The structure of foreign exchange markets may have been permanently altered by the global pandemic, according to a new study from Greenwich Associates, a financial services consultancy.
"Though the pricing and the flows are returning to normal, the way in which those prices are discovered and the flows are channeled have shifted significantly during the COVID-19 pandemic," Ken Monahan, a senior analyst at Greenwich Associates, wrote in the paper, which was based on interviews with 147 forex investors globally in June and July.
The pandemic motivated increased volumes through single-dealer platforms and voice trading as investors pointed to relationships with dealers and others in the forex market as increasingly important as perceived liquidity declined, Monahan wrote. Forex investors also increasingly broke up larger trades and delayed the execution of trades, behavioral shifts which many said will likely last once the global crisis passes, he said.
Nearly 20% of forex investors polled in the study said they increased their use of voice trading during the pandemic, which the study called "amazing in context," due to forex markets becoming almost exclusively electronic.
According to the study, 67% of respondents pointed to relationships within the forex market as a key takeaway from the pandemic.
"This is perhaps also a healthy reminder that even in a market as disaggregated and electronic as [forex], individual relationships between firms and between people are still the basis of all business," Monahan said.
However, the study also revealed that while many investors moved from the electronic to the personal, the use of algorithms was also on the rise during the pandemic.
"Firms were very reliant on relationships, but they were also using every tool in the toolbox," Monahan said.
According to the study, 23% of respondents said the increased use of algos would likely persist post-COVIO; 11% said the higher level of voice trading would continue, and 10% said delayed executions of trades would likely persist.
Greenwich Associates is part of CRISIL, an S&P Global company.