How Technology is Transforming the FX Markets

Technology continues to transform the FX markets, enabling both buy and sell-side market participants better access to pricing, liquidity, and post-trade analytics. As we saw with the equity markets in the early 2000s, the FX market is adopting much of the same technologies to address market access. Early adopters of e-FX platforms built, invested, and maintained in-house systems as the FX market evolved; and now these in-house systems morphed into complex and fragile components of larger trading infrastructures.

Scott Wilson
Scott Wilson
Karl Dundon
Karl Dundon

With the market evolving, service providers and fintech firms specializing in FX solutions have continued to flourish, especially as both banks and buy-side firms look to minimize costs and expedite time to market by outsourcing non-core business initiatives. Maintaining and monitoring market data feed handlers and venue gateways is expensive, time consuming, and risky. Traditionally, these critical components have been managed by an in-house team of developers, QA testers, and project managers. As we gear up for a new paradigm in the capital markets with higher volatility and interest rates, we see firms wanting to redirect their limited IT resources to projects focused on driving profitability, overseeing compliance, and managing risk.
A recent Celent research report “Innovation in the Capital Markets FX Technology” highlighted the expanding number of core functionalities required to compete in the FX market and discerned the industry will continually be remapped by emerging technologies. Today’s market participants have the ability to leverage third-party technology providers that deliver the same performance and functionality that previously was only available to large, bulge-bracket players with vast IT resources and budgets. Increasingly, both buy and sell-side participants realize that outsourcing functions such as market data, Transaction Cost Analytics (TCA), networking, etc., to best-of-breed providers not only delivers a better ROI for the business, but allows them to focus IT resources internally on more proprietary projects that can drive a better client experience and profitability.
A 2018 FX survey headline read “Banks Go Back to Nuts and Bolts” but what are the key cornerstones firms should look for when selecting a technology partner to build an e-FX platform? We would suggest starting with these key attributes:

Scale - With the FX market evolving, players need to be as agile as possible when deploying technology. The expansion of MIFiD II regulated trading venues continues to drive FX-market fragmentation. Trading infrastructures must be designed to address current business requirements, as well as deliver an environment that can grow in tandem as the market evolves. A successful technology provider to the world’s capital markets in general and the FX market in particular, must have the resources and capability to invest in new and emerging technologies and deliver these enhancements seamlessly to their clients. Such providers need to continually align their technology roadmap with their clients ongoing business requirements to ensure future success. 

Speed - Is that speed scalable and provide actionable insight? Speed is a key component to effective price discovery, market making, execution, and risk management; but the fastest does not always imply the best. You must be able to scale at a consistent speed, across applications and markets.  As more participants deploy low-latency solutions, the focus needs to be speed at scale in delivering executable prices. Exegy from the beginning has focused on delivering the highest value, most actionable information as quickly as possible. We make tradeoffs from raw speed to increase the actionability of the data we deliver, providing the most effective execution possible for our clients.
Managed Services - Developing and maintaining cutting-edge technology is a never-ending process. In a market that trades 24x6, deploying a reliable market data infrastructure is mission critical to compete in the FX market. The need has never been greater for a fully-managed, 24x7 market data platform that is continually monitored and tested, ensuring that the most up-to-date feed handlers, change management, and upgrades are done seamlessly to provide optimal performance. Partnering with a technology provider that understands how to optimize your IT infrastructure helps lower your total cost of ownership, reduce risks, and adapt to new markets and trading strategies with agility.
Cross-Asset Capabilities - Multi-asset solution providers simplify internal complexities. As the evolution in FX continues to embrace third-party providers to provide technology solutions, the process of vetting and managing multiple vendors adds increased pressures on IT, legal, and procurement departments. To alleviate these internal mine fields, we see firms searching for more holistic and multi-asset solution providers. Technology providers now need to address diverse business and market requirements and offer truly multi-asset class solutions. 
With the innovation we see in the FX market today, the future is bright. New technologies are emerging that may transform prime brokerage, credit, clearing and settlement workflows. FX TCA providers are gaining momentum. Non-bank market makers are making strides. Venue consolidation will continue and result in unique opportunities in the FX market. Now is the time for FX participants to reevaluate their core business, determine where they should dedicate key resources, and ready themselves to take advantage of the transformation of the FX market.