FX Fuels Demand for Multi-Asset Trading Technology

June 19, 2024 | By: Ivy Schmerken

T+1 is pushing firms to align equities and FX trading on a single platform.

As multi-asset trading gains momentum on the buy side, institutions are seeking workflow efficiencies and foreign exchange is playing a key role in fueling the trend.

On the execution side, there are many factors driving demand for FX liquidity and multi-asset trading technology.  In addition, there are several regulatory forces and trends in the marketplace — such as T+1 settlement and the rise of digital assets — pushing the marketplace toward multi-asset trading technology.

Today, U.S. asset managers and hedge funds investing in international equities need to generate positions in both equities and foreign exchange because they need to hedge their currency risk. For example, a portfolio manager investing in a biotech stock listed on the London Stock Exchange, which has a correlation with a U.S. biotech stock listed on Nasdaq, at some point will need to convert euros into US dollars. Most institutions are multi-asset in terms of their investment strategies, and they have multinational trading desks. On the hedge fund side, if there’s international exposure to any other asset class, then FX automatically comes into the picture. 

As the buy side builds out multi-asset trading strategies with equities and FX, this creates demand for technology infrastructure that can manage executions and source liquidity for different instruments from a single blotter.

When portfolio managers (PMs) need exposure to futures or FX, they want to see that all together, along with risk, compliance, and profit and loss (P&L). In addition, firms investing in fixed income want to net and generate FX positions off the underlying instruments.  Executing algorithmically through an execution management system (EMS) or integrated order and execution management system (OEMS), allows the PM or trader to generate their FX positions in tandem with equities on the same multi-asset platform.

In the past, the buy side had separate platforms for each asset class, or they routed a trade to a different desk to execute the FX component. From a multi-asset technology perspective, a trader should not need to click on three systems to see what aggregated exposures look like. This approach has led to operational inefficiencies, redundancy, and the risk of data inaccuracies.

Now most hedge funds and institutional asset managers running global portfolios with equities and FX recognize that consolidating trading activity on a single EMS or OEMS platform provides distinct advantages.

Access to FX Liquidity

In the $7.5 trillion a day FX market, where there is no centralized market, participants rely on bilateral trading, using automated protocols like request for stream quote (RFS/Q) and executable streaming prices (ESP). With FlexTRADER EMS connected to data feeds via application programming interfaces (APIs), traders receive bilateral connectivity to multiple FX liquidity providers streamed on a single platform.

T+1 Settlement

As global regulators push for faster settlements in equities, the shift to T+1 settlement in the U.S. on May 28 will impact buy-side traders executing equities and FX.

A shortened settlement time for US equities falls on the heels of Canada and Mexico moving to T+1 one day earlier on May 27. The mandatory migration will impact global asset managers located in Europe and Asia Pacific, causing them to rethink how they will fund their US equity positions on T+1. Since FX currently settles on T+2, the buy side will need to execute their FX trades sooner, which means liquidity that is on T+2 will likely move over to T+1.

Non-U.S. based accounts trading U.S. and Canadian securities will need to complete their FX transaction by the end of the U.S. trading day. Asset managers have talked about pre-funding the position, where the buy side would do the FX transaction on trade day (T+0).

While it’s too early to predict the full implications of T+1, a speedier settlement period bolsters the need to align FX trades with equities. An integrated order and OEMS enables the buy side to execute both equities and FX orders on a single platform, while taking advantage of netting to save costs and reduce complexity.  Depending on how they choose to execute, a trader could trade 100 equity fills algorithmically, and then do 100 FX fills in real time, or decide to execute the FX orders in bulk at end of day.

Using one platform, with fewer variables to monitor is more stable, and makes it easier to get through the shortened time window.  

Digital Assets on the Rise

In the last few years, many institutional investors have become involved with cryptocurrencies and digital assets. A September 2023 study by Amberdata and Coalition Greenwich found that 48% of institutional investors now manage digital assets, reported

While the digital asset landscape is still evolving, many traditional finance players are looking for trading technology partners that can execute crypto and digital assets in a safe and efficient manner.

In March, FlexTrade announced an integration with Coinbase Prime, providing clients with one of the largest pools of liquidity for digital and crypto assets. The integration with Coinbase Prime provides seamless connectivity, consolidated depth of book, and order placement from within FlexTRADER EMS and FlexONE OEMS.

Building the digital asset OEMS to address the needs of multi-asset institutional clients is a key priority. At the same time, the multi-asset EMS and OEMS will bring institutional grade technology, compliance and analytics to the full order lifecycle of digital assets and cryptocurrencies.

With exchanges launching digital asset products, the interest in blockchain technology for faster settlement and transparency into asset ownership, as well as 24/7 trading in cryptocurrencies being talked about for equities, the worlds of digital asset trading and traditional finance could converge, reports The Trade.

In the future, demand for multi-asset trading technology is expected to pick up as more hedge funds and asset managers look to consolidate their equities and FX trading on a single platform. As traders bring new multi-asset trading strategies to the desk, they will require EMS/OEMS platforms that can access new data feeds through APIs and whose components can keep up with innovations in the marketplace.

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