The evolution of SDPs to meet complex institutional needs
SDPs have evolved significantly to cater to the increasingly complex needs of banks and their clients. Historically, SDPs were primarily designed to facilitate simple currency transactions. However, as client requirements have grown, so too have the functionalities of these platforms.
The main drivers of this evolution are:
Opportunity cost: Banks want to digitise more and more manual processes. They believe it is possible to retain loyalty with a slicker (and stickier) web experience that enables customers to self-serve more and interact with expensive humans less for routine tasks. This implies a premium on brand image and matching the expectations customers have developed from using personal apps, which in turn suggests a move away from commoditised platforms and vendors.
Channel selection: Banks want to win back flow from multi-dealer platforms (MDPs). Spreads have contracted, brokerage has risen, and so SDP profitability is many times greater than that on MDPs. Furthermore, the ‘one size fits all’ approach of MDPs has trended to ‘once size fits fewer’ as larger corporate and institutional clients become worried about information leakage and lack of bespoke tools.
Technology advancement: Many of the old SDPs reached end of life in terms of resource thirsty technology (eg Silverlight) and the need to serve all the different external and internal clients from a common platform has inspired the need to refresh with the latest technology.
Key advancements include:
Customization and Personalization: Clients now demand bespoke solutions tailored to their trading strategies and workflows. SDPs have responded with flexible interfaces and customizable trading algorithms that enable clients to maintain a competitive edge. Banks have more and less sophisticated clients. It follows that their SDP experience should be tailored to be more and less sophisticated.
Enhanced execution capabilities: Advanced analytics, algorithmic trading tools, and real-time market data integration have become standard features. These tools help institutions optimize execution quality, minimize slippage, and better manage liquidity.
Broader asset class coverage: While initially focused on FX, many SDPs now support trading across multiple asset classes, including fixed income, commodities, equities and crypto reflecting the industry’s shift towards multi-asset trading.
Internal as well as external: Internal users, particularly sales traders, have become important ‘customers’ of a bank’s SDP where they can reap the rewards of automation to assist ‘Trading On Behalf Of’ (TOBO/OBO). A bank strives to capture all internal FX, from Prime Brokerage, Global Custody, Agency desks and various forms of wealth management especially now there’s greater transparency regarding best or fair execution.
Post-trade: Early SDP implementations focused on price discovery and execution. Increasingly, they offer post-trade support of netting and allocations as well as affirmations and confirmations within the settlement process. Some banks simply can’t grow their business because of manual bottlenecks in the back-office.
Regulatory compliance: The introduction of regulations such as MiFID II and Dodd-Frank has necessitated greater transparency and reporting. SDPs now include built-in compliance tools to ensure that trades meet regulatory requirements.
The strengthening value proposition of SDPs
The value proposition of SDPs has only strengthened over time. By reinforcing the link between a client and their liquidity provider, SDPs enable tighter spreads, faster and more guaranteed execution, and deeper liquidity compared to MDPs. Additionally, they provide a tailored experience that allows institutions to align trading activities with their specific goals.
Some of the key benefits include:
Cost efficiency: SDPs help banks reduce trading costs by eliminating intermediary fees, which in turn leads to price improvement for the client.
Relationship building: They foster stronger relationships between dealers and clients, enhancing trust and collaboration, ironically despite suggesting lesser human interaction.
Data insights: Proprietary platforms allow dealers to capture and analyse client trading data, enabling better risk management and more informed decision-making.
However, there are challenges. Smaller institutions may find the cost of developing or subscribing to an SDP prohibitive. Despite this, the growing functionality and reliability of SDPs continue to attract interest from a broad range of market participants.
Build vs. buy vs. collaborate: Deployment strategies for SDPs
Institutions face a critical decision when deploying SDPs: whether to build their own platform in-house or purchase a third-party solution. This decision hinges on several factors:
Scale and resources: Large banks often have the resources and skillsets to develop proprietary SDPs, offering complete control over design and functionality. Smaller institutions, on the other hand, may prefer to buy or lease existing solutions from vendors with dedicated expertise to save on costs and development time.
Time to market: Third-party solutions allow institutions to deploy quickly and start trading securely and reliably almost immediately. In contrast, in-house builds can take years to develop and mature.
