The Nordic FX markets have long been pillars of European finance. The Danish Krone, Swedish Krona, and Norwegian Krone are amongst the most actively traded currencies, ranking ahead of other exotics such as the Mexican Peso and the Russian Ruble.
Electronification has been a mainstay in these markets for a long while. Carolina Trujillo, Head of e-FX Distribution at SEB, points out that the factors driving electronification haven’t been unique to the region. “The same factors are relevant in the Nordics as in any other region: automation of processes to remove manual errors, aggregation of liquidity sources, smarter integration of FX to other in-house or third-party systems, compliance with regulation, search for transparency and efficiency,” she says.
Matti Honkanen, Director, Head of Next Gen FX at Nordea, points out that the evolution of electronification is only accelerating. “The COVID pandemic outlined the importance of risk and liquidity management, and also the importance of the partners you can rely upon on a rainy day,” he says. “The crisis has only worked as a catalyst by accelerating the evolution that was already taking place. The services that provide a smooth and accurate way of managing your FX risk and liquidity have become ever more important.”
So what factors are influencing client demands for electronification, and how are banks and technological service providers positioning themselves to address these needs?
Sophisticated market needs
Nordic clients have long proved themselves tech-savvy, thanks to the proliferation of technological solutions in their daily lives. In turn, this drives high expectations in the FX world. As Honkanen says, “Our clients typically use many advanced digital services as private persons. This means they also have high expectations when they wear the corporate hat in their daily job.”
Digitalizing workflows has become the norm in a market where banks are starting to realize their changing roles. For instance, smoothing the entire FX trade workflow has become a top priority, as opposed to focusing solely on trade execution. Olivier Werenne, FX Sales Manager at leading regional technology provider Itiviti, a Broadridge Business, point to the pandemic as a catalyst for increased technological adoption. “The pandemic has accelerated the adoption of technology and data management,” he says. “The taker/maker relationship is now based even more on a quantitative and data-driven approach.”
“How data can be accessed, how it can be used efficiently, and how much it costs are hot topics,” explains his colleague Jerome Cardon who is FX Product Manager at Itiviti. “Having a systematic and automated trading workflow will certainly help accelerate this trend.”
Itiviti has been very active in promoting transparency and reducing the degree of manual processes in trade workflows. “Alongside Broadridge’s full suite of post-trade and settlement services, we offer ways of improving efficiency in the FX workflow, reducing manual intervention,” explains Cardon. He notes that Itiviti closely follows regulatory developments and adapts its solutions proactively.
SEB’s Trujillo also points to the GFXC’s recent changes to its Global Code as a sign of shifting client demands. “The Code’s focus on ethics and sound business principles fit very well with our long-standing focus on ESG,” she says. “We share this with large parts of the Nordic financial community, including many asset managers. We also find that it has created a very healthy debate around principles of last-look and other topics.”
“Mifid II has fundamentally changed the way the e-FX trading world operates. Best Execution, TCA, Pre TCA, cost of execution, algo trading, leakage of information are all concepts that have taken even more importance since its implementation.”Olivier Werenne
Aside from the demand for execution TCA, Trujillo points out that the buy-side is increasingly interested in deriving insight into other factors, such as the market impact their LPs have. This observation resonates with Jerome Cardon. “Access to data is now becoming critical to the quality of execution and the overall relationship between takers and makers,” he says.
Meanwhile Nordea’s Honkanen points to a broader change in expectations that firms have of electronification. “Previously, electronic FX trading has meant that the customers do all the number crunching on their own, more or less manually, until they log on to a digital trading platform where they manually type what they want to trade, and after which they manually book the trades for accounting,” he says. “However, now we are witnessing a large shift to a model where the digital solutions take care of an increasing share of the manual tasks of this process.”
Clients are comfortable defining rules and letting software handle the operational flow. For instance, software these days informs the trades end-users take and automatically routes their results to platforms. Thanks to APIs (specifically the rise of REST API availability,) systems seamlessly integrate and eliminate repetitive manual tasks.
