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Special Report: Digital Innovation EM eFX Trading published by DMALINK and other industry leaders.






An e-Forex special report prepared by Deutsche Bank, DMALINK and Smart Trade on how the use of automation and innovation will be critical in managing the operational risk and market volatility that comes with trading in emerging market currencies.


The last triennial survey of FX trading volumes and trends published by the Bank of International Settlements (BIS) in December 2019, showed that FX markets for emerging market (EM) currencies grew more rapidly than those for major currencies. In fact, between 2016 and 2019, EM currency trading rose by 60%, almost double the global average (33%), and by the end of 2019 accounted for almost 25% of global turnover. The BIS ascribes this growth to several factors such as the growing appetite among global investors for EM assets in their search for yield. It should also be noted that banks enjoy greater profitability by offering more exotic products.

Between 2016 and 2019, there was also an increase in the share of trading generated by hedge funds and proprietary trading firms. The presence of more non-bank financial institutions was hugely driven by the electronification of FX trading, states the BIS. This enabled smaller players to access markets that had been traditionally dominated by inter-dealer trading among banks. There was also a noticeable growth in forwards, particularly NDFs, and offshore trading, a trend that was driven by the inclusion of these instruments on the main electronic broking platforms such as EBS and Reuters/Refinitiv which launched NDF trading platforms in 2020. The BIS concludes that the rapid growth of EM currency trading and its electronification can create both challenges and opportunities. On the plus side, it allows for round-the-clock trading and the greater liquidity can boost foreign investment in those emerging economies.


Electronic benefits

However, the increase in offshore trading can influence the price discovery process for exchange rates in markets that are more difficult to monitor. There are also similar risks for FX traders in these more exotic currencies. The higher profit margins on offer have to be weighed against the lack of automation and higher operational risks. And just as central banks have sought to expand their monitoring capabilities, the many vendors and developers of FX trading platforms and services have looked to develop more products and tools geared towards EMs in order to reduce those operational risks. “The EM world is differentiated from other currencies by often reduced liquidity, more complex workflows and additional trading restrictions,” says John Stead, global head of pre-sales at smartTrade Technologies. “Some processes and currencies can be fully electronified so benefit from the existing advanced trading functionality already used with non-EM instruments. But at the extreme ends of the EMs, some currencies and the liquidity providers do not have any electronic rates distributed via application programming interfaces (APIs).” Instead, the rates are quoted via a daily rate card sent via email or fax each day. “We have the ability to capture these rates from non eFx sources in order to keep manual processes to a minimum,” says Stead. “Once captured banks may use these rates within the existing eFx flows. Some can be provided via API for interbank trading but the sell side only wants to show clients a rate fixed at a certain time each day. Here the process required is one of moving from a variable rate to a distributed rate card can be automated reducing risk and again keeping any manual work to a minimum.”


“The EM world is differentiated from other currencies by often reduced liquidity, more complex workflows and additional trading restrictions,”


The use of APIs has become vital in allowing maximum integration of flows and reducing the manual intervention, says Ludovic Blanquet, chief product and strategic planning officer at smartTrade Technologies. “Semantic and self-describing APIs, also known as RestAPIs, allow for a much richer integration between human interventions and automatic processing. As the banks reduce the size of their operations, they need to raise their productivity. Intelligent automation allows them to do both while protecting their margins. Any process that is automated creates an audit trail and key checkpoints triggering a commensurate decrease of operational risks levels.” The role of technology and automation becomes even more important in EMs where liquidity is harder to come by, as is the relationship between trading platforms and liquidity providers, says Stead. “The partnership between banks and their liquidity providers is especially important when liquidity is scarce as can be the case when quoting and managing risk for