e-Forex-Nov-23

Electronification rising amid turbulence: Taking a closer look at the MENA FX picture
REGIONAL E-FX PERSPECTIVE
“Like elsewhere, the buyside across the MENA region is
eager to understand trade costs and what their impact is on
the market and how their liquidity will be used.”
Albert Blackburn
HSBC’s Almohri agrees. “Local banks
are adapting to electronification at
pace,” he says. “It’s a strong trend
that we do not see slowing down
anytime soon. This has involved material
changes in workflow, processes, and
technological buildout, which, as one
might expect, can carry operational
risks in their execution and, therefore,
might require adjustment in planning
timelines.”
Blackburn notes that LSEG doesn’t view
the region as an emerging market, as is
the prevalent global view. Several GCC
countries only recently moved from
the MSCI Frontier Markets index to the
Emerging Markets one. While this move
has accelerated FDI inflows, volumes
remain small compared to global
benchmarks.
He explains further. “Many of the
regional firms have been engaged
in electronic trading in the global
FX market for many years,” he says.
“Whilst there are opportunities to
support governments and central banks
evolve market structure as countries
look to reform access to their domestic
currencies, we see no difference in the
levels of client sophistication in this
region to any other.”
DEMAND FROM SOPHISTICATED
INVESTORS
Regulation and continued government
investment in infrastructure are slowly
turning the GCC into a hub for
sophisticated investors. Almohri lists a
few reasons for several hedge funds
and asset managers setting up shop
here.
“Exponential growth in the region’s
debt capital markets, following the oil
Many asset managers and hedge funds have moved their physical locations to MENA, to capitalise on the economic
growth of the region
price drops between 2014 to 2016,
together with the transformation
and economic diversification plans in
MENA, has attracted a large number
of hedge funds and asset managers
into the region,” he says. “With that,
we have observed a higher interest
in methods of execution and data
analytics, which are tailored for a more
sophisticated segment of the market.”
“We have observed more demand and
FX flow driven by foreign investors,”
he continues. “This has been in
response to policy changes leading to
a relaxation of restrictions on foreign
ownership of assets and allowing more
access to the market.”
As electronification steadily rises, algo
adoption is also increasing. “FX algo
execution is still at an early stage of
adoption in MENA,” cautions Almohri,
“although it is becoming a growing
topic of discussion with clients as
an additional tool at their disposal,
particularly among institutions that
trade equities. Algorithmic stock
executions are more mature and
already embedded in their typical
workflow.”
And what does the electronic versus
voice trading picture look like? Some
MENA currencies are famously illiquid.
Has electronification changed that
picture? Blackburn and Almohri reckon
it hasn’t. “Electronic markets are
now the norm in more established
and larger Middle East economies,”
Blackburn says, “however in smaller
markets, central banks are seeking to
work with their local counterparties
to facilitate orderly markets. In some
regions e-trading is still relatively new,
continued pressures on credit and
banks are facilitating this approach.”
“Voice trading is still the preferred
channel for large transactions,” Almohri
says, “where electronic liquidity
doesn’t exist or is particularly thin. One
significant factor for further increasing
electronic liquidity distribution would
36 NOVEMBER 2023 e-FOREX