Richard Willsher
Richard Willsher

Australasia: An e-FX market in transition

Electronic FX trading in Australasia is adapting and changing fast. The drivers for this are both local and global and insistent demands from both institutional and corporate buy-side clients are principal factors reports Richard Willsher.

First Published: e-Forex Magazine 79 / Regional eFX Perspective / December, 2017

Research conducted annually by Sydney based Peter Lee Associates among the 200 largest FX users in Australia suggests the buy-side is some way behind their peers in North America and Europe in using e-platforms but they’re catching up.

“We’ve found that the percentage of corporates using electronic platforms to transact foreign exchange has steadily grown over the last 7 years – from 39% in 2010 to 64% in 2017,” explains the firm’s Managing Director, Cameron Peter. “The percentage of total reported volume transacted through electronic platforms has significantly increased over the last 7 years – from 8% in 2010 to 38% in 2017.  However, growth in volume has plateaued in recent years - 36% over 2015 and 2016 and 38% this year.”ANZ, CBA, Westpac and NAB are the most widely used platforms, the research finds. However the proprietary major bank platforms are only used for small trades.  Only 9% of the total reported volume transacted through platforms is transacted through these four platforms. Of the third party platforms, Bloomberg was the most widely used with 19 per cent of transactions in 2017. This was more than double its share in 2015.  However, the share transacted through each platform was as follows: Bloomberg (FXGO): 17%, 360T:  34%, FXall: 30%.

Thomson Reuters’ head of FX market development - Asia Pacific Michael Go confirms, “Australasia is seeing growth in the use of electronic channels on the buy-side in particular as they seek to ensure compliance with the FX Global Code of Conduct, best execution and also efficiencies from investors. The buy-side are increasingly seeking multi-bank providers these days with a large increase in appetite for straight through processing (STP) as well as post trade services.  As we’ve seen in prior years there has been further growth in the percentage of non-bank providers to the buy-side participants.”

At ANZ, one of the four leading regional banks, Luke Marriott, global head of wholesale FX, is very conscious of the pressure from the buy-side and the need to respond. “There is no doubt electronic channels will continue to grow in use in the future. There are four key reasons why this trend will continue: cost efficiency – both to the sell- and buy-side, price and product transparency, execution efficiency and regulation. Clients across all segments through the evolution of technology expect a greater degree of service from the sell-side. No longer can the sell-side simply rely on relationships to generate business. Clients expect pre- and post-trade services, from pre-trade liquidity management, portfolio overlay, post-trade analytics on best execution, STP to their settlement and accounting systems. New product innovation – algorithmic execution and direct market access (DMA) are becoming standard offerings.”

There is no doubt that the sell-side is having to pull its socks up. At the same time the global majors – Deutsche Bank, HSBC, UBS, Citi and JP Morgan – are well ensconced with the leading corporate and institutional customers and ratcheting up the global technology competition.

Cameron Peter

Cameron Peter

“We’ve found that the percentage of corporates using electronic platforms to transact foreign exchange has steadily grown over the last 7 years.”

Regulation – enforceable undertakings and The Global Code

There is also significant regulatory pressure on the Australasian banks. This is coming from both local and global measures.  The four major Australian banks – ANZ, CBA, NAB and Westpac - have been obliged to issue enforceable undertakings as a result of investigations into their FX trading conducted by ASIC, the Australian Securities and Investments Commission.  ASIC’s Scott Tilden, a senior specialist within the Market & Participant Supervision Team, says, that the remedial process is going as hoped. He also comes out strongly in favour of electronic trading as an important aid to a better-regulated market. 

“The conversations that we have with the institutions that we monitor here in the Australian market, is that the shift is continuing towards electronic or e-commerce style platforms in FX. There are benefits around the click and trade technologies, algorithmic trading, automated execution, automatic order routing, and the follow-on benefits of STP and payments, audit logs and being able to achieve or monitor or evaluate best execution when you’re looking at an electronic executed audit trail. There is a push for more trade to happen on electronic platforms. More volume and more customers on the platform base.”

