Unlocking the Power of Granular FX Forwards Data

Unlocking the Power of Granular Data to Transform the Forward FX Market: Insights from New Change FX 

“Transparency is not the same as looking at data; it is the ability to see and understand data in context,” according to leadership expert Simon Sinek. We agree with Sinek and believe the evolution of the foreign exchange market is inextricably linked to the availability of accurate, unbiased and granular data. 

The landscape of foreign exchange trading has undergone a seismic shift, particularly with the rise of electronic trading platforms that dominate the spot market. Billions of price points are streamed daily across various platforms, thanks to the dual engines of regulation and technological innovation. Large fund managers are now mandated to demonstrate “best execution,” leading them to take a more comprehensive view of their trading relationships and value-added services. Regulatory requirements have also compelled large asset managers to engage in transaction cost analysis (TCA) to validate their trading practices. 

Yet, despite these advancements, a substantial portion of foreign exchange trades remains manual, especially in the forward market where trades are usually executed into "broken dates." If the electronification of spot foreign exchange represented a monumental leap akin to landing on the moon, the forward market's electronification resembles a journey to Mars—inevitable, yet fraught with challenges and uncharted territory. 

The complexities of the forward market stem from various factors, notably the approximately 250 trading days per year for each currency pair and the escalating significance of credit components as trade durations increase. This complexity complicates the provision of accurate pricing that accommodates all participants. While some electronic platforms have begun streaming “standard tenors” like one week or one month, the reality is that most trades do not go into standard tenors. 

Futures markets have made strides by providing electronic solutions for future FX trades, effectively addressing credit issues through margin management. However, these exchanges face the same limitations as those focusing solely on standard tenors, neglecting the vast utility offered by a comprehensive range of dates. 

Despite these barriers, progress is on the horizon, and at New Change FX (NCFX), we believe the crux of the forward FX market's evolution lies in data. Experience in other sectors demonstrates that the fusion of advanced technologies—such as Artificial Intelligence (AI) and Machine Learning (ML)—with robust data can catalyse substantial progress. 

Historically, data in the forward foreign exchange arena has been fundamentally flawed. The predominant focus on standard tenors, with linear interpolation between those dates, fails to capture the necessary granularity. This oversight results in a disconnect between theoretical pricing and the realities faced by market makers. NCFX has pioneered the development of granular and “neutral” forward curves, a breakthrough that we believe will significantly enhance market functionality. 

The utility of NCFX’s Forwards365™ curve is profound. It not only provides a benchmark for post-trade evaluation but also signals pre-trade pricing discrepancies. As large fund managers continue to grapple with TCA, many had reduced this vital process to a mere compliance exercise. This is understandable; if they are assessing performance against flawed data, the value of such assessments diminishes. Knowledge of the real neutral curve empowers traders to make informed decisions, enhancing the integrity of their trading strategies. 

Moreover, the forward FX market's intricacies mean that liquidity providers (LPs) often manage their risk by clearing through standard tenors, relying on these data points for visibility into broader market pricing. However, challenges remain in them demonstrating their axes in the broken dates where they may want to reflect either their market view or inventory management post-client facilitation. A transparent neutral curve enables traders to navigate this landscape more effectively, optimising pricing strategies and reducing market impact. 

Some of the earliest adopters of our data include prominent asset managers and sophisticated central banks. Their feedback underscores significant advantages, such as improved date selection for rolling trades and the ability to discern genuine market value in dealer quotes.  

One asset manager likened accessing our data to putting on glasses—suddenly, the market came into focus. Eric Brown FX trader at T. Rowe Price says “NCFX Forwards365™ provides an independent view of the curve to aide in pre-trade price discovery and optimal date selection when rolling positions. Their data adds value in our process and helps give us increasing clarity into where the market is trading.” 

Furthermore, the knowledge of the neutral curve can be used to help mitigate the “winner’s curse” which occurs when the price taker discloses their trading intentions to too many losing (LPs) meaning the winning LP now holds a trade that everyone else knows about. When asset managers leverage this granular data, they can strategically engage with fewer LPs, enabling them to offer better pricing. This dynamic fosters an environment where both asset managers and LPs can operate more efficiently, achieving mutual benefits. 

Banks, including those in market-making roles, require independent data for some of the same reasons. Understanding where asset managers perceive value in the market enables LPs to offer competitive pricing while managing their own risk exposure. With cost pressures compelling LPs to do more with fewer traders, maintaining precise pricing on single-dealer platforms becomes increasingly critical and an independent curve can provide a valuable oversight. 

The global FX code has emphasized the necessity for independent data to guide optimal trading outcomes. Independence is paramount; it is challenging to maintain objectivity when vested interests are at play. NCFX's benchmark rates draw from a wide market spectrum, ensuring transparency and neutrality—principles at the core of our mission. 

Looking ahead, we anticipate two pivotal developments: the establishment of a more sophisticated feedback loop between trading activity and pre/post-trade analytics, and a significant leap toward the electronification of the forward market. The former only makes sense if the data driving the process is independent and accurate. Anything less than this will open the process to inefficiencies and abuse.  The latter will hinge on illuminating all trading dates, with the neutral curve as a vital component in drawing market interest. 

In summary, the evolution of the forward foreign exchange market is inextricably linked to the availability of accurate, granular data. New Change FX stands at the forefront of this transformation, committed to providing the insights necessary for market participants to navigate an increasingly complex landscape with confidence. 

For more information please contact: info@newchangefx.com

Read the full article here: Unlocking the power of granular data to transform the Forward FX market - e-Forex