When Goldman Sachs CEO Lloyd Blankfein described the bank as a technology company, he wasn’t just referring to its investments in private technology companies; he was also alluding to wider trends such as banks white-labelling their FX platforms to enable other banks to sell these services on to their own customers and under their own brand, a trend known as the platform-as-a-service (or PaaS) market.
Overall, the market continues to grow rapidly. The Transparency Market Research report states that it will be worth $8 billion by 2020, a fivefold increase on 2013. Much of this growth is coming from what is known as application infrastructure and middleware, where platforms are deployed either on the customer’s premises or off-site as an enabling technology for business applications such as FX trading.
More than 50 banks – including US Bank and Raiffeisen – are now using Integral’s FX platform-as-a-service offering for price generation, distribution and risk management, says Harpal Sandhu, CEO of Integral Development Corp. He adds: “In addition, there are a number of institutional and retail brokers who use our platform to design and deliver their FX business. An example of a non-bank leveraging PaaS is Russell Investments’ RFX Network trading platform.”
According to Sandhu, PaaS has had a greater than expected impact on FX markets by substantially cutting the cost of setting up an FX trading platform, reducing the time to market from years to weeks or even months, increasing system reliability and rendering the building of in-house solutions largely obsolete.
“It has allowed banks and brokers that previously were at a huge disadvantage compared with the top 15 global institutions to catch up and compete head to head for customers,” he says. “Cloud computing has democratized FX markets and increased competition, leading to improved services for many buy-side firms that rely on FX trading in support of their business.”
The order-and-execution management systems used by asset management firms to manage FX flows and liquidity aggregation are increasingly akin to platform-as-a-service and some hedge funds are using PaaS to trade FX, adds Russell Dinnage, senior consultant at GreySpark Partners.
However, opinion is divided on whether the technology has enabled Tier II broker-dealers to compete with larger institutions. Sandhu believes it has, referring to the cost and time required to build from scratch an FX trading system that might have to be replaced before it has produced any return on the investment.
Dinnage disagrees. “Technology is not the differentiating factor between Tier I and Tier II investment banks in terms of competing for FX trading market share,” he says. The leading FX banks have instead begun to implement the adoption of hybrid agency trading-riskless principal business and trading models for managing flow or spot FX liquidity, which is as much an operational play as it is a technology play, adds Dinnage. “No PaaS system is able yet to allow Tier II banks to replicate that level of sophistication in either the business or trading model.”
Sandhu and Dinnage also diverge in their views on the extent to which PaaS has evolved. Sandhu suggests that FX platforms are being used for more than just pricing and trading where the bank has access to liquidity for best execution, while Dinnage says they are still commonly used as a means of either developing or enhancing the sophistication of pricing or trading capabilities, primarily through post-trade functionalities that allow their users to determine how well they are able to aggregate flow FX liquidity across the whole of the marketplace.
Banks choosing to adopt some or all of a PaaS solution need to consider the ability of their FX business to integrate and adopt the utilities and cost efficiencies that the new platform can offer in terms of existing client relationships, primarily from a trading perspective but also from the perspective of how the wholesale adoption or the bolting-on of a new PaaS solution affects the bank’s liquidity distribution and servicing model.
Many banks will only bolt on some of the solution’s offerings as opposed to abandoning their long-standing FX trading platform set-up in exchange for something completely new. As such, they must consider whether it is cheaper to buy in the necessary components from the technology provider they are considering working with, or whether the bank can build/replicate those off-the-shelf components itself.
In addition, when choosing to bolt on off-the-shelf components of a PaaS solution, it is essential for banks to consider the long-term cost implications related to becoming beholden to a specific technology provider or set of solutions if those solutions eventually begin to consume higher levels of fixed or variable costs that could otherwise be distributed to servicing client needs.