At the same time Tilden addresses the voice-trading question. “I think firms have to work harder to monitor behaviour of voice broking, that’s a given. But there will always be a place for voice in all markets and FX is one of those markets. The consolidated audit trail, not only trading but communication, original order instructions, client instructions, confirmation, are definitely more challenging within the voice world and being able to evaluate best execution is easier on e-trading platforms but sometimes speed is not the main driver. Sometimes it’s about market impact for example or the outcome of multiple transactions. This will ensure that voice has a role to play.”

Tilden confirms that ASIC welcomes The Global FX Code of Conduct, which strengthens its arm in carrying out its supervision. The Code’s author, also Australian, is Guy Debelle, deputy governor of the Reserve Bank of Australia, the country’s central bank. He is also chair of the Australian Foreign Exchange Committee. Dr. Debelle is confident that the Australian banks will quickly align themselves with the Code. Particular so, as their alternative, as for banks all over the world, is regulation; and banks already have plenty of that.

“We’ve been at pains to say this. It is up to the market to adopt [The Code] and if it doesn’t then you’ll end up in a state of affairs that is a hell of a lot worse than what we’ve got currently,” he says.

Luke Marriott

Luke Marriott

“There is no doubt electronic channels will continue to grow in use in the future. There are four key reasons why this trend will continue: cost efficiency – both to the sell and buy side, price and product transparency, execution efficiency and regulation.”

He goes on to note that electronic platforms are now in widespread use in the Australian market and what the local banks competitive position looks like. “Our platforms are the same as anywhere else in the market. On the buy-side, we have a decent sized asset management industry here and we have been able to get a fair amount of engagement on that side as well.The regional banks worked out some years ago that there is no point in competing on technology with the global players. They need to provide customer offering here, to their local customer base, in a way that is going to be attractive. We trade ourselves on EBS and Bloomberg, so they are transparent in that we actually use them. It is true that particular platforms have a higher share of particular crosses. Beyond that, it’s a global market infrastructure, which is across the whole of the global FX market.”

So between the Reserve Bank and ASIC, there is clear support for continued moves towards electronic trading. This brings the local market in step with much of the global FX industry, from both technical and, in practice, regulatory aspects.

Scott Tilden

Scott Tilden

“I think firms have to work harder to monitor behaviour of voice broking, that’s a given. But there will always be a place for voice in all markets and FX is one of those markets.”

Capacity to innovate

Regulation comes at a price, ANZ’s Luke Marriott explains. “The largest challenge in the changing regulation environment is the sell-side reducing its capacity to innovate for clients. The sell-side has limited investment and development capabilities and over recent years the majority of the investment has been channelled to ensure regulatory compliance. This being said, banks have learned to become regulatory innovative and scale their own regulatory obligations to extend their capabilities to assist clients solve their own regulatory obligations. MiFID II regulatory reporting and best execution are driving this phenomenon.”

Nonetheless, ANZ is not resting on its laurels and is bringing out new offerings to clients. “We’ve released a new risk based engine, Prophet, to improve client flow internalisation and deepen our pools of liquidity in our core competency: AUD, NZD and deliverable Asian products. The new engine compliments ANZ’s FX application programming interfaces (API) based distribution strategy that seamlessly connects to where our clients choose to deal. We have added both pre- and post- trade services to assist client optimise their hedging returns and performance, as well as manage their internal execution policies. We are currently extending our e-capabilities to include DMA via algorithmic execution for spot related products and expanding our e-options capabilities leveraging our investment in the Sky derivative risk engine.”

Dr. Guy Debelle

Dr. Guy Debelle

“We’ve been at pains to say this, it is up to the market to adopt [The Global Code] and if it doesn’t then you’ll end up in a state of affairs that is a hell of a lot worse than what we’ve got currently.” 

Deutsche Bank’s response is similar. “Some regulatory guidance has focused on market participant’s ability to be able to demonstrate best execution in its practices,” says Lee Merchant Head of G10 FX Flow Asia Pacific. “While at first it was easy to assume this meant best price at point of trade, market participants are beginning to refine that definition to include factors such as market impact, reject rates, execution guidance etc. to better demonstrate cost of execution with their liquidity providers. Understanding some these factors requires the employment of trade analytics.”

CBA is also in the throes of a large technology overhaul of its end-to-end eFX solution. This involves co-location in low latency data centres, new price aggregation services, e-commerce pricing and sales/ trader workflow tools. Some of these will be rolled out by Q2 2018, we understand.

