Financial institutions and corporations are increasingly moving to electronic platforms for the benefits they bring in terms of operational efficiency and market transparency.
The Foreign Exchange market is the world’s largest and most liquid market and operates 24 hours a day, five days a week. In one day, the average amount of FX trading totals $5.1 trillion a day, 30 times more than the entire daily volume at the New York Stock Exchange, according to industry experts.
The India rupee is the 20th most actively traded currency globally averaging at approximately $53 billion a day.
Volume continues to grow, even as the market is changing structurally. Regulations such as Basel III are requiring increased levels of capital, credit, and risk controls, forcing many banks to reassess their appetite for broad participation across all market segments.
Regulation can help bring stability, transparency and a more level playing field, and they also mean that FX professionals have to adopt the additional burden to meet compliance mandates and increased IT costs. In addition, there is still a significant need for clarity and consistency across jurisdictions. Either way, everyone accepts that regulations are not going away and firms need to innovate to keep up with the global markets.
The biggest industry trend is the move to technology and automation to “electronify” the currency market. Today, nearly 70 percent of FX trades globally are done via electronic trading, according to industry sources. In India however, the reverse rings louder with majority of the market still on voice trading and confirmation.
Those who have embraced newer technology say it helps reduce operational risk, improves operational efficiency, and reduces costs. Some regional market players have been hesitant to move away from voice trading and adopt electronic trading, but that is changing.
In a new, more conservative risk environment, electronic trading offers significant advantages over legacy practices such as phone trading. The current practice of trading over the phone is subject to price slippage during volatile markets, and this puts manual traders at a distinct disadvantage. Phone trading can also have a greater margin for misunderstanding due to language barriers. Electronic trading can help eliminate verbal misunderstandings. With e-trading, users can compare quotes from several banks in real time, which improves price discovery, follows best practice and results in better pricing for the customer.
Electronic trading doesn’t need to come at the expense of client relationships either. The close, personal business relationships developed over many years are still important in these markets. Technology can provide automation and efficiency without compromising preferred business relationships. As local markets expand it is also important to accommodate local market practice and conventions, in order to gain wider adoption.
Bloomberg convened over 300 banking and foreign exchange executives at an FX16 India event to gauge the opportunities and challenges that firms in India face. The two biggest issues were ‘managing currency exposures’ that 34% of the respondents voted for and ‘hedging against market volatility’ by 29% of all respondents polled.
All these factors coupled with the increasing globalization of markets clearly demonstrate the case for India to embrace electronic trading as it strives to create a vibrant and liquid marketplace.
The author Sunny Chhabria is Head of India, Bloomberg
Kamal Singhania is Senior Vice President - FX Clear of The Clearing Corporation of India Ltd.