Customization needs: Institutions with nuanced trading requirements may opt for in-house development to ensure their SDP aligns perfectly with their needs, but they’re financial institutions not fintechs.
Maintenance and upgrades: Third-party solutions typically include ongoing support and updates, which can reduce the operational burden on institutions.
While all options have their merits, hybrid approaches are becoming increasingly popular. Take a minimum viable product from a vendor off the shelf, ensure that is built using configurable components, then adapt and modify using bank or vendor skills.
Integration of next-generation technologies
The integration of next-generation technologies is critical for SDPs to remain competitive in the rapidly evolving FX landscape. Technologies such as artificial intelligence (AI), machine learning (ML), blockchain, and cloud computing are transforming the capabilities of these platforms.
AI and ML: These technologies enable predictive analytics, better execution algorithms, and more accurate risk assessments. For example, AI-driven tools can analyse market trends to suggest optimal trading strategies.
Blockchain: Distributed ledger technology can improve transparency and security in post-trade processes, reducing settlement times and mitigating risks.
Cloud Computing: By moving to the cloud, SDPs can offer scalable and cost-efficient solutions, ensuring high availability and reduced latency.
Mobile: The use of mobile technology is growing as companion apps support fiddly manual processes such as the management of orders and confirmation activities. What is more, client employees have come to expect it and it’s an efficient way of a bank promoting its brand and a sticky client experience.
The importance of these technologies varies among firms. Larger institutions often lead the way in adopting cutting-edge innovations, while smaller players may prioritize cost-effective solutions over state-of-the-art technology.
Are SDPs fully mature or is there room for innovation?
While SDPs have achieved significant maturity, there remains ample room for innovation. Some areas ripe for development include:
User Experience (UX): Enhanced interfaces and intuitive navigation can improve client satisfaction and trading efficiency.
Interoperability: Seamless integration with other trading systems and market infrastructure can streamline workflows. This means having extensible APIs that can connect accounting packages and other workflow tools.
Advanced analytics: Deeper insights into trading behaviour and market trends can provide a competitive edge.
ESG integration: As environmental, social, and governance (ESG) considerations become more important, SDPs could incorporate tools to support sustainable trading practices.
One stop shop: As the SDP becomes the bank’s shop window, it should look to offer capabilities that cover both the full trade lifecycle right through to settlement and ancillary products and research that the banks offer.
Innovation will likely focus on delivering more personalized, efficient, and secure trading experiences, ensuring SDPs remain relevant in an increasingly competitive market.
Growth in demand among smaller institutions
The demand for SDPs is expected to grow significantly among smaller banks in the coming years. Several factors are driving this trend:
Accessibility: The proliferation of cloud-based solutions has made SDPs more affordable for smaller players.
Competitive pressure: To remain competitive, smaller institutions are investing in technology that enhances trading efficiency and execution quality.
Globalization: As smaller institutions expand their reach, they require platforms that can handle diverse currencies and regulatory requirements.
Emerging markets are poised to see substantial growth in SDP adoption as financial institutions in these regions modernize their trading infrastructure.
The future of SDPs in a multi-asset trading environment
As the financial industry moves towards a multi-asset trading environment, SDPs will need to adapt to support a broader range of instruments. The future of SDPs in FX may involve:
Unified platforms: Consolidating FX, fixed income, commodities, equities and crypto trading on a single platform to streamline operations and improve efficiency.
Advanced analytics: Leveraging big data and AI to provide insights across multiple asset classes.
Collaboration: Partnering with fintechs and technology providers to deliver innovative solutions.
Sustainability: Developing tools to support ESG-aligned investment strategies.
The rise of multi-asset trading presents both challenges and opportunities for SDPs. Platforms that can adapt quickly and offer comprehensive solutions will be well-positioned for future success.
Conclusion
Single Dealer Platforms have come a long way, evolving to meet the complex needs of institutions and delivering substantial value. While they have achieved a high level of maturity, there is still room for innovation, particularly in integrating next-generation technologies and supporting multi-asset trading. As demand for SDPs grows, especially among smaller institutions and in emerging markets, these platforms will play an increasingly vital role in the global financial ecosystem. By staying at the forefront of technological and market developments, SDPs are poised to remain a cornerstone of FX trading for years to come.