Yuan Trading Finally Goes Global as Bots Displace `Voice Market'

(Bloomberg) -- As China's integration with global financial markets intensifies, some of the most sophisticated electronic traders are stepping up to buy and sell more of the country's currency.

Jump Trading LLC and XTX Markets Ltd. say they are boosting volumes in the offshore yuan market as well as Asian non-deliverable forwards, a type of currency derivative. They come from a cohort of computerized trading firms that have grabbed market share from banks in currencies and transformed other assets like stocks and futures.

The two companies probably aren't the only ones. Exchange giant CME Group Inc.'s recently acquired EBS platform -- one of the key places where automated traders do business -- saw offshore yuan volume surge 57 percent last year, and yuan-dollar is sometimes the second-most-active currency pair there.

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Internationalizing the world's second-largest economy has long been a holy grail for markets. It's happening for the Chinese currency amid some important shifts. During the past year, Chinese stocks and bonds were added to indexes that guide investments by passive money managers with trillions of dollars in assets, potentially creating the need to trade yuan as a hedge.

And then there's prospects for volatility -- something that's been lacking in currency markets, which tends to erode trading profits. U.S. President Donald Trump just stirred things up with his threat on trade talks with China, driving offshore yuan on Monday to its biggest plunge against the dollar since January 2016.

Speaking before Monday's busy session, an executive with Chicago-based Jump said the company is trading offshore yuan and Asian NDFs on exchanges and directly with investors -- bilaterally, in industry parlance. That's partly because the business has shifted away from the old-fashioned way brokers used to get currency deals done: by phone.

“Five years ago, it was very much a voice market,” Mark Bruce, Jump's head of fixed income and foreign exchange, said in an interview. “As electronic data has accumulated, quantitative research firms are able to build reliable and accurate pricing models that in turn are providing substantial liquidity.”

Historically, there wasn't a “widely available and active” electronic order book for offshore yuan or Asian NDFs, according to Matt Clarke, XTX's head of distribution and liquidity management for Europe, the Middle East and Africa. Then, in 2016, EBS started letting liquidity providers that weren't banks trade the Asian products. London-based XTX doubled its trading in offshore yuan and Asian non-deliverable forwards in 2018 versus 2017, Clarke said.

The presence of Jump, XTX and their ilk points to an increasingly automated future. Futures and equities markets around the world are dominated by automated traders, who have also been making inroads in currencies.

Two computerized firms -- Citadel Securities and Virtu Financial Inc. -- have grown so much that they together handle about 40 percent of volume in the $32 trillion U.S. stock market. They plus two others, IMC Financial Markets and GTS, oversee nearly all trading at the New York Stock Exchange floor as designated market makers. XTX made a splash in 2016 when it came from nowhere to rank among the world's biggest currency traders.

Banks still play an important role in the overall currency market since they have huge customer bases. And banks have computers, too. JPMorgan Chase & Co. and Citigroup Inc. are “at the top of the field” among major banks when it comes to electronic trading, research firm Greenwich Associates LLC said in a report last month.
Still, electronic traders have dramatically changed the investing landscape. They create liquidity that helps to reduce transaction costs, generating even more volume, according to a senior Virtu executive.

“As these markets develop and become more open to global competition, as more people price into these markets, it makes it cheaper for people to transact, thus increasing people's interest in trading it,” said Andrew Smith, Virtu's head of corporate strategy, investor relations and communications. “They trade it, the volumes go up. It's a virtuous feedback cycle.” He declined to comment on whether Virtu is trading the yuan.

MSCI Inc. last year started adding Chinese shares to its global benchmarks and began increasing their allocation this month. Bloomberg LP, the parent company of this news organization, started adding some of China's onshore bonds to the Bloomberg Barclays Global Aggregate Index a month ago.

Those are potential catalysts for the yuan. The world's second-largest economy is seeking more foreign direct investment at a time when its domestic consumers are already boosting foreign spending.

“As China's current account trends toward a more balanced picture, portfolio flows will be another important indicator to drive currency strength and weakness going forward,” said Stephen Chang, portfolio manager for Asia at Pacific Investment Management Co.

TCW Group Inc., which manages about $200 billion in assets, is in the process of setting up accounts so it can buy onshore bonds and trade yuan in the country.

“In some ways, the last 15 years was about China becoming integrated in the global trading system,” said David Loevinger, an Asia strategist at TCW. “The story for the next 10 years is China increasingly integrated in the global financial system.”

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