For many years, some foreign exchange participants and industry watchers predicted that it was only a matter of time before trading, especially of spot, migrated on to a single, exchange-like location. However, far from consolidating, the FX market has continued to fragment and, perhaps more important, it has continued to thrive. If ever there was proof that competition is beneficial to a market’s smooth and efficient operation, it is FX. The view that FX would one day function in much the same way as equities has now almost completely disappeared. Instead, it seems that the equity market is in the process of fragmenting and moving toward an FX-type model.
Nick Dyne, the founder and head of business development at Logicscope, says he is among those who never believed that FX would consolidate. When pushed, he admits that if this had happened, there would have been little reason for his company to exist. But Dyne had spotted a gap in the market that needed to be filled when Logicscope started operations in 1997. That was, put simplistically, to connect the various electronic trading platforms to market participants’ back offices. This is what Logicscope still does; however, because of the proliferation of platforms, such a service is now even more important.
"We got into the post-trade business in 1997 with a product that took trades from EBS’s trade feed and converted them into the Reuters post-feed format," says Dyne.
"The problem EBS had was that Reuters refused to write an interface between Kondor+ (its back-office system) and EBS, so we wrote an interface to do it. It’s a perfect example of Reuters’ intransigence leading to an opportunity. As a result of that we developed a strong relationship with EBS and we have since developed that type of service to allow multi- and single-bank portals, as well as numerous ECNs, to do the same."
Dyne says that the service was "virtually an instant hit. Each time the product was installed, EBS saw a significant increase in trade volume." But despite this, cash did not pour into Logicscope’s coffers, even though it built up a significant client base. This was largely because of the business model it decided to follow when it set out to rebuild DealFeed, EBS’s global deal notification system.
"We set about rewriting DealFeed so it could be deployed more flexibly and handle more than just spot FX, and rebranded it TradeSTP. We decided that we would eat all of the costs of doing the integration into clients. What this meant was that we developed links to all of the main back-office systems. If we come across new applications, we would write to that as part of our service," says Dyne.
According to John Barber, the company’s chief executive, it is now starting to see the benefits of that decision. "It was a very high-risk strategy and it did cause us quite a lot of pain to bear that level of cost but it has stood us in good stead," he says. "The big differentiator between us and our competitors is that we have crafted every interface for the recipient and that helps to minimize the whole (IT cost) process for the client as much as possible.".
Trading service providers are now having to respond to the demand for choice their clients are making. This is true in all markets and is applicable from the front right through to the back end of the deal chain. The days when a company could effectively dictate that, if you used its front-end dealing system, you would have to use its middle- and back-office applications as well have passed. Most of the trading system vendors realize this and have opened up their systems to allow them to integrate with those from rival companies. And although they will often write the interfaces themselves, it can be easier to use a specialist such as Logicscope.
Dyne says Logicscope has reached the stage where it has written to most FX back-office applications that exist. So, therefore, it is probably not surprising that it is now looking to cater for similar needs in other assets. "We are now starting to write to various European MTFs (multilateral trading facilities) and exchanges," he says. "We will do exactly what we did in FX. We’ll write interfaces between the MTFs and companies like GL Trade, which provide trading connectivity and back-office solutions."
What is surprising is that the move into equities was not one the company decided for itself. "It’s been driven totally by client demand," Dyne says. "It was a unique experience. I’ve never been told by a client that I had to do something like this. It recognizes we are at the sharp end of integrating and that we’re not an application vendor. We spend a lot of time simply thinking about how to integrate various applications, so we’re more efficient at doing it. The client that wants to streamline its back office wants us to help it do that."
He adds: "I’m a little bit surprised we’re doing equities, but the fragmentation we’re now seeing is causing problems. It makes sense to deliver a multi-asset feed. Post-trade transaction flow should be considered in the same way as market data. Companies like Logicscope look to aggregate it from numerous sources and then send it into a specific back office that the clients choose."
Barber agrees and adds that increasingly the back office is becoming a potential business differentiator. "The truth is that there is more than just price and credit to a trading relationship," he says. "Our business is built on a simple concept but it is still complex. The reliance on the software is huge. It has to work. When there’s a blockage in the back office as a result of processing bottlenecks, traders tend to switch to other applications. Connectivity will remain Logicscope’s core business."