More order types will be segregated from spot desks

Order management within banks will become a key topic over the next 12 months, as scrutiny of their relationships with clients intensifies due to regulatory drivers – a development that will move dealers to segregate certain order types in similar arrangements as fixing flows.

"In 2016, most banks had set up a segregated desk where fixing flows are handled completely separately from the trading desk to manage the conflict of interest that existed before. I believe we will see certain order types go the same way, including stop-losses and take-profit orders," says Asif Razaq, global head of FX automated client execution at BNP Paribas.

Razaq believes the process will be similar to what happened with benchmark-related orders, which are now overwhelmingly executed via algorithms in an environment fully separated from dealers' main trading desks.

"Banks that utilise their algo execution platform to manage and execute regular order types would have the benefit of being fully auditable and transparent to clients as well as regulators. Algorithms remove the possibility of conflict of interest, which is a hugely valuable proposition," he says. 

Spot-trading desks will be much more focused on market-making, providing two-way prices to clients and managing risk, while the task of managing orders will be removed and migrated to algos
Asif Razaq, BNP Paribas

"As a result, spot trading desks will be much more focused on market making, providing two-way prices to clients and managing risk, whilst the task of managing orders will be removed and migrated to algos," Razaq adds.

During the course of 2016, banks have published so-called execution policy documents outlining some of the practices used by dealers when handling client orders. While execution policies represent a significant step ahead, compared with only a couple of years ago, disclosure around the relationship of the bank with its customers will remain a hotspot.

"Banks will be very busy preparing for the arrival of the Markets in Financial Instruments Directive (Mifid) II and other regulatory regimes, such as the Global Code of Conduct, all of which will force dealers to evaluate their business models and take steps to better align themselves with new requirements, especially around transparency," Razaq says.

Partnerships and analytics

Transparency around analytics is also a key theme for 2017, he says, with banks poised to provide more data to clients, which they can use to gain insight about liquidity conditions, order-book imbalances and trading metrics – until now, only banks had access to this. While banks will continue to provide transaction cost analysis, clients will be using third-party tools to validate their results.

Partnerships will become more common between banks and their non-bank counterparts, either for the supply of technology only or the wholesale outsourcing of market-making operations, Razaq says.

"Alternative liquidity providers will slowly be able to access client segments that currently only banks have access to, but it remains to be seen whether clients think NBLPs are a sustainable source of liquidity in the long run," he adds.