Why are Peer-To-Peer (P2P) models gaining in popularity amongst buy-side FX firms and do you think interest in them may have reached an inflection point?
Thanks to better data measurement, buy-side firms have become more aware of the value contained within their trading activity information and how it can impact their execution costs. As risk continues to shift from sell to buy-side participants, P2P and the ability to trade FX without market impact has become increasingly attractive. This concept is already well established in the Equities market for instance. What has changed in recent years is that e-FX technology has become more accessible while banks have developed additional credit intermediation and execution services. Again, not dissimilar to what has happened in Equities. This suggests an inflection point for P2P FX.
Calculating the true cost of FX execution can be a complex business. Please give us some examples of this and why it’s so challenging for many buy-side firms?
This is a very big topic but in short, there are widespread issues around the bundling of services, and how difficult it can be for buy-side firms to decouple the cost of liquidity from that of credit provision. Also, there are a number of more operational challenges such as accessing consistent timestamps from order origination to submission, and execution to trade booking. Benchmark pricing, or the establishment of a price reference to measure costs, is also not an easy task in a decentralised global market like FX.
Please tell us about the key features and functionality of your own P2P FX solution and how it helps to address and overcome many of the difficulties we have been talking about?
Siege has exclusive access to the FCA-regulated streaming benchmarks published by New Change FX to match trades, and we use these non-manipulable mid-rates to settle netted transactions anonymously between buy-side participants. Our order book is not observable and transactions do not influence price formation in the wider FX market.
In Siege’s mechanism, orders and trades do not leak information and therefore produce no market impact. Clients benefit from timestamps throughout the order and trade lifecycle. Netted transactions are settled at an all-in rate, alongside the New Change FX mid-rate, thus providing transparent fee calculation. All participants in a netted trade share the benefits and true costs are passed down to underlying portfolios or strategies fairly.
What sort of firms are benefiting from your services?
P2P outcomes are optimal when operated for a diverse group of participants in terms of transactional objectives, time horizons and geographies. We are very excited that some of the largest Pension Funds, Asset Managers, Hedge Funds and Corporate Treasuries have already joined the Siege community. It is important to note that Siege’s workflow is delivered in partnership with banks that offer prime brokerage and/or algo execution services to these buy-side clients.
How easy is it to integrate your technology into a clients existing workflow and how does Siege go about trying to minimise any disruption?
From the outset, our aim has always been to make Siege available within existing client systems and workflows, and offer the added benefit of market neutral P2P as a first step on the way to reaching ‘lit’ markets. At its core, Siege is a FIX-in FIX-out platform. Clients can connect directly, use the Siege UI, or access via a certified EMS platform or algo bank. We are onboarding with a growing number of EMS and algo providers following the successful pioneer integrations with Bloomberg FXGO and Credit Suisse AES FX.
The FX market is evolving with the assumption of risk continuing to shift from the sell-side to the buy-side in spot FX and an increased uptake of bank client execution algos. The buy-side are also starting to view banks more as credit providers and not just as liquidity or market makers. How are developments like these likely to support growing interest in P2P?
As capital utilisation and cost controls took centre stage, we have witnessed a fundamental shift in the nature of FX market making and risk warehousing over the last ten years. This has led a majority of banks to refocus on their credit intermediation role and/or develop additional execution services as mentioned earlier. In this context, they have become more natural partners for P2P projects like Siege where they can help their buy-side clients to reduce execution costs.
New technologies like the Blockchain and DLT are starting to be explored by FX trading firms. What impact could these also have on the P2P space?
As outlined, Siege’s offering has to fit in with existing workflow, messaging and credit paradigms. The same applies to new technologies like DLT, which have the potential to re-engineer the post-trade space in FX and reduce operational costs for all transactions including P2P. Also, it could potentially enable a broader group of participants in the credit facilitation process, further strengthening our proposition.
Looking ahead what steps will Siege FX be taking to grow your community further and move your product offering to the next level?
We will continue to build our EMS and algo bank partnership network for Spot FX. Increased participation in the netting mechanism will drive better outcomes for all. Looking ahead, we are already working towards adding pre-fixing auctions and extending our services to other FX products, starting with Forwards and NDF.