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Bill Strachan 10-Jan-2013 10:19:00 17 min read

e-Forex - the Dawn of a New Era

Speed and precision - empowering clients with faster and smarter FX e-commerce engines

The astounding rate at which technology has developed in recent years has allowed the FX trading market to execute in huge volumes, at microsecond speeds and with unerring precision. Nicholas Pratt talks to one leading bank and FX technology provider to explore how these enhanced capabilities have allowed traders to pursue strategies previously unthinkable and to also discover what factors have led to a step-change in the speed, flexibility and transaction processing capabilities of FX e-commerce platforms.

The march of technology is often perceived as coming at the expense of durable relationships. Speed becomes all-important, volume becomes too huge to be managed manually, the machines take over and human interaction diminishes. Automated efficiency comes at a price, some might say, especially in a market like the FX world where it is still heavily reliant on relationships.

For the large liquidity providing FX banks, this is an issue they have had to manage in terms of how they develop their e-FX services and how they manage to combine all the benefits of automation, online access and algorithmic execution yet maintain a fruitful and communicative relationship. Furthermore, they must also consider how the FX e-commerce platform can be specifically customised for each client without incurring unmanageable development costs.

Design and user experience

According to John Bartter, Head of FX Institutional Platforms at Deutsche Bank, the client relationship is always placed as the highest priority when considering the design and provision of FX e-services. “Given this, we have brought clients into our design process earlier than we have ever done in the past.  We have also re-engineered our platform to allow us to distribute new features more rapidly.”

In terms of the factors that have precipitated a step-change in the speed and transaction processing capability of FX e-commerce platforms, Bartter says that the growth of FX volumes and the number of dealers on single dealer platforms have been directly correlated.  “As clients become more comfortable with ecommerce platforms, there is a demand to have their dealing experience automated as much as possible.”

The leading FX providers are also looking to assist their corporate and institutional clients in working their orders and improving the way they communicate with the marketplace. “With the development of intelligent algorithms which give clients access to advanced liquidity in all timezones, we are also seeing the development of new kinds of orders and orders extending out to new FX products such as Swaps and Options,” says Bartter. 

Similarly, the leading FX banks are aiming to provide an enhanced user experience of their trading platforms and gaining market share by deploying more scalable and flexible platform infrastructures to facilitate improved price generation, order management, post trade services and risk management operations. 

“Single dealer platforms need to be more nimble and adjust to rapidly changing client and regulatory requirements.  Platforms need to move onto a new architectural design to accomplish this, and to this end Deutsche Bank recently announced the launch of the next generation FX trading platform on Autobahn.”

Deutsche Bank’s new platform is an example of the trend for liquidity providing banks to combine access to cross product research with trade execution and connectivity services to provide clients with even more powerful e-FX services, says Bartter. 

“We have created the Autobahn App Market, which we believe is the first app-based electronic distribution system in the financial services industry.  This integrates the pre-trade, trade, and post-trade experience onto one platform.  And it allows clients to customise the information and applications they need across all asset classes.”

Deutsche Bank is also personalising the provision of post trade services and helping clients to prepare for planned changes in FX market structure by being as transparent as possible around its understanding of the new regulations. “We are releasing post trade functionality as early as possible to allow our clients to test and prepare for any upcoming regulatory changes which will affect their banking requirements.”

Ultimately, says Bartter, banks should consider treating their investment in electronic FX platforms as a strategic asset and the feedback from clients should decide where the banks’ resources should be focused for future e-FX development. “Clients want bespoke solutions because everyone has specific needs and priorities.  Solutions that allow our clients to grow their business will always be at the center of any strategic business plan.”

Evolving technology

Similarly, says Bartter, finance is at the heart of evolutionary technology. “Within FX we are capitalising on advances in the technology space to service the growing demands placed upon us by clients and regulators alike. The speed of this evolution continues to increase and it is our responsibility to continue to drive these innovations further.”

In order to achieve this drive of innovation, the major FX banks will have a sizeable in-house IT development team to call on but increasingly they are reliant on the third party vendors that provide a range of services for building or enhancing electronic trading platforms.

According to David Woolcock, Global Head of Sales at Eurobase Banking Solutions, a bank’s strategy for developing its e-FX services depends primarily on the constituent group of buy-side clients is it serving. For small and medium sized enterprises that do not trade especially frequently, a very basic request for quotes (RFQ) platform with easy to use features is required. For larger corporates and multinationals, the ability to pool requirements across entities and trade on behalf of subsidiaries, along with features such as up loadable cash flows, should be part of a bank’s e-FX offering. 

For asset managers, the ability to net trades into one transaction and then book them across multiple entities is essential as well as robust procedures for the pre-trade netting requirements and rules. And finally, for active trading clients looking to maintain good and profitable client relationships, detailed MIS capabilities to monitor clients’ behaviour are needed. 

In addition to client segmentation a bank needs to decide in which capacity it wishes to engage, says Woolcock. “The most basic choice is between being a market making bank with the risk taken onto its own books, or a customer service bank using its e-FX platform to source liquidity and cover the resultant customer trades - a so called ‘Bank in a Box’.”

The latter group need to rely on extremely fast business processes and limit checking supplied by a vendor who can supply all stages of the deal chain in a modular way, says Woolcock. “This allows the offering to seamlessly expand as the customer base grows post adoption of an e-FX single dealer trading platform.”

