FX Trading: Banking on Crowd Trading

FX Trading: Banking on Crowd Trading

This is an excerpt of a speech delivered by Patrick Teng, Founder & CEO of Six Capital, at the Fintech Innovation Forum 2015: The Next-Gen Financial Services in a Connected Era, held on 12th November Fullerton Hotel, Singapore.

Good morning everyone and let me start by first thanking Fintech Innovation for organising this excellent event and for inviting me to speak here today. The fin-tech industry in increasingly disrupting the financial services sector and it is no different in FX trading. And in FX markets due to the new regulations brought in after the financial crisis of 2008 the environment is ripe for disruption.

We are now is a position where the top ten banks of the world who together accounts for about 80% of the daily turnover are no longer ‘market makers’ – their ability to have such a role has been undermined by the ban on proprietary trading enforced through the Volcker Rule. Without the major banks able to play market maker, liquidity has been sucked from the market, leading to unprecedented volatility which we have all seen for most of this year. This was recently most evident when the Swiss Central Bank dropped the Euro peg causing the Euro to fall 25% against the Swiss Franc in just 15 minutes – an unthinkable scenario not too long ago. Even the Singapore Dollar is not spared this volatility. Last Friday, at about 9pm our time, the USD/SGD jumped 100 pips in just ten minutes from 1.4100 to 1.4200 in the New York market. Over the last 15 months Sing Dollar had weakened 16% against the US Dollar at one point.

These regulatory changes have forever altered the dynamics of the forex markets. Today, instead of the banks it is independent, entrepreneurial firms that are stepping in to fill the liquidity gap – Six Capital is one such firm. New regulations, evolving dynamics and increased volatility in the forex markets today mean that new approaches to trading are required, including new technological models.

It is the developments in technology that have presented new opportunities for disrupters to enter the market and challenge the traditional players. And it is through these new technologies that the key to success in the current environment lies – it is by exploiting and leveraging today’s technology that the market can be disrupted.

Utilising technology to disrupt the market

There are three key elements to how technology can be exploited to be successful in the modern FX trading environment: big data analytics, distributed ledger technology, and the scaling of resources. Firstly, sophisticated technology now enables Big Data to be collected, stored and analysed like never before.

An amazing statistic I read recently was that 90% of the data in the world today has been created in just the last 2 years. When you think about it that is absolutely incredible. Those companies that are able to leverage this immense amount of data and analyse it to improve their decision making will be increasingly successful.

For example, At Six Capital, we saw in this an opportunity to develop a platform that not only processes large volumes of trades, but also generates insights by leveraging and analysing Big Data. Within seconds, trading data collected worldwide are being organised into information and coupled with intelligence gives rise to actionable trading insights in the real world forex markets. This led to the creation of Ricebowl, our algorithm-based training and trading platform that trains am army of utility traders from China, India and Indonesia to enter and exit their positions within 90 seconds on dummy accounts, enabling big data to be created and analysed, whilst removing the emotional aspects of greed and fear in trading.

In the process we are reducing the risk in trading FX, while leveraging scale through access to crowds; providing consistent returns to customers. The era of the ‘big-swings’ FX trader is over and the pendulum is shifting from the long-position, big-bet trader to the consistent, aggregation of small-wins trader mentality. We now think in terms of one-foot putts: building up returns through small, consistent wins is the most effective approach in the volatile, high risk markets we now face – and this model is only possible due to the digital revolution and the ability of technology.

Secondly, distributed ledger technology such as Blockchain has huge potential. Distributed ledger technology can be used to transact anything of value without requiring a trusted third party, with proven ownership and timestamps of transaction enabling instant settlement and clearing.

In simpler words, Blockchain is to currency what email was for the postal service – allowing direct trade without recourse to a trusted third party and at a fraction of the transaction cost.

And lastly, and perhaps most importantly, technology enables resources in the currency markets to be scaled like never before. We now have the ability to draw on the resources of crowds and entire populations to bring together huge numbers of small investors. It is the number of participants now that has the potential to drive the market rather than single, large-scale investors – the force of the crowd could in the not too distant future begin to overpower the influence of the few big boys.

Democratisation of Finance

This is what I see as the democratisation of finance – taking power away from the few and giving it to the many – imagine if 100 million people all make the same $100 investment, at the same time and in the same direction, and leverage that up by 100 times (i.e. One Trillion Dollar position size), the impact will dwarf the power of even the largest institutions including the central banks.

Interestingly, this is also exactly what one of the Founding Fathers of America, Thomas Jefferson wanted when he said: “Power should be taken away from the banks and restored to the people, to whom it belongs”. Access to scale and resources has always been a huge barrier to entry in the sector and it is now in the process of being smashed down. At Six Capital we have created TAGG, a gamification of Tagging the Chief; bringing together crowds of individuals, amplifying the power of their money and delivering greater returns by thinking small to win big.

This model enables another very important transformation – it re-introduces the focus on customers as the co-creators of value.

The Future

These are exciting times for the FX markets. There are certainly challenges but there is also no shortage of opportunity. I would argue that these changes occurring in the FX trading industry today are beneficial for customers and society as a whole.

By increasing competition in the market, customers and provided with more choice. This is a good thing in any market, as it drives businesses to improve their offerings and become more efficient. The democratisation of FX trading will increasingly provide more power to individuals in society and enable them to have an influence in the market – something that until now has been reserved for a select few institutions.

There are so many variables in flux that is difficult to predict exactly what the industry will look like in 10 years’ time. Having said that, it is clear the companies that will be most successful will be those that that can leverage the potential of new technologies, and be nimble and agile enough to evolve with the market, whilst ensuring customers are recognised above all as the co-creators of value.