The Canadian foreign exchange market has grown dramatically over the past 15 years. Ever since the Bank of Canada and its subsidiary group - the Canadian Foreign Exchange Committee (CFEC) - began publishing average daily turnover numbers in April 2006, the market has more than doubled in that time. In October 2019, FX turnover hit a peak of $130.6 billion per day. It has since retracted slightly back to $119.2 billion but is still well above its humble beginnings of $52.6 billion.
The numbers follow a pattern globally highlighted by the Bank for International Settlements in its triennial survey on FX volume. Starting in 1986 at less than $500 billion per day, the FX market now stands at record highs of above $6 trillion transacted on a daily basis.
This exponential growth has led to huge changes impact how FX trades, be it spot contracts or complex derivative products. The Canadian dollar, which sits seventh in the most traded currency charts, is no exception to this and the market has adapted significantly as a result.
Electronic trading is one such evolution. Today, electronic trading makes up the majority of how FX instruments are traded in Canada. Spot and forward transactions traded electronically made up 62% and 71% of the daily volume, as voice trading makes up a shrinking share of the pie.
Zachary Felshman, e-FX sales, Americas at Royal Bank of Canada (RBC) Capital Markets, says that while the Canadian market has retained a certain percentage of voice execution and other non-electronic services compared to other markets in the United States and Europe, “constant increases in transparency and efficiency have increased the proportion of electronic execution”.
“The Canadian Institutional client base is sophisticated and diverse, requiring all the advancements in liquidity, execution and workflow solutions utilized by institutions in the US, Europe and Asia, which has in turn driven RBC Capital Markets to develop electronic solutions which are competitive with its global counterparts,” he says.
Much of this shift has come from the buy side, many of whom are demanding new tools and capabilities to manage the growing regulatory burdens and best practices that are being implemented globally.
For example, in Europe the introduction of the Markets in Financial Instruments Directive, or Mifid II, has presented asset managers with numerous challenges about how best to show they are executing in a way that meets new industry directives.
Another example is the FX Global Code which is “a set of global principles of good practice in the foreign exchange market, developed to provide a common set of guidelines to promote the integrity and effective functioning of the wholesale foreign exchange market”, according to the Bank of Canada. RBC Capital Markets has been involved in the development of the FX Global Code since its inception and was heavily involved in the initial design and architecture of the Code via the CFEC and the Global Foreign Exchange Committee (GFXC). There have also been working groups that drafted the Electronic Trading (including last look and algorithmic trading) and Confirmation & Settlement sections of the Code. While the code is a global document, the need to improve is no different in Canada, where buy side firms are seeking superior execution outcomes and have grown increasingly comfortable in utilizing advanced technology to drive their endeavors.
“Empowered by execution products and services along with the real-time market data and visibility over working orders, traders are more comfortable in using their FX expertise to manage the outcome of their executions,” says Felshman.
“Traders are acutely aware of FX microstructure and liquidity dynamics across the spectrum of tradable products and consequently seek a partner whose sophistication complements their own; and can assist them in creating a bespoke trading environment to suit their needs,” he adds.
The changes have been easier for the larger buy-side Canadian firms who typically leverage their scale and technological capability to lead and help drive global buy-side best practices for FX execution. Being early adopters of the best execution standards, which originated in Europe under MiFID II regulation, these firms often deploy extensive resources to measure quality of execution and reduce transaction costs.
However, these services are available to smaller firms, too. Using electronic services helps Canadian buy side firms track and trace orders through the full lifecycle and prove to clients they are executing in the best way possible. This is much easier than using a voice system where operational risk can impair this process.
Part of tracking trades is done via transaction cost analysis which is part of the buy-side’s continued efforts to understand and reduce transaction costs given the focus on best execution standards.
This has also been helped by the emergence of multi-asset class execution management systems (EMSs) have made it easier for buy-side trading desks of all sizes to manage their own FX—whose main trading focus has previously been strictly equities or fixed income trading. Both these factors have contributed to the buy-side’s shift towards e-FX, according to leading global market maker Virtu Financial.
“There has been an increased focus on electronic FX trading by Canadian buyside firms using Virtu’s broker-neutral services—which includes FX Trade Analytics and the Triton execution management system (EMS) for FX,” says Ian Williams, chief executive at Virtu Canada.
“Practically speaking, we see large Canadian buy-side firms, who already execute FX primarily electronically, seeking to further leverage advanced FX TCA—such as low latency FX metrics, direct dealer algo data connectivity, and FX market impact models—to help support active execution strategy selection and to measure quality of execution both of internal desks and of dealers’ FX algos.”
