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Impact Investing

IPE special report May 2018

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Dealing power goes electronic

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The world of online foreign exchange trading has shown remarkable stability through the recent years of the dotcom boom and bust. Where other asset types, such as equities and bonds, have seen a host of trading platforms come and go, most of the FX online facilities that were set up over the last five years or so are still in business. Volumes may be spread unevenly across them, with a few platforms dominating in particular markets, and the others operating in particular niches, nevertheless the consolidation that has occurred with other forms of electronic trading platforms has not happened in FX.
“People have consistently predicted consolidation among electronic FX service providers, but instead we have seen exactly the opposite – the entry of new firms, each attacking the market at different levels,” says Tim Sangston, consultant with Connecticut-based financial services consultancy Greenwich Associates.
Meanwhile, electronic FX trading is booming, with volumes doubling to $8trn (e6.5trn) from 2002 to 2003, according to a recent report from Greenwich, ‘Converts spark eFX boom, despite holdouts, April 2004’. “In past years, institutions have been tiptoeing into the marketplace, but last year we saw institutions starting to push huge volumes through e-trading systems,” says fellow Greenwich consultant Peter D’Amario.
FXall, FX Connect, EBS Trader on Bloomberg, Hotspot FXi, Currenex, Reuters Dealing 3000 Direct, Oanda and Centradia are some of the platforms that continue to operate and grow their businesses. These are all either multi-bank or independent. Many banks also operate proprietary trading platforms – UBS is a notable success in Europe, for example. But what differentiates these platforms, and which are most suitable for pension funds and investment managers?
UBS has established a reputation for its research, says Greenwich, coupled with a close integration to clients’ systems which supports the straight-through processing of trades from research to execution and fulfilment. This has resulted in it becoming one of the leading platforms by volume, according to industry estimates. The platforms do not generally publish their volumes so it is impossible to accurately rank them. However, various industry surveys suggest that while UBS has a strong position in the single-bank market in Europe, FXall and FX Connect dominate the multi-bank market.
FX Connect, which is part of State Street’s Global Link investment services platform, was one of the earliest into the market, launching in 1996, and from the start it focused on the buy side.
“FX Connect grew out of State_Street servicing large institutional money managers who were doing large volumes of trades, who were price sensitive and who needed to trade with many banks,” says Simon Wilson-Taylor, managing director of Global Link. Although operated by State Street and originally a single bank platform, FX Connect now provides access to 47 banks in over 130 locations globally, meeting the requirement of organisations that need to trade with multiple banks.
FX Connect is the only electronic FX platform that has targeted large buy side organisations, and dominates this area of the market, claims Wilson-Taylor. Over 400 of the world’s largest asset managers and pension funds that trade on their own accounts are connected to Global Link (although Wilson-Taylor would not name any of them). FX Connect’s success in this area of the market is not disputed. Most of the other major platforms have targeted other areas of the market - Currenex focuses on corporates, Hotspot FXi on hedge funds, EBS on the inter-dealer market, while FXall is more of a generalist.
Most of the electronic platforms claim similar benefits over telephone broking, notably speed and efficiency of execution. The multi-bank platforms also claim to give greater transparency of the market by providing access to prices from many banks, making it easier for organisations to find competitive prices, and to demonstrate that they have looked for the best price. Online trading is quick - FXall users get streaming prices in under two seconds from its 50 bank participants, and execute trades in under eight seconds, says Mark Warms, general manager for FXall for Europe. Online platforms also facilitate the straight-through processing of trades, speeding up the fulfilment process, providing audit trails and reducing the risk of errors through re-keying of information. Platforms such as FXall and FX Connect have teams of integration specialists that will help clients link their order management and other systems in with the electronic trading facilities.
A further advantage that FX Connect claims is sophisticated netting abilities that help the participating banks net down orders that have multiple trades to enable them to provide better prices back to clients.
Offering a different pricing model from most of the other platforms is Centradia, the creation in 2001 of a European bank consortium including, Santander Central Hispano, Commerzbank, The Royal Bank of Scotland, Sanpaolo and Société Générale. Centradia allows its clients to take prices from any of its participating banks while requiring them to have a relationship with only one bank. (Most multi-bank platforms insist that clients can only take prices from those banks with which they have relationships.)
Centradia caters for pension fund and asset managers, other financial institutions and corporates, with the pension fund and asset management sector showing the largest growth, says Fabrice Mativat, chief executive officer of Centradia. Other factors besides its pricing model attracting business include the platform’s support of money market as well as FX products, and the fact that the platform’s website, as well as its client helpline, are available in six European languages – English, French, German, Spanish, Portuguese and Italian. “This has proven to be a key benefit as more than half the activity on Centradia is in a non-English language,” says Mativat.
The Greenwich report claims that many more organisations would use electronic foreign exchange platforms but for concerns over security, the loss of market intelligence that dealing on the phone with a broker can bring, and the potential negative impact on an organisation’s relationship with its bank or banks. Mativat claims that because Centradia’s member banks integrate the platform into their own FX services, it does not attempt to replace an organisation’s relationship with a bank, but enhances it.
Wilson-Taylor agrees with Greenwich’s figure that around 50% of organisations that trade FX now do so online, but disagrees that many more would do so but for concerns such as negative impact on banking relationships. In many cases, where organisations are making relatively few trades. “they would lose the perceived comfort and support of speaking with market professionals as they go through the process of completing an FX trade if they gave up their telephone-based trading relationship with their bank or broker”, he says. Hence, they are unlikely to move soon to online trading as there is no benefit or additional increased operational efficiency in moving to an online process. Most of the major organisations that are likely to trade online are already doing so.
There are times when using an electronic platform may not be appropriate, admits Warms. If a deal is very complex, the customer may wish to also maintain direct telephone contact with a bank when executing the trade, he says. Mativat agrees: “It is better to telephone your favoured bank direct for sensitive trades as this method offers better anonymity, which might be appropriate for particular transactions.” The platforms try to recognise this and attempt to support aspects of the trade even if it is not done online. FXall, for example, allows its clients to input trades done on the phone in order to benefit from the audit trail, automatic confirmation and other aspects of its service.
Warms says that one reason for the increase in use of FXall by the buy side is the growing trend for organisations to seek third-party prices for the FX deals that accompany cross-border securities trades rather than simply dealing on their custodians’ prices, as has been the case traditionally. FXall has introduced an electronic message that automatically notifies custodians if an organisation trades with a third-party. This is just one of a number of additional services that the platform offers over and above trading, says Warms, and it is these kinds of services that are helping to attract more organisations to online electronic trading.

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