Kevin, how did Velsys get into the FX business?
Velocity Systems was formed in 1999 in Australia. The company has always been focused on the FX business and at the outset the company developed complex pricing and risk management solutions for major banks. As e-commerce started to take off, Velocity was asked to develop solutions to connect banks to liquidity providers, internal systems and more recently the ECN and API community. In 2008 the company embarked on the development of end-to-end trading systems. In 2010 the company’s trading systems development caught the interest of the investment community and two major funds invested in the company and as part of this process the company moved it’s headquarters to the UK and was renamed Velsys.
What core financial software and connectivity solutions does the company offer to FX trading firms?
Velsys offers both a range of components and complete trading systems. These are grouped into connectivity solutions – ViSTRA, and trading systems – V-FX.
Why did Velsys decide to invest significant resources in developing your cloud-based FX workstation, V-FX and what range of trading models does this solution support?
Velsys recognises the power of service-based models and has for some time offered its solutions on this basis. So the company was extremely well positioned to embrace cloud computing when this model became the preferred method for rapid deployment and support of trading solutions. Velsys understood the operational model before “cloud” became fashionable.
The commercial model embedded in service-based propositions works very well in the FX market. It allows systems to be deployed rapidly with a manageable level of integration to existing systems, and with a low initial investment. The providers income is primarily tied to use and is therefore fully aligned to the growth of a client’s business.
However, the primary reason for making the investment was a recognition that most of the solutions in the market have been around for some time and were not designed either for rapid deployment or to cater with the demands of today’s market. For example many were designed before ECN’s, API and retail margin trading became important distribution channels.
In terms of trading models, Velsys provides the complete supply chain from aggregation of pricing and liquidity through to distribution of liquidity to multiple destinations, via trading screens (GUI’s) for internal users and external clients, API’s and broad ECN connectivity. Our solutions support multiple business models. For example, in the area of pricing and liquidity management, we can support agency trading (back-to-back) market-making and position management models, plus combinations thereof including flexible trading rules to allow our clients to tightly manage their client and trading profitability, positions and exposure.
In this edition of e-Forex we have reported on the advantages of the FX White Label business model in delivering e-FX products and services. What are the main benefits that institutions get from taking a White Label version of V-FX?
The priority with White Label is to offer a great service to all of your customers, irrespective of the mechanism the end client uses to trade (screen, portal, API or ECN) who they prefer to trade with, or the style of trading they prefer (Cash, Margin or High Frequency) And all provided 24x6 with automated hedging, client position management plus where appropriate warehousing of positions to maximise value.
There are a wide range of options available to a bank seeking to deliver an e-commerce solution to their clients via a white label model. What we see as a common theme, with V-FX clients, is speed to market, but the real driver is control over their supply chain. From how they source and derive pricing and liquidity, to instant views on profitability and positions, automated risk management but most important distribution to end clients, via multiple channels and for many the ability of one system to offer both cash trading and an integrated Margin FX offering.
What key features and functionality are provided with your VISTRA connectivity solution for FX and what types of trading venue can also be connected with it?
ViSTRA comes in three flavours, up-stream, down-stream and STP; ViSTRA is also an integral part of V-FX. As the names imply, up-stream is the provision of adapters to allow organisations to seamlessly connect to external sources of liquidity/marketplaces and pricing whereas downstream is connectivity to ECN’s, GUI’s, Portals and API’s in general. STP covers a range of adapters that provide connectivity to a wide range of recognised third party middle, back office and messaging solutions, plus a framework for connecting to proprietary systems.
While it is easy to see “connectivity” as a commodity service, within the FX market, products like ViSTRA have to be “intelligently aware”. For example, connecting to an ECN can be straight forward, however, understanding and managing the various workflows, account mapping rules and message handling mechanisms deployed by each of the ECN’s requires significant industry knowledge if the adapter is going to perform effectively. We are also planning to add further intelligence at the adapter layer. Velsys believe by putting intelligence e.g. smart order routing, closer to the connectivity layer we can reduce the complexity of pricing engines and simplify the trading environment. It is also possible, at the adapter level, to aggregate flow and undertake intelligent analysis and better manage and predict patterns, more effectively and with greater flexibility if this task can only be accomplished large and complex pricing engines.