For Canadian medium size buy-side firms, who traditionally relied on a custodian or prime broker for passive FX execution or voice trading, Virtu sees increased demand for e-FX execution which is largely driven by the ability to trade FX using the same multi-asset class EMSs currently used for equity execution. Many have typically outsourced FX execution as it has not necessarily been a primary investment strategy of a particular buy-side firm, but many can actually achieve substantial execution cost savings by taking FX execution in-house and by better tracking and optimizing their executions with enhanced tools and reporting.
“Global, broker-neutral and multi-asset class EMSs, such Virtu’s Triton, help to ease and streamline a firm’s transition from passive FX to e-FX from both a technology and operational resources viewpoint, including electronically executing more FX trades in competition,” says Williams. (see boxout)
Juggling numerous systems in order to trade FX electronically can be a handful for some buy side firms, particularly if they do not trade FX that often. Given trading, risk management, payment processing and analytics is all being done electronically via tools to facilitate straight through processing, Canadian customers across the board have become more price sensitive. As a result, banks are looking for better pricing from liquidity providers and venues. Part of this comes down to having a single platform to handle both payments and structure corresponding FX transactions, as well as integration with treasury cash management and accounting systems.
“The buy-side wants to use self-service to access more services. TickTrade enables banks to add additional services as well facilitate integration with other systems that buy-side clients use,” says Will Kennedy, Managing Director - Sales and Marketing at TickTrade, a Toronto-based technology firm. In Canada, many of the new types of FX trading services businesses are now offering have witnessed a significant increase in demand. For example, Virtu’s Trade Analytics and Data services has had an uptick in requests, including post-trade FX TCA based on Virtu’s enhanced FX reference rates, as well as pre-trade FX TCA and Virtu’s FX Agency Cost Estimate (ACE) market impact models.
Buy-side clients want closer integration between trade analytics and their execution workflow as valuable analytics products must provide actionable insight and accommodate portability of execution data and easily integrate across trading workflow technology and analytics providers. This allows buy-side firms to achieve effective data driven execution while managing overall technology and infrastructure related costs.
The need for seamless and bespoke integration in the client workflow was a catalyst for Virtu to introduce Open Technology, a portal-based solution which provides clients with API access to both analytics and a normalized feed of data for in-house and/or third-party data processing. Virtu also partners closely with OMS providers, multi-dealer platforms and the dealer community to provide seamless data and analytics integration for clients.
“We expect the requirement for data portability and ease of integration to remain a key theme for the e-FX industry, driven both by the buy-side demand and by regulatory pressure,” says Williams.
Making things easier
Banks themselves have also been making big strides in developing solutions in order to make it easier for clients to trade electronically. For example, in July 2019, RBC Capital Markets acquired Canadian Fintech, WayPay, to accelerate the transformation of the digital payment experience for its clients.
“Embedding this solution into our infrastructure has allowed us to remove many long-time friction points on a scalable platform where we can continue to innovate,” says Abdullah Al-Hashimi, head of eFX trading, North America at RBC Capital Markets.
WayPay provides RBC’s clients the ability to automate all their accounts payable (both origination and reconciliation) through API integration into Accounting Software and ERP’s allowing them to utilize multiple payment methods, such as ACH, Wires and Credit Card, combine funds from multiple bank accounts or credit cards when making a payment (bank agnostic); and migrate cheques to digital payments through the automated supplier contact functionality optimizing both our clients and their suppliers experience.
“RBC Capital Markets is continuing to build on this market leading functionality through our agile delivery, with a road map that includes incorporating real time FX rate offers, foreign currency accounts and collection solutions,” says Al-Hashimi.
Banks are also investing in creating platforms with mobile access that enable customers to both structure and initiate payments as well as FX transactions on a single platform. They create these platforms by partnering with firms like TickTrade that integrate seamlessly with their core banking systems.
“Our platform offers multiple access types including mobile access that enable customers to both structure and initiate payments as well as FX transactions on a single platform,” says Kennedy.
Investment in new technology
Banks in Canada also continue to invest in new and more advanced FX technology, as well as, in infrastructure and personnel. The product set has expanded from various executable request-for-quote and streaming services for deliverable products to pricing for less liquid NDF products, benchmark automation and customized liquidity access through algorithmic execution with intelligent workflow processing including allocation services and TCA reporting.
Concurrently, there has been an increase in real-time pricing for all customer segments including commercial payment creation capability, engaging multiple payment processors to improve reach, delivery, and reduce cost integration with cash management and accounting systems.
Interest in use of AI and big data technology to track and analyse customer behaviour continues to grow and, as a result, tailor services to customer specific needs and address expanded compliance requirements. At RBC Capital Markets for example, the bank has been incorporating AI into capital markets research since 2016.
“We led the way in AI within the financial sector with the launch of Borealis, our AI Research Centre, in 2018. Thanks to Borealis we have been able to develop tools for different areas of the bank and we continue to invest in this field with a view to launching more developments in the near future, including FX,” says Felshman.
