Richard Willsher
Richard Willsher

Scandi squeeze

The Nordic FX markets continue to adapt quickly to new e-trading trends. But local service providers are caught between competition from international banks and demands from their increasingly technology driven customers, writes Richard Willsher.

The Nordic market is Denmark, Norway, Sweden and Finland. With the exception of Finland, which is part of the EUR, the three Scandinavian currencies, DKK, NOK and SEK, form a discrete currency group. The latest Bank for International Settlements Triennial Central Bank Survey of global foreign exchange turnover in April 2016, showed that added together they accounted for just 4.7 per cent of average daily global turnover. The total so-called percentage shares add up to 200 rather than 100 to account for the two currencies involved in each transaction. SEK’s share was largest at 2.2 per cent, NOK’s 1.7 per cent and DKK 0.8 per cent. 

Troels Estrup

Troels Estrup

“Voice is critical, especially in Scandis. I don’t think we’ll ever get to 100% E because of these illiquid currencies that we trade in.”

The specialist nature of this Scandinavian group provides the dominant local liquidity providers, Danske, DNB, Nordea and SEB with their competitive advantage. Their main foreign competition comes from the major international banks such as BNP Paribas, Citi, Deutsche Bank and J P Morgan. Their customers’ needs to translate to and from the major trading currencies represent consistent FX services demand. However, many buy-side clients are highly sophisticated and international in outlook and have access to the full range of providers and trading venues and for this reason the regional banks maintain very close relations with them and aim to meet their needs in any way they can. 

Buy-side demand

Providing clients with state of the art e-trading capabilities is key. “The banks in the Nordic region are fairly sophisticated compared to other European countries,” asserts Troels Estrup, Head of e-FX at Danske Bank. “Among the clients there is a lot of import / export business on the corporate side. Institutions are often invested outside the Nordics. There are quite large pension funds that are invested abroad as well. So there is a lot of FX going on the Nordics.”

“The whole market is looking for efficiency gains and to reduce operational risk,” explains Svante Hedin, Head of Electronic Markets at Stockholm-based SEB, with a focus on large corporates and financial institutions. “The shift away from manual processes and manual execution will continue. Straight-through-processing, seamless integration and automation can make life easier for everyone involved and as such are a natural progression; in addition, regulatory transparency and reporting requirements leave few other options.”

Multibank platforms are part of this reach for efficiency. “The Nordic region’s buy-side community is showing significant interest in electronic platforms for internal hedging and improving internal workflow,” Peter Hall Head of Liquidity Sales, EMEA for Thomson Reuters corroborates. “These same firms require liquidity provision from Nordic region provider banks and are already requesting additional cross-currency pairs to be listed on our FXall platform,” he says.

Buy-side clients are looking for pre- and post-trade allocations, netting, algorithmic trading and straight through processing. There is a dash for technology going on but, and this is an important but, “E” does not necessarily present the solution for all client requirements in the Nordic markets.
“While perhaps slow to adopt, the Nordic region is by contrast quick to adapt, embracing and driving digital change across a number of industries,” says Peter Collins, Global Head of Sales at Aphelion, the Swedish e-FX platform technology provider. “Note that Nordic corporates pioneered straight-through-processing. Aphelion remains at the forefront of this change in FX and we are involved in more discussions across all customer segments.” However Collins concedes, “There are some more complex transactions, in options or structured trades for example, or in some end user interactions, that require a voice broker to negotiate in multiple markets simultaneously to get anything approaching best execution and those will always remain.”

Svante Hedin

Svante Hedin

“The whole market is looking for efficiency gains and to reduce operational risk,”

Voice trading is definitely not dead in the Nordics. It is a weapon in the regional banks’ competitive armoury. “E-ratios are continuing to increase year-by-year and I can’t see a reason why it shouldn’t continue,” says Danske’s Estrup. “But voice trading is critical, especially in Scandis, with liquidity being patchy at times. I don’t think we’ll ever get to 100 per cent E because of these illiquid currencies that we trade in.”

“In Scandi currencies you have to do a mixture of electronic and voice and algos to some extent,” Estrup continues. “We are investing in the electronic side, but we think that voice and our advisory services also make a difference. E is very commoditised and super competitive. We can make a difference by having some client-facing sales people doing advisory work and at the same time delivering on the electronic services clients are expecting nowadays.”

