Managing forex spreads has been the biggest trading challenge for pro traders since the pandemic and resulting lockdowns began according to a Refinitiv survey released last week.
In the global survey of over 1,000 FX traders, which included responses from 132 traders at asset management companies, 55% percent of respondents felt spreads was the biggest challenge. Interestingly, 15% have managed to overcome citing no issues. 13% of respondents chose access to liquidity.
The survey asked 1,063 clients from 50 countries from 4 May – 19 June 2020 about the impact of COVID-19 on forex trading, including their biggest challenges, favoured execution methods, and their experiences working in a virtual office environment.
The issue of spreads was felt more significantly for asset manager traders compared to corporates where only 35% cited this as their biggest issue.
Refinitiv, formerly the Financial & Risk business of Thomson Reuters, is one of the world’s largest providers of financial markets data and infrastructure.
Jim Kwiatkowski, Global Head of Transaction Sales at Refinitiv, had this to say:
“The changes to spreads during this period have been well documented. Spreads widened as volatility increased and providers became concerned about client credit. This was clearly a market-wide impact, but one that was mitigated, at least partially, by the utilization of trading tools to aggregate available relationship pricing and find that elusive ‘best price’. Many clients have taken advantage of auto execution capabilities for smaller orders so that they can focus on their larger, more difficult to execute orders.”
Which forex execution method was most reliable?
The survey also asked which execution method was the most reliable during the crisis period. The top answer by far was Streaming Risk Transfer, chosen by 84% of respondents. This was significantly larger than banks (56%) and hedge funds (41%). Voice risk transfer was the second most reliable with only 10%.
Given spreads, liquidity conditions and volatility, streaming risk transfer has the advantage of leveraging pricing from multiple relationship liquidity providers as well as the certainty of immediate risk transfer.
The increased use of Send Details, which allows trades to be agreed by voice, but then automates the booking through normal Straight Through Processing, suggests that many forex traders opted for electronic trading tools, even for voice trades, to reduce the risk of booking errors and satisfy compliance concerns.
Communication challenges are also a factor in forex trading
When asked about working from home, 35% of all respondents described communication with colleagues as the biggest challenge. This was followed by market conditions on 27% and 15% had no issues.
Difficulties in communicating could be part of the reason why electronic trading was found from the survey to be far more reliable for FX traders than ‘Voice risk transfer’. It also shows that instead of reverting to old-world methods (voice), the market is now so far down the path of electronification that it pushed even further in this direction as the crisis evolved.