We asked Scott Wacker, global head of e-commerce sales at JP Morgan and Gordon Noonan, global head of FX and European rates at Schroders, to tell us how the consensus in the research will translate into practical action on trading desks.
Transcript of interview:
Dan Barnes: Welcome to Trader TV your insight into institutional trading. I’m Dan Barnes. JP Morgan’s latest trading survey has found that traders have new priorities and concerns in 2023 across asset classes. With me to discuss these results and implications are Scott Wacker of JP Morgan, and Gordon Noonan of Schroders.
Guys, welcome to the show.
Scott Wacker: Thanks.
Gordon Noonan: Thanks, Dan.
Dan Barnes: Which challenges and new developments will be driving markets in 2023?
Scott Wacker: We had a bit of a change this year. Last year, inflation was the number one priority. But this year there’s more concern around recessionary risks, followed by inflation and then geopolitical issues.
Dan Barnes: And Gordon, how do you see technology changing trading over the short and medium term?
Gordon Noonan: Well, I think traders are very much now getting into the mode where they can use data a bit more and be a lot more comfortable with the data that they can consume. Traders now have access to more tools, they’re getting more data from the banks ranging from equities, which is very, very data rich all the way down to high yield credit, which is still light on data. And they’re happy to use that data to provide better investment decisions on the fly while we’re trading in flight.
Scott Wacker: This year, we saw artificial intelligence and machine learning as sort of the number one technology innovation that’s going to affect trading over the next three years, followed by API connectivity and integration. And then the third one, which I think was quite interesting, is a view that the emerging blockchain technology is going to change things as well. How the market is harnessing this data using machine learning is evident. But the second one I think is probably most poignant in terms of where electronic trading is going. The fact that more people are recognizing API connections is really the cornerstone of enhancing electronic trading across asset classes. In transaction costs analysis, you need to use a lot of data and if you want to enhance your trading models, also get more efficient outcomes, using data with sort of machine learning reinforcement has played a huge part.
Gordon Noonan: As traders have become more comfortable with the data, they will be getting a lot more comfortable asking questions and then querying the data themselves. And then we can go back to the sell-side and query that data further and make suggestions and we can work together. Guys like JPM have really kind of pushed that forward with their JPM markets tool, giving us more real time data, which is only better for us and only better for our clients.
Dan Barnes: So coming back to you, how do you see market structural change potentially impacting how and where people will be trading this year?
Scott Wacker: Really the three biggest market structural concerns for clients were first, access to liquidity. Second, regulatory changes and finally market fragmentation. That’s one of the things I think electronic trading really helps address. So by connecting through APIs, creating an automated process, we’re able to give access to markets that typically might not be as easy to access. And so as that grows, I think it’s just going to continue to improve.
And when you look at the world sort of through the pandemic, and particularly in 2022, where we saw unprecedented levels of volatility, essentially we didn’t see any major markets break down. No real flash crashes. And actually the electronic portals were very, very resilient through a pretty testing period of time.
Gordon Noonan: As we get more data, we’re able to look at the pricing we get from different banks. We’re able to then raise the quality of that pricing. If we see a material market impact, we know that although the bank has given us that price, how they’re accessing that liquidity, where they’re getting that liquidity from, we can gauge a lot better than the way we used to.
Spreads have widened materially post the Ukraine invasion. Now they have come down and they’ve come back, but not to where we were prior to the invasion. Liquidity is a bit thinner and the depth of book is thinner as well. We’ve noticed from conversations with a lot of our banks. So on the back of that, we’ve had to change how we’ve executed with the market and we have to constantly reassess going forward as we see changes in liquidity and adapt accordingly.
Dan Barnes: Scott, looking at inflation, how impactful will that be this year?
Scott Wacker: In last year’s survey, inflation was the number one concern. This year it’s risk of recession. If you really think about it, one sort of leads to the other. The natural response to inflation is to raise interest rates. The whole purpose of raising interest rates is to slow the economy down. And essentially a recession is a slowing down of an economy.
Gordon Noonan: What we’re finding is divergence in interest rates across different economies and different currencies. So all of a sudden, the points, the four points that we’re being charged is a lot more important than when everyone had zero interest rates. Before we would be hyper concentrated on the spot spread. Now we really need to start looking at the forward spread as well, and we have to look at the all in cost, spot and forward. That is just as important now.
Dan Barnes: So Scott, what sort of institutional interest do you see in digital assets this year?
Scott Wacker: Interestingly, 72% said that they don’t have any interest in trading in the next year, with 6% saying that they did. We did see a rise in expectations over the coming years. But in the short term, it looks like perhaps the interest from previous years seems to be waning a bit.
Gordon Noonan: The talk is very much moved away from people asking where Bitcoin pricing is going to go and the crypto bro kind of idea. People kind of understand the technology a lot better and I think there’s a lot more nuance and a lot more education out there now from the buy-side and the sell-side about where we can go with digital technologies. With regard to DLTs, it’s not just about Bitcoin anymore. We’re really kind of looking on a wider scope.
Dan Barnes: That’s great. Thank you. What are your expectations for electronic trading in 2023?
Gordon Noonan: As people become more comfortable with the data they can use post TCA data to make a virtuous feedback loop into pre TCA data and make smarter decisions. What we’re hoping to do is allow automation and auto rules to allow us to trade smaller tickets, more electronic. And we can feed that back through again and through our data and allow traders to concentrate on value out for PMs or concentrating on larger tickets.
Scott Wacker: If you look at the survey, 100% of the respondents said that they anticipate their electronic trading to grow. And if you think about machine learning and execution optimization, I think we’re only at the beginning of that process. I think some of the advances in bringing the equity markets, such as the ETFs into the fixed income side of the market is going to increase liquidity. I think bringing some of the tools that we’ve learned from foreign exchange, such as, you know, increasing internalization, creating SKUs, tiers, looking at markouts and responding accordingly, is again going to still bring further advances this year and in the years to come.
Gordon Noonan: A lot of the buy-side have always been keen to increase automation and increase electronification. What finally has happened in the last few years is that the EMS’s have actually improved their functionality to allow us to realize a lot of what we planned on doing. So the quality of offering from the EMS is very, very important in this space. We need to increase more logic there, more complicated rules that allow us then to increase our automation in a safe and risk free manner where we can.
Dan Barnes: Gordon, Scott, that has been fantastic. Thank you.
Gordon Noonan: Thanks very much.
Scott Wacker: Thank you very much.
Dan Barnes: I’d like to thank Scott and Gordon for their insights today and of course you for watching. Catch up on our other shows or subscribe to our newsletter, go to TRADERTV.NET.