Broadening their reach

Meanwhile the constant drive for efficiency gains continues, with new product offerings coming to market. 

Across the region technology is nothing new and investment in it will continue. SEB launched its single-dealer portal in 1999 and was one of the first Internet-enabled ecommerce platforms. Much has happened since then. “The whole industry has gone through waves and cycles, but it’s clear that some of the early platform differentiators are becoming commoditised through a much more complex ecosystem of available technology,” says Svante Hedin. “Banks like SEB serve corporates and institutions in size all the way from SMEs to tier one, and obviously each segment comes with its own requirements and expectations. Our proprietary channels still add a lot of value in certain segments, as we keep investing in them, whereas other areas are moving more toward multi-dealer platforms and/or utilizing APIs to connect our digital services straight into their own tech stacks.”

Thomson Reuters’ Peter Hall adds, “Nordic provider banks are investing in the development of algos knowing that client interest is growing and that competition from London based banks is significant. The latency game continues to prove important and banks here are investing in faster technology and data feeds in order to improve speed.”

Voice trading is critical, especially in Scandis, with liquidity being patchy at times
Voice trading is critical, especially in Scandis, with liquidity being patchy at times

From a technology provider’s point of view, Peter Collins at Aphelion summarises, “Certainly, all of the largest banks in the region have very well-developed e-trading technologies for FX defined by global reach, product sophistication and the quality of research. One level down, the regional players are now in a position – through technology – to deliver the same product offerings as their peers. The ability to connect into portals and venues where their customers are using increasingly complex workflows and strategies and then to price them competitively, while managing risk through increased automation, leapfrogs them into contention. We could perhaps see more peer-to-peer engagement, especially for the Nordic currencies and more insourcing of these currencies from non-specialist market-makers.”

Danske Bank is currently rebuilding their eFX infrastructure in order to make them more agile and customer focused. “This is a response to the demands from our clients,” says Estrup “We’ve invested in that because we know that we will be asked to give new products and services going forward. We are rebuilding our FX price engine, the way we risk manage and the way we can connect to the market as a whole. We now own the code ourselves and will be able to make all the changes internally that we want to make for our clients. That’s a great place to be.” 

Peter Hall

Peter Hall

“The Nordic region’s buy-side community is showing significant interest in electronic platforms for internal hedging and improving internal workflow,”

Innovation through regulation 

As in other markets, regulation is a primary driver for FX product innovation and technology development across the Nordics. The main sell-side players are taking different approaches. 

Tod Van Name, Bloomberg’s Global Head of Electronic Trading for FX and Commodities, says that Nordic firms are deeply involved in assessing regulatory obligations and how they can continue to provide services under MiFID II. “Where practical, they are looking to leverage services by technology providers and execution venues to provide an array of services for execution, compliance, surveillance, reporting, and data storage.”

Thomson Reuter’s Peter Hall agrees. “Nordic banks have already invested heavily in the regulation and compliance space with many hires in both areas. The best execution theme is a key area of focus here and a number of banks have upgraded, or invested in more advanced aggregator platforms as well as their own client-facing services. Again, we have seen strong interest from regional banks wishing to migrate customer flow, traditionally executed by chat or voice, onto newer electronic trading platforms such as our white label platform Electronic Trading. Again, the driver here is best execution as well as the ability to integrate systems and subsequent ability to meet various reporting requirements.”

At SEB Svante Hedin says, “New and more onerous margin requirements on non-cleared OTC derivatives are pushing clients to consider more margin efficient alternatives, for example the use of cleared listed FX futures. This becomes difficult however in those FX futures where liquidity on the exchange is deemed poor, such as the Scandi listed FX futures. But as the leading provider of Scandi FX liquidity, we are developing solutions that will also provide our clients with a liquid alternative in the Scandi listed space, complementing our already broad offering in OTC products.”

Peter Collins

Peter Collins

“While perhaps slow to adopt, the Nordic region is by contrast quick to adapt, embracing and driving digital change across a number of industries,”

Added to this Peter Collins notes that HFT will be another area impacted by new regulation. “There has been some decline in spot trading recently with HFT strategies that rely solely on speed becoming less effective. Higher entrance costs for HFT firms, cost and leverage pressure on banks and a shift to retaining larger volume clients has also had an effect. Regulatory change has forced some boundaries both directly and indirectly though the key to exploiting opportunities especially during adverse market conditions will always be technology.”

