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.

Poll results confirm, Single Dealer Platforms best positioned to provide SEF routing capabilities

We have been running a poll asking whether Single Dealer Platforms should provide routing through to SEFs.

The results are shown below, and not unsurprisingly the majority of voters thought that SDPs should provide an aggregated view of SEF liquidity, and order routing capabilities.

Our survey echos the findings of a similar poll carried out during live Webcast last week on Regulation and OTC e-commerce: Future-proofing your systems (may require password), with some 80% of voters suggesting that Single Dealer Platforms will become more important rather than less important as new trading regulations unfold. Actual webcast available here

Single-Dealer Platforms grow in importance

It is interesting that, following Paul Blank’s post on May 29th suggesting that single-dealer platforms are fighting back against SEFs, the audience at yesterday’s Waters webcast seemed to agree.

Yesterday (June 7 2011) Waters hosted an audio webcast entitled, “Regulation and OTC e-Commerce: Future-proofing your systems”. Sponsored by Caplin Systems, and hosted by Rob Daly, editor of Waters’ publication Sell-Side Technology, the panel for the webcast included Stéphane Malrait of Société Generale, David Bullen of Citi and Nick Green of Crédit Agricole.

The first audience participation question was, “Do you see a direct electronic channel to market being 1) more or 2) less important in this new regulatory environment?”

82% of the audience decided that in the new regulatory environment a direct electronic channel to market will be MORE important than it is now.

This is clearly good news for those of us engaged in building electronic channels to market for broker/dealers.

For those who missed it, an on-demand recording of the full audio webcast will be available online in a week or so. As soon as it’s available I’ll post the link.

Single Dealer Platforms fight back against SEFs

Under Dodd Frank, SEFs fundamentally change the relationship between dealers and their clients (for certain products)!

Under the new SEF regulations, those OTC derivatives that are deemed ‘cleared products’ – accepted for clearing by central counterparty clearing houses (CCP), and that are in standard size (not large block trades), and are made available for trading on a SEF will no longer be able to be executed by the bank on their SDP, but instead must be offered for execution on a SEF.

Clients value the liquidity delivered through their SDP relationship channels, but under Dodd Frank, in some cases clients will be prohibited from seeking a risk price directly from banks for certain products and instead must offer their positions out to SEFs for execution – which will involve greater risk management by clients.

At Caplin, we believe SDPs are ideally positioned to act as the gateway through which clients access all liquidity, and where required, route client trades through to SEFs.

So it’s encouraging that an increasing number of dealers are now embracing this view as well!

RISK.Net carried an article last week which talks about how banks are fighting back, it’s a long article (password required), but here is a small snippet, which seems to confirm yet again our view.

Dealers argue their customers won’t want to connect to more than a handful of SEFs, but also won’t want to miss out on the liquidity spread across this fragmented market. With as many as 20 SEFs now waiting in the wings, there’s a role for an aggregator. Enter single-dealer platforms. Robbed of their ability to execute clearable trades by Dodd-Frank, these platforms could now gain a new lease of life as super-SEFs, collecting prices from competing venues and once again making banks the gateway to the OTC markets. In essence, Dodd-Frank enabled SEFs to leapfrog the dealers – and dealers now hope to pull off the same trick.

“We’re discussing internally how to be the aggregator. We’re trying to find a way to make it easy to execute across cash, futures and OTC markets as a way to separate ourselves from the SEFs,” says Rhom Ram, the London-based head of Autobahn, Deutsche Bank’s single-dealer platform.

Deutsche is not alone. E-commerce specialists at five other banks all argue that dealer-run aggregators will be the way clients choose to access the market, and one claims to have a beta version of a Sef aggregator up and running already.

Under Dodd Frank, SEFs may change how dealers and clients interact, but the dealers are fighting back, and looking at innovative ways to maintain their position as the relationship channel of choice for clients.

etrading trends research by GreySpark

GreySpark (in conjunction with Best Execution) have released a detailed study on the trends in etrading.

It dispels some common industry myths… Continue reading

Reuters launches hosted FX Aggregation service (using Aegisoft)

Following the acquisition last year of Aegisoft, Reuters has now released a hosted FX liquidity aggregation and algorithmic execution enhancement capability for FX.

A welcome addition to the Reuters RET product suite.

It will be interesting to see to what extent Reuters ‘opens this up’, Continue reading

ISDA comments on SDP role in the new regulated world

ISDA have released a response to the FSB progress report published on April 15. While the response covers regulatory arbitrage, execution, clearing and reporting, the most interesting statement is their view of how SDPs can and should function within the new regulations.

In the section “Organised trading of derivatives”, the following comment is made: Continue reading

Dodd-Frank: Where have we got to so far?

As part of our review & assessment of Dodd-Frank, I thought it would be useful to summarise progress to date & try to draw some conclusions about the speed & direction of the implementation.
Continue reading

FXAll to register as SEF – my thoughts

Yesterday I blogged about how banks should be doing more to ‘future proof’ their single dealer platforms, by providing tools and services that would enable clients to continue dealing on SDPs with greater confidence, whilst complying with the evolving regulatory landscape.

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: Continue reading

Celent study on Electrification of FX Markets

Celent study (summary available) on the ‘electrification’ of FX markets.

Summary of findings:

Algo trading, non-dealer and retail have driven ave ticket size down from $4.3mln in 2004 to $1.8mln in 2010, and number of daily trades up from 86k to 498k.

Single Dealer Platforms continue to gain in popularity due to greater speed and reliability of trade execution. Continue reading