FX technology bets to drive dealer market shares

By:
Paul Golden
Published on:

The jury is out on whether the rise of tech-savvy non-banks means FX banks should adopt either a full service, market champion model or a simplified, limited service provider model, or something in between.

A report on wholesale and investment banking published by international management consultancy Oliver Wyman in March refers to dealers facing growing technology costs, while the May 2015 Greenwich Associates report Top FX Dealers Still Dominate but Cede Market Share to the Middle states technology is playing an outsized role in dealers’ competition for market share.

According to Sean De Souza, principal consultant at financial services technology consultancy Capco, banks are countering the growing market share of non-bank providers, such as TransferWise, by spending more on improving existing technology, harmonizing systems and introducing features that will be useful for their existing client base, and will draw potential clients to their platform.

"In the FX e-commerce space, banks are increasingly looking to invest in IT to help provide clients with functionality, services and innovations," says De Souza.

Parwinder_Sekhon-160x186
Parwy Sekhon, UBS
Parwy Sekhon, head of FX, rates and credit e-trading at UBS, suggests banks are increasing their investment in FX technology partly because of competition between tier-one banks, but mainly to ensure regulatory compliance. He also claims that tier-two banks are reducing their technology expenditure, terminating in-house electronic pricing and risk management, and delegating it to larger liquidity providers.

Lee Butler, global head of FX e-distribution at HSBC, adds: "Continued investment in technology solutions for major tier-one banks is essential for both the external client base and the internal business.

"Changes in market structure, through regulation and FX remediation, have increased the cost of doing business. Investing in technology solutions allows banks to automate, segregate and monitor trading/sales activity."

Butler acknowledges there are new entrants coming into the FX space as providers of single-dealer platform solutions and that there is significant volume traded on multi-dealer platforms.

"Providing liquidity through multi-dealer platforms is very much integral to our strategy," he says. "Investing in our own technology platforms allows us to innovate and get new products to market faster."

Al Saeed, global head of investor e-sales and Citi Velocity, suggests the degree of automation required to provide research, analytics, liquidity, execute and book trades, adhere to evolving regulatory requirements and manage risk, means providing a best-in-class FX service requires considerable investment in technology.

He adds: "The specific areas of an FX business that receive investment will vary depending on the bank’s priorities, but fundamentally clients require similar tools to ourselves, so a bank’s decision to invest in technology will be made at least partially without reference to the services non-bank FX providers offer."

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These alternative providers have proven that technology is a must to remain ahead of the FX market and this has driven banks to invest more in their FX technology. That is the view of Brian Andreyko, head of strategy and corporate development at end-to-end trading infrastructure provider TradAir.

"We see this not only from the Euromoney top 10 banks, but across the entire banking segment," says Andreyko. "However, investment in technology is not just in traditional aggregation and recycled liquidity, but also in sophisticated pricing and hedging, and the analytics that support and drive them."

So, is there any danger that banks might reduce their investment in technology if non-bank FX service providers increase their market share?

Yes, says Michael Daniels, financial services consultant at technology consulting firm CGI, adding: "It is expected that banks will migrate to either a full service, market champion model or a simplified, limited service provider model. It is perfectly logical that a non-bank may elect to become a full-service, market champion."

No, says Russell Dinnage, senior consultant at capital markets consultancy GreySpark Partners, adding: "FX trading services are an essential element of every banking franchise. Banks – especially those in the top 10 to 20 of the annual Euromoney FX survey – will always seek to remain competitive with each other and with the rest of the technology vendor landscape for FX technology.

"This is a means of seeking to retain client business across a broader range of investment banking services rather than simply the provisioning of access to different types of currency liquidity."