The return of volatility in FX last year created the necessary environment for relationship-based trading between banks and their clients. When volatility hits, market participants tend to want to execute with certainty.
Citi’s decision last month to consolidate its e-FX trading platforms into a new single-dealer platform was a reminder of the extent to which banks are pushing their own trading infrastructure as a better option than multi-dealer platforms.
Other banks have extended the functionality of their platforms, with UBS pushing the boundaries on the amount of liquidity provided to clients electronically by offering up to €500 million notional on its single-dealer platform.
“The direct nature of trading through single-dealer platforms can provide stability and reassurance to clients when markets are moving, especially as bank platforms have become increasingly sophisticated, with ultra-low latency and high throughput,” explains Vikas Srivastava, chief revenue officer at Integral.
David Leigh, head of electronic FX trading at Deutsche Bank, refers to increased client engagement as banks put more capability and resources on to single-dealer platforms.
“Volumes are driven by clients in pursuit not just of faster, web-based services but also the desire for more intelligent integration, pre-trade analytics, studies and market colour,” he says. “We see the worlds of multi- and single-dealer platforms blurring. Clients value our data and analysis and need it even when using multi-dealer platforms.”
Swaps
BNP Paribas has seen clients moving to its single-dealer platform from multi-dealer platforms for short-dated FX swap business, says the bank’s digital COO for foreign exchange, local markets and commodities, Joe Nash.
“There is a growing appreciation from clients of how the outsized brokerage costs banks face when executing with clients on multi-dealer platforms impact pricing, and this is never more apparent than in the tightly priced and very competitive short dated G10 FX swap market,” he says.
Pricing will always be a factor. Single-dealer platforms do not incur brokerage fees and there are also reduced implicit costs, such as reduced market impact from the quality of the liquidity provided.
According to Nash, there is an obfuscated cost to executing on multi-dealer platforms, while the direct impact on a specific client or product pricing is very hard to ascertain, with many other factors impacting pricing alongside brokerage costs.
“However, what is easy to ascertain is that banks face material brokerage costs when providing liquidity on multi-dealer platforms,” he says. “The scale of the impact varies significantly by product, but can range from 50% of the normal bid-offer spread to single digital percentages of the bid-offer.
“This additional cost is likely to be passed onto clients in some capacity by banks in the long run.”
Over the last two years, BNPP has added a number of analytical features to its Cortex platform, including a real-time holistic view into market liquidity across primary FX markets and options inventory and restructuring.
Analytics
On the algo execution side of JPMorgan’s business, tools range from pre-trade metrics to help guide clients to select the most appropriate algo for their needs, through to real-time analytics about market conditions and live executions.
“However, it is not just the analytics that are important,” says Arnaud Floesser, head of core e-FX trading at JPMorgan. “We continue to improve client execution tools, which help consolidate our single dealer offering as a place where they can get information about the market, access best in class liquidity, and execute the way they want to.”
Deutsche ’s Market Colour service delivers current and historical market views based on the bank’s data, with enhanced access to pricing and market information, while its multi-channel gateway Autobahn provides live reporting to a client of their portfolio positions and risk factors as markets move.
“By seeing and understanding this impact immediately, clients can move quickly to seize opportunities – crucial in periods of market volatility,” says Leigh. “Essentially, we are offering exposure to our own risk management to enable clients to risk manage their positions.”
Richard Anthony, global head of FX e-risk and commodities at HSBC, says it is easier for a bank to provide sophisticated market analytics to clients via their own proprietary platform than via a third-party platform.
“We have seen a growing appetite for analytics that help clients in their assessment of market conditions – notably liquidity – and support them in their decisions regarding method of execution,” he says.
However, Hugh Whelan, head of EBS Direct, reckons multi-dealer platforms are better placed to meet demand for more granular insight into FX trades, demonstrating best execution and achieving better execution from liquidity providers, identifying frictional costs, where trading behaviour needs to change to minimise the impact of trading at different times of the day, and how much more to pay for larger order sizes – as well as more esoteric factors such as the types of trading protocols and which dealers to put in competition.
“Multi-dealer platforms have the edge here, not just for post-trade but also pre-trade analytics thanks to the vast amounts of trading data sourced from activity taking place across their markets,” he says.
