Scandies are all about getting the balance right, Danske says

Executing well in Scandinavian currencies requires a certain amount of deftness. The sourcing of liquidity in the currencies of Europe's northern shores is an exercise in dexterity, which must be balanced between various execution methods, be they algorithms, electronic or voice execution. This is an equation Danske Bank has perfected over the years.

"The challenge up here in Scandinavia is being able to find the right model of execution," says Karl Niklas Karlsson, global head of currencies and commodities at Danske Bank. "Liquidity in Scandies is not that easy to execute entirely via algos, so the challenge is to find the right combination for our clients between electronic trading, algo trading and voice trading."

"Telling our clients to sweep the market for Scandies would invariably lead to bad execution. When trading Scandies, execution needs to be more balanced to get a better result," he adds.

To achieve these results, the Danish bank has invested in an electronic-trading platform called OneTrader. But, when it came to algorithms, the bank decided it would make little sense to invest in a full set of them, thinking a targeted set would best serve the needs of its clients.

Several years ago, Danske Bank, the winner in the Best Bank for Scandinavian Currencies category at the 2016 FX Week Best Banks Awards, decided to change tack and stop quoting all currency pairs for the sake of it. Instead, it resolved to focus its attention unambiguously on what it does best: Scandies.

The key is to know which providers actually add liquidity, and which ones are just followers and don't add anything real to the market
Karl Niklas Karlsson, Danske Bank

Today, three-quarters of the bank's FX business involves one leg in one of the three main Scandinavian currencies – the Swedish, Danish and Norwegian crowns – with that figure rising to nearly 100% for asset managers and corporates, as they almost always have a Scandie leg in their currency exposure.

"For our clients such as corporates, asset managers and hedge funds, we provide a wide range of instruments if it makes sense," explains Karlsson. "But because of capital consumption, we don't do that on a bank-to-bank business anymore. We don't provide a wide range of products for banks unless there is a Scandie leg."

While competition in market-making is on the rise, with non-bank liquidity providers making some inroads in the Scandies space, Karlsson says such providers are never there when volatility picks up.

"I'm not against non-bank liquidity, but the key is to know which providers actually add liquidity, and which ones are just followers and don't add anything real to the market. It's a new phenomenon and maybe it will get better with time. As long as it's regulated, I'm all for it," he adds.

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