Prior to the global COVID-19 pandemic, many banks, under pressure to reduce cost-income ratios were still in the process of shifting from a universal banking model to a niche market approach by focusing on flow. The pandemic accelerated the electronification of trading, motivating many of their clients to experiment and use more sophisticated trading workflows.
Banks found that they needed to react rapidly to these developments. Those Banks which, pre-pandemic, were already well advanced in digitising their client relationships now find themselves in an enviable competitive position.
There are several factors to take into consideration for banks committed to delivering an exceptional experience to corporate and institutional clients. In this article we will look at these factors and explore how the right technology partner can help them to win and retain business.
No two clients are the same
First it is important for banks to understand the varied needs of their client base: the requirements and expectations of an institutional buy side firm will be different from those of a large corporate and different again from those of a SME (small medium enterprise). The latter group requires convenience above all and will seek solutions from fintech providers should banks be unable to focus on user experience, for example by embedding trading capabilities into their mobile or browser-based applications.
By contrast, buy side and non-bank financial institutions have typically invested heavily in technology in recent years with FX becoming more important to them as an asset class because of the savings that can be achieved post-trade. Today many of these clients require FIX integration, algo trading, efficient Request for Quote (RFQ) and aggressive streamed rates. It is essential that banks are able to handle the specific requirements of this client segment around allocations and confirmations, as well as advanced trading strategies.
Larger corporates tend to lean towards multi-dealer portals (MDPs), which represent a significant cost for banks. To lure these clients back to their single-dealer platforms (SDPs), banks need to offer advanced workflow, supported by appropriate credit and risk models.
A question of price
While banks need to understand the importance of user experience to their clients, central to attracting and retaining business is the ability to provide them with the best price, no matter what the type of transaction or the market conditions. In order to do this, and to retain and build their e-FX franchises, there are a number of things banks need to take into account.
When pricing clients, banks must first consider their own costs, which are usually complex and difficult to allocate accurately. It may be that a bank’s FX business is a loss leader which allows them to win business elsewhere. Even if this isn’t the case, it can sometimes be difficult to distinguish between capital expenditure (Capex) and operational expenditure (Opex) costs and to allocate expenditure accurately across front, middle and back office. Other costs which need to be accounted for are staffing, x-value adjustment (XVA) and, importantly, distribution – as outlined above, the cost of a MBP can be as high as 10$/M whereas the GUI or API channel of a SDP will give rise to a much lower, fixed cost.
Having analysed their own costs, banks should ensure that they are pricing the right bands of liquidity for their client segments as well as whether they are pricing to the right channels and venues. Other factors to consider are the clients’ own preferred charging structures (i.e. as a pips or percentage rate, or split out as post-trade commission) and the pricing policies of other providers in the market.
As the market changes, banks need to re-evaluate their pricing choices regularly, looking at whether client preferences or their own costs have changed and whether increased margins can be justified. The ability for a bank to make real-time margin adjustments based on variables such as client trading history, patterns and overall profitability can give it an edge when competing for business.
Technology: the key components
It is clear that accurate pricing is reliant on the availability of data. This is an increasingly important requirement for banks aiming to profitably operate an e-FX franchise. It allows them to generate reports from which they can analyse and improve pricing and trading performance for their segmented client base. it has therefore become essential for banks to deploy a trading platform with a solid analytical framework or the functionality to extract data to a good third-party platform.
Today’s FX trading world is one of uncertainties and renewed market volatility. Banks no longer have the luxury of a long development cycle, and client onboarding needs to be a simple and pain-free process. Similarly, with the industry focused on increased automation, a bank which can integrate FX trading into its more traditional solutions such as lending, payments and cash/treasury management will find itself at an advantage, not only with its clients but also in terms of internal costs.
At the heart of a successful, client-centred e-FX solution is the workflow orchestrator. This needs to be open enough (through an API) to allow a bank to plug in its pricing, business logic and existing systems to tailor workflows to each client segment – ideally with no, or very little, coding required. The focus of a buy-side trader will be on pre- and post-trade allocation and advanced trading strategies such as algorithmic execution, whereas a corporate treasurer is likely to require access to flexi-forwards, extensions, fixing orders and single-spot portfolios (SSPs). There is evidence that banks offering these transaction types to corporate clients are benefiting from repeat business and overall flows. A reminder that the ability to differentiate client journeys by segment is without doubt an essential driver of value.
Equally important to an end-to-end e-FX solution is a unified order management system (OMS) which combines electronic and voice trading. Not only does this simplify the technology stack, but it represents a response to the demand from some clients for voice trading whilst helping those same clients become more confident with a self-service digitised solution.
The market volatility of recent months, whilst generating sustained demands from corporate and institutional clients, has given rise to renewed concerns from banks about the effective management of their own risk. A platform with advanced risk management capabilities will empower banks to adjust their core pricing and associated management processes in line with their appetite for risk, and thus will allow them to better service their clients.
of analytics is increasing too
The demand for algos
The contribution of every technology component to a profitable e-FX franchise cannot be considered in detail here, but it would be remiss of us not to mention algos. We have already touched briefly upon the fact that advanced trading strategies and algos are specific requirements of institutional clients, and the increasing importance of algos to this client segment is well documented.
Overall, the rise of algo use in FX has grown over the years for spot trading and has now extended to FX derivatives such as non-deliverable forwards (NDFS). Use of algos is now commonplace among larger buy side firms, which are increasingly using them in order to achieve best execution. Being able to access these sophisticated execution strategies is attractive to institutional FX market participants since it allows them to save costs, minimise the impact on the market of large trades by placing them across multiple liquidity venues whilst improving transparency and the efficiency of their operational processes.
As the use of algos among buy side firms widens, their demand for reliable and comprehensive sets of analytics is increasing too. Clients are now seeking a deeper understanding of algos and are looking for information on how they will perform based on historical performance and on which algo strategies are most appropriate for their execution needs. With the increasing regulatory focus on best execution, pre-trade, as well as post-trade, analytics have become important to firms making decisions about algo selection.
To meet the expectations of clients using algos, banks need a platform which can analyse performance data across multiple liquidity providers and trading venues and provide evidence of compliance as well as reporting requirements. A solution which can store and analyse big data is invaluable to banks seeking to offer clients a superior service. Big data is smart data when it allows users to inspect trading performance, analyse client or trader behaviour and usage, survey market abuse and manage liquidity provider relationships.
Choosing the right technology partner
It is clear, then, that to run a successful e-FX franchise, an understanding of each client segment’s expectations and trading behaviours is paramount. It follows from this that, from a technology point of view, one size does not fit all. In order to adapt to the rapidly changing requirements of various client segments, banks need to adopt a technology stack with a broad range of functionality. But rich functionality, whilst of vital importance, is not enough by itself. Banks need to choose a technology partner agile enough to future-proof their businesses by continuously responding to client challenges within the changing trading landscape.