Trujillo says that SEB’s clients aren’t exactly shy about voicing their needs. “Having a close dialogue and constant feedback with our most sophisticated clients is what has enabled us to progress and to ask ourselves the right questions,” she explains. “They have been key in voicing their priorities so that working closely with them, we confirm where our focus and development should be.”
Nordic institutions are also coping with the challenges that regulations have placed on them. For instance, the arrival of MiFID II highlighted the technological gaps in many firms’ electronic FX workflows. Itiviti’s Werenne says, “Mifid II has fundamentally changed the way the e-FX trading world operates. Best Execution, TCA, Pre TCA, cost of execution, algo trading, leakage of information are all concepts that have taken even more importance since its implementation.”
“Access to data is now becoming critical to the quality of execution and the overall relationship between takers and makers,”Jerome Cardon
As a result, the push to electronify large portions of the FX workflow has increased. Itiviti’s Cardon notes that many firms have initiated projects to fill gaps in workflows. There are other efforts underway as well. “Widening product suites, as well as developing and implementing execution capabilities such as pegs are underway,” he says.
Flexible and powerful electronic solutions
As customer needs become ever more diverse, banks are discovering that the days of bulky universal apps are on the way out. The different roles FX plays for each customer is also informing product development choices. “For some customers, FX is a central part of risk management, for others, it is just a by-product of payments, for still others something else,” says Nordea’s Honkanen. “That’s why banks need to develop a portfolio of e-FX solutions with fully-fledged trading platforms on the one hand and smaller micro services with easy integrability on the other.”
While institutional markets have been slower to adopt digitalization compared to their retail counterparts, product advances continue to come thick and fast. “We are in general moving towards real-time payments and looking further ahead, cross-border real-time including FX,’ says Trujillo. “We are paying close attention to that area of growth and are in many discussions with clients and third parties on these topics.”
Honkanen points out that the average bank’s product catalog has also changed. APIs have become a pillar of the new institutional ecosystem, and every platform comes equipped with standard API libraries. “On the other hand, if you offer no unique value behind the APIs, you will be equally doomed,” Honkanen explains. “That’s why we develop smart services coupled with APIs – to provide state-of-the-art embedded FX services wherever the customers want them.” He highlights the value Nordea’s technical offerings add to their clients. “We provide customers with prices via a few different APIs which they can then naturally feed wherever they want, be it pricing engine of their webshop, order management systems, pricing tool of their sales department or something else,” he says. “Also, we provide solutions that can understand customers’ ERP data, combine it with customer’s hedging strategy and open trades and tell what this trades policy would require from them.” He explains that customers can connect to Nordea’s platforms via custom APIs, should they wish to leverage their custom logic.
Meanwhile SEB’s Trujillo is quick to point out that an execution-only focus does not work to satisfy client demands anymore. She believes that the sell-side’s technological strength, connectivity, and large proprietary datasets are great tools to leverage when designing new products. “The larger question becomes how to wrap this up into services that truly add value in other parts of the clients’ process flow – be that a corporate treasurer in a large industrial company struggling with their forecasting, or a financial institution making hedging decisions,” she says.
To this end, SEB offers a seamless API offering across product areas, along with analytical tools. In addition, SEB also adds value by positioning itself as an automation partner, advising clients on planned infrastructure, and creating efficient workflows.
No discussion of electronic solutions in FX is complete without casting an eye on the increasing use of algos in execution. SEB has been leveraging its unparalleled reach in the Scandies to present a unique value proposition in its algo services. “The key value proposition of our algos is access to our internal pool of liquidity, and the ability to cross-match with other client flow ranging across global institutions and Nordic retail,” Trujillo says. “SEB has recently launched a liquidity seeking algo called DynamicX to use this internal liquidity to an even higher extent and further enhance our clients’ experience.”
