Don’t forget it’s people that build FX Pricing Engines

We have talked about the ‘Flow Giants’ that dominate the top positions of the EuroMoney FX rankings, with the ‘Mighty’ Deutsche Bank seemingly fixed forever in pole position, with the usual ‘contenders’ BarCap, UBS and Citi jockeying for the next three places.

The 2011 rankings which came out in May, saw UBS lose 5% market share, ceding 2nd place to Barclays Capital, whose commitment to eFX through their BARX FX platform has taken them steadily from 5th place in 2005 to 2nd place in 2011.

EuroMoney FX Ranking 2005-2011

In Separating the men from the boys in global FX I touched what I thought were three key factors that led to Deutsche, UBS and BarCap dominating the global FX business:

1. Total commitment at board level to an ongoing, multi-year, multi million dollar investments in FX technology

2. Deep understanding of liquidity, and continuous adaptive optimisation of back-end FX pricing engines and risk management tools, and the ability to internalise global flows

3. Ability to deliver unique back-end capabilities to clients across any platform

Whilst technology is certainly at the heart of an eFX business, what really makes the difference as highlighted above in point 2, are the highly talented eFX technologists, who design, implement and continually refine (through real-time feedback) the pricing algorithms that are behind the highly sophisticated pricing engines of Deutsche’s Autobahn, BarCap’s BARX, and UBS’s FX Trader.

This is bourne out in this EuroMoney story (sorry password protected) about the revamping of UBSs eFX pricing engine. Last year, UBS managed to entice Chris Purves (now Global Head of FX eTrading at UBS) away from BarCap, where he built the FX algorithmic trading that was responsible for all pricing and hedging on the BARX FX platform.

According to George Athanasopoulos, Global Co-Head of FX at UBS;

The revamp of their eFX algorithmic pricing engine, has resulted in FX volumes tripling, and their market position with some of the highest-volume clients in the electronic markets has gone from 10th to first.

The article goes on the mention that the day last month when the Swiss National Bank intervened to weaken the swissy, driving it down against the euro from 1.12 to 1.21 was their most profitable day ever in FX.

They claim that their eFX pricing engine was able to quote throughout the move, with 50-60 pip spreads, compared to around 375 pip spread on EBS.

EUR/CHF move from 1.12 to 1.21 on 6th Sept 2011 – SNB intervention

Speaking as an old swissy trader, I know just how hard or rather how painful it can be to maintain tight pricing for clients in such one way markets, and for UBS to achieve consistent tight dealable pricing, is a real testament to the highly sophisticated pricing and skewing engines these top banks now deploy.

The other point made in the article, which echos comments from Deutsche Bank, is that by examining real-time stats from their pricing engine, they can identify, and ‘turn off’ what we often call ‘toxic flows‘.

Such continual refining and optimising of pricing engines is certainly needed for the very top-tier banks, as they compete for highly price sensitive flows, and would be punished immediately if they let their guard drop.

It will be interesting to see whether their revamped FX pricing engine enables UBS to regain their 2nd place in the 2012 EuroMoney rankings next year.

9 Responses

  1. […] they are thin on the ground and are expensive. This point has been made by my colleague Paul Blank here. Where technology can help is to efficiently provide the raw inputs to the business so that all […]

  2. […] three top FX banks, Deutsche, BarCap and UBS (see story on UBS pricing engine) all report strong FX Q3 volumes and profitability, outperforming other asset classes, which they […]

  3. […] to 3rd place above BarCap, reflects their renewed investment in pricing technology. We mentioned in Don’t forget it’s people that build FX Pricing Engines, that UBS had lured Chris Purves and a number of key BARX FX pricing technologists over to UBS, and […]

  4. […] 7. Don’t forget it’s people that build FX Pricing Engines […]

  5. […] we have mentioned in previous posts, having people with strong pricing engine capabilities is a prerequisite to building a credible eFX distribution franchise. RBC hired that expertise in […]

  6. […] internalising flows, creating deeper and more robust client pricing. And as discussed in Don’t forget it’s people that build FX Pricing Engines effective pricing engine and risk management competence is at the heart of any successful etrading […]

  7. […] asset correlations’ affecting their portfolios, and move easily through to execution, against UBS pricing, algorithmic execution, or externally via routing to SEFs or other venues, and finally through to […]

  8. […] Based on back of envelope stuff, I would suggest that over the past decade, each of the top five global FX banks would have spent in the region of $600-800mln to build, enhance and upgrade their e-trading technology capabilities. […]

  9. […] from the intelligence asymmetry gained by the trader or more correctly today, by the bank’s pricing engines, in terms of their ability to rapidly analyze client flows, and ‘deduce’ trends based […]

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