EuroMoney 2011 FX Poll – some thoughts


SDP volumes continue to outstrip MDP volumes:

An interesting comment caught my eye in the EuroMoney 2011 FX poll that customers preferences are changing, and that whilst single dealer platform (SDP) volumes still exceeds multi dealer platform (MDP) volume, the gap is closing, and clients are starting to migrate to MDPs.

Still seems a decent gap to me!

  • SDP volumes: 38%
  • MDP volumes: 20% (up from 7.8% in 2007)

SDP volume continues to be driven by downsteam and regional banks who are the largest segment users of SDPs, as shown by data (tab 1.G) from the Bank of England shows:

Regional Banks usage of SDPs vs MDPs as Pct of total volumes

2008     2009     2010
SDP 7% 6% 11%
MDP 6% 4% 8%

Regulatory Pressure: EuroMoney talk of MDPs providing more white label solutions for regional and downstream banks. Again, this may change as regional banks realise that productised solutions are already available that democratise the ability to rapidly build SDPs, rather than reply on upstream banks and white label MDP solutions.

What is interesting is that EuroMoney talk of regulatory influences at work here, and that buyside firms embracing MDPs “because they are more likely to qualify as a Swap Execution Facility (SEF)”.

Well, if that was indeed the case, it will be interesting to see whether that trend reverses now that the US Treasury Secretary has determined that FX Swaps and Fwds will be exempt from Dodd Frank and SEF regulations! Although of course that still leaves NDFs and FX options within the Dodd Frank regulations (and some MDPs are preparing to become SEFs in those products).

However, banks should be doing more to future proof their investments in single dealer platforms by providing tools and services that would enable clients to continue dealing on SDPs with greater confidence. Two great wins would be:

Greater Pre-trade transparency: Provide greater pricing transparency in terms of what I would call, an independent ‘market’ sourced VWAP (volume weighted average price) for larger trades they are doing. Enabling clients to see the bank’s rate, together with an independently sourced market rate (could be independently audited to show validity of the rate). Given that for most major currencies the spreads are very fine anyhow, banks should have confidence that they are offering fair pricing to clients.

This is not for all client, and I know this is not something that banks would naturally want to do, but in reality it’s far better to let clients see competitive pricing whilst remaining on the SDP. After all, clients don’t always demand the best rate, as long as they see the rate is reasonable (as consumers we don’t always buy cheapest, as long as the price seems ok, and the other shop is a hassle to get to!). This is far preferable to having the client go shopping for a better rate elsewhere and perhaps not return!

Route to SEF (for NDF/FX Options): Like with equities or futures, banks should prepare to enable clients to request price quotes for NDFs/FX options, and where those instruments mandated to (and actually are available) on a SEF, then route the request to the SEF, otherwise the bank will continue to quote, but all done from within the SDP.

Greater Post Trade transparency: Transaction Cost Analysis (TCA): Provide clients with greater levels of post trade reporting. Not just what they have done, but also provide clients with execution reports and tools for customizing those reports to demonstrate the quality of the execution on the SDP, by currency, by subsidiary across metrics such as:

  • Executed Rate vs market VWAP: Overall, what was the $$ value of the quality of trade execution
  • Price requests vs trades executed: How many prices did you request compared to how many you actually executed
  • Rejected trade ratio: How many attempted trades were rejected
  • Time to quote: How fast was the bank to quote prices
  • Average latency of price updates: How fast is the platform

I think this is a huge area, and banks should be more willing to help clients see the value of trading on the SDP.

It will be interesting to hear what people think of these ideas!

5 Responses

  1. […] I touched on the idea that bank SDPs should consider providing routing capabilities for client requests through to SEFs for products such as NDFs and FX Options if required: Route to SEF (for NDF/FX Options): Like with equities or futures, banks should prepare to enable cli… […]

  2. […] OTC markets, by far the fastest growth has been in cash FX trading, where last year SDPs captured 38% of trade volume compared to just 20% for […]

  3. […] the realization that a substantial proportion of users — a majority, in the case of FX — would rather trade on an SDP than an MDP. Finally, and crucially, technological advances and new SDP frameworks have dramatically reduced […]

  4. […] Whilst FX falls outside the Dodd Frank regulations, the general regulatory move towards greater pre-trade transparency, and the buy-side requirement to ‘demonstrate’ performance, should be viewed by banks as an opportunity to differentiate their service offerings to clients by incorporating TCA tools within their SDP, as discussed in Single-dealer platforms and TCA and further in my review of the EuroMoney 2011 FX Poll – some thoughts. […]

  5. […] have commented before (here and here) that single bank platforms should do more to deliver TCA, and help their clients to demonstrate […]

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