FX technology investment strategies revealed
While substantial investment has been made in FX technology since the global financial crisis, there are areas of the market where its impact has yet to be felt.
One of the key themes of the May 2015 Greenwich Associates report Top FX Dealers Still Dominate but Cede Market Share to the Middle, at first blush, sounds trite, but its importance can’t be understated: substantial investment in technology is a pre-requisite for FX market leadership.
Bank FX services have positively benefited from investment in IT because it is now easy for banks to meet client demand for electronic access to FX liquidity.
The services provided by correspondent partners have made it easy and cost-effective for financial institutions to compete
One area of expenditure providing obvious benefits is the unification of trade entry, which simplifies trade entry whilst abstracting the underlying risk-management system/s, says Sean De Souza, principal consultant at financial services technology consultancy Capco.
“A number of FX businesses have also invested in infrastructure to better service regulators’ demands, such as simplified reporting and real-time monitoring,” he says.
Tony Salamone, senior vice-president North America at global transaction banking solutions provider Fundtech, observes that correspondent banking solutions have become a key factor in smaller financial institutions staying competitive.
“The services provided by correspondent partners have made it easy and cost-effective for financial institutions to compete,” he says, adding that integrating real-time exchange-rate solutions with back-end payment systems has served to eliminate errors and consolidate FX processing into a single system.
Banks are having to align their operational capabilities with their strategy to an unparalleled degree, which means that for FX they are choosing one of two strategies, says Michael Daniels, financial services consultant at technology consulting group CGI.
“The first option is to have high operational costs, but offer clients a comprehensive set of services, usually covering multiple currencies and multiple markets with exemplary service,” he says.
“Alternatively, banks can opt to provide a low-cost operation covering a simplified set of currencies/services. From an operations perspective, banks’ systems are now – or should be – displaying increased operational resilience and reduced settlement failures.”
He adds: “Reporting capabilities across all banks have improved, but few banks have made this investment follow through to a service gain.”
Al Saeed, global head of investor e-sales at Citi Velocity, says investment in IT has enabled FX customers to access research and analytics electronically, and has more closely coupled these services with liquidity provision and execution services.
“In specific areas, such as algorithmic execution or options, continued investment in technology has seen the launch of new products on our platform, which has moved beyond basic trading functionality,” he says.
Mike Lawrence, FX and local markets global CAO at Citi, accepts there remain areas of the FX market that would benefit from greater use of technology – for example, certain emerging markets are not yet electronic.
“However, it is fair to say that FX execution services have seen large and sustained investment in technology,” he says.
“Services around execution – whether it is administration, analytics, accessibility or post-trade services – will see the next wave of investment, along with continued technology expenditure on market making, risk management and the dynamic rebalancing of credit as the number of liquidity pools continues to grow.”
According to Capco’s De Souza, banks are starting to realize that any one client could potentially need the ability to trade multiple products across asset classes.
“Investment in banking front-end portals and their underlying technology is on the rise to create a one-stop shop that provides clients with the necessary functionality and technology, as well as reducing internal costs due to technology harmonization,” he says.
CGI’s Daniels suggests there are a number of areas of the FX market that would benefit from better rather than necessarily more use of technology, including fraud control and reporting.
“Use of analytic capabilities to proactively identify non-normal behaviour requires a stable and well-designed metadata structure and near real-time reporting – and control – capabilities supported by tuned algorithms,” he says.
Banks have invested to meet standardized regulatory reporting requirements, but they still struggle to report on an ad-hoc basis, adds Daniels.
“Integrating risk and finance data to provide comprehensive disclosures of risks arising from FX trading remains a mainly manual process – which embeds substantive costs – and associated risk controls remain weak.”
Non-deliverable forwards (NDF) are the last class of FX instruments to remain broadly un-electronified, although Russell Dinnage, senior consultant at capital markets consultancy GreySpark Partners, observes there are a number of innovative platform-based solutions, such as R5, that are addressing demand for short-dated electronic access to NDF liquidity.