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Banks' single-dealer strategy might have limited shelf life

Many banks are leaning heavily on their single-dealer platforms to improve the efficiency of their FX business, although there is no guarantee that this approach will be sustainable in the long term

Although multi-dealer platforms account for the largest share of FX trade volumes, banks are pitching their single-dealer platforms as an entry point into the wider market for their clients.

Analytics is now available to help a trader decide what order type to use and when to cross spread or work orders for a particular trade, explains Tom Robinson, head of sales at MahiFX. “Order books continue to evolve, as do apps that link clients to the platform when they are on the move.”

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Tom Robinson, MahiFX 

He says banks have increased their focus on using single-dealer platforms to improve internal sales efficiency, with sales people starting to use the platforms to trade larger sizes on behalf of their clients using order functionality such as algos – acting more as sales traders than conduits between their clients and the risk takers on the trading desk.

IHS Markit’s director of transaction cost analysis, Michael Richter, notes the increased client focus on regulatory compliance, with an emphasis on quality and ease of access to data to be used in reporting and surveillance.

“Single-dealer platforms allow banks to monitor client behaviour, which can be utilized for big data analytics as well as helping provide links between market-makers and remote sales across banking groups,” Richter says. “This also helps increase efficiency and promote internalization of group-wide flow with increased cross-selling and finally increased deal flow, thanks to targeted offerings and ownership of the client’s desktop as well as the ability for banks to imbed research into their platforms.”

Keith McAuliffe, general manager, financial services, at Solace Systems, agrees that banks see single-dealer platforms as a means of empowering their sales forces by automating the analysis of research reports and scanning CRM systems to proactively suggest trading recommendations and strategies.

They are also developing models to help with intra-day liquidity management and optimize risk management, he adds. “In response to recent political events that have driven significant market volatility, clients are demanding more advanced modelling to hedge existing positions. Advances in machine learning and deep analytics are enabling the sophisticated modelling it takes to support more-informed decision making.”

Improved confidence

Transaction cost analysis and best execution analysis have improved customer confidence in single-dealer platforms, although those that have benefited most have pushed functionality that reduces the bank’s costs to the client, with price discovery being an obvious example.

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Sean O'Donnell,
Sapient Global Markets

That is the view of Sapient Global Markets director of technology Sean O'Donnell, who also highlights increased activity around tools and technologies that can further automate the sales process and deeper integration with Salesforce and other CRM automation tools. Richter says personalization tools will also become increasingly important. “Clients will be looking for a highly customizable, configurable offering – at a minimum there will be personalization capabilities, notifications and alerts – and while the banks have been present in the pre-trade space with a variety of offerings, it is the post-trade area in which most opportunities are presenting themselves. Items such as early take-ups, extensions, partial fills and multi-deal capture are becoming mainstream requirements.”

And according to a report published by PricewaterhouseCoopers, “The single- vs. multi-dealer platform choice”, single-dealer and multi-dealer platforms can co-exist at the same institution – albeit the appropriate combination will differ for each bank based on its unique capabilities and market positioning.

“Each will continue to exist in its own right, but clients want the best of both worlds and this is likely to happen in a number of ways,” says O’Donnell. “Leading banks will allow services and products from other institutions to be traded through their single-dealer platforms. Clients will build their own single-/multi-dealer platform solution though APIs, and independent firms will aggregate these services.”

Others take a more circumspect view, though. Aite Group senior analyst David Weiss observes that while single-dealer platforms have been moving to quoting more complex listed and bespoke products, they have become constrained in OTC derivatives in the US with swap-execution facilities and might become similarly restricted in the EU with organized trading facilities.

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David Weiss, Aite Group 

“They are also becoming constrained in another sense as we have seen recently by the sell side culling their buy-side customers as they continue to reduce their overall capital commitment,” adds Weiss. “Buy-side confidence in single-dealer platforms will be most influenced by the size and quality of a sell-side firm’s capital commitment.”

Joe Ahearn, co-founder and COO of TradingScreen, suggests that in many cases banks have curtailed enhancements to single-dealer platforms. “Clients are demanding workflow solutions that integrate their start-of-day, intra-day and end-of-day activities. The problem with most single-dealer platforms is that they are restricted to a single asset class and very few clients restrict themselves to one asset class.”

Weiss says the biggest “bang for the buck” in terms of improving internal sales efficiency will be real-time P&L and risk management as well as CRM and workflow tools that facilitate more mixed principal/agency business. “Personalization in the sense of account preferences and trading/utilization profiles is nice to have, but becomes academic at a certain point as buy-side firms progress to more sophisticated execution and order management systems,” he concludes.