A closer look at EM FX and NDFs
Over the past 15 years, the FX market has shown signs of great innovation by benefitting from the development of electronification, automation, and algorithmic trading which have all created improved liquidity and transparency. Historically though, while the FX market has been innovative, NDFs (Non-deliverable forwards) and EM (Emerging Markets) currencies always seemed side-lined, receiving only a fraction of the trading activity in comparison to the more traditional G20 FX currency pairs. In fact, up until relatively recently, the only way an NDF trade could be place was over the phone or by chat.
Today, however, volumes in the NDF market are growing exponentially, catching up to the more traditional G20 FX market. Globalisation and trending volaitility have all proved to be reasons for the increased turnover in NDF's, but we can now add to this the associated lockdowns because of the coronavirus crisis. Here the shift to the work-from-home environment has resulted in employees streamlined in the way businesses trade with less desktop space, whilst in parallel, trading desks have been slimmed down, motivating traders to do more with fewer resources.
NDFs continue to attract increased volume and are being traded with a greater degree of sophistication and efficiency. While transacting over e-trading platforms has lagged when it comes to NDF trading, these currencies at an institutional level have become more transparent and liquid across electronically traded platforms, increasing some 40% year-on-year over the past few years. The commoditisation of trading in the spot market and subsequent search for new revenue streams, appears to have motivated the sell-side to begin expanding algorithmic tools to NDF investors.
NDFs account for roughly 4% of the total FX volume, according to the Bank for International Settlements (BIS). More than half of the market's activity is concentrated in a handful of emerging market currencies. Average daily volume has nearly doubled in the past three years as traders evidently saw more significant opportunities with booming pricing and liquidity. Previously, retail traders in Brazil, for example, were not able to trade in Brazilian Real, but now, there is a quiet revolution in the making changing the industry as we know it today. Currently, traders are looking for more products that can help them diversify their portfolio in the market.
While the NDF market is at the early stages of evolution, it will lead to more expansive e-trading, even beyond standardised instruments. Executable streams, which have long been available in the spot FX world, may be going mainstream, pushing NDF trading to the next level.
An increasing number of brokerages are aggregating streaming liquidity from providers and offer executable streams to their clients for both one-month and broken-dated NDFs. A number of market professionals that make up a company called Sheer Markets have identified the evolution that has been silently in the making. These professionals identified the opportunity and have been instrumental in being part of it. Realising that more and more brokers understand the opportunity, Sheer Markets is one of the regulated brokerages we have found that took a big step in the right direction.
Sheer Markets today offers steaming retail NDF CFDs alongside more than 1,400 CFD trading instruments, including FX, EMFX, indices, commodities, cryptos, and stocks. Sheer Markets' product range offers traders looking for opportunities to diversify their portfolio with a broader scope of liquid markets.
If you are looking to diversify your portfolio, NDF CFDs could be a great option.
For more information on Sheer Markets and their
product offering, have a look at their website here.