What solutions has Velsys recently developed to cater for the fast growing high performance, high speed end of the FX market?
In order to answer this question, let’s first define how Velsys sees this market. We divide the market for high speed trading into two segments.
The first being the ultra high frequency market where participants want the fastest access they can achieve, and directly to primary liquidity partners. In this segment, any technology that sits between the pricing engine and the client’s execution algorithm adds latency. In other markets co-location of algorithmic systems and the source of liquidity (i.e. exchanges) has become a market norm and this is also happening in the FX market. However, the application of algorithmic trading is different due to FX offering multiple trading venues for a product that is extremely fungible – v’s the non-fungible nature of, for example, the futures markets or the more rigid and regulated structures of the equities markets, including alternative venues such as the dark pools. Velsys primary involvement in this sector is low latency connectivity solutions.
The second market is lower intensity API market, which is more relationship based, and the ECN marketplace. While a user of an ECN may well be using either a screen or an API, from the bank’s perspective they are connected via an API.
A common factor in API markets where banks are competing with multiple other providers, is that price distribution must be as fast or faster than your competitors. If a bank’s prices are arriving too slowly, and the bank is getting the order, it’s because the market has moved against their price. So, to avoid getting “caught” banks widen their prices and inevitably see less business. We were recently working with a bank that, in a few years, slipped from the top 10 list of providers to a particular ECN to somewhere south of the 70th provider, purely due to having to widen prices to overcome high latency from an earlier generation vendors solution.
This market is a significant opportunity for Velsys. Any bank relying on systems from the previous generation of solutions will need to upgrade to compete in the ECN marketplace, or any other marketplace, which provides price discovery from multiple entities. This market is growing, helped by legislation and the penetration of the ECN’s into the traditional client bases of the regional banks. With newer technology and a range of high speed connectivity solutions, Velsys is particularly active in this sector.
Why are increasing numbers of institutions choosing Velsys to supply and support their e-FX operations and what do they like about the value proposition that the company offers?
Simply the need for more control over the whole of the FX supply chain coupled with necessity. We have all seen the BIS numbers which show the market doubling in size since 2007. What the reader may have missed is that the BIS also reports the in the same period the average transaction size has halved – i.e a 400% increase in trading volumes. Furthermore, that the market share of the “other” financial institutions is growing at a much higher rate than the market as a whole –i.e. more entrants and therefore more parties for banks to interact with and manage – electronically.
There are two main reasons why more banks are looking to Velsys for solutions. The first being to the desire to implement an e-commerce trading system they can control. Such organisations are likely to be moving from either using multiple LP systems, a white label solution from a single LP or perhaps from using an ECN as their e-commerce solution. As mentioned above, these organisations are looking for control and flexibility. However, many do not know how large their business will grow and are therefore attracted by the “cloud” model, which involves limited initial investment plus volume related charges – i.e. a low risk approach.
The second group, often driven by poor transaction experience in API venues, are banks seeking to upgrade from an older system and benefit from the flexibility that can be achieved from modern systems and the rapid deployment that is possible. Many of the adopters of earlier solutions took over a year to implement and commission their current system. Many find these older technologies very inflexible and not built to effectively support multiple sources of liquidity and pricing and very limited with respect to ECN and API connectivity and the ability to provide browser based trading solutions and portals.
A recent report by a leading research firm indicates that technology spend in FX is set to substantially increase over the next 2 years. In what ways do you think the expertise Velsys has in understanding the structure of the FX market will enable you to take advantage of this future investment in technology?
I believe that our timing could not have been better. At Velsys we have in excess of 10 years experience in the FX market and this is reflected in an up-to-date solution that is effective and easy to deploy and we have the financial backing required to be successful in the market.