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Taking you from peak to peakRisk Warning: Trading CFDs involves significant risk of loss.

FxPro UK Limited is authorised and regulated by the Financial Conduct Authority (registration no. 509956). FxProFinancial Services Limited is authorised and regulated by the Cyprus Securities and Exchange Commission (licenceno. 078/07).

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Interest in Cryptocurrencies continues to grow and significant momentum is being added by the intervention of large financial institutions and even central banks many of which are working on various development initiatives. One that recently caught our eye for example, was work being done on a rival to Bitcoin called RSCoin, which some commentators believe would be more likely to gain mass acceptance than Bitcoin because the ledger would remain in the hands of the central bank. Secure digital currencies have the potential to disrupt the global payment ecosystem and so banks and financial infrastructure providers are all currently grappling with the implications of this. The disruptive nature of digital ledgers is one area being covered in our technology article in this edition.

We have introduced several new sections into e-Forex which we hope will become regular features in the future. The Trading Operations article is exploring why more granular analysis of FX trading activities is increasingly in demand from both buyside and sell-side firms and it highlights a variety of new visualisation toolsets that are available which aim to give firms increased visibility into the performance of their FX trade lifecycles, liquidity streams, network architectures, software applications and managed trading infrastructures amongst others.

Our new Security section article looks at DDoS attacks in FX and what steps market participants can take to protect their bandwidth and IT resources. Cyber crime is a topic that is never far from the news nowadays and is a growing cause of worry for banks, brokers, trading infrastructure companies, software platform providers and of course traders who count on reliability and security to conduct their business. While there is no perfect defense to cyber attacks, financial services organizations will need to start applying best practices such as using the right software and routinely evaluating load and security systems if they are going to combat the threats.

As usual we hope you enjoy reading this edition.

Charles JagoEditor

Welcome to

Spring 2016

Susan [email protected] Editor

Charles [email protected] (FX & Derivatives)

Charles [email protected] Manager

Helen [email protected] Manager

Michael [email protected] Manager

David [email protected] Manager

Ingrid [email protected]

John [email protected] Manager

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e-FOREXtransforming global foreign exchange markets

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4 | april 2016 e-FOREX

April 2016

CONTENTSINDUSTRY REPORT34. FX Trading 2.0Brad Bailey highlights some of the latest developments taking place across the FX market and why this year is likely to be all about engaging with the right type of liquidity for the specifi c needs of each trader.

CRYPTOCURRENCIES 44. A blockchain-based world – Is the Vision too big? When it comes to the Blockchain, keep taking the small steps, says William Essex. Then you can change everything.

FX E-COMMERCE AND PLATFORMS58. Single Dealer Platforms and the quest to deliver a more impressive digital experience Multi-channel, multi-asset and multi-dealer: The Single Dealer Platform continues to evolve. To discover more, Frances Faulds talks to three leading providers to see how they are adapting their offerings to the changing landscape in FX.

TRADING OPERATIONS68. Performance analysis - new toolsets for improving the operational oversight of FX trading operationsNew solutions that can deliver more granular analysis of FX trading activities are increasingly in demand from both buyside and sell-side fi rms. Nicholas Pratt examines some of the critical components of these services.

THE e-FOREX INTERVIEW78. Building success upon a new strategic focus e-Forex talks with Charles Henri-Sabet, CEO of London Capital Group (LCG).

REGIONAL e-FX PERSPECTIVE 88. Australasia - an emerging powerhouse of digital FX innovationRichard Willsher sets out to discover what factors are shaping the foreign exchange market across Australasia and what further growth in e-FX we can expect to see taking place throughout the region.

Brad Bailey Industry ReportFX Trading 2.0

Francis FauldsSingle Dealer Platforms Better digital experience

Charles Henri-SabetThe e-Forex InterviewLondon Capital Group

Dan Barnes Special Report

Financial Cloud Services

Dick PirozzoloSecurity

DDoS attacks in FX

William EssexCryptocurrencies

Blockchain-based world

Nicholas PrattTrading operations

Performance analysis

Richard WillsherRegional e-FX Perspective

Australasia

Heather McLeanCFD Trading

Platforms and technology

Klaus PaeslerVoice from the buyside

Russell Investments

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MEET THE TEAM102. With Saxo Markets, the Institutional Division of Saxo Bank Group.

