The study we commissioned specifically excluded electronic trading of equities, since the electronic market in equities is already mature and largely exchange-traded. We were particularly interested in finding out, in advance of any changes brought about by the current “tsunami” of regulatory legislation, about the current state of, and future plans for, electronic trading in OTC instruments.
FX - leading asset class in e-Commerce
There is a greater volume of FX traded via e-Commerce than any other asset class included in this study. Almost 90% of firms surveyed trade FX electronically (compared to almost 70% of firms trading rates and 35% of firms for each of Commodities and Credit). FX has also been traded electronically for longer than any other asset class. Almost 40% of respondents have been trading FX instruments electronically for more than 10 years, compared to around 30% for Rates – the longest of the other asset classes.
Trading volume trends
It’s clear from the research data that electronic trading is growing both in overall volume and as a percentage of all trading. The report concludes that “the responses indicate a continuous migration towards electronic execution.” However there appears to be a different rate of migration depending on the size of the firm. Tier-1 banks indicated that the migration towards e-Commerce is steady but gradual, whereas the majority of respondents from the smaller firms indicate that they are seeing “continued and rapid growth,” particularly in FX.
We can speculate that this may be because the tier-1 banks have offered e-Commerce in FX for many years, and that the majority of their clients that want to trade electronically have already migrated. For a variety of reasons many tier-2 banks are still in the adoption phase of FX e-Commerce and their clients are still in the process of migrating from traditional trading channels.
e-Commerce is driving growth
The research identifies that adoption of e-Commerce is driving a substantial increase in trading volumes. Whether that is because more clients are at ease with the technology and so the availability of an electronic trading interface makes trading easier or whether there was already a pent-up demand for trading which couldn’t be handled by existing channels is not revealed.
The result however, is that 16% of respondents said they had observed “dramatic” increases in e-trading volumes, and a further 60% of firms reported that the impact of e-Commerce on trading volumes has been “somewhat significant”.
Differentiation is key
Every bank, regardless of size, must continue to enhance their e-Commerce offering and capabilities in order to differentiate themselves in the market. Most of the banks interviewed have undertaken, or are undertaking, major initiatives in this area, and this is driving investment.
Differentiation initiatives can be grouped into four main areas:
1. Visually appealing and intuitive tools: Many banks are using user experience (UX) design and UX expertise to enhance their e-Commerce offerings. This varies from improving “look and feel” as one tier-2 bank described it, through to a radical redesign of the entire user interaction and workflow in the application to make it more “intuitive” for the user.
2. Reduced latency: Clearly when trading, the time it takes to process and transmit trade data and other information is critical. One tier-1 US firm explained that it is increasing its investment in low-latency technology and its e-Commerce infrastructure because it sees this as an opportunity to differentiate itself from its competitors.
3. Bespoke trading applications: The general improvement of UX also involves analysis of particular client types, their workflows and the types of products traded most frequently. This allows provision of tailored services for individual classes of clients and even for individual clients. Banks are now placing far greater emphasis on analytics, metrics and other key performance indicators around e-Commerce. In fact one tier-2 European firm cited this to be its top priority, while another bank is accomplishing this by increasing the depth and level of analytics it offers.
4. Global consistency: Provision of uniform applications across different regions is also an integral part of a quality client experience. One European firm commented that it is keen to get the organisation of its e-trading proposition right both from a business and an IT perspective, allowing for a more tailored, flexible and scalable approach.
Tier-2 banks driving for change
Tier-1 banks, when questioned directly, seem largely happy with their existing e-Commerce offerings, with 60% of tier-1 firms indicating that they are satisfied. In contrast the tier-2 banks appear to be driving for change, with the same proportion of tier-2 banks indicating that they were not completely satisfied with their e-Commerce platforms.
It’s clear that banks cannot afford to be complacent in this increasingly competitive space, and many tier-2 banks recognise this, while some of their tier-1 competitors, having led the way for so long, may be in danger of resting on their laurels.
Multi-dealer platforms: use and limitations
In FX, multi-dealer platforms represent a very important channel to market, and 39% of respondents reported that more than half of their FX trade volume went through multi-dealer channels. However many respondents reported some significant disadvantages:
Poor service provision: The most critical issue reported by respondents was that the quality of service associated with multi dealer platforms was below standard. One tier-2 European bank said that multi-dealer platforms facilitated only a loose client relationship and a therefore a lack of service differentiation.
Restriction to a single asset class: Several respondents mentioned that most multi-dealer platforms are used solely, or primarily, to trade a single asset class. This was seen as a disadvantage due to their customers’ increasing requirement to be able to trade multiple asset classes on a single venue.
Lack of differentiation: A majority of respondents cited lack of differentiation as a major disadvantage of multi-dealer platforms, along with the lack of flexibility to offer new products. This was reinforced by at least one European firm which felt that user interface and flexibility were key customer issues and that these were difficult to address on a multi-dealer platform.
Competition: Substantial pressure on margins was reported by several respondents, along with commission and other marginal costs which were seen as being expensive compared to the fees and revenues generated. However most banks felt they had to be present on the multi-dealer platforms in order to be seen as competitive with their peers.
Functionality: Several respondents have issues with dealer intervention and high latency on multi-dealer platforms, while others felt that multi-dealer platforms were unsophisticated and slow to develop new features.
The research indicates that around half of the respondents rely on Single Dealer Platforms (SDPs) for over 40% of all electronic trading.
In a relatively short period of time single-dealer platforms (SDPs) have become an integral constituent of banks’ electronic market offerings. This is particularly true in FX. SDPs are seen as offering a number of key benefits including:
• Enhanced differentiation and service capability
• Facilitation of tailored pre-trade and post-trade services
• Integration and multi-product functionality
The survey results suggest that third-party SDPs are being widely used across all asset classes, with more than 50% of respondents citing some use of vendor solutions. Even for e-trading of FX, where many banks have built their own solution and therefore third-party products appear to be used least, fewer than 50% of firms rely solely on in-house developed platforms.
The ideal solution
The key features of an ideal electronic trading solution have changed considerably over recent years, with far greater emphasis now being placed on user experience and the necessity to differentiate from the competition. Respondents cited a long list of different features, but three in particular were frequently mentioned:
• Greater integration capability – to enable the solution to be quickly interfaced and integrated to a variety of in-house modules, components and systems
• Multi-product capability – lack of multi-product capability was seen as one of the key drawbacks of most multi-dealer solutions, so a single-dealer solution that can offer multiple products across multiple asset classes was seen to be highly desirable
• Enhanced service capability – with client service being seen as a major differentiation opportunity, the ideal e-Commerce solution must be able to deliver unique content and functionality alongside low latency data handling and seamless on-boarding of clients
While multi-dealer platforms are here to stay, and price discovery, transparency, consistency and reliability are important, other criteria are being assigned equal or greater priority. This research indicates a definite trend away from multi-dealer platforms towards single-dealer platforms, driven by the need to differentiate from peers by offering superior customer experience.
While, many banks are exploring this opportunity, the trend is most pronounced at tier-2 firms. Advances in technology, particularly in third-party systems, have helped many smaller firms to implement a single-dealer e-Commerce solution quickly and cost effectively.
In the future, markets will become increasingly competitive and the issue of differentiation will remain key. Investment in intuitive and customisable e-Commerce platforms, that enrich the user experience, will be essential, both to retain market share and attract new customers.