The future of foreign exchange trading in Asia

IT HAS been an unprecedented year for trading around the world - especially in Asia. Advancements in electronic trading, expanding goods and services trades between China and Asean countries as well as increased interest from international firms in the region have contributed to Asia's rise as a market especially so when in search of alpha and against the pandemic backdrop.

Let us look back on how the year has evolved for FX trading in Singapore and the region, as well as what it might look like in the new year.

CURRENT FX TRADING TRENDS IN ASIA

Lockdowns and the resulting 'work from home' culture raised challenges for traditionally voice-driven institutional trading markets. Without access to their work machines and specialised trading software, traders began to rely more on electronic trading for its flexibility and reliability as it allowed for more seamless trading between the home and the office. Electronic FX trading platforms across the board also witnessed an uptick in volume traded and change to dealing behaviour as the trend towards e-trading continues to pick up in Asia.

At the same time, some Asian governments have started to build a more cohesive financial ecosystem by implementing business-friendly policies to attract liquidity providers and financial institutions. In Singapore, the Variable Capital Companies Act 2018 came into effect on Jan 14, 2020 to facilitate the creation of new investment vehicles. The Monetary Authority of Singapore (MAS) has also been actively wooing banks and liquidity providers to build their pricing and trading infrastructure in data centres within Singapore.

As a result, institutions and companies are moving quickly to relocate their new funds and trading desks to Singapore. Equinix has announced that its Singapore data centres would be hosting the FX trading centres of multiple financial companies. The FX arms of banks such as BNY Mellon and Macquarie have also announced plans to build FX pricing engines in the country. Singapore's success in this respect sets a high bar for other countries to follow suit.

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FORECASTS OF FX TRADING TRENDS IN ASIA (2021)

Working from home will remain an important part of our daily lives for at least next few months. It may well become the new business standard. The need for an efficient communication tool will remain high on virtual FX trading desks, which will continue to feed demand for flow automation around the world - including in Asia. As FX traders transition into a hybrid work environment or start working from home full-time, the core trading requirements of flexibility, reliability and mobility will drive demand for fully automatic, end-to-end trading and reporting platforms.

We are also seeing some new developments in relation to finance and tech that should further push the digitalisation of the FX trading market. For instance, some banks are opening their APIs (application programming interface), which provide a holistic overview of their finances and enable more streamlined financial management. Countries are also granting new digital banking licences to various institutions, including Singapore, which awarded two digital full bank and two digital wholesale bank licences to four successful applicants in December 2020.

Given the lingering uncertainty over the future - Covid-19 vaccine effectiveness, US-China trade tensions and so on - the markets are likely to remain somewhat volatile for the near term as the state of the world is still in flux. Active investors will continue to feed into this volatility to generate alpha. Volatility drives opportunity, so I would expect to see a rise of new managers or smaller spin-offs from larger firms next year.

Singapore's FX ecosystem is on a growth trajectory and this is expected to continue. I expect the government and MAS to keep investing in the sector and redouble their efforts to attract FX investors and corporate or bank treasury desks to achieve Singapore's goal of strengthening its FX ambitions on the world stage. The sophisticated rates and FX investors currently available in Singapore will expand further, leading to increased trading activity and subsequent ecosystem growth.

Digitalisation and FinTech have been the buzzwords of the last decade. They are maturing into the new standard now; conversely, this makes them no longer 'news' as everyone has accepted their central role in the new world. It is about time to find another catchy word as we move into a new era. For 2021, my bet is on Bank-as-a-Service (BaaS). We are already seeing some early signs of banks moving into a digital banking infrastructure; this could mean new avenues of growth for the FX scene, but only 2021 will tell.

• The writer is CEO of BidFX