Combating latency arbitrage

Woolcock acknowledges that there has been a conspicuous step up in the speed, flexibility and transaction processing capabilities of FX e-commerce platforms and says that the primary factor in this change was the need to combat latency arbitrage, where the slower platforms would find their prices being exploited by high speed and high frequency traders scouring the market for pricing anomalies caused by high latency. This led to a revolution in bank technologies deployed in the FX arena.

“The client segmentation mentioned above and the resultant differing requirements have led to increased flexibility for bank e-FX platforms to be able to appeal to a broad constituency of buyside clients. In today’s market, a pretty GUI is just not enough. Robust flexible workflow solutions are essential as well as the ability to customise the platform for local markets and customer segments served,” he says.

Now that the latency arbitrage issues of a few years ago have been generally addressed by most FX banks via enhanced MIS, speed is becoming less of factor and low latency is less of a priority, says Woolcock. “Now good relationship clients and those with genuine business to do are being targeted and other factors such as rejection levels are becoming more critical."

Working orders

FX providers are also dedicating more resources to assisting their corporate and institutional clients in working their orders and to generally improve the way they engage with the FX marketplace, says Woolcock. “As best execution rules and new developments such as execution quality analysis (EQA) and transaction costs analysis (TCA) have come to the forefront so have new additions been made to e-FX platform’s functionality to assist.”

Buy-side clients are also expressing more interest in specific algorithmic order types designed to suit their trading needs. “Orders at the FIX are proving popular with institutional customers along with algo orders especially for those customers who have large amounts to do and who do not wish to disturb the market as they execute.

Resting orders are also moving from being placed over the phone with the bank to being placed electronically and those still preferring to place orders by phone will probably find that the sales trader electronically enters them into the bank’s resting order book using the same functionality being made available to clients.”

Another key component to assisting client engagement is the rate engine with the ability to add a variety of margins and mark ups to tailor the price being shown to either groups of customers or down to, if necessary, the sub-account level of an individual client, says Woolcock. “The ability to view these complex price tailoring rules in an overall summary is also crucial for assessing the correct engagement with customers.”

Linkages and combinations

The linking of strategies found in bank research to execution is seemingly becoming a must have for FX traders, says Woolcock. “For example, this could include the ability to place a trade and set of limit orders from a technical analysis strategy directly from the graph or to launch a trade ticket directly from research in the correct currency pair. These combinations of research and execution services are becoming common place as we move to an era of machine readable news and the development of strategies that will execute on actual breaking news.”

“Another feature that will become more prevalent is the combining of FX and commodities and this offers an interesting opportunity to offer FX covered/uncovered commodity trades designed for end users to increase the alpha from the FX component in their hedges. If you are a utility used to transacting your FX online it makes sense to also conduct your commodity hedging requirements online as well,” says Woolcock.

Banks are also looking to extend the personalisation of services in both their pre and post-trade areas in order to strengthen the relationships with their clients. And while the banks have been present in the pre-trade space with a variety of offerings, it is the post-trade area that most opportunities are presenting themselves. Items such as early take ups, extensions, partial fills, multi deal capture are becoming mainstream requirements. Additionally the demand to provide services which support a client’s cash flow forecasting and enable them to enter hedging strategies is becoming an increasingly common requirement.

“As banks take advantage of investments made in the capabilities of e-Prime Brokerage the new regulations are offering a window to be able to offer a more rounded and complete post-trade service and get paid for doing it,” says Woolcock. “From trade reporting to clearing, customers are looking to their banks to provide services to solve these new issues for them. Getting the post trade offering right will increase customer loyalty and open additional sources of revenue.”

Dawn of a new era

Woolcock wholeheartedly agrees with Deutsche Bank’s Bartter that banks are now treating their investment in electronic FX platforms as a strategic asset. “We are moving, or some would say we have moved, to an era were the provision of electronic execution and related services is a statutory requirement. What we are seeing now is banks developing a robust strategy towards meeting their customer’s requirements and chosen execution style. 

“Those that have not invested in a single dealer platform are realising it is a must have. So whether it is a top 20 player offering a full blown service or a niche regional bank going down the route of deploying a “Bank in a Box”, the trend is certainly heading towards 90% of all FX flows being traded electronically in the coming years.”

These coming years are likely to see a continuation of the fast paced evolution that has occurred in the last 10 to 15 years and a rise in demand from FX traders for even more flexible and powerful tools. This will undoubtedly have an impact on how FX-e-commerce engines and order management solutions develop.

“The FX market has seen more than a decade of continual growth post the re-alignment of the Euro blip in volumes and although this has been followed by sluggish or lower growth post the crisis the FX market is still attracting new participants. Meanwhile electronic developments have continued at the same frenetic pace with a plethora of new developments in recent years,” observes Woolcock.

“Given the amount of work required on the regulatory and reporting fronts it is reasonable to suggest that now the focus will shift from trading engine enhancement to STP, reporting and MIS fuelling the continued development of FX e-commerce platforms. The addition of FX options being electronically traded and the drive towards cross asset class platforms will add to this as more markets become transparent and commoditised making them ideal candidates to feature in future plans for e-FX platforms,” he concludes.