Digital Vega, Spark deal hints at wider shake-up for platforms

Two trading tech firms seek point of difference as dealers cull vendor relationships in cost-cutting drive

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Options trading platform Digital Vega has entered into a strategic partnership with Spark Systems, a cash trading platform based in Singapore, in a sign of consolidation among trading tech firms as banks cut spend in this area.

Top-tier banks have announced they intend to prune the number of their vendor relationships, with Citi saying it aims to channel the vast majority of its external trades through just five platforms. Other banks have indicated they are seeking to reduce the fees they pay to platform operators.

In response to the sell side’s greater focus on value for money, foreign exchange trading platforms recognise a need to differentiate themselves from others in the market.

“We will be working towards being one of the five that Citi can work with,” says Joo Seng Wong, co-founder and chief executive officer at Spark. “It’s all about ticking the right boxes in terms of some key features.”

In the case of Digital Vega and Spark, the combined entity will offer users the chance to trade spot FX, FX options, FX forwards, swaps and non-deliverable forwards. The companies will share a 200-strong joint client base. For now, each company will retain its own identity and platform, but Jason Wang, chief operating officer of Spark, says the duo may in future work towards a full merger.

The new partnership is already up and running in Asia with three clients and is now being expanded to larger currency trading hubs in London and the US.

The pairing faces stiff competition in the crowded FX electronic trading space, where the likes of Bloomberg’s FXGO, Deutsche Börse-owned 360T, and Refinitiv’s FXall offer a similar scope of products.

Mark Suter, executive chairman and co-founder of Digital Vega, is confident that the combined entity offers enough to stand out from the herd.

“When you take into account the support for complex structured products and the workflow provided, there are no competitors out there; this will be a unique offering,” he says.

Compared to other asset classes, the foreign exchange market boasts a high number of trading platforms and aggregators. The fragmentation has forced some of the biggest dealers to hook themselves up to dozens of venues in an effort to reach clients where they are trading. But with sell-side margins under pressure, dealers have renewed their complaints about the fees they must pay to the gatekeepers of that liquidity.

To reduce these costs, some banks have opted to cull names from their list of vendor partners. Last July, FX Markets reported that Citi intended to cut ties with more than a dozen FX trading platforms over the following 12 months, with plans to ultimately have 90% of its external electronic volumes to come from just five vendors. The bank had already disconnected from 20 vendors it said brought little value to the business.

Nomura also announced last year it would be withdrawing from a number of electronic platforms, citing a desire to reduce costs. At the time, the bank’s deputy head of global markets predicted there would be consolidation among trading venue providers.

For the largest dealers, the cost of connecting to scores of platforms can run into tens of millions of dollars a year. Costs range from connectivity and maintenance, to governance and human resources, spanning sales teams and the technology teams managing those interactions.

Not all banks are looking to reduce their vendor roster, though. Some dealers are content to remain active on multiple venues in response to client demand. An argument in favour of this approach is that distilling the number of tech providers into too small a pool could erode competition and give vendors too much pricing power.

Elsewhere, dealers claim to have succeeded in persuading – or coercing – some platforms into lowering their fees.

Mutually beneficial

Executives at Digital Vega and Spark Systems believe the alliance between the firms will benefit each in different ways.

Digital Vega will open the door for Spark to expand its footprint into Europe as well as the US market where the UK-based company recently received permission from the Commodity Futures Trading Commission to operate there. This expansion will help Spark introduce its products and services to the US market.

A tie-up with Spark will help Digital Vega further penetrate markets in Asia where it set up shop in late 2019. Spark, a recipient of a financial services technology and innovation grant from the Monetary Authority of Singapore, is currently valued at $70 million.

With a 7.6% share of global FX trading, Singapore is the largest FX trading hub in Asia, and the third largest globally behind London and New York, with 43.1% and 16.5% of the market, respectively, according to data from the Bank for International Settlements. The MAS has been embarking on a multi-year effort to transform the city-state into a financial centre capable of managing the region’s growing trading and hedging needs.

Asia’s wealth management and private banking space may also bring an opportunity for the Digital Vega and Spark union. In 2019, the top 20 private banks in Asia saw their assets under management increase by more than 20% year on year to nearly $2 trillion.

Mark Suter, executive chairman and co-founder of Digital Vega, says the two firms have already identified 30 firms in Asia as potential targets for the combined service.

Editing by Alex Krohn 

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