Single-Dealer Platforms: (4) the provider axis

In the fourth in a series of posts about how single-dealer platforms are evolving, I’m going to look at how the range of firms that use SDPs to grow their business has broadened over the last couple of years.

Until fairly recently, SDPs were largely the preserve of  Tier-1 banks. These global firms used their huge IT teams and budgets to gain competitive advantage via technical innovation, particularly in e-commerce. Deutsche, for example, used its Autobahn family of SDPs to drive business growth in FX and IRS, and BarCap profited greatly from its highly successful BARX FX offering. Not all these experiments were successful, and there were notable false starts. But the successful ones demonstrated the huge impact SDPs could have if done properly.

In the last few years, however, the larger regional investment banks have started to deploy their own SDPs. In the cash FX markets, some kind of direct Internet offering is now provided by almost every large bank, and increasingly these are being extended into FX options, precious metals, and fixed income. These SDPs are of course used by the bank’s customers, but a major additional target for many firms is use by their own staff so as to internalize more of their flow.

There are three key drivers behind this Tier-2 adoption. The first is customer demand, with the emergence of a new generation of end users who are more attuned to screen-based trading and less inclined to pick up the phone. The second is the visible success of SDPs built by the Tier-1 banks, and 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 the cost of building highly competitive offerings in this area.

Recently, we have witnessed exciting SDP initiatives by entirely new categories of non-bank firms. These include independent broker-dealers and IDBs, large buy-side money managers, and retail brokers. In all these cases, the message seems to be that providing “trading as a service” via the Web is fast becoming an essential component of any successful trading business.

2 Responses

  1. […] Paul Caplin explains this in the 4th of his series of articles on how single dealer platforms are evolving. […]

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