MFX Compass takes aim at the FX flow monsters
Foreign-exchange technology provider MahiFX is seeking to challenge the dominance of the leading banks in the electronic FX market by eating into their share of trading and sales with second-tier banks and brokers.
MahiFX launched MFX Compass, a package of solutions that allows users to start up and run an e-FX business from scratch, earlier this year and it is gaining traction outside of the top-tier banks and brokers.
MFX Compass was created and launched by husband and wife duo David and Susan Cooney, who also founded foreign-exchange trading platform MahiFX. MFX Compass provides customers with a suite of wide-ranging services, such as FX pricing, algorithmic hedging and risk analytics.
| This is technology that allows you to form rates yourself that reflect your view of the world
The electronic FX business has traditionally been the domain of large dealers, such as Citi, Deutsche Bank, UBS and Barclays, collectively known as flow monsters – due in large part to their dominance in the FX market.
However, Cooney believes this concentration of market share is unsustainable in the long term with the advent of third-party service providers.
“The question is why [that concentration] exists,” he says. “It’s because [large dealers] have the technology to price and risk-manage better than the rest. To match that technology is pretty expensive with a long lead time, and if it’s done by those who haven’t done it before there is uncertainty around its success.”
Cooney’s proposal is that those outside the flow-monster enclave can look to service providers such as MFX Compass. He is keen to tap into tier-two banks and brokerages with his new offering.
“There is an opportunity to go away and build an engine, as we’ve done, and then license it to banks and partner with them to run their business” he says.
The MFX Compass dashboard offers a number of functions, including the ability to monitor flow, risk, profit and loss, and configure spreads. It can be integrated into a bank’s existing trading platform, with the aim of building up an e-FX trading business, but keeping development costs and time to market to a minimum.
Five clients have signed up to use MFX Compass, including second-tier banks, although Cooney declines to name them as he says banks are not always keen for their customers to know they have outsourced their technology.
However, the concept of outsourcing is familiar in foreign exchange, and a lucrative business for providers. Saxo Bank has carved a niche in foreign exchange with its “white-label solution”, whereby other banks can offer their own clients a personalized version of Saxo’s trading platforms.
The white-label solution has been particularly popular with tier-two investment banks and private banks that do not have the technological resources to set up their own platform.
So what makes MFX Compass different to a run-of-the-mill white-label solution? The rate customization component, says Cooney. A bank that uses a provider’s white-label solution sources its FX rates from that provider’s portfolio of bank liquidity providers, but MFX Compass adds a degree of flexibility.
“This is technology that allows you to form rates yourself that reflect your view of the world, and your position to internalize as much flow as possible,” says Cooney. “It allows you to do the whole thing yourself.”
|The old form of white-labelling is taking a generic offering, slapping your own name on it and bringing it to market
Vikas Srivastava, head of new business development at Integral, an FX trading network that has been offering white label services in FX for over a decade, says that times and client demands have changed and the ability to customize solutions is crucial.
“The old form of white-labelling is taking a generic offering, slapping your own name on it and bringing it to market,” he says. “That is not what is needed in unique OTC markets.”
A bank that instead uses a service provider can offer a pricing engine with connectivity to multiple platforms at the flick of a switch, allowing customers to trade on single- and multi-dealer platforms.
MFX Compass takes a proportion of its clients’ profits, so its interests are aligned with the success of its clients.
Srivastava says: “The pay-as-you-go model is a powerful way to reduce friction, as it doesn’t require a huge amount of capital expense at the beginning and it encourages a true partnership between the bank and its technology service provider.”
“The entire risk is shared, because if nobody uses the service, the bank doesn’t get any business and the vendor doesn’t get paid.”
Integral's offering enables banks and brokers to offer e-FX services to their customers, including access to liquidity, price customisation, multi-channel distribution and risk management. Such an offering is proving successful - the company has over 200 white label solutions at banks and brokers, including Gleneagle Securities, Newedge, Tullett Prebon and Wells Fargo.
Cooney has created a useful solution for smaller banks and brokers that need a more sophisticated FX pricing engine, but it remains to be seen whether they can challenge the large flow monsters that are able to internalize much of their flow.
Smaller players cannot compete on price when it comes to liquid currency pairs, such as eurodollar, but should instead focus on less-liquid currencies where they might have some natural expertise, says Andre Veissid, partner at the Boston Consulting Group.
However, he said MFX Compass is part of a trend whereby technology is becoming less costly and service providers are ready to take advantage.
“It is another chink in the armour for big banks in losing some of their special sauce to players than can offer solutions that mimic what they have,” he says.
“It is not a big threat to the established order, but when you pair with everything else like [increased] electronification and a more sophisticated buy side, it does become destabilizing for the biggest banks. How long can they maintain this kind of dominance?”