The Last Look…

There is little doubt that momentum behind the concept of 24/7 trading is growing – obviously it is already a reality in some markets – but what would a 24/7 FX market look like? It’s time to get the (rather dusty) crystal ball out!

Probably the first thing to say is that FX is already, to a degree, 24/7 – albeit largely targeted at the retail end of the spectrum – thanks to banks offering “weekend FX” rates and the odd LP willing to price to a platform. Both solutions offer pricing that is wider that your average planet when it comes to dealing in any size, but, strictly speaking, trading is possible around the clock.

For this discussion, however, I want to look at the institutional market only, where, for most people, 24/7 trading just doesn’t cut it at the moment. Surveys report buy side participants unhappy with it, platforms ponder the necessary down time for tech refreshes, and banks recoil from the likely cost of increasing staff numbers.

Of course, it would be easier if we could separate spot from everything else and just trade that – after all, so much is done by the machine already, would it notice another 46 hours? – the problem here, unfortunately, is that separating spot from options in particular, but also swaps, is pretty tricky. It can, however, be done, I suppose, so what would be the trigger for institutional 24/7 FX (and I mean proper institutional, not a few punting prop shops as cited by every retail-orientated provider desperate to be seen as institutional)?

The first criteria has to be other markets, especially securities, going 24/7. If punters want to punt FX, they can already do it – what we are concerned about in today’s exercise is hedgers operating 24/7. If a securities market is operating 24/7 and creating exposures, a decent number of investors will want to hedge their currency risk, which should generate demand. Of course, an even greater number will probably want to wait for the Fix, but don’t get me started on that one…

Best execution (I could not, in all consciousness, put that phrase in the same sentence as the Fix) of course, would also be a second criteria – or more accurately, the loosening of requirements. If anyone is judging best execution seriously, i.e. including market impact and signalling risk, then trading in what will still be thinner markets will make it impossible meet the requirements as they stand under existing policies.

Inevitably banks will have to offer 24/7 payments to compete, so why not extend that into the FX trading and risk silo?

Continuing down this rabbit hole, will the markets be thinner? If there is sufficient demand, then liquidity will build and we will have true, “always on” trading. This probably requires one of two things – either the market trades on an exchange over the weekend, where everything is lit, and liquidity consolidated (and here we are back to signalling risk and market impact); or the major LPs have to be willing to assume risk during that period. For many non-bank LPs that would be anathema, although that is changing a little, because they churn risk rather than hold it. This idea risks the market seeing more flash events unless everyone has truly bought in – I don’t buy the idea of the automated market maker always being there in FX the way they are discussed in crypto, mainly because the level of risk and size of trades is significantly different. If everyone buys in, then the market should operate just as it does on, for example, a Thursday afternoon in London, so problem solved.

For banks 24/7 means overhauling their risk systems and, importantly, significantly increasing the resources allocated to the business – something few have been really willing to do in recent years. Of course, one could argue that the banks themselves could take advantage of 24/7 markets to better manage their risk by being able to react to a weekend event. Equally, these institutions, like it or not, are going to be offering instant payments and transfers in their businesses thanks to the growth of stablecoins and tokenisation. Yes, again, it is at a lower level in terms of average transaction size, but inevitably banks will have to offer 24/7 payments to compete, so why not extend that into the FX trading and risk silo?

To answer an earlier point at this stage, if spot markets are deep enough 24/7, then could options desks be able to price on a similar scale? The problem here is the more manual nature of the business – while the machines can quite happily quote spot and manage the risk (within reason), options desks, whilst being automated, have much more human input – that raises the spectre of increased human resource cost. For FX swaps, I suspect it less of an issue, but again, if futures and fixed income markets are 24/7, then FX swaps pricing could be. There will be no central bank rate announcements in all probability, but market sentiment can change over a weekend, these desks are running large risk – they will probably want to be involved.

Looking at the market landscape, futures markets are likely to be easier to extend than OTC, which means one trigger for a move to a 24/7 FX market could be CME. I stress I have no information on this, and have not raised the subject with anyone there, but from an outside perspective, CME offers the easiest route to the end goal, because things like margin can be automated and it is already well-embedded in the FX space. This probably makes trading there the lower-cost option in terms of resources, but does not take away the signalling risk associated with any lit market.

Can providers in a 24/7 world make enough money to cover the cost of extra operating hours and still keep their pricing tight enough to satisfy customers?

So, from a technology and market structure perspective, extending 24/7 FX trading into the top end of the industry is feasible, and there is some demand for it, albeit not pressing. So why am I still a sceptic?

I think it is down to the human aspect of the whole issue – yes technology can manage much of what goes on, but humans have to not only decide to let the tech do that, but also be willing to actually oversee it. On one hand, the financial services industry could come to the rescue of any government battling rising unemployment, on the other, would they find enough qualified people to staff the desks?

There is also the issue of changing the human mindset at a fundamental level, because as anyone can tell you, putting the cork back in the champagne bottle is extremely difficult, if not impossible. The champagne in question is the right to a couple of days off, most often Saturday and Sunday, and the cork was released, in the UK at least, in the middle of the 19^th century when workers were given a half-day on Saturday in addition to Sunday.

Could humans be persuaded to go back to a six, or even seven day week? I doubt it. Two sets of employees would be required then, each having different days off, but then the problem comes when all your mates have Thursday and Friday off and you have Saturday and Sunday. (I would also note kids are at school if someone has Thursday and Friday off, but I know a few parents who would welcome that!) Less frivolously, institutions would be paying out more on salaries and associated costs, not to mention the extended infrastructure costs involved.

The problem is, therefore, one of our minds rejecting the concept because it would mean giving something up, or at the very least a radical change in our life (and I can’t wait for the Annual Report BS about work/life balance from some companies). In the past, change has been effected by a new generation adopting new ideas and they becoming the norm, but, loathe as I am to speak for another generation, I just don’t see it in the current group(s) coming through, who seem more aware of work/life balance than my generation was.

As so much is these days, I think this will come down to a question of cost/benefit – can providers in a 24/7 world make enough money to cover the cost of extra operating hours and still keep their pricing tight enough to satisfy customers? For anyone charging brokerage it’s a no-brainer, but for those running risk it becomes a trickier question to answer.

Ultimately, I suspect FX will extend 24/7 trading up the ladder, but stop short of anything meaningful when it comes to hedgers. You will be able to get a price in smaller amounts (one or two million units), but that price will not refresh as quickly and will be more impacted by trades. This means, if you want to chuck a couple of bucks at something, you can; but, assuming there has been no dramatic event, if you want to hedge even a $100 million exposure, good luck – you’re probably still waiting for Monday.

Of course, if we do get a weekend event – and we have them, that’s for sure – then the market will be open, but I suspect the rates will suddenly resemble those at an airport bureau de change!

colin@thefullfx.com