Outlook 2024 from Daniel Chambers, Head of Data & Analytics at BidFX

What were the key theme(s) for your business in 2023?

This year, ANZ Bank joined BidFX as our latest algo liquidity provider. ANZ has a unique position in the eFX market in terms of its liquidity franchise and we have seen strong demand from our sophisticated institutional clients for ANZ Algo’s on BidFX.

As a result, clients can now tap into the FX Market with ANZ’s superior access to unique liquidity pools, as well as access ANZ’s exceptional Australian dollar, New Zealand dollar and Asian franchise. Firms can also hedge FX exposures while meeting reporting obligations with transaction cost analysis (TCA), as well as set parameters that can be defined and controlled, including timing, price, and chosen strategy, all with prevailing market conditions.

What are your expectations for 2024?

2023 has seen investors hanging on every word uttered by central banks around interest rates. Changes in interest rates inevitably drive FX markets. Depending on how markets react to monetary policy next year, and whether volatility returns to FX, there will be an even greater need to actively assess liquidity in a much more granular way.

That said, even if FX markets are more benign in the New Year, this will not put a stop to the general trend of hedge funds and asset managers seeking more precise insights from their liquidity providers. 2024 will see investment managers ask why their FX flow has been directed to certain counterparties, rather than passively accepting the liquidity provider’s perspective.

Rather than simply looking at FX flow distribution, investment managers will be demanding insight into the exact rationale behind a certain bid/offer price being offered up at 11:55am just prior to the Bank of England’s rate decision. They will also want to know who is providing the tightest spreads at that exact time, in addition to identifying those at the top of the order book and those displaying a price skew.”

What trends are getting underway that people may not know about but will be important?

Any outcomes from the FX Global Code review, particularly around the transparency principle, could also help focus minds on more detailed liquidity assessment.

However, regardless of the review’s outcomes, this will not stop FX traders trying to bridge the gap between post-trade information and pre-trade decision making. Assessment of liquidity, also known as liquidity provision analysis (LPA), is key as it equips traders before they execute their order.

With asset manager and hedge fund adoption of execution now at 30% and 40% respectively, according to Coalition Greenwich, there will be a surge in demand for comparing expected execution costs using different liquidity provider algos.

Right now, a fund manager can open multiple bank FX trading platforms and enter their expected cost for executing a specific amount in sterling/dollar by using a certain algo. The trouble is that this approach is very fragmented. The fund manager needs to know not only who is offering up the most competitive bid/offer spread, but who is sending the trade to their execution algo.

For instance, a fund manager may receive insight from such liquidity providers suggesting that they can execute x amount of sterling/dollar on an execution algo for y cost. Based on this information, the fund manager may opt for an alternative liquidity provider for the trade. Ultimately, as investment managers execute more of their FX trades via algos, their investors will expect ongoing monitoring around the pricing of those algos.