Managed solutions offered by leading technology providers have been pushed as a catalyst for increasing the degree of electronification in the Scandinavian markets. Itiviti’s Werenne acknowledges that these solutions require deep introspection and aren’t simple choices. However, the benefits outweigh the risks. “The client focuses on its core competency – their research trading and pricing models and strategies,” he says, “while the service provider uses its software development capabilities to create service improvements that, through client mutualization, generate large benefits.”
He points to Itiviti’s offerings as an example of a managed solution creating efficient workflows. “Our clients can leverage the mutualization of the cost of infrastructure that we maintain,” he explains. “And this is where we are good at with our Professional Services team, our NYFIX order routing network, and Broadridge’s client support.”
Blockchain, AI, and next-gen technology
Technology always evolves, and the institutional FX market in the Nordics is feeling its impact. High customer expectations and technical UX familiarity have prompted banks to wholeheartedly embrace new technology. “We are now really starting to use Machine Learning in our day to day activities, and its applications continue to increase in parallel with the increase in data,” says SEB’s Trujillo. “Currently, we’ve started to use ML to predict client flow volumes and to identify potentially toxic flow.” Itiviti’s Cardon echoes this view and says, “We are introducing Machine-Learning in multiple points of optimization of the workflow, identifying patterns and using predictions, effectively using data to make the platform smarter.”
Given the nascent nature of these next-generation technologies, many solutions are still unsuited for high volume institutional use. “ In nine out of ten new digital solutions, these new technologies play no major role,” says Nordea’s Honkanen. “As Ray Stata said in one of my favourite quotes: “The limits to innovation have nothing to do with creativity, and nothing to do with technology. They have everything to do with management capability.”
Does this mean he sees no use cases for them currently? “We do utilise machine learning and AI in finding new customers and in analysing existing customers’ behaviour and needs,” he counters. “Blockchain, in turn, is likely to play a central role in making FX trading more instant and 24/7. Going forward, these technologies are going to have an increasingly crucial role.”
The future-centric view of these new technologies has prompted SEB, along with several Nordic banks, to initiate research-oriented projects into CBDCs, advanced mathematics, and machine learning. “One such project is a joint research case between SEB and KTH supported by the Wallenberg AI, Autonomous Systems and Software Program (WASP,)” says Trujillo. “The project aims at improving trade execution in FX using reinforcement learning.”
“We provide solutions that can understand customers’ ERP data, combine it with customer’s hedging strategy and open trades and tell what this trades policy would require from them.”Matti Honkanen
Exciting times ahead
The Nordic markets have always played a critical role in European finance. As technology improves, firms and service providers are evolving to keep pace with the times. Honkanen, for one, believes digitalization has further peaks to scale.
“Even though we have gone quite some distance in the path of digitalisation, we are not running out of problems to be solved,” he says. “I expect increasingly tailored solutions to cater to diverse customer needs. For example, a treasurer is going to have to increasingly work like an engineer in the control rooms of big factories – focusing on defining the right strategies and settings and making sure everything works as it should.”
Technology service providers such as Itiviti are often at the front of such changes. Werenne acknowledges the potential risks of being a first-mover but believes culture and a client-centric focus will help weather any storms.
“Critical to transforming a first-mover advantage into a winning argument is the internal culture,” he says. “Lessons learned at the leading-edge will be transformed internally into value-differentiation. It is crucial to have a stable, well-established development process, product management, customer support, and to innovate where it makes a difference: in customer value propositions.”
SEB’s Trujillo is a firm believer in the region’s ability to innovate and evolve. “In the Nordics, banks are well-capitalized, partly driven by high capital requirements from local regulation,” she says. “There tends to be a strong focus on cost efficiency and continuous investments in digitalization.
We strongly believe in the region’s continued competitiveness, and with that should come many opportunities for outside investors, just as well as for new initiatives sprung out of the Nordics in itself,” she concludes.