The Finance Hive: Digital Café, 8th May
Earlier this month, we were joined by 31 members of The Finance Hive for a Digital Café on FX NDF streaming. Covering the evolution of the NDF market, NDF algos, data accessibility, and more, this blog explores some of the many key takeaways from the buy side discussion…
Market Evolution
Members first discussed the evolution of the NDF market. 10 years ago, there were just a small handful of institutional brokers to aggregate prices and voice trading once accounted for 95% of volume in the NDF space. Fast-forward a decade, there has been a noticeable shift from voice to electronic trading.
Singapore in particular has heavily invested resource into NDF infrastructure and non-bank market makers are coming to the fore, with the ability to stream pricing directly to the buy side. Members are interested to see how futures further influence the market and drive the electronification of NDFs over time.
Whilst the volume of futures is still small compared to OTC trades, futures are growing in popularity. Our members believe that this interest will only increase as non-bank market makers gain greater access to futures liquidity.
Moreover, as the market matures and futures come into play, our members expect to see improvements to OTC trades. “It’s pretty much a hybrid model. The one-month deals are all electronified, but swaps are not. A few banks stream them. Some banks still want to deal in one voice, so we’re in the midst of things…”
NDF Algos
Members were keen to understand who is currently using NDF algos. Some members have been avid users of NDF algos for several years now, reporting a gradual improvement due to other venues going online. “There’s more flow. They’re moving electronically. We’ve seen better execution there.”
Banks are expanding into the LATAM world, particularly Brazil, but our members have experienced more electronic liquidity in the APAC region to date. There is still a reliance on voice trading due to the workflow challenges posed by the LATAM market. “I think price transparency is one thing that kind of lacks. The hours are kind of constrained as well, then spread capture is something that goes with this, which is what we’re struggling with at the moment.”
Some members have put NDF algos on pause as a result of affiliated costs or trade size, having used NDF streams to maintain multiple APIs previously. “Right now, the RFQ price aggregator is sufficient for our needs.”
Build vs. Buy: Sourcing NDF Data
Members discussed the challenges associated with historical data. Real-time NDF data is relatively easy to acquire from banks and venues by API, whereas historical data can be costly, sitting firmly in the hands of vendors.
Historical data doesn’t necessarily benefit firms that are price sensitive either, leaving some members opting to build their own data. “We don’t see a lot of value in buying data, because that’s not exactly where you’re going to find your price and where you’re going to trade. Pricing is typically dependent on who you are and what pricing you receive from your providers, and that depends on your flow and your relationship. So, if you really want to know where things are, you should store your own data.”
That being said, members are encouraging banks to show more aggressive prices for electronic NDFs. For liquidity reasons, banks can be reluctant to show aggressive pricing on their direct bank platform—which they often prefer to use to minimise risk. “You want to make them comfortable to start streaming more aggressive pricing when it comes to NDFs, especially as they get to know the account better as the sizes start increasing. And if there’s a good two-way flow, they’ll be incentivised, but it also takes a push from the buy side.”
Despite members being at varying stages in their NDF journeys, with some regularly using NDF algos and others yet to truly test the waters, members across the board are looking forward to future developments in the FX NDF space…
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