JP Morgan e-FICC Survey Confirms Increased Electronification
Posted by Colin Lambert. Last updated: February 10, 2021
Just a week after the regional FX committees’ turnover surveys indicated the same trend, the fifth annual JP Morgan e-FICC survey has also found that traders turned to e-channels during the events of 2020 – and stayed there. Not only that, but the results also indicate a level of confidence amongst traders that e-channels provide a robust execution method – one that was proven during crisis.
While only a minority (21%) of respondents changed their execution style in the period March-June 2020, of this group 54% increased their electronic trading and 23% increased their use of algorithmic execution strategies. Equally, while the vast majority of respondents are happy with their execution style, of the 16% that predict their trading will continue to change, 100% predict e-trading it will be a bigger part of their workflow.
It is not just in FX either, for the survey finds an expected rise in e-ratios in Rates which is forecast to rise to 67% in 2022 from 49% at the end of 2020; Credit, from 28% to 40%; and Commodities, to 60% from 49%. This suggests budgets and attention will be focused on those areas and that here will be the next battleground for providers.
As noted, algorithmic execution also appears to be gaining traction, with 50% of this group expecting to increase their use of the strategies. While this may not represent aggressive growth in the bigger picture, it does indicate that interest in algos continues and that volatility shocks as seen in March 2020 have probably enhanced their reputation. Of those already using algos, expectations are that their trading volumes will increase 15%.
The other hotspot in the survey is mobile trading, which is expected to have the biggest influence in terms of trading technology over the next year, although this is overtaken in respondents thoughts over a three year time horizon.
Mobile trading’s popularity is undoubtedly a result of experience during the upheaval of working from home where even the best organisations probably took a day or more to equip their traders remotely, and unsurprisingly, the pandemic plays a big role in the survey. 42% of respondents believe it will have the greatest impact on markets in 2021, and over half expect to spend an average of four days per week working from home. There is a hint of a drift back to the office in the survey, however, with 77% of respondents working at home between March and June 2020, while 55% expect to work at home in 2021. Equally, while the percentage of respondents expecting to work from home for one, two and five days in 2021 has dropped, those expecting to be in the office for three and four days has risen. This suggests a structured, staged, and probably cautious return, perhaps with split teams being rotated through.
Interestingly, although the overriding sense from the survey is one of satisfaction with how the market structure coped in 2020, the second biggest impact on markets cited by traders is “market and economic dislocation”, this suggests that the scars from the oil and gold market dislocation in 2020 have yet to fully heal. This outranks recession risk (15%), trade tensions (9%) and equity volatility risk (4%) in traders’ minds.
Usual Concerns are Easing
Nobody should be surprised that liquidity availability remains the number one challenge for traders – this is the fifth year in a row this has been the case and it is likely to remain that way as long as JP Morgan runs the survey. Equally, when citing the top three criteria when selecting a liquidity source, the survey finds that price consistency is top ranked amongst traders.
What is striking, however, is how confidence that markets are able to withstand further shocks is reflected in these results. Liquidity availability is cited by 29% as their top concern, but this is down from 33% in the 2020 survey and 40% in that of 2019. Just as notable, price consistency was cited by 40% of respondents as critical, this is down from 79% in the 2020 survey and 48% in 2019.
The fact that traders are less concerned by these issues is unlikely to be complacency, more likely it reflects the fact that the FX market in particular proved sufficiently robust during the vol shock.
Something that reinforces this view is how workflow efficiency was the second biggest challenge for traders. Of course, this will reflect the challenges of a dispersed workforce (12% cited remote working as the biggest challenge), but the fact that nearly a quarter of respondents are concerned about efficiency suggests they their thoughts are turning from actually getting deals done to handling them in the most efficient manner possible.
The availability and cost of data, as well as meeting best execution requirement came in at 12% (both down from 15% in the previous survey) – price transparency also declined in importance, to 10% from 15% previously.
In terms of the main criteria for selecting LPs, after price consistency, it is unsurprising to see liquidity availability during volatile times as the second most cited at 40%, but this too is down a long way from the 2020 survey where it was named in the top three 70% of the time. Market impact (23% from 40%), response times (18% from 47%), hit ratios (10% from 20%) and response rates (10% from 32%) all attracted less importance in the 2021 survey, as did internalisation which fell from 5% to 10%. Again, these findings would indicate that respondents are comfortable their service providers and, perhaps more importantly, have their own processes and structure nailed down.
New Tech…But Not Yet
The survey indicates that even towards the end of 2020 when it was taken, thoughts were still very much dominated by business as usual. When asked about transformational technologies, 33% of traders, as noted earlier, highlighted mobile trading as the most influential in 2021. This was followed by AI and machine learning at 19%, blockchain at 7% and natural language processing (NLP) at 3%.
When asked over a three-year period, however, mobile was only seen as the most influential by 6% and again this could indicate that using mobile devices is becoming a part of the usual working routine. Perhaps reflecting the aforementioned focus on workflow efficiency, blockchain as an influential technology is supported by 26%, but it is AI and machine learning that are really seen as the most influential, by 57% of respondents (NLP was cited by 4%).
Mobile trading is the hot button issue now, but over three years that focus switches quickly to AI and machine learning
Traders are certainly aware of the the rise of AI and machine learning, 49% of respondents agreed that the techniques represented an opportunity to hone their trading decisions, although it should be noted that in the 2020 survey this was at 58%. Similarly, 54% believe technology can help them optimise their execution and this is down from 66% in 2020. The percentage who see AI and machine learning providing deep data analytics is largely unchanged just above 70% – that is, after all, what the technology is really about.
On data, respondents were asked to rank their three most useful data tools and, unsurprisingly given they are traders, predicted and real-time market conditions analysis were the most cited. This was the same in the 2020 survey.
The second most cited in traders’ top three was in supporting key performance benchmarks, this was only the sixth most cited in the 2020 survey and indicates a renewed focus on execution quality as volatility returned to markets. Third up was data presenting historical market context, this did not feature as an option in the previous survey, but also fits with the performance assessment angle.
Not for the first time in the survey, however, there was a paradox in that using data for pre-trade optimisation purposes, which last year was the second most cited use, now finds itself friendless and was named as the least important overall.
It will be interesting to see if unprecedented working conditions have produced outlier results in the survey, for that, however, we have to wait another year. For now, the FX industry (respondents were not all active JPMorgan clients) can largely look upon this survey with satisfaction for service levels clearly remains adequate. This reflects a rational view by users of markets that conditions were extremely challenging, but also no little success on the part of the providers.
Overall, the impression is one of continued evolution. Electronic trading and the use of algos will continue to climb, but in the case of the former it will inevitably be at a slower rate and for the latter it will never be quick enough for providers. It is on an upward trend, however, and that is probably what matters most at the end of the day.