New trading platform costs weigh on FX dealers

The recent surge in foreign exchange trading platform launches has forced banks into a tough choice between spending money on new connections or risking the loss of client flows. 

A flurry of spot FX trading venues have come to market over the past two years, with new interbank and anonymous dark pool matching platforms offering different functionalities or technologies for market participants. 

Some estimate upwards of 75 FX trading venues are now available to firms – and that number could rise even further as fintech providers specialising in API-based trading and artificial intelligence look to expand their solutions to FX.

Liquidity providers (LPs), though, say they often feel obligated to connect to these new venues if clients demand it or risk losing business. Sometimes all it takes is one large client to make the request. 

“We have some customers and big asset managers that to some extent impose the platform they want to trade on. Naturally, as we serve those large clients, we are regularly connecting to new platforms as the clients prioritise them,” says Julien Puvilland, head of FX electronic trading at Crédit Agricole Corporate and Investment Bank.

The build-up of brokerage fees charged by these venues, as well as the cost of connecting to the myriad services, has led to pushback from some banks as they try to convince buy-side clients to trade on fewer platforms. 

It’s a huge drain on resources. Often, the user interfaces are appalling and it requires a phenomenal amount of testing

Head of FX algo execution at a large US bank

In 2020, Citi took the bold step of cutting 90% of its ties with a range of electronic FX spot vendors, with a view to focusing on just five venues. 

Yi Hahn Chin, head of digital FX solutions sales at Citi, says the factors that influenced this decision still apply in its current approach to connecting with new venues.

“It’s really platform-by-platform and it comes back down to the focus on the client – how that platform fits their needs and that it optimally and strategically aligns with the way our infrastructure is operating,” says Chin.

Over the years, Citi has reactivated a few platform integrations. 

Other dealers say they are limited to offering advice on what platforms would be ideal for clients to trade on. 

“Within reason, we will connect to or meet our clients at whatever venue they want to be met on. If we don’t, then we don’t see the business. Now, that’s different from us saying ‘we would have a clear preference for what venue they might choose,’ but we don’t drive that discussion. Ultimately, it’s the client’s choice as a function of what works best with their transactional workflow,” says a global FX sales executive at a large European bank. 

Recent platform startups include Reactive Markets, which launched as a competitor to FX Spotstream, and Singapore Exchange’s Currencynode. There is also the upcoming dark pool matching platform run by LoopFX and T3 Technologies, an Abu Dhabi-based peer-to-peer platform. 

Protocol pains

Some of the platforms have highly innovative features that catch the eye of clients, says the head of FX e-commerce at an international dealer.

“They can be an attractive offering for a client to jump from one technology provider to another. From our perspective, we have to look at them individually and consider what is the opportunity cost for connecting to this new platform and client base,” he says.

But LPs say connecting to them isn’t easy as it necessitates developing new protocols to receive quotes and stream liquidity for each one. With so many new vendors popping up, trying to absorb them could prove overwhelming for some dealers.

“The issue with many of those platforms is that they usually don’t share exactly the same type of communication protocol. As a result, we have to develop a new protocol for each platform – it’s something that could be expensive for us. And considering the low-margin business, particularly in spot, it’s something that we are not pushing directly,” adds Crédit Agricole CIB’s Puvilland.

Dealers also face the pain of reprogramming their various execution algos to ensure client orders can access liquidity from these new platforms. This can take up to six months of work, with little reward if there is a lack of clients wanting to trade in them.

“It’s a huge drain on resources. Often, the user interfaces are appalling and it requires a phenomenal amount of testing,” says the head of FX algo execution at a large US bank.

Expectations management

The head of FX trading at a second European bank says his desk sticks to the platforms they are used to.

“You have to invest to onboard a platform and you need to make sure that there is a certain kind of customer base behind [it]. For me, I’d rather stick to the platforms that I’m comfortable with,” he says. 

“When onboarding new platforms there has to be a very solid business case behind it, because it’s going to cost you to onboard, there’s cost to keep up that connection, and if there’s latency issues it’s going to cost to trade on there.”

The head of FX derivatives and macro trading at an international dealer says his desk recently turned off its connection to one venue as its activity did not justify the $25,000 monthly fee.

“Even though it’s a good product, it’s just not a good product for us, and it wasn’t worth the associated costs,” he says.

The slow-motion fragmentation of liquidity pools across multiple venues has meant banks have had to think more carefully about the value proposition of a new venue and how they can monetise that flow before connecting to it. 

“For us, a platform decision comes down to asking if these platforms support our core business. Does it connect us with clients we’re mostly focused on? Does it give us an entrance into a new segment or access to a lot of new prospects we’ve been looking to onboard but haven’t had an opportunity to yet?” adds the head of FX e-commerce at the international dealer.

The head of global FX sales at the first large European bank says the market could be nearing the point where the current costs of providing liquidity on these platforms can no longer be maintained.

“We know that a dollar of flow is not the same on all these [venues] and that some are incredibly expensive for us to connect to. At some point, the industry needs to ask itself whether it’s sustainable and whether expectations are aligned across all parts of the ecosystem,” he says.

“Because it’s a commoditised business, clients expect everything at an incredibly competitive price. But the longer that continues, there’s a point at which not everyone can keep up and your number of providers begins to tail off. So, you get to a point where, if you go any further, the model breaks a bit.”

To mitigate some of the connectivity costs, LPs are making greater use of technology vendors such as ION Market Factory and oneZero that allow banks to offload the burden of connecting to the platforms. 

Steve Totten, director of quantitative analysis at oneZero, sees more and more banks moving towards vendors and outsourcing to manage that kind of workflow. 

“If you’re connecting to multi-dealer platforms, banks are realising that maintaining all of these venues – for what amounts to a small, unique user experience – makes less sense than taking their resources and focusing them on areas where they can really add value, whether it’s in pricing, risk management or data analysis,” he says.

Looking ahead, banks say platform consolidation could be both a logical and efficient step. Having only one platform for the industry would be dangerous, but a situation in which 20 platforms fight over the same liquidity isn’t ideal either. 

“If we could influence market structure, we would like to have some kind of fairly aggregated market, where connecting to between three and five platforms will get access to most of your clients. That would probably be the overall view in terms of an ideal setup,” says Crédit Agricole CIB’s Puvilland.