More to the point, one only needs to look at some of the tech stacks on offer in our business to know that the absence of cutting-edge technology is not a business killer! I will save blushes, but we all know of players in our industry whose tech dates back 20 years or more. It has been tweaked, perhaps, but not changed radically, and certainly not often. Why? Because clients and users like familiarity and as long as it fulfils its duty they are happy.

A lot of the complaints in this area come from firms who have an interest in shaking up the status quo – that’s fair enough, but wishing it rarely brings it. There is an interesting case study taking place right now in the fixed income space, and while I know there are major differences in market structure between that and FX, there are still lessons to be heeded.

What customers want from their providers can be distilled down to a few things; a tight price, market information, high quality execution, and a lack of stuff ups

Last year, FMX futures was launched to challenge CME’s dominance in US Treasuries. The tech was great, the backers serious players in the industry, but has that translated into a genuine challenge? Not yet it hasn’t, and it is going to be a long hard slog if it is to emerge as such.

The lesson is clear: upsetting the incumbent is no easy task, because if nothing else it involves changing habits.

If there is one area that I think can have a radical difference, it is in tokenisation and stablecoins, because they target one of the sore points of the FX business – the time it takes to settle and pay a trade. The fact is, in this day and age, we should be processing and settling trades quicker, but even here there is a limit to how far most want to go. I have made the point previously that firms trading a large proportion of spot especially, don’t want instant settlement, they want a net settlement at a certain time.

With securities markets going to T+1 in 2027, I fail to see a reason why the convention in FX markets shouldn’t also change, with spot becoming T+1 as well. We can make the payments sufficiently quickly, the pricing structure will remain the same and it will still be a “yours” or a “mine”, just settling quicker.

Occasionally someone points to funding of these trades as a reason to stay at T+2, but solutions exist for this to be done quicker, as has been proven by the North American switch. On which note, incidentally, while firms pushing intra-day FX trades have a point, the reality is that overnight markets have always existed, all that is happening is we are, again, targeting the ability to settle quicker, to bring that timeframe forward – it’s not a radical market structure upheaval.

I am struggling to think of a really radical concept that changed the FX industry in the space of a year

Innovation has always been a big part of the FX industry, and it will remain so, but from my perspective those firms making so much of how they are “changing the world” need to understand they have to work with existing market participants and service providers, rather than against them. The work involved in overhauling major institutions’ tech stacks is simply too onerous for anyone to embrace radical change, and unless bitcoin keeps going north at a rate of knots, these are the firms with the financial muscle.

The argument for change also, conveniently, ignores that absolute snail’s pace of change on the part of the buy side – ask anyone involved in that and you will hear nothing but tales of caution.

There are some good ideas coming out of the “new tech” world, and these firms have to have a positive message, but it is to be hoped that the reality of their thinking is that they want to work with existing providers and make nuanced changes to the structure. I am struggling to think of a really radical concept that changed the FX industry in the space of a year (Barclays’ extra decimal place perhaps?) – plenty have changed how we think about problems and processes, but even then implementation has taken much longer.

The reality of the FX market is, due to some basic fundamentals of how people trade, change will come slowly. If I look at what customers want from their providers it can be distilled down to a few things; a tight price, market information, high quality execution, and a lack of stuff ups. The first three won’t be changed by better tech – the tech is already good enough and sometimes these deals are better if done the old-fashioned way – but the latter could. Even there though, what we are really talking about is more automation rather than better tech.

So a message to those firms who think they are changing the world – good luck! It’s very unlikely to happen without substantial backing from the existing players and change is likely to be incremental rather than a big bang. If the latter is what you are after there is one vital aspect to your business plan – keeping buying bitcoin, it’s going to be a long road.

I’m going back in my Luddite hut now…

colin@thefullfx.com