SPECIAL REPORT114. Financial Cloud Services - utilising scalable solutions for FX trading applications Dan Barnes investigates why Cloud computing is challenging the status quo in FX and how a diverse range of ecosystems are now available to cater for banks, FX brokers, asset managers and high performance trading firms.

TECHNOLOGY124. Seizing the opportunities of new disruptive technologies in FX Dan Barnes explores the nature of some of the so called “disruptive technologies” and where competitive advantages may lie for FX firms who are first to seize the opportunities that these can deliver.

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A ABX pages 24ADS Securities pages 2 & 3Allocated Bullion Exchange page 24Aphelion page 13Audacity Capital page 22Axicorp page 101Axiory page 12Azul Inside Back Cover

B Bats Global page 23Baxter page 143BCV page 12Beeks FX page 121Bloomberg Tradebook page 71BMFN page 137Broadridge page 19BSO Network Solutions page 110BT page 117 C Caplin Systems page 65

G Gain GTX page 17Gold-i page 146Green Key Technologies page 20 I ICAP page 20INTL FCStone page 25IPC Systems page 24Itexsys page 37Itiviti page 20

J JFD Brokers page 11

L LMAX Exchange Outside Back CoverLombard Risk page 16London Capital Group page 78

M MahiFX page 21MetaQuotes Software page 129

Solace Systems page 7 Squared Financial page 29SS&C Technologies page 22Stellar Trading Systems page 20Swissquote Bank pages 8 & 9

T 360T page 56TABB Group page 124Thomson Reuters page 41TransFICC page 14

V Velocimetrics page 70

W Wells Fargo page 58Westpac page 91

X Xignite page 18

CenturyLink page 116CFH Clearing page 132Commerzbank page 61Corr Analytics page 155

D DBS Bank page 62Deutsche Borse page 39Devexperts page 131DGCX page 20

E EBS BrokerTec page 10Equinix page 118Exegy page 24 F FCM360 pages 42 & 43Fortex pages 12FXCM page 27FXecosystem page 72FxPro Inside Front CoverFXSpotStream page 5

N National Australia Bank page 93New Change page 10

O Old National Bank page 22

P Philip Futures page 15PFSoft page 16Pirozzolo Company page 150

R R3 page 12R5 page 145Royal Bank of Scotland page 10Russell Investments page 156

S Saxo Bank page 102smartTrade Technologies page 75Sigma Trading page 16Silver Sigma Group page 151

Analytical toolsets for FX

Combating DDoS attacks

Financial Cloud Services

FX BROKERAGE OPERATIONS 134. Liquidity, platforms and technology - greasing the wheels for more efficient CFD trading Heather McLean looks at why increasing numbers of institutional firms and FX brokers are looking to trade and expand their product range with contracts for difference (CFDs) and the issues involved in undertaking this.

150. DDoS attacks in FX - taking steps to protect your bandwidth and IT resources Dick Pirozzolo outlines some of the strategies available to help FX trading firms to combat Distributed Denial of Service (DDoS) attacks.

VOICE FROM THE BUYSIDE 156. A never ending pursuit for Best Executione-Forex talks with Klaus Paesler, Head of Currency and Overlay Strategy for the EMEA region at Russell Investments.

004 006 Contents.indd 2 17/03/2016 09:05 Solace Ad.indd 1 16/03/2016 12:48

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Anthony Martial, Striker

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Take the lead.

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The Royal Bank of Scotland plc (RBS) has chosen New Change Currency Consultants Limited (NCFX) to deliver an independent way for large corporate and financial institution customers to measure “slippage” and run a portfolio analysis of their currency trades against NCFX mid-market rate data. The NCFX mid-market rate data is available through a Transaction Cost Analysis (TCA) application on RBS’s Agile Markets digital platform. Andrew Woolmer, CEO of NCFX, said: “NCFX believes that this is a significant step

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continuous data we will remove the need for low latency connectivity to respond to time sliced data, which tends to create race conditions amongst participants. This in turn will improve the overall ecology of the platform.”