The multibank platforms are also innovating. Michael Go of Thomson Reuters says that his firm, “Has recently completed a major refresh and upgrade of its market leading eco system that will support future growth and regulatory change for all of our clients and looks forward to being part of the continued innovation in Australasia and Asian regions overall.” 

Electronic Trading – Australia – Financials – Foreign Exchange Users (71) (49) (67) (64)
Electronic Trading – Australia – Financials – Foreign Exchange Users (71) (49) (67) (64)
Advantages of Electronic Trading Platforms – Australia – Financials – Electronic Trading Users (49) (52) (50)
Advantages of Electronic Trading Platforms – Australia – Financials – Electronic Trading Users (49) (52) (50)
 

He adds that Thomson Reuters lays claim to having, “The broadest set of capabilities in the market that provides solution to all parts of the FX workflow.” These include, “Pre-trade data and analytics to execution and pricing over disclosed and anonymous platforms, sourcing a broad number of liquidity providers. Electronic trading for pricing that allows solutions for firms of all tiers wishing to price their FX internally or externally to clients. They have the ability to white label and allow participation for firms who may not wish to assign capital to develop their own solutions.  And its post-trade solutions provide STP and trade reporting to participants including central banks in developed and emerging markets.”

Michael Go

Michael Go

“The buy-side are increasingly seeking multi-bank providers these days with a large increase in appetite for straight through processing (STP) as well as post trade services.”

What next?

Technology innovation in Australasia could be about to advance further however. Gaining an inroad to the major institutions and corporates may be a mountain that is difficult to scale for small fintech businesses. However Peter Lee Associates’ Cameron Peter sees the small and medium sized business end of the spectrum is been more receptive.

Algorithmic Orders/Transaction Cost Analysis – Australia – Financials – Electronic Trading Users (50)
Algorithmic Orders/Transaction Cost Analysis – Australia – Financials – Electronic Trading Users (50)

“The big corporate users have nine or ten FX providers and proprietary platforms as well as third party platforms. So they are getting a lot of attention from the established banks. There are not gaps opening up where a fintech can find a way in. Further down the size spectrum you go, there are thousands of companies that might be receptive to something new. Then there’s compliance at the big firms and institutions and they can’t move as nimbly as a smaller companies can in adopting those newer things.”

Meanwhile ANZ’s Luke Marriott sees technological innovation in a variety of avenues. “Artificial intelligence (AI) is playing a role in predictive analytics around market events, credit decisioning, electronic chat surveillance, digital servicing, the interpreting of social commentary in relation to the market and AI as a service. Fintechs are increasingly leveraging synthetic ways of facilitating cross border trade to circumvent traditional correspondent channels.  Distributive ledger technology (DLT) uptake is starting to gain traction but more for the consensus ledger aspects than as a way to move a store of value such as Bitcoin. Its value lies in uptake, which can be challenging across so many market jurisdictions, actors, local regulations, differing degrees of digital maturity etc.”

Lee Merchant

Lee Merchant

“Market participants are beginning to refine the definition of best execution.”

Marriott adds that trade and supply chain activity in intra-Asian trade is also driving FX digital innovation. He points to statistics that show that this is 3.5 times higher than Asian trade with North America and Europe.

Meanwhile, Thomson Reuters’ Michael Go tempers his response to the question of the importance of AI and DLT. “I understand that blockchain is being tested in a number of firms in Australasia, in the areas of payments and settlements across a number of asset classes but nothing as yet that is being touted for release from a client / trading perspective. The AI space is very interesting when it comes to the future development of automated and algorithmic trading but again it is very much wait and see.”

Conclusion

What becomes clear when speaking to market players in Australasian FX at the moment, is how responsive it is to international pressure on one hand – the FX market being truly global. And at the same time how quickly it is adapting to buy-side demands. This is evidenced in areas such as its rapid take up of the Global Code and FX market regulation for example. But it is also taking on board new trading technologies and innovations. There is a sense that while Australasia e-FX is in a phase of great change and transition – along with many other jurisdictions – it is also demonstrating how keen it is to adapt and rank itself among the most advanced in the world.