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The COVID-19 Crisis Brings Volatility Back to the FX Market

Francois Lamy
Francois Lamy
Strategy Director, FXall

Amid a global health and economic crisis caused by the spread of COVID-19, the FX market is experiencing heightened levels of volatility and thinner liquidity. Refinitiv’s market-leading FX platform provides unique insight into recent market conditions.


  1. FX trading volumes and volatility have soared on the back of market turmoil in equity and fixed income markets. FX traders must navigate challenging market conditions including widening spreads and thin liquidity.
  2. A deeper look at Refinitiv’s market-leading FX platform reveals how spreads evolved in the Dealer-to-Dealer and Dealer-to-Customer markets.
  3. The use of execution algorithms by the buy-side continues to increase, confirming they have become an everyday tool for institutional investors, and not just in times of low volatility.

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A serious test of FX trading continuity plans

The unprecedented health and economic crisis caused by the spread of Covid-19 has caused major disruption in financial markets worldwide, putting the business continuity plans of all market participants to the test.

Over the last few weeks, FX trading professionals have endured a tremendous amount of pressure on their trading operations, technology, and infrastructure, especially as a majority of them shifted to  working from home.

Technology and platform providers including Refinitiv have been at the forefront of the industry’s response to the crisis.

“We appreciate how critical our systems and services are to the FX market”, said Neill Penney, Managing Director and Global Head of Trading at Refinitiv, “which is why we have been closely monitoring the situation and taking the steps we need to stay resilient and keep clients trading.

In addition to investing strongly in our own business continuity and resilience measures, we have actively reached out to all of our FX clients to ensure we can understand their BCP arrangements and help them achieve practical and appropriate solutions where they are needed”.

Our survey of FX clients revealed that most clients prefer staff work from home or from locations already identified and tested for business continuity.

A spike in activity and volatility

In the midst of these operational challenges, FX traders have had to deal with levels of volatility unseen in recent years, as illustrated below by the Deutsche Bank Currency Volatility Index that tracks expected volatility in the FX market.

As the equity and fixed income markets were affected by a market correction on a scale not seen since the great recession, increased FX trading activity has resulted in liquidity providers and FX trading platforms reporting record volumes.

Refinitiv clients across the buy-side and sell-side rely on us more-than-ever to access market-leading OTC liquidity. In March daily trading volumes averaged $540 billion across all Refinitiv FX platforms, a new record high since Refinitiv began publishing volumes. Average daily volume for Spot FX across all Refinitiv platforms reached $141 billion in March, the highest since September 2014.

Buy-side traders rely on innovative workflow solutions to handle the increase in activity

Buy-side institutions, especially those managing international equity or fixed income portfolios, are having to leverage their full range of bilateral trading relationships with bank and non-bank market makers to deal with greater FX trading needs. On FXall, Refinitiv’s multi-dealer platform, trading volumes in March increased by 25% year over year. As one would expect, this significant uptick in activity is mainly driven by the asset management segment with a 45% year over year increase over the same period.

Originally centered around execution methods that allow users to secure the best price from a panel of liquidity providers (via request-for-quote and streaming prices), leading multi-dealer platforms have expanded their core capabilities over time. FXall’s advanced workflow solutions and execution tools have been critical in helping the buy-side safely cope with much larger volumes from their remote or virtual work environments. FXall clients rely daily on a broad range of features, including:

  • Pre-trade order netting (including cross-currency netting and netting of same pair exposures that have different dealt currencies) to submit orders to the market for the most cost-effective execution possible.
  • Batch trading workflow and rules-based auto-execution, in order to automate all or portions of clients’ trading activity and increase operational efficiency.
  • Execution algorithms and other advanced order types that help users access liquidity in smarter ways, minimizing market impact as well as information leakage.
  • Sophisticated business intelligence to assess trading performance, identify improvement opportunities and enhance provider selection.
  • Regulatory reporting, audit trails and transaction history for robust risk management and compliance.

Deep liquidity in the primary market allows efficient risk transfer in times of turmoil

On the other hand, while sell-side liquidity providers are benefiting from increased client activity, they are also having to push more of their hedging flow through electronic inter-dealer platforms. That is partly due to the fact that their clients’ positions have tended to move in the same direction through the market correction, causing the banks’ internal matching rates to decrease. Recent market commentary also indicates that the voice brokerage model of inter-dealer brokers has not proven as resilient in remote or virtual work environments.

Refinitiv’s Matching platform, one of the historical primary markets for interdealer trading in FX, recently saw Spot volumes spike to levels last seen during the UK Brexit referendum of June 2016 and the November 2016 US presidential election, and also broke record highs for Forwards Matching. The benefits of trading on a platform like Matching include:

  • High certainty of execution: with firm orders only, when two orders are matched, as long as the counterparties have available bilateral credit in the system, the trade will be completed.
  • Pre-trade anonymity: when used strategically anonymous trading can allow institutions to minimize market impact and transaction costs.
  • Price transparency and access to market data: users have visibility into order and price information from the order book (such as best prices, last traded prices), and market data feeds are also available (both real-time and historical data) to facilitate model/algo back-testing, benchmarking and transaction cost analysis.

While multi-dealer platforms offer the benefit of relationship-adjusted liquidity, the need to ensure access to deep liquidity even during times of market turmoil is also driving interest in primary markets on the buy-side as well.

Widening spreads and thinning liquidity

While the general consensus is the FX market has proven robust in recent weeks, able to sustain a substantial spike in activity, market participants have observed a significant widening of spreads as well as thin liquidity at times for larger ticket sizes.

Buy-side traders are dealing with deteriorating liquidity conditions, including a widening of spreads quoted by their liquidity providers and lower levels of liquidity available for certain amounts. Through periods of illiquidity they are having to spend more time to get normal business done. The sell-side is echoing similar remarks, observing very wide spreads and erosion of liquidity in certain instrument types or currency pairs, notably in some emerging market currencies.

The unparalleled breadth and depth of FX trading conducted on Refinitiv platforms offers a unique glimpse into how spreads have evolved since the beginning of the year in the inter-dealer and dealer-to-client markets.

The first chart illustrates how spreads for GBP/USD, AUD/USD, and USD/CAD on Refinitiv’s Spot Matching platform increased sharply on March 9th, rising steadily thereafter and peaking around March 23rd. As market conditions gradually improved, we can observe spreads starting to decline around March 25th.

This second chart illustrates how spreads evolved on Refinitiv FXall, a leading multi-dealer platform where buy-side market participants trade on a disclosed basis with their liquidity providers. A similar trend is observable, with a sharp increase in spreads starting once again on March 9th, followed by a decline beginning around March 20th.

Buy-side usage of algos on the rise

Facing a very heavy workload in tough market conditions, the buy-side is turning to smart tools to enhance their trade execution.

While the rise in adoption of execution algorithms in FX has been well documented, recent usage trends confirm algos have become an everyday tool for the buy-side, and not just in times of low volatility.

For the most part, buy-side traders have become familiar with the benefits of using bank algos, such as the potential to reduce the market impact of large trades through the stealthy placement of orders across one or more trading venues.

Another key benefit is the potential to generate cost savings by minimizing spread paid. Buy-side traders are now confirming they are willing to bear market risk even in times of high volatility in order to avoid paying significant bid/offer spreads. Passive algo strategies in particular have been very popular, as they allow a trader to post resting interest in trading venues and capture spreads over time.

On FXall, algo trading volumes in March increased by 380% year over year, with the bulk of the increase once again attributable to asset management clients. Not only did existing algo users rely on these automated execution strategies to execute much larger amounts than usual, there was also significant interest from institutions using algos for the first time.

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