Algorithmic trading

One area where technology would, on the face of it, bring new innovation is in the use of algorithmic trading tools. While this is happening it has not necessarily been plain sailing.
“We’re certainly seeing interest in algorithmic execution services and also many clients are disappointed with performance from some of the more standardized offerings available on the street today,” says SEB’s Hedin. However, he says, “A typical liquidity-seeking algo that was built for G7 may not work well in Scandis where the interbank market is thinner, more sensitive, with fewer transactions going through the open market and footprints more visible. This tends to reduce the more generic algos to “egg timers” that periodically cross the spread in the market, or worse, generate market impact with unfavourable outcome. Our unique selling point therefore is our focus on the Scandis and also integrating execution with our flow franchise, which generates netting opportunities favourable to both sides of the trade. In time I think we will see more of this type of specialisation, also in many other parts of the world outside of the G7 space.”

Bloomberg’s Van Name is seeing quite a lot of algo activity. “The use of algorithmic trading among buy-side clients in Scandinavia is relatively high, particularly with money managers and corporations. Many local banks are now starting to provide algorithmic solutions, as client demand for best execution with minimal market impact continues to increase.”  

Danske’s Estrup is more balanced on the subject, “There’s a lot of talk but less action about algos. I am wondering if we will eventually see algos that work better for Scandi currencies. Demand today is relatively small and we meet those demands with a select offering on algos. We are working on a more complete algo offering, so we have it ready when the client interest eventually starts picking up”

Tod Van Name

Tod Van Name

“Nordic firms are looking to leverage services by technology providers and execution venues to provide an array of services for execution, compliance, surveillance, reporting and data storage.”

Fintech heritage

Nonetheless technology is likely to be the way forward, not least because of the tradition of hi-tech start-ups and enterprise development in the Fintech space. Svante Hedin provides some perspective. “The Nordic region, and Stockholm in particular, is a prolific tech-hub - per capita second in the world behind Silicon Valley. It represents 2 per cent of global GDP but the start-up scene accounts for 10 per cent of the world’s billion-dollar exits over the last decade. Stockholm attracts nearly 20% of all Fintech investments across the EU, is a European leader when it comes to employment in high-tech areas, and has built up considerable experience. I believe the growth will continue and even intensify in the years to come and that will drive new waves of entrepreneurs and innovation in the region.”

How then is this likely to influence the e-FX space? “New entrants in the market will continue to emerge and add increasing competition in all customer segments,” says Peter Collins. “But unless they have superior, or niche offerings founded on innovative technology, they are unlikely to succeed. It is likely that firms like Aphelion will have a busy time keeping abreast of implementing technology change and become more valuable to its customers as they choose to outsource regulatory compliance, technology strategy and automation in a bid to lower costs.”

“There are a lot of Fintech start-ups happening around here,” says Troels Estrup. “We have Saxo Bank which might count as the very first Fintech out there. There will be more and Danske is also at the forefront of digital banking. So I wouldn’t be surprised if some of our FX products got pushed that way as well.” 

Thomson Reuters’ Peter Hall adds, “As anywhere, cloud services and mobile are the way to the future. There are still hurdles in terms of compliance (data protection) but as technology advances and there is increased confidence in the legal frameworks, this will be a growing space in the region.”

Stockholm’s Fintech ecosystem
Stockholm’s Fintech ecosystem


In summary then, Scandinavia is, as expected, a pretty well wired, technology driven e-trading region. However that is not the whole story. Surprisingly perhaps, but largely down the thinness of liquidity in the Scandinavian currencies, human intervention remains key. This plays to the strengths of the regional liquidity providers who find themselves squeezed between the rock of increasing customer demand for efficiency and the hard place of competition from global banks and e-platforms. Their response looks to be robust however. 

Buy-side clients benefit from close relations with their local banks, while banks are respond flexibly to meet their demands. Which is not the same as saying the Nordics represent a closed market to outside competition. But may be the Danish word hygge is useful here. It means, apparently, the art of living comfortably, “cosily.” Researching the market in e-Forex among the Nordic countries, one gets the impression that buy-side and sell-side firms like to work warmly, though not exclusively, together for their mutual benefit.