Technology vendors have long advocated the use of post-trade utilities as a means of not only reducing costs but also encouraging good market behaviour by weighting charges for manual or exception trades.
Research by FIS has found that the most disruptive market participants understand that post-trade utilities increase their ability to focus on client service and competitive differentiation by shifting the responsibility for commoditized processing to a utility vendor.
The FX industry needs to look at other over-the-counter (OTC) asset classes that have improved operational efficiency and resilience by migrating functions such as trade confirmation and lifecycle management to shared networks.
That is the view of Jane Hamilton, managing director for FX at IHS Markit, who says there is growing interest in centralizing key functions such as trade affirmation and confirmation.
However, Capco managing principal Alan Philpot observes that although there is interest in the concept, few utilities have succeeded in generating momentum. He refers to the challenge of realizing cost savings while migrating transactions into a controlled service model and handling complex transitions.
Post-trade services such as NetLink claim to reduce costs, free up processing capacity and boost profitability.
Basu Choudhury, head of business intelligence at Traiana, accepts that NetLink has not directly led to a reduction in execution costs, although he says it has facilitated the growth of retail and prime-of-prime services by enabling intermediaries to reduce the line items they are managing and therefore reduce the post-trade costs associated with that business.
Choudhury suggests this allows participants to trade a large number of tickets that are of low value with limited operational impact, enabling smaller participants to compete with larger firms in the FX markets.
Cobalt CEO and co-founder Andy Coyne states that market participants constantly describe the pricing of incumbent post-trade services as confusing and expensive when compared to brokerage fees.
“Netting came about due to the lack of operational throughput capacity, and since this capacity has greatly improved there is no reason for netting services to be as expensive as they are,” he says.
“Coupled with reduced spreads, the reduction of risk appetite and an increase in regulatory costs, post-trade costs can now even exceed the potential profit from execution of the trade.”
Execution costs related to FX trading are reduced when market participants use pre- and post-trade intelligent analytics, but it is critical to remember that the best analytics must rely on pure, relevant data, according to Curex CEO James Singleton.
He says the challenge in today’s marketplace is that many service providers rely on data that are aggregated and prices that may or may not be executable.
“A market participant that is evaluating third-party service providers should dig deep to determine the adequacy of the data being used to inform the analytics it is paying for,” adds Singleton.
Some FX execution service providers believe the growth of direct market access and liquidity market-making solutions has reduced total costs for passive clients if they use best execution protocols for their trading. These protocols include trading in markets where the client’s identity is unknown and using markets with streaming, no last-look liquidity.
However, the alternate view is that downward pressure on post-trade costs has been minimal since the cost benefit is derived from the underlying settlement netting model, employed by the central counterparty clearing house (CCP) to settle trades. The ability to reduce the settlement of multiple transactions to a single settlement at instrument level has lowered settlement costs for transactions executed on an exchange and cleared through a CCP.
|John Halligan, Global|
Noble Bank International CEO John Betts observes that post-trade costs have substantially increased as the cost of credit, clearing and settlement relative to ticket profitability has risen, while Cobalt’s Coyne refers to significant fixed infrastructure costs that outweigh any benefits from economies of scale that favour the largest market operators.
John Halligan, president of Global Trading Analytics, accepts that anything that either enhances the path of least resistance to getting an execution done or improves liquidity has the potential to lower implicit trading costs.
“However, execution enhancements alone do not to any degree ensure better execution,” he concludes. “Skilled decision-making will always be the one reliable constant which can translate to lower trading costs.”