Canada’s more sophisticated buy-side clients are keen to have access to customized liquidity pools, and their use of FX algo execution highlights the unique needs of each individual client.
“Typically they are interested in a bank which has both the capability and expertise to give them a tailor-made yet transparent execution experience with fine-grained control over price and destination routing,” says Felshman.
For example, RBC Capital Markets has built a TCA solution for clients and continues to evolve the presentation of this data and execution benchmarks. Some clients are also exploring the bank’s fully supportable integration into rich third-party TCA solutions with enhanced meta-data tagging of orders to help with explaining execution outcomes.
Electronic trading, which has often most been associated with the spot FX market, has also become relevant in FX derivatives, too. In Canada, buy side firms have wanted to remain at the cutting edge of technology and have an expectation for FX Options to follow the trend of electronification and automation that has been set by other FX products.
“As they continue to interact with institutions by voice and chat for their sophisticated structured requests, they seek the convenience and regulatory rigor of an electronic platform for vanilla products, along with the advantage of a trusted counterparty such as RBC Capital Markets which can adapt its capabilities to the client’s specific needs,” says Al-Hashimi.
Recent events have only accelerated the trend of more electronification in FX in Canada. As the events of Covid-19 have changed how people work it has had a subsequent knock-on effect to the increased reliance on the digital world. As a result, Covid-19 has in many respects accelerated trends that were already well underway, and FX in Canada is no exception, says Al-Hashimi.
“With people forced to socially distance and work from home, e-FX became a lifeline for many firms giving them the ability to continue their trading operations via electronic platforms such as RBC DX. The volatile market environment highlighted to clients the importance of dealing with an FX liquidity provider which is able to meet their needs in an efficient and timely manner for both Algo execution and risk-transfer trades,” he says. The FX market in Canada will continue to grow steadily in the forthcoming years, particularly with the end of Covid-19 still uncertain and an increased reliance on digital offerings. TickTrade’s Kennedy believes a very significant area of growth is in the commercial and retail segments for solutions that deliver improved pricing execution, risk management, and payments combined with analytics tools to understand and predict customer demand. By allowing banks to be notified of changes in client behaviour, they can identify cross-sell and upsell opportunities and have foresight into trading activity. Integration into their trading platforms, (both market-facing and bank’s client platform), allows banks to leverage the benefits of an ecosystem-based offering. Adding smart payments routing to the mix further expands the ability to offer improved cost efficiency and settlement times to be optimized.
“Generally speaking we see a significant trend towards higher degrees of self-service, improved risk management tools, integrated STP, and a much higher quality and range of services dynamically tailored to buy-side needs,” he says.
Banks like RBC Capital Markets also believe there are a range of growth opportunities ranging from smaller institutions who are dipping their trading toes into the e-FX world, as well as large institutions who are seeking a partner as they grow in sophistication.
“The lion’s share of the benefits will come from partnering with a global bank that understands the Canadian markets; and can offer clients convenient and transparent services leading to increased efficiency and reduced transaction costs,” says Al-Hashimi.
The e-FX market in Canada, like many other regional markets, still craves more solutions to help trading firms fulfill their electronic needs. This has been made easier by developments such as multi-asset class EMSs which have lowered the barrier-of-entry to buy-side firms currently executing FX passively. Buy-side firms who currently trade FX exclusively with their custodians or prime brokers still need to demonstrate that they are achieving best execution in FX trading which impacts their foreign securities trading. There are technology and operational hurdles in transitioning to FX electronic trading, but that process can be greatly streamlined by using a multi-asset class EMS.
Virtu’s Triton EMS will launch in Canada in the first quarter of this year and offers a complete electronic FX execution solution based on the firm’s global, broker-neutral and multi-asset class Triton EMS. “Triton EMS is widely used by institutional trading desks to manage market access and execution needs for equities. The new capabilities enable Virtu clients to execute FX with their long-standing liquidity providers on the same Triton EMS platform – either via request for stream (RFS) protocol and/or by directed execution such as dealer algos,” says Ian Williams, chief executive at Virtu Canada.
The new Virtu e-FX solution allows firms to manage FX execution in-house and trade electronically in competition using the same financial technology equity traders use to achieve best execution. The multi-asset functionality of Triton EMS is designed to help firms’ evidence best-execution and realize substantial FX execution cost savings without incurring additional technology costs or increasing workflow complexity. A driving factor behind the expansion of e-FX trading is ease of technology integration and the ability to unify all the components in a complete front-to-back FX execution solution. In Virtu’s case, its broker-neutral FX services include both Triton EMS execution capabilities with broker neutral access to major Canadian banks’ liquidity, as well as post-trade FX services and FX TCA. Clients can either select required components for a custom solution or take the full package as a comprehensive approach to e-FX execution.