Build or buy, it’s all about differentiation

Early this morning, New York time, I and about 40 other people attended the panel “Evolving Platform Technology & New Markets” which was sponsored by Caplin as part of Profit & Loss’s Forex Network tradeshow in New York. As Jennifer mentioned recently, the panel consisted of Raj Iyer of BNY Mellon Global Markets, Thomas Lo of FinaniciaLogix Group and Jose Cadalzo of Caplin systems, all questioned and moderated by Colin Lambert, Editor of Profit & Loss magazine.

The panel at P&L Forex Network

The discussion was wide ranging and touched on what institutional trading platforms can learn from retail traders, FX trading in Japan vs that in the USA, and on how different the requirements for software as a service for a bank might be from the service that Amazon and Google might offer.

However the main point that all of the panelists agreed upon was that when creating a single-dealer platform there isn’t really a choice between building it and buying it – every bank does some of each, but the issue is how much you buy and how much you build yourself.

The conclusion was that there’s very little point in spending time and money building anything that doesn’t differentiate you from your competitors. Differentiation can be in the pricing and the products, it can be in the content and analysis, and it can be in the way that the interface is designed and that information is presented.

An interesting conversation. I’m sure we’ll hear more about this in the weeks and months to come.

Is Deutsche Bank calling the top on Retail FX?

Deutsche Bank is exiting the Retail FX space by selling its hugely successful FX platform dbFX to Gain Capital, in order to focus on its core institutional FX business. The business was started in 2006, using technology provided by FXCM. However, this was no ordinary retail FX business, this was Deutsche Bank retail client FX flow. As such, the average account size of dbFX clients at $100k was some 40 times the average account size for in the retail FX business. Yet for the mighty Deutsche Bank, this is seen as a distraction to their core institutional FX business (full story here).

According to Bank of International Settlements Data (BIS), retail FX has been growing strongly, and has accounted for over 10% of global FX volumes (see here). Yet, not everyone is making money from retail FX. Goldman Sachs who bought a 10pct stake in CMC only three years ago, last year wrote down their $140mln investment to nearly zero (story here)

Personal View: Too early to tell whether Deutsche Bank is calling the top for Retail FX, and whether we will see other banks begin to exit this space, or (as I suspect) this is more a sign of the focus of the top global FX banks on their core institutional client business, and that even a profitable platform such as dbFX is seen as a distraction for Deutsche Bank to it’s core client franchise!

Also, the consolidation in retail trading platforms continues with the above deal, and also in the US, with trading platform TradeStation for Active Traders being sold for $411mln to the large Japanese Brokerage MONEX: story here

Top SDP FX vols up 200% according to latest BIS Data

Excellent analysis of the trends from the latest 2010 BIS Triennial FX Survey, much has been covered in this blog before, but lots to digest: (here)

A few picks from the data shows:

  • Top single-bank trading systems have increased by up to 200% over the past three years

The growth since 2007 is primarily due to the increased importance of single-bank trading systems.

  • Concentration of liquididty continuing in hands of top banks

The largest dealers have seen their FX business grow by investing heavily in their single-bank proprietary trading systems.

  • Internalisation of FX flows rises from 25% to over 80% in past three years for top dealers

See previous post on internalisation (here)

  • Increased volumes driven by algorithmic trading

Algo volumes on EBS now account for 45% of total spot compared to 2% in 2004. High Frequency Trading (HFT) may account for 25% of global daily FX volumes.

  • Retail FX estimated to account for 10% of FX flows, via retail aggregators

Importance of retail flows, and the use of the retail aggregators. Trading by households and small non-bank institutions has grown enormously, with market participants reporting that it now accounts for an estimated 8–10% of spot FX turnover globally ($125–150 billion per day).

Conclusion from report:

Electronic trading is transforming FX markets and encouraging greater trading by the category of “Other financial institutions”. This broad category includes smaller banks, mutual funds, money market funds, insurance companies, pension funds, hedge funds, currency funds and central banks, among others.

Higher trading by other financial institutions is responsible for 85% of the increase in daily average turnover between 2007 and 2010. Within this category, the main contribution appears to come from high-frequency traders, banks trading as clients of the biggest FX dealers and retail investors trading online.

While the top dealers report that in April 2007
less than 25% of trades were internalised in this way, by April 2010 they were
matching 80% or more of customer trades internally. These