New technology widens trading providers' FX appeal

It has become an almost cringe-worthy cliché to describe the battle for technical superiority in the capital markets as an ‘arms race’, but it is a phrase that pops up so often in a discussion of foreign exchange (FX) trading that, hackneyed or not, it bears repeating.

The gargantuan FX market is looking increasingly attractive to banks. Unlike most asset classes, the pool of potential customers is growing – large funds that might once have stuck to equities, for example, are turning their attention to deeply liquid FX as something of a proxy for broader economic movement.

FX attractiveness

Despite slender margins, banks that possess the requisite scale can still turn a good business. However, as the electronification of the FX market continues unabated, securing or maintaining that scale requires speedy, dependable technology. Even servicing the FX needs of second- and third-tier banks is a mostly electronic business these days. However, in the already vastly hi-tech institutional space – where clients want research, real market feedback, best execution and sophisticated algorithms – technology is king. “The trend is clear, and technology is a very important component,” says Thomas Soede, global head of electronic markets with BNP Paribas. “BNP Paribas believes that technology will become a key selling point. Along with pricing, trade ideas [and] risk management… technology is part of the basket of goods that clients want to buy.”

Realising this, new trading technology is being rolled out by the major (and not so major) FX houses at an unprecedented rate. Citi’s overhauled Velocity 2.0 system was unveiled in January, while Royal Bank of Scotland (RBS) was not far behind with new technology of its own. Other players, including Deutsche Bank and UBS, are in the process of developing their own improved platforms, too, while the likes of Morgan Stanley and Barclays Capital make continual tweaks to already top-of-the-line technology.

It is a testament to how serious these platforms are being taken that Citi’s latest Velocity iteration was already in development just six months after the previous version hit the market.

Make no mistake, it really is a battleground out there, and the monumentally expensive game of one-upmanship shows no sign of abating as banks strive to match and improve upon each others' strengths. Al Saeed, Citi’s global product manager for Velocity trading, global FX and local markets, for example, speaks highly of Credit Suisse’s algorithmic platform, Goldman Sach’s order platform, Barclays Capital’s multi-asset capabilities and Deutsche Bank’s reliability, openly acknowledging the influence they had on Velocity’s development. "We looked at what our clients found useful in existing tools, addressed the shortcomings and then added a lot that is purely unique to Citi Velocity," he says.  "We feel now that we have a platform that brings together a combination of technological strength and our franchise."

Information technology

There certainly are numerous similarities among the approaches of each of the different banks, unsurprising given the common objectives and target customers. An almost universal priority is to provide information from other asset classes alongside FX data, a must for traders looking for correlations with interest rates, credit or commodity prices. "These trends change, but at the moment there are some pretty highly correlated markets," says Mr Saeed. "We want to make it easier for our clients to trade on that information."

Providing this information in the right amounts and delivering it to the right places is just as important. As markets speed up, traders start to become limited by how fast they can digest what is going on and turn that into a trade decision, adds Mr Saeed. As a result, the latest iteration of Velocity breaks down information and filters it by currency, topic, interests or market then links it closely to execution functions, allowing for speedy responses.

Across the market, information delivery is becoming more and more important for trading systems – execution is no longer enough. As well as offering access to a range of commonly consumed FX products, Harry Moumdjian, head of e-distribution, Americas, with Morgan Stanley, says the company’s Matrix platform also delivers research content and trade ideas. Similarly, BNP Paribas’s newly launched Cortex system allows new trade ideas to be released to clients as and when required, and added to the pricing engine at the touch of a button.

Citi has gone one step further and built its in-house FX wire news service into its trading platforms.

To avoid data overload though, a custom-built approach to information delivery and trading styles is a crucial tenet for many. “You can’t have a one-size-fits-all approach,” says Ed Mount, head of technology based trading in FX at RBS. “We believe that individual clients have individual ways of operating, so it was important to make sure that we designed our tools so that they’re flexible enough to accommodate them. It doesn’t do a lot of good to get 90% of the way there.”

Presentation matters

When it comes to interface and usability, however, inspiration has not just been drawn from the banks’ direct peers. In fact, consumer technology has had a clear, and obvious influence, with the name of a certain Californian corporation popping up again and again. “The look and feel of Matrix is a bit Apple-friendly. If you play around with it you’ll see it looks like it was designed for a modern generation of Apple devices,” says Mr Moumdjian’s colleague, Brock Arnason, Morgan Stanley’s global product manager for Matrix. “We did take some visual usability cues. Apple is a good example, because really no one does user design as well as it does. It’s definitely something we’ve striven for.”

Over at BNP Paribas, Mr Soede is also quick to describe Cortex’s product centre in the same terms, likening it to Apple's iTunes and App Store distribution platforms.

