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Knowing a Market’s True Colors – It Takes a Call

Success on the trading floor is built on more than measuring speed to market in microseconds – it requires traders to leverage real human relationships for a clear and accurate picture of the market’s color.

Electronic trading, and the technical benefits it offers, has long been touted as the future of financial communication, providing STP, low-latency, reduced post-trade breaks and the transparency required by regulators. However, success on the trading floor is built on more than measuring speed to market in microseconds – it requires traders to leverage real human relationships for a clear and accurate picture of the market’s color.

Voice communications remain a vibrant, effective and profitable way to collaborate, construct and execute on trades. Relationships that are built on more than just an IM feed can help reduce counterparty risk, and solutions that leverage and improve existing infrastructure address firms’ restricted appetite for spend. As such, market-leading voice communications still have a vital part to play in achieving the maximum value from each trade.

Within this context, it is interesting to note that the Bank of International Settlements' quarterly review in December 2013 reported that over 40% of the daily average FX trades in April were executed by traders picking up the handset. In fact, the report makes it clear that voice trades are vital for relationship management and collaboration pre-execution:

“Voice and relationship trading remain sizeable in some segments. The voice contact may, for instance, provide advice on alternative order execution strategies or ways to implement a trade idea. It may also help to avoid high-frequency traders as a counterparty, or to ensure execution in a busy market. Voice remains the preferred execution method for more complex FX derivatives such as options, where 62% of the deals were done by phone.”

While it might make sense to execute electronically on a straightforward trade, the ISDA acknowledges that traders crafting and executing complex derivatives are increasingly leaning on Voice relationships to see the bigger picture. In response to a survey they conducted in November 2013, 61% of market participants indicated that they believed SEF trading had been redirected from electronic to voice execution as a result of recently introduced CFTC rules .

Even more important, that shift in response to regulations was seen across a range of asset classes, amplifying the FX-specific BIS perspective. When asked to quantify the decline in electronic trading in favor of voice, 86% of respondents reported a drop of greater than 40% in the Equity markets – with 75% in Commodities, 38% in Equities, 31% in Interest Rates and 24% in Credit .

Traders continue to demand the ability to collaborate, construct and execute trades over the phone. This has led to a resurgence in the voice trading paradigm, as firms begin to see that, despite the increase in electronic trading, “human interaction has not been removed from the equation.”

While electronic, algorithmic and high-frequency trading continue to increase in sophistication, the capital markets are still driven by relationships. Picking up the phone remains the best way to view the color of the market and to access counterparties’ insight, intelligence and intuition. In today’s market, firms that seek growth, success and profitability cannot afford to underestimate the power of a call.