Why are people building single-dealer platforms anyway?

We are seeing plenty of new comments, and blog posts regarding who is building single-dealer platforms (SDPs), although there don’t seem to be many posts that take things back to basics and explain the actual reasons SDP’s are being built. For those of you looking for a brief, straightforward explanation, here you go:

When built by an experienced team, single-dealer platforms are a fast, low cost and low risk way to service highly differentiated client segments, delivering unique relationship pricing in commoditised vanilla flow products, and adding stickiness through enhanced compelling and more complex services.

There are no restrictions on what can be built on top of a single-dealer platform. Top players tend to build their platforms in-house, leveraging their huge internal core competences for strategic competitive advantage.

Other benefits to banks include:

  • Improved margins, through delivering unique per using relationship pricing
  • Better customer retention, through delivering highly segmented workflow solutions
  • Reduced transaction costs, by providing low touch, low cost price discovery and execution, with full STP
  • Cross-selling capabilities
  • Escape from commoditization, by offering customised solutions, and aditional value added services such as research, analytics, and other client focused services
  • Internalisation of flow

FX Liquidity Mirage

Interesting comment in today’s FX week (sorry password required) about the problems with some banks FX feeds… “Banks must improve their foreign exchange pricing and trading infrastructure or risk losing order flow, according to currency traders….”

My take on the article, is that some banks are still streaming the illusion of ‘robust’ deep liquidity to clients, when in reality, the liquidity is not deep, and will disappear after the first client ‘hits them’, additional clients are then unlikely to be filled, and due to slippage (the price has now moved) the trade is rejected – this does not make for a happy client!

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Marketing your Single-Dealer Platform

There seems to be fairly little written about the successful marketing of an SDP but having been working with many customers who have been providing successful SDPs for a few years now it is becoming clear that as this area of the market grows and the technical and pricing hurdles are overcome, that having an integrated marketing plan for your SDP will become a more important element for overall success.

There are naturally many aspects to such a plan but one in particular came to prominence last week when I caught up with one of Caplin’s customers’ who built their emerging markets FX SDP 3 years ago. When we were originally architecting the system with them, they wanted to design a completely parallel deployment that could be used for demoing the service and for users to trial it all with dummy accounts.
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Straight-Through Processing is Coming to Swaps (Securities Industry News)

On March 31, Deutsche Bank electronically traded and cleared an off-exchange interest-rate swap on behalf of a hedge fund client in what it termed “one seamless move.”

The development may mark the first time an over-the-counter interest-rate swap has been handled electronically from order to clearance, for an institutional buyer.

The trade was executed on Deutsche’s proprietary, single-dealer electronic trading platform, called Autobahn. The transaction was confirmed over Markit Wire, the confirmation-affirmation “matching” service of MarkitServ.

Read more at Securities Industry News

Euromoney FX survey 2010: The chasing pack narrows (password required)

Very interesting article about the move toward foreign exchange markets becoming fully electronic. Comments from Deutsche Bank, UBS, Cit and HSBC. The article also comments about single-dealer platforms and internalization. Click here to view the full article on Euromoney.

eFX volumes Single Dealer Platforms vs Multi Dealer Platforms

Research by Greenwich Associates (released in March 2010) states that around the world, multi-bank electronic trading platforms captured about 40% of overall FX trading volume in 2008-2009 and single-bank platforms captured another 15%.

However, the two most authoritative sources of actual empirical data on FX activity, namely the Bank of England (BoE) and the Bank of International Settlements (BIS) seem to paint a very different picture!

Bank of England (BofE): Empirical data released by the Bank of England (Oct 2009), covering FX activity between reporting dealers and clients in London (the largest global FX market), shows that single dealer platforms (SDPs) accounted for 25% of all electronic FX volume, compared with only 13% of electronic volume done through multi-dealer platforms (MDPs).

(BoE):London daily eFX volumes by SDP and MDP (2009)

Bank of International Settlements (BIS): The most definitive empirical data on global FX volumes is produced every three years by the BIS in their Triennial survey. Data from the 2007 triennial survey shows a similar picture to the BoE data. Whilst eFX accounted for 34% of all global daily FX volumes, SDPs accounted for nearly 30% of all electronic FX volume, compared with only 21% done through MDPs, as shown below:

(BIS): Global daily eFX volumes by SDP and MDP (2007)

The 2010 Triennial Central Bank Survey of FX activity will be released in August, and should prove fascinating reading in terms of the latest trends.

Online platforms displace telephone as primary FX trading channel (Finextra)

Electronic trading in foreign exchange continued to gain ground in a contracting market last year, overtaking the telephone as the primary channel for customer dealing, according to research by Greenwich Associates.

While total FX volumes declined six per cent from 2008 to 2009, e-trading volumes increased by seven per cent, suggesting that market participants continue to actively shift volumes to multi-bank and single dealer platforms from other channels.

Read more at Finextra

Trading Platforms must perform in extreme market conditions

WallStreet & Technology touches on an interesting topic relating to last weeks near 1,000 point fall in the Dow in late US trading.

Data released by Gomez Inc (see chart below), shows many on-line trading platforms struggled to cope with the resulting surge in investor activity, with some platforms showing a 10 fold increase in the time taken from log-in to trade execution, compared to ‘normal’ market conditions. Such delays can rapidly kill hard won client loyalty for a platform.

Gomez Inc, Website response times for top 15 on-line brokerages on Thursday, May 6

I am sure senior management at many of those platforms are struggling to understand why their platforms were unable to scale sufficiently to support user numbers under conditions of extreme market volatility, without excessive latency and delays being introduced.

This clearly highlights the importance at the design stage of ensuring that the platform has been architected for scalability and performance, even under the most extreme market conditions.

Rigorous automated performance and regression testing should be incorporated into a continues build process testing performance and functionality at every phase. Prior to go-live comprehensive stress testing must be carried out, throughout the entire platform stack, to ensure pricing, trading and all end user GUI functionality is performing to acceptable levels and within agreed latency thresholds. Time spent in final UAT testing, will be worth it’s weight in gold!

At Caplin, we are engaged with a number of banks that are building new multi asset trading platforms. From the early design phase we work with the business and technical teams, to ensure their new platform is architected to deliver the performance, scalability, low latency and full range of functionality required to exceed the projections of the most optimistic of business plans, and perform to agreed and acceptable levels even in the most challenging of market conditions.

EuroMoney FX survey 2010 results – some thoughts

EuroMoney has just released the results of the 2010 FX Survey (sorry it’s subscription based).

2010 FX Share Top 10 ranking (2009)

1. Deutsche Bank (1)
2. UBS (2)
3. Barclays Capital (3)
4. Citi (5)
5. RBS (4)
6. JPMorgan (6)
7. HSBC (7)
8. Credit Suisse (9)
9. Goldman Sachs (8)
10. Morgan Stanley (11)

The top 10 has almost remained the same, with one new entry (and some slight shuffling of the deckchairs) and for the 6th year running, the mighty Deutsche Bank tops the poll – which is an amazing record! I touched on the factors that separate the top players in an earlier post here

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Progress expands single bank platform FX connectivity

Progress Software Corporation (NASDAQ:PRGS), a leading independent enterprise software provider that enables companies to be operationally responsive, today announced that it has expanded its Foreign Exchange (FX) connectivity adaptors for the Progress Apama Capital Markets Framework.

The Apama platform now connects to a much wider range of single bank FX platforms (or portals) as well as a broader spectrum of FX liquidity sources, including electronic communications networks (ECNs) and inter-dealer markets. These adaptors are accessible from all Apama Solution Accelerators, including algorithmic trading and FX aggregation.

Read more at Finextra


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