There is a serious reason behind this focus, however. For a trader, with multiple applications and platforms competing for his or her attention, simplicity and ease of use is key. “Personally, I tend to try and keep the experience simple and straightforward and not complicate it with distractions. We think the value lies in having it tied together with our market-making operations, our analysis tools and just making it easier,” says RBS’s Mr Mount. "There’s always competition for desktop real estate.”

To that end, Mr Saeed says a minimal aesthetic was a big part of Velocity’s overhauled design. This even went as far as reducing the size of price tiles by 60% when compared with version 1.9. “There’s a battle going on for desktop efficiency and for the attention of the trader who has 10 of these platforms up,” he says. “But every part of Velocity 2.0 allows you to access every other part. A price tile lets you see latest news and charts, for example.”

Need for speed?

At the other end of the spectrum, sheer speed is a major source of bragging rights for Citi, which has said it thinks Velocity 2.0 is the fastest platform on the block. “It’s an acknowledgement that times are changing in the market, things are getting faster and people are looking for newer methods to execute,” says Mr Saeed. “We tried to deliver a product which is extremely fast in terms of pricing and setting up pages, and in terms of the speed at which you can execute, and that’s because in the market generally, everything is getting faster. Especially in the past couple of years with the introduction of more and more algorithmic execution tools and black boxes.”

There is little argument from Citi’s competitors about its number one slot when it comes to all out speed. However, others seem happy to remain a notch or two slower. RBS's Mr Mount says that while the bank has focused heavily on high-frequency trading operations and being the fastest in the market, it has now found a happy medium whereby it remains among the top contenders but also caters to a set of corporate and financial institution clients which are not necessarily in the business of low-latency arbitrage strategies.

It is a view echoed by Morgan Stanley’s Mr Arnason. “From a client’s perspective, I don’t think being the fastest on a platform is the number one criteria," he says. “We think about speed quite a bit in terms of our overall FX pricing, market making and risk management infrastructure… but generally our clients' number one concern isn’t speed but usability, reliability, and breadth across the board.”

Barriers to entry

Sophisticated, quick, comprehensive and customisable, the technology requirements to compete in any sort of scale are sizeable, and meeting them will require similarly sizeable investment and resources. The obvious worry for smaller houses is that technology becomes yet another obstacle to breaking into the top tier. And the playing field is already heavily skewed towards larger players, with up to as much as 65% market share in some currencies handled by just six of the biggest banks, according to Bank of England data.

“The combination of technology and timing means that the barriers to entry are very, very high," says Morgan Stanley’s Mr Moumdjian. "It’s not an easy business to get into.”

One bank that is trying is BNP Paribas, which Mr Soede says embarked on a very large investment programme designed to make the bank a “flow house of choice” two years ago.

Back then, BNP employed a white-label solution from an external vendor as a stop-gap solution. However, technology was an integral part of this plan, he says. And while he admits the French bank may have been a little behind its peers, he says it should be able to take advantage of the latest and nimblest technology to get an edge on the competition. “Some of the market share leading platforms haven’t changed for three or four years and are built on old technology and infrastructure,” he says. “Changing that infrastructure is a big risk because you have to migrate clients, so having not been the leader allows BNP to choose agile technology.”

There may be some hope for less dominant houses then, but even Mr Soede acknowledges that it will not be easy, and BNP is no minnow. For smaller players, he says, it will be even harder. “It depends on the level of your ambition. If you want to build a global electronic FX product that does all the things I mentioned before, that’s a big cost, as is the running cost. To have that ambition you need a very large client base.”

Future importance

For any bank that wants to play a serious part in the FX markets, however, the latest technology is already a practical necessity and its importance could well grow in the future, as the regulatory landscape develops.

The Dodd–Frank Wall Street Reform and Consumer Protection Act in the US, and the European Market Infrastructure Regulation and Markets in Financial Instruments Directive (MiFID) rules across the Atlantic are likely to lead to a fairly prescriptive environment in terms of outlining the conditions that certain instruments can be traded under. FX spot transactions should remain unaffected and continue to thrive on single dealer platforms and multilateral facilities for the foreseeable future, but FX options, for example (along with the numerous other asset classes), are likely to end up being traded electronically on competitive platforms with trading taking place on an agency basis in a model that is fairly analogous to today’s equity markets.

Mr Arnason expects these transactions will be conducted on platforms created by the big players, at which point technical expertise will make or break operations. “That becomes in some sense a more boring business, and in some sense a more interesting one, because you’re no longer getting paid on your profit and loss from the positions you’re managing, but for the quality of service you give your clients and on a transaction and volume basis, given the flow that you’re facilitating for clients. The reliability of your platform, the speed of your platform and the ability for you to deliver that quality of service to clients then becomes even more important.”