Research conducted by MillTech FX has revealed that many European corporates are now looking for platforms that allow them to see live rates from multiple banks and execute at the best rate, while also reducing the operational burden traditionally associated with this kind of market access.
Companies require more than just competitive pricing across products including swaps and options. The most successful single-dealer portals offer tools to help clients make sense of market structure and activity, such as pre-trade analysis so they can make informed decisions across large spot executions – especially to determine whether they are done through risk transfer or an execution algorithm.
“Flow metrics tools are important as they allow a client to understand what currencies or baskets different investor types are buying or selling,” says Alex Nowak, head of continental electronic fixed income sales at JPMorgan.
Laurent Descout, founder and chief executive of Neo, notes that improved API connectivity makes it easier for tech-savvy clients to connect to several single-dealer platforms at once, recreating the effect of a multilateral trading facility without obstacles such as having to book FX with a bank that will not make the final payment.
“Some of the more advanced, popular and flexible features of our client-facing algo solutions are made available only through our single-dealer platform,” says Jim Foster, global head of e-FX trading at State Street. “But even if the customer has submitted their algo through a third-party platform, they have the option of controlling and monitoring it on our single-dealer platform.”
John Stead, director of sales enablement and marketing at SmartTrade Technologies, says that the cost of multi-bank platforms can be a hurdle, with clients indicating that distribution fees are among their highest costs. Consequently, some banks have either refused to price via certain platforms or treat the business as a loss leader to secure deals elsewhere.
“Corporates may look to leverage single-dealer platforms where functionality can be greater or when product development is required, for example for options/algos,” says Mimi Rushton, managing director and head of global FX distribution and co-head of global risk solutions at Barclays. “We also see more embedded FX automation solutions, especially where there are specific workflow use cases and we are able to offer live or held rates to match a client’s underlying needs.”
Best of both worlds
In the early years of electronic trading the trend was towards corporates following the multi-dealer platform route. But in the last few years relationship trading has become more attractive to corporates as well as other buy-side market participants, according to Vikas Srivastava, chief revenue officer at Integral.
He adds that as banks are now able to offer services that are more efficient and targeted, customers can have the best of both worlds: relationship-based trading and efficient execution.
“Because of the implementation of transaction cost analysis, market participants are able to address any concerns around best execution at both pre-trade and post-trade,” he says.
While adoption of independent FX execution benchmarks is still in its infancy, Xavier Porterfield, head of research at NCFX, suggests that over the next decade or so disclosed trading arrangements – backed up by disclosed and pre-agreed tolerances to benchmark rates – will become even more prevalent.
“Users of single-dealer platforms can easily integrate individual bank feeds to compare their disclosed pricing to the anonymous pricing that is available on multi-dealer platforms,” he says. “They can ensure that the disclosed prices available to them are fair by establishing tolerances around independent mid-rates.”
The FX market’s intense competitiveness and the proliferation of single-dealer platforms raises concerns about overcrowding
Roger Lee, SGX FX
There is also the potential to evolve single-dealer platforms from an FX-centric infrastructure into a multi-asset platform offering trading capabilities across commodities as well as interest-rate derivatives and government bonds, as JPMorgan has done.
However, it must be acknowledged that the costs of running a single-dealer platform – including investment in technology and regulatory compliance – can be prohibitive for smaller regional banks.
According to Roger Lee, global head of sales at SGX FX, these financial pressures might prompt some to re-evaluate and turn to multi-dealer platforms, which share operational and technological costs among multiple participants.
“The FX market’s intense competitiveness and the proliferation of single-dealer platforms raises concerns about overcrowding,” he says. “Smaller players may struggle to stay competitive unless they offer specialised services.”
Customers need to have a good reason to use a single-dealer platform rather than a multi-bank platform, and liquidity on its own is no longer a good enough reason, suggests Foster at State Street.
“Platforms with more advanced, popular and flexible features can stand out, and the ability to adapt quickly to new ideas and the changing market can be a key differentiator,” he says.
These sophisticated FX capabilities include support for complex orders strategies, weekend trading, automation and connectivity with treasury-management systems.
