The Times, They Are a-Changin’

May 13, 2020

Caplin's Keith Hill has written an article on the implications of the Covid-19 crisis in the FX market. First published in Profit & Loss magazine, May 2020.

‘Back to normal’ – three simple words, and a world of meaning. For those in the UK, Monday, 23rd March 2020 marked the point at which everyone’s life changed. Lockdown has had, amongst many other effects, a profound impact on how and where we work and the very nature of the job we do. The financial markets in general, and the FX market in particular, are no exception. This article looks at some of the implications of the Covid-19 crisis in the FX market and considers what the ‘new normal’ might look like.

Whilst the fundamentals and products of the core FX market would be familiar to someone stepping out of the year 2000 or even 1990, the technology and much of the behaviour of the participants have changed the nature of the business.

On the tech side, the execution of trades, as seen by both the buy and sell side, has become almost wholly electronic. As the nature of the relationship between bank sales and traders has changed, as has that between interbank traders, so the market structure has also changed.  The voice dominated web structure, client – sales – traders replicated across hundreds of banks worldwide, transitioned through e-replacement but still stayed recognisable. It has now morphed into the current hub-and-spoke setup, with a handful of dominant market makers including non-banks, a myriad of diverse liquidity pools, and a vast array of smaller banks fighting to service their own client base and protect it from new entrants both downstream and upstream. These struggle to carve out a niche (either in reality, or, in many instances, simply in their own minds and in those of their management) to justify the current structure.

Not only have the levels of market volatility changed substantially over the past two decades, and especially over the past four years, but so, too, has the nature of that volatility. The phrase ‘long periods of boredom punctuated by moments of sheer terror’, so often used to describe warfare, springs to mind. With the exception of the past few weeks, spreads have been eroded to a point that would have seemed unimaginable 20 years ago.

Yet the ripple effect of digesting flow into the market and the feedback from the observation of the impact of any action in that market makes consistently profitable market making a challenge. Add into the mix an increasing cost base, whether from credit charges, chunky fines or the nebulous and ever increasing ‘allocated costs’ of ‘Running the Bank’ and the difficulty of generating an acceptable return for shareholders is clear. 

O tempora, o mores

On the ethics side, the industry has witnessed a sea change in what is considered acceptable behaviour as a consequence of many well publicised scandals, from front running, to Fixings, to Last Look. Greater transparency in pricing (whether spread, level of liquidity, or composition of margin) has swung the pendulum in favour of the buy side, and, many would argue, not before time. Following the last Global Financial Crisis of 2007/2008, the rules have changed regarding permissible activities in markets divisions of banks, and codes of conduct like the FX Global code have emerged. The nature of information flow has changed, and an army of compliance officers and a complex array of communications monitoring systems patrol everyone’s activities, looking for possible transgressions.

Given all this, what’s surprising is that the physical environment in which a bank conducts its FX activities - the dealing room - has changed so little. Old hacks bemoan the lack of noise, buzz, excitement and electricity, but what’s remarkable is that we still have these large amphitheatres designed for combat where the majority of flow and communications with clients happens electronically and silently.

Slowly but certainly, it’s taking a virus pandemic to shine a spotlight on this way of working and ask whether it’s still fit for purpose.

Better together

Without a doubt, we humans crave each other’s company and if that’s the sole reason for herding together large numbers of sales, traders, quants, researchers, compliance officers and managers in a single room, it’s still a very powerful one.  

There are other reasons why a permanent workplace is an advantage – confidentiality of client information, deployment of systems, separation of the work environment from the home environment, especially in crowded and overpriced cities where space is at a premium and flat-sharing is common. The flow of information is often cited as an essential element of the dealing room setup and the need for policing that flow is ever present. 

Lastly, camaraderie and the benefits of that team drink at the end of the day are established pillars of the FX market.

Yet if we look at the cost of maintaining this setup, for all employees, all of the time, a counter argument starts to emerge.

This pandemic, which is not the first and won’t be the last, highlights the risks of the grim commute into the City, in rush hour, where a two metre exclusion zone around each commuter seems a ludicrous notion. On the Central Line, you’d be lucky to get 20 cm!  A crowded dealing room containing hundreds of staff is about as far from ‘social distancing’ as you can get.

What used to be impossible – working for a financial markets institution whether in front office, middle or back office, legal, compliance, research or support, from somewhere other than in the office – is now not only possible, but a daily reality for hundreds of thousands of professionals across the world. How has this been achieved in only six weeks, what problems will emerge, and will we ever go back to the old normal?

Dispatches from the front

As we move into week six of lockdown in the UK, most banks have resolved the seemingly insurmountable problems of running a modern FX business from a home environment.

