FX providers mull outsourcing through the cloud
Areas of the FX market where outsourced or cloud solutions have the potential to exert a greater impact include platforms that electronify the workflows associated with FX options trading, although bank conservatism is likely to prolong the lifespan of in-house solutions.
Earlier this year, Boursorama – a subsidiary of French bank Société Générale and one of France’s largest online broker dealers – announced plans to migrate their data-intensive operations to a cloud computing solution, becoming the latest in a line of firms to do so.
Harpal Sandhu, CEO of OTC FX network Integral Development Corp, says outsourced or cloud solutions have the potential to impact all aspects of the FX market, from connectivity, aggregation, market-making capabilities, customized price generation and distribution powers to risk management and trade execution.
The trading and execution of OTC FX options is, by and large, a very nuanced and bespoke affair
Outside of platform-as-a-service solutions for the development of a new single-dealer platform or for enriching an existing set of single-dealer platform or single-dealer platform-like systems, there is an established and increasing level of demand within the buy and sell side for solutions that service liquidity needs in FX instrument types other than spot.
Russell Dinnage, senior consultant at capital markets consultancy GreySpark Partners, says: “For example, many FX technology vendors are specializing in platforms that can electronify the workflows associated with FX options trading, creating a consolidated trading system that – when partnered with an FX spot trading platform, market data and analytics – creates a powerful white-labelled offering.”
However, Brad Bailey, research director for Celent’s securities and investments practice, describes options as a “tricky business” from an automation perspective.
“At least on the trading and execution side, the market is bifurcated,” he says. “If we are discussing exchange-traded IMM options, electronic trading makes sense, but for the bulk of FX options trading the answer is different.”
For OTC FX options, market participants are looking for solutions that make the clearing and settlement more automated, so any tools there will be in demand, continues Bailey.
“The trading and execution of OTC FX options is, by and large, a very nuanced and bespoke affair,” he says. “In most cases, the options are customized to the specific needs of the hedger or trader initiating the positions.
“That said, this is a market where electronic tools will migrate to the front-end and there are several initiatives adding additional tools for streamlining execution.”
According to Colin Payne, principal at Capgemini Consulting, cloud computing spells the end for in-house solutions only to a certain extent.
“Cloud options allow for scale and resilience, so why hold expensive capital equipment in secure locations when the opportunity to be hosted, providing security requirements are met, is so readily available?” he says.
“The maturity of the cloud enables many previous concerns to be answered and it therefore provides a compelling option for many.”
Questioning the logic
FX agent Chapdelaine FX has introduced a number of services to address specialized needs of margin FX brokers and fund managers, offered over Integral Development Corp’s cloud-based multi-sided trading network.
However, Payne also accepts some systems might remain within the ownership and control of a bank – perhaps scaled down or for specific requirements – as there will always be those who question the logic of allowing external parties to store and potentially access their valuable data.
Other providers have adopted a hybrid solution, such as DMM FX, an online forex trading and CFD broker in Australia, which was looking to connect cloud-based virtual servers to physical hosted infrastructure. Celent’s Bailey agrees in-house solutions will continue to have a place in the FX value chain for reasons including security and privacy, while Craig Ramsey, principal product manager, transaction banking at electronic banking and payment solutions provider ACI Worldwide, says the potential for cost savings needs to be considered carefully.
“Although some cloud offerings are happy to tailor the solution to the exact demands of the bank, this is often a poor strategy for the bank wishing to use the cloud,” says Ramsey. “The reason banks are looking to replicate their environment often goes hand in hand with the expectation that they need to retain all their current capability.
“It is more often the case that cloud vendors have already created a best-practice package and that if banks utilized that, significant cost-savings could be achieved and unnecessary customization avoided. If all they want is lift and shift, it is unlikely to come at a significant – or any – cost saving.”
Integral’s Sandhu – not surprisingly – has a more bullish view of in-house solutions, suggesting they will become extinct at all but “the largest players”.