22 November 2018 – ACI UK Square Mile Debate

On 22 November 2018, ACI UK members and guests participated in the third Square Mile Debate of 2018, kindly hosted by HSBC at its UK headquarters in Canary Wharf.  A fireside chat between Mark McDonald, Head of Quant FX Strategy and Amanda West, Global Head of Innovation, Risk and Investment, Refinitiv (formerly Thomson Reuters) on the perception and reality of AI (machine learning) in financial markets was followed by a look at global currency markets in 2019 and beyond, delivered by the inimitable and highly entertaining David Bloom, HSBC’s Global Head of FX Strategy.

Mark McDonald and Amanda West kicked the evening off by debating whether an apparent ‘frenzy of interest’ in machine learning in financial markets was driven more by the desire to ‘keep up with the Joneses’ than an understanding of the actual value of machine learning for business operations, and bottom lines.  On the question of alpha generation, Mark noted three main differences between this and other machine learning use cases: The volume of data is really only ‘big’ in respect of high frequency trading activity; the data is highly ‘non-stationary’; and the adversarial nature of financial markets means that successful trading strategies are likely to be short-lived as market participants adapt to the new landscape. He noted that, given the huge interest in this area in recent years, those who simply applied standard machine learning techniques to standard datasets were likely to find that their trading signals would lead to quite crowded trades.

In Mark’s view, the most promising area for machine learning in financial markets today is the automation of tedious operational processes; replacing today’s inefficient ‘cut and paste’ activity required because “different parts of an organisation don’t talk to each other”. Mark noted that machine learning techniques were already commonly used in electronic execution systems. Other promising areas were discussed such as turning unstructured data into structured [meta] data and using deep learning methods to enhance option pricing systems.  Amanda referenced ‘alt-data’ as the new buzzword, noting that this was not really a new thing in the Refinitiv/Thomson Reuters world where machine learning was applied increasingly to “reading much more data more quickly, than humans can”.  Observing that “it’s a great time to be an alt-data provider”, Mark highlighted some of the difficulties which are often encountered by users of alt-data.

Responding to the ‘million dollar question’ of the risk that ‘people will be replaced by robots’,  he observed that despite our ‘innately Luddite’ fear of new technology, history showed that while certain jobs might be eliminated, typically technological change generates a whole new industry.  He cited the advent of e-trading in spot FX in the early 1990s to illustrate this point; while a lot of traditional trading functions were lost, an array of new ‘quant’ and support roles were created, resulting overall in more jobs in the FX space, not less. He acknowledged, however, that these new roles would require different skills “more graduates with coding skills”.

After the fireside chat,  David Bloom outlined the three ways in which currency markets can be viewed – structural, cyclical and political – debating the merits and limitations of each.  Calling his presentation “The Running of the Bulls” he suggested that market participants tend to follow one of two strategies –  caution (“equilibrium – the marzipan layer”) or excitement (“let’s run with the bulls!”) observing that the latter strategy “is high risk for the runners and doesn’t work out so well for the bulls, either”.

In a highly entertaining session,  he took the audience through a whistle-stop tour of his observations on the major currencies in 2019 and beyond, referencing US politics, European social issues, Cryptocurrencies, Brexit and a host of other subjects along the way.  In closing, he paraphrased Donald Rumsfeld, former US Secretary of Defence (under two Presidents), saying “If you know what you know, buy forwards. You can hedge against known unknowns.  But the challenge will always be the unknown unknowns – what you don’t know you don’t know”.

ACI UK extends its sincere thanks to HSBC Investment Bank, and to David Bloom, Mark McDonald and Amanda West, for their generous support and participation in this industry event.