Initially, getting staff access to work systems en masse was a huge challenge – many banks simply hadn’t considered needing VPN connections for all their staff, including all operations personnel too. Staff needed laptops, and whilst some firms arranged for them to be sent out, others shipped out whole desktop setups, in order to be confident that staff could perform their roles. Many people have struggled with connectivity and wifi at home, not so much in the cities, but once you move out beyond the suburbs, you realise that the UK is not a world leader when it comes to Internet access, and the burden of trying to hold video conferences from home, with the distraction of YouTube and the temptation of Netflix has proved too much for our meagre broadband setup in some parts of the country.

Firms that outsourced support functions to lower cost centres abroad, are now realizing that, in the face of a global pandemic, these countries may have very limited access to the Internet from the home environment, and yet are facing the same constraints on movement and social interaction. It’s doubtful that many decision makers at banks considered this when deciding to outsource offshore originally.

However, once all the software and hardware challenges have been resolved, there is still, for most people, the logistical challenge of working from home. Whilst working from broom cupboards, out on a balcony if the sun is shining, or on the kitchen table might work as a short-term measure, as a permanent solution, it’s not at all satisfactory.  Partners, flat mates, children and pets all have a call on available space. From a confidentiality point of view, having two flat mates or partners in similar roles but at rival firms, makes a confidential work environment impossible.

Feel the force

Spare a thought, too, for the responsibilities placed upon compliance officers. Whilst electronic surveillance of bank operated systems, official chat channels like Bloomberg and Eikon, and recorded mobile phones still functions smoothly, it becomes even harder to monitor personal phone usage, let alone encrypted apps like WhatsApp. Sales need to maintain contact with clients, and since many rely on the contact details available on, say, Bloomberg, it is difficult to enforce that only work numbers, not personal mobiles, are listed. Whilst VPN technology might prevent staff from copy/pasting confidential information from a work system into a non-work application, the ability to capture screenshots still exists. And they leave little trace of their capture on a personal device. If the last lines of defence are training and a strongly worded compliance policy, does distance from the office lead some people to feel distanced from being supervised fully?

All by myself

Social isolation and loneliness are an increasing problem in modern society, often acute in urban settings where we live surrounded by others but not in real contact with any of them.
Whilst the current Covid crisis has undoubtedly awakened a community spirit, is it wishful thinking to expect that to continue when the situation starts to revert to normal? So, for many, the workplace environment encourages that creative spark amongst colleagues which is very difficult to replicate virtually over a conference or video call.

The end of the beginning

It is clear that there will be no return to the ‘old normal’ in the FX market any time soon. It is also becoming clear that the current situation, whilst workable, is unsatisfactory for the majority of those employed in the industry. As for the ‘new normal’, what might it look like?

Firstly, it seems likely that the existence of large disaster recovery sites will become a thing of the past. Often, they are in locations that are out of town, and not that easy to get to, especially with constraints on public transport. They are rarely tested under real stress scenarios, and the success and speed of the shift to working from home has been one of the positive lessons of this crisis. The advances in technology even since the Global Financial Crisis of 2007-2008 have been huge – at the start of that crisis we barely had the first iPhone and now we have the ability to perform tasks on mobile devices that were unimaginable then.

Secondly, working from home is clearly an impossibility for many people in many jobs. But we have proved that that is not the case for the majority of people in the FX market. In a short space of time, we will have moved from employers discouraging the practice, to allowing it, and then, perhaps, to actively encouraging it as a permanent, balanced solution. Many other roles support a truly flexible work environment, using hot desking as a way of reducing the concentration of staff in the office. 

Thirdly, it is time to focus attention and investment on solutions that support work away from the office. Encryption, authentication and surveillance have improved immeasurably over the past years. Banks are increasingly offering mobile apps to clients, ranging from research portals to monitoring and execution platforms. It’s time this flexibility was extended to their own workforce. There are definitely challenges on the trading, sales coverage and support side, but increasingly, solutions are being discussed and proving workable. As market conditions demand that banks cover more clients with fewer staff, so the need to share relevant information, seamlessly and confidentially between members of a sales team becomes ever greater, highlighting the need for advanced sales dashboards, integrated into banks’ core systems. Clients can receive a highly personalised service from many members of a sales team, some working remotely, thus reducing key person risk at both buy and sell side firms.

Fourthly, encouraging ‘working from home’ as an alternative to always being in the office, opens up a huge degree of flexibility to a labour force that can struggle with the additional burdens of lengthy office hours and unpredictable commutes. Juggling  childcare and family responsibilities can deter some people from returning to the workplace or working part time as a job share with a co-worker. Normalising ‘working from home’ and improving the systems that support this would be a valuable step towards recognising and celebrating a more diverse workforce.

And lastly, this article was written on Earth Day, and so maybe it is fitting to consider the benefits to the environment of not mandating the mass commute and incessant need for physical travel previously thought essential to grow and support a global markets business. Less can be more. Performance can be measured by results rather than just attendance. A little balance can, perhaps, be restored.

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