Inevitably, platforms developed to accommodate both retail and institutional clients are in the vanguard of calls for market convergence.
For example, Andrew Ralich, co-founder of oneZero Financial Systems, says a hybrid approach offers value to market participants who are looking to leverage technical capabilities – such as ultra-low latency, scalability and extensibility – along with order routing, risk management and execution workflow solutions.
According to True Trade COO Emilio Mercado, a single FX platform would suit the combined needs of all retail clients and most institutional firms in terms of pricing, transaction fee and best execution.
The complexity lies in having liquidity pools that can cater to a variety of client types and algorithmic trading strategies, he says, adding: “There will always be a need for specialized pools of liquidity, dark pools and internal matching.”
The retail and wholesale FX markets are increasingly symbiotic, suggests Tom Lee, FX product manager at Saxo.
“Retail trading platforms have been at the forefront of investment in technology, creating tools that have levelled the playing field between retail and institutional clients,” he says.
On the question of whether the established institutional platforms are better placed to service the demands of retail clients or vice versa, oneZero’s Ralich reckons retail technology platforms would need to adapt their high-level workflows to accommodate less-demanding institutional ticket volumes, while institutional platforms would likely need to radically overhaul their architecture to accommodate retail ticket flow.
Technology venues that can successfully process and execute massive retail ticket flows have proven to scale nicely into the institutional space with faster tick rates, says Saxo’s Lee.
“The workflow requirements to service the wide variety of institutional clients have already been built into these platforms, whereas institutional platforms would require low-level changes to make the transition to service retail clients,” he says.
A key challenge for the institutional FX market is to drive new efficiencies through the application of technology, learning from the business models of non-bank liquidity providers as well as the dynamism of the retail FX brokerage market, adds Lee.
While the retail FX market is a key source of growth, he says it is worth remembering that not all retail platforms are created the same.
“The more sophisticated platforms will play by the same rules as institutional platforms, using technology and market experience to minimize market impact from client orders, protect clients from widening spreads and ensure risk is managed appropriately,” says Lee.
Jill Sigelbaum, head of FXall, observes that the expense of processing tickets within banks’ infrastructure means most of the retail flow is hedged through the single-dealer platforms at the banks.
“The multi-dealer platforms have tried to get into that space, but the challenge they face is that these trades tend to be netted before they are sent downstream at the banks, so they have to be traded in a disclosed relationship,” she explains.
“However, retail brokers tend to be prime-brokered, so it is a tricky model to trade on a multi-dealer platform – in a disclosed relationship, most of the access is through the central limit order book and is not disclosed, which means the aggregation process doesn’t work.”
According to Sigelbaum, it would make sense to streamline this process, but post-trade solutions are an obstacle.
“Banks want to keep those trades out of their IT infrastructure as much as possible because it costs money, takes up capacity and could present risk to a large notional trade hitting the books faster,” she adds. “A bank would not want a thousand small tickets holding up a $100 million trade.”
MarketFactory executive chairman James Sinclair cautions that there are a number of other barriers to convergence, such as the fact that retail platforms are much more highly regulated.
In addition, retail providers need to focus on a large numbers of customers that demand a lighter-touch support model in contrast to high-touch institutional customers, he says.
“The customer acquisition model is also different – institutional customers usually require personal meetings – while the credit, execution and custody functions provided by retail platforms are separated in the institutional world,” says Sinclair.