Institutional Investor's Alpha Magazine - April 2008 - (Page 30)

efx Electronic Platforms Reshaping Foreign Exchange Trading Markets On a global basis, FX traders will continue to reﬁne their models, drive transaction costs down and push through higher volumes. transactions tend to be ‘lumpier,’ they are often executed over the phone, rather than electronically, especially if large pieces have to be moved.” Considerations for Fund Managers A fund manager new to the FX market has a number of issues to consider. Godfrey says the ﬁrst question to ask is how changes in FX rates will affect the portfolio. “If you have foreign currency-denominated assets and are concerned about volatility, the next question would be how much a movement in FX rates would affect your underlying assets,” he says. If the holdings include volatile equities, for instance, moving into FX may not have a major impact on the portfolio. But FX can add signiﬁcant volatility to a short-term ﬁxed-income portfolio. the prime broker’s protocols for credit provisions in order to maximize liquidity,” he says. “Partner selection, of course, is also important.” For managers who expect to be active traders, another issue is latency – the build-in delay inherent in electronic platforms. “Whoever is closer to the servers will be slightly ahead of the game,” says Alexandre. In reviewing bank platforms, a manager should look at the institution’s overall capabilities. “The best ﬁt also depends on factors most sensitive to a client,” says Coyne. “Does the manager have a speciﬁc strategy for the FX program? Are there intense operational needs that require a prime brokerage or post-trade facilities? These factors inﬂuence the choice of platform.” Managers may need to make their own technology investments in order to achieve their objectives in the eFX market. That could mean hiring top IT specialists and building sophisticated modeling applications. “Developing a short-term trading strategy has become a moving target with daily iterations,” says Olsen. “In other words, this is not easy money.” Stone notes that new traders need to be sure their staffers and systems are up to the challenge. Moving into eFX trading raises the issue of training, especially with new functionality, he says. “In addition, there are connectivity, integration and straight-through processing issues to get trades seamlessly into order management and back ofﬁce settlement systems.” Growth Curve to Continue Considering trends in global ﬁnancial markets, Olsen expects to see eFX trading volume rise dramatically over the next few years. “We are still in a very steep part of the growth cycle, and more entrants will be coming to the market,” he says. Currently, most eFX trading is done in the US and Europe, although there is increasing participation from Asia, he adds. On a global basis, FX traders will continue to reﬁne their models, drive transaction costs down and push through higher volumes. “The challenge for prime brokers, banks and other participants is to be a couple of steps ahead of the market growth trajectory,” says Olsen. “You can’t be caught short in your technology investments – you have to think about tomorrow.” ■ “The challenge for prime brokers, banks and other participants is to be a couple of steps ahead of the market growth trajectory. You can’t be caught short in your technology investments – you have to think about tomorrow.” Dave Olsen JPMorgan “If FX volatility is driving your portfolio, you need to manage that very actively in order to generate a desired return while mitigating risk,” Godfrey says. On the other hand, a fund manager may be looking at FX as another asset class. “In that case, you need to consider which currencies to buy and sell, and which broad strategy to adopt,” he explains. “Once you decide on a strategy and investment time horizon, then you can think about execution, using the various available channels.” When reviewing eFX trading options, Olsen says a platform’s ability to offer a ﬂuid gateway to pools of liquidity is one of the fundamentals. “Managers should also understand the details about how trade messages are routed and 8 • Alpha Sponsored Report • April 2008

Table of Contents Feed for the Digital Edition of Institutional Investor's Alpha Magazine - April 2008

Institutional Investor's Alpha Magazine - April 2008 Contents Letter from the Editor Longs & Shorts Pension Corner: Here to Eternity The Good Guys: Voice of Hope Cover Story: The Kings of Cash Where the Money Is Into the Light Interview: Proceeding with Caution Strategies: A Convenient Truth Alpha Bytes: Village Voice Unhedged: Commentary: No Time for Complacency

Institutional Investor's Alpha Magazine - April 2008

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