FX market grapples with tech dilemma

COPYING AND DISTRIBUTING ARE PROHIBITED WITHOUT PERMISSION OF THE PUBLISHER: CHUNT@EUROMONEY.COM

By:
Solomon Teague
Published on:

Banks and brokers face a tough decision as they struggle to keep up with technology: when to abandon upgrades and take the plunge into a new system. Increasingly, starting again is looking like the easier option.

Owning no hotels or taxis has not stopped Airbnb and Uber from becoming the largest companies in those sectors.

Their success demonstrates the importance of harnessing the power of technology while perfecting ease of use and convenience. The message is one that financial institutions in the FX markets and beyond have heard loud and clear.

The financial sector has tried hard, but has often lagged others in technological innovation. That’s not entirely its own fault. Security reasons make it trickier to deliver banking services to people’s smartphones and tablets than it is to offer a taxi ride or a room for the night.

However, financial institutions have invested heavily in upgrading their technology offering, now seen as the frontline in the battle to win market share. Nowhere is this more apparent than in the world of foreign exchange.

Chris_Truce 160x186

Chris Truce,
Saxo Markets

“What we have now is a service economy – for banks that means the best way to increase value is by adding more services,” says Chris Truce, director of API development at Saxo Markets, an online FX broker.

“But since the 2000s, we have seen a shift towards what you could call an experience economy, or a user-driven economy, where the user-interface layer has become more important.”

In the future, Truce says, it’s possible that the distribution of financial services will be a thin layer – the interface and digital relationship – between a user and a vast number of suppliers.

Saxo is moving in that direction. It says its open architecture platform, which it unveiled last year, is designed to play a disruptive role that is similar to the likes of Airbnb and Uber. It has positioned itself as a conduit between a large client base and the venues on which they trade currencies and other assets.

Saxo this month upgraded its FX prime brokerage offering, adding a cross-collateralization facility between its PrimeXM sites in New York, London and Tokyo, to which it provides FX direct market access. The result is that Saxo’s prime clients can optimize their collateral by synchronizing balances and exposures across the three locations, avoiding over-allocation of capital.

“By adding the cross-collateralization facility, our clients will benefit from access to local liquidity per site, without having to divide up the collateral allocated per site,” says Lucian Lauerman, head of API business at Saxo.

“The combined solution gives them real collateral efficiency as well as extremely efficient pre-trade risk controls.”

Saxo says volume in its FX prime brokerage business in September 2016 was just over double compared with the same month in 2015, and about four-and-a-half times what it was 12 months earlier.

Tweak or rebuild?

Adding services is only half the puzzle, though. Increasingly, the look and feel of an interface are as important as the functionality.

That presents a dilemma. With upgrades being cheaper and quicker to deliver than bottom-up redesigns, financial institutions have tended to stick with legacy systems for as long as they kept working. Clients also might balk at having to navigate a new interface, and would prefer to have new bells and whistles added to an old product.

However, there comes a point at which legacy systems cannot deliver what new technology offers – and even start to make tweaks impractical. Java-based systems have worked well in the past, but HTML5 offers a more stable and secure environment that is less resource intensive and works better on mobile devices.

Yet advances also increase the cost associated with maintaining legacy systems, as more development is needed to ensure they can still talk to the increasingly sophisticated elements around them.

For Currenex, an FX technology and liquidity provider, the answer was to completely redesign its trading platform. Incremental improvements would have been a cheaper and quicker option, but the redesign, which incorporated HTML5, was seen as the more future-proof option – despite the risk of confusing customers.

Rick_Schonberg 160x186
Rick Schonberg,
Currenex

“Many platforms intentionally look and feel similar, which allows one venue to easily poach customers from a competitor as clients can easily acclimatize to the new platform,” notes Rick Schonberg, global head of product for trading and clearing, and the North American head of trading solutions at Currenex. “Still, we wanted to completely re-envision things.” 

This was not the easy route, concedes Schonberg, adding: “A system can be polished over years of use, but that does not mean it is optimal. Doing a complete redesign is hard work; it is slow and expensive and there is a lot of pressure to deliver. A blank canvas is scary for most people.”

To minimize the disruption for clients, Currenex monitored usage patterns and left the most-used functions either unchanged or amended only slightly – for instance, to simplify a process by reducing the number of clicks required to execute it.

It also developed functionality it thinks is unique in the market to address challenges relating to last look, where it can be unclear how much of the liquidity a client sees on a screen represents firm orders.

On Currenex’s system, when executing a trade there is one visual indicator showing where the client’s size is available, but another that also factors in any last-look liquidity.

In some cases the prices might be the same, but in others there might be a difference.

“By having these indicators, clients can better read their liquidity and trade more expertly,” says Schonberg.

Outsourced answer

For many banks the answer has been to outsource the problem to a third party, which is the logic behind Saxo’s OpenAPI. Just this week, Industrial and Commercial Bank of China in Singapore adopted Thomson Reuters’s FX e-commerce system Electronic Trading.

However, the issue extends well beyond banks and brokers. Central banks and market utilities are wrestling with the same problems. The Bank of England’s (BoE) real-time gross settlement system review, following an outage in October 2014, found that the system was too clunky and complex, and was difficult to scale or adapt. The BoE is consulting with the industry about how best to upgrade it.

John_Hagon-160x186
John Hagon, CLS

CLS, the world’s largest multicurrency cash settlement system, faced a similar problem. 

“Our legacy client (member) gateway worked well for 14 years, but in the end it had to change because it was too difficult for clients to integrate with their other systems,” says John Hagon, head of global operations. “The maintenance costs were too high. It had to be hosted locally and updated via CDs.”

It wasn’t only the push factor of creaking infrastructure that convinced CLS to invest in its new connectivity model, which uses ISO 20022 and XML, can be accessed via a web browser and is more scalable.

“In a world where real-time information is critical, the new client-user interface provides faster access to a richer pool of data,” adds Hagon.