Preparation is all for JP Morgan as it hits new FX records

After the brutal reality check of January 2015, market participants realised the effect that big dislocation events can have in an electronic marketplace where the number of risk takers has diminished. Not only did risk management become a top-of-the-list concern, but it was also the seed of change that shaped players' behaviour throughout 2016.

The market became better prepared for unexpected outcomes and moves by learning lessons from the Swiss National Bank event. For market-makers, this meant a full review of how prices are distributed, where they interact with clients and with whom they engage.

An example is JP Morgan, which had a very good year in foreign exchange: according to the bank's third-quarter earnings for 2016, revenues were up 78%, compared with the same period of last year; the figure for the nine months ending September 30 was also 44% higher than in 2015.

The bank came second in the overall rankings at the 2016 FX Week Best Banks Awards and was voted the winner of five prizes (listed at the end of the article), including the coveted Best Bank for e-Trading title.

Anticipating the outcome

On the morning of June 24, the pound dropped 12% against the dollar, as results flowing in from the UK's referendum on its European Union membership indicated a Brexit scenario was likely. While market participants knew the vote was a risk, few anticipated the outcome or magnitude of the currency's move.

This was exactly the type of event for which the SNB event prepared firms. JP Morgan broke several records during the tumultuous night in terms of burst rates, total volumes, the number of clients logging on to its single-dealer platform and the volume of algorithmic orders handled.

"We were among the top liquidity providers on a number of platforms throughout the day," said Richard James, head of FX execution services at JP Morgan, at the time.

The bank supplied prices and liquidity throughout the night without interruption. It had even warned clients in advance to expect a bumpy ride. "There was a lot of work that went into just getting ready and reviewing capacity constraints," Chi Nzelu, global head of automated trading strategies at JP Morgan, told FX Week on June 24.

One of the surprising aspects of 2016 has been the strong performance of single-dealer platforms; venues that only a few years ago were increasingly dismissed in importance due to anticipated regulatory changes.

Despite the rising importance of a number of large non-bank market-makers, the heads of the e-FX business told FX Week in August that JP Morgan does not plan to use third-party liquidity in its internal foreign exchange pool; rather, it intends to rely on the breadth and width of its client franchise to meet customer demand.

Banks are generally looking to show more transparency and consistency in how they operate than ever before, and that's the spirit of why we recently published our last look guidelines
Chi Nzelu, JP Morgan

Transparency has also been a huge driver of behaviour for FX market participants throughout the year. Since late 2015, several banks have published so-called execution policies to formally declare to clients what happens to orders, especially around the use of last look.

JP Morgan published its own execution policy in May, going into an unprecedented level of detail about its parameters for using last look, as well what customers can expect when passing an order for execution.

"Banks are generally looking to show more transparency and consistency in how they operate than ever before, and that's the spirit of why we recently published our last look guidelines. In doing so, while we didn't make any actual changes to our trading policies, we thought it was important to underline that we execute trades as fast as we reasonably can, that we offer symmetric slippage and that we don't engage in practices that disadvantage clients, such as pre-hedging trades or putting additional latency into the process," Nzelu said in an earlier interview with FX Week.

Clients have also changed the way they view liquidity, as transaction cost analysis and best execution are playing an increasing role in their minds. Rather than just looking at prices, customers want to understand fill ratios, round-trip times, the overall quality of the liquidity on which they execute and the service they receive.

"We are there for our clients 24 hours a day and we don't stop providing liquidity during turbulent markets, be it Swiss National Bank-like or indeed Brexit-related, because clients expect consistent provision of liquidity. That has always been a fundamental underlying principle of our franchise and we remain committed to it," James said in August.

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