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Overall investment in FX technology has declined in line with the wider financial services sector over the last 12 to 18 months as banks focus on specific markets and business objectives. But there’s no shortage of innovation in banks’ proprietary or off-the-shelf platforms.
Expenditure on IT by the banking and securities sector fell 2.4% last year, according to global research firm Gartner. While the appreciation of the dollar against the euro, yen and the ruble and the relative slowdown of emerging markets (particularly Russia, Brazil and China) played their part in this decline, a larger factor is that regulatory pressure has shifted the focus of investment of the largest banks away from FX technology and into compliance, say analysts.
“We see banks reducing their internal capabilities and showing a greater willingness to work with a vendor solution that might address most but not all of their requirements,” he says. “The advantage for mid-tier banks is that the cost of automating now is lower than it was for banks who implemented technology five years ago. We see banks asking for consolidation of systems from multiple vendors or requesting systems that are maintained externally rather than in-house.”
Brian Andreyko, head of strategy and corporate development at TradAir, suggests that regional banks are spending proportionally more on their FX technology to be able to compete locally and participate globally in currency pairs where they feel they have a competitive edge.
“Both large and small institutions are seeing the benefits of outsourcing to technology firms that can customise and integrate the latest technology with existing infrastructure,” he says, adding that FX banks have yet to fully capitalise on improvements in reporting capabilities.
“Larger banks, which face greater regulatory burdens, are much further along in this process, but there is still a long way to go in terms of applying these improvements to infrastructure developed in-house,” says Andreyko. “New reporting platforms have a definite edge.”
Reporting is generally a challenge, particularly in Europe outside of spot FX where the variety of demands on banks and their clients within Mifir/Mifid II/Emir is a work in process. That is the view of Celent analyst Brad Bailey, who says banks remain keen to explore how technology can help them cope with market volatility.
“In the larger banks, these systems have traditionally been built in-house,” he explains. “However, they are increasingly automating smaller and even mid-size trades in spot FX and are looking for vendor technology solutions to increase the speed of connectivity and offer third-party views on execution and TCA. Smaller banks are really looking to vendor solutions for their pricing and market-making infrastructure, as well as their sourcing of liquidity.”
Bailey observes that for smaller banks, creating a robust pricing system to satisfy different types of clients can be a challenge and that the voice channel in FX remains challenging in terms of accurately reflecting risk and credit extension as quickly as possible. He also refers to intense efforts by the larger banks to update and normalise the variety of legacy systems that make up much of the FX infrastructure.
“Smaller banks are looking for partnerships, vendor solutions, white-labelled solutions and access to FX liquidity venues that offer an infrastructure for creating a multi-bank, multi-client disclosed liquidity system,” says Bailey. “We are seeing a lot of strategic decisions – especially in larger banks – to first decide which clients to serve and which geographies and currency pairs to support.”
Although overall spending on FX technology may be down, GreySpark Partners senior consultant Russell Dinnage says the banks with the strongest automated offering have invested in baseline IT systems for market making, liquidity aggregation and trade execution since the start of 2015.
As a result, he says it is difficult to identify any part of the FX market that has yet to benefit from automation. “It may be challenging from a client perspective for even a leading FX-trading bank to make a market or execute certain types of instruments, but there is no shortage of proprietary or off-the-shelf technology solutions available to banks,” he concludes.