RBS chooses New Change for TCA FX tool

EBS Market moves to real-time FX Market Data

Gil Mandelzis

Andrew Woolmer

TRTN network connections riseThe number of FX market participants publishing and receiving trade notifications on Thomson Reuters trade notification network has grown 50 percent year-on-year through February 2016 as industry participants seek to realize the benefits of increased transparency and reduced costs and errors from automated trade notification and straight through processing (STP). Thomson Reuters Trade Notification (TRTN) has also seen an increase in message volume of 20 percent in the same period.

“While regulation is putting the onus on market participants to ensure transparency throughout the trade life cycle, efficiency and cost benefits are also driving our clients to consolidate the systems they use,” said Jodi Burns, Head of Regulation and Post-Trade Networks at Thomson Reuters. “For trade notification they are looking for a system that can serve the entire FX market, and we are committed to partnering agnostically across the industry to achieve that.”

EBS BrokerTec is redesigning its premium FX market data service, EBS Live, and will move to streaming real-time market data. The ‘EBS Live Ultra’ feed will provide significantly improved price discovery and transparency. Commenting on the new service, Gil Mandelzis, CEO EBS BrokerTec said: “This is a meaningful development for customers who will now be able to receive significantly more granular data and substantially further enhanced price discovery on the EBS Market platform. EBS is already the market’s reference point for the world’s most liquid currencies, but by delivering

forward for the clients of RBS seeking enhanced transparency and objective measurement in their FX execution. By providing the tools to measure costs objectively, independent transaction cost analysis can be performed.”

Jodi Burns

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BCV partners with smartTrade

Axiory and Fortex announce partnership

smartTrade Technologies has announced that Banque Cantonale Vaudoise (BCV), a Swiss cantonal bank, has released a new hosted FX solution to trade Spot, Forward, Swaps and Precious Metals based on smartTrade’s LiquidityFX. BCV was looking for an end-to-end e-FX trading solution to replace their existing one and smartTrade’s LiquidityFX out-the-box offering fulfilled all of their requirements with a fast time to market. The platform includes functionalities such as connectivity, aggregation, distribution, risk management and post-trade. In addition to the core modules, it was the order management system and the highly customisable HTLM5 user interface which further

distinguished smartTrade’s offer over other solutions. Eric Vauthey, Head of Trading at BCV said: “smartTrade demonstrated efficiency in implementing their e-FX solution and a great capacity to seamlessly integrate with existing third-party applications. Their team showed responsiveness and flexibility in order to deliver an offering that best suited our needs.”

Axiory and Fortex have teamed up in a collaborative effort to make FX Trading available on-the-go from any device. Fortex’s MT4 Web Trader Platform features a fully responsive design and will readily support Axiory’s growing base of customers across the globe. The platform has been developed using the latest HTML5 technology and delivers a superior user experience by utilizing its multi-language interface, available in English, Chinese and Japanese. Axiory’s traders can now enjoy trading FX, Metals and CFDs using Web Trader linked to any mobile device and operating system.

“With this strategic alliance, Axiory is making great strides to demonstrate our ongoing commitment to our client base,” said David Kasper, Co-founder of Axiory Global Ltd. “Fortex MT4 Webtrader will help us to deliver the latest cloud-based, high performance and modern web trading solution to our clients.”

R3 completes cloud-based blockchain trialFinancial technology innovation company R3 CEV has successfully trialed five distinct blockchain technologies in parallel in the first test of its kind. The trial represented the trading of fixed income assets between 40 of the world’s largest banks across the blockchains, using multiple cloud technology providers within R3’s Global Collaborative Lab.

David Rutter, CEO of R3, commented: “This development further supports R3’s belief

that close collaboration among global financial institutions and technology providers will create significant momentum behind the adoption of distributed ledger solutions across the industry.”

David Kasper

David Rutter

Eric Vauthey

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TransFICC is launchedLondon-based FinTech, TransFICC, has recently lauched to provide technology to address the issues of fragmentation, market data throughput and MiFID regulation, for clients trading in the Fixed Income and Derivative markets. TransFICC’s technology will use open source components focused on

high performance messaging. “MiFID II regulation will require the Fixed Income and Derivative markets to have a greater degree of risk control, which needs to operate across all instruments. This requires technology that can provide high performance, flexibility and scale”, said Steve Toland, Founder of TransFICC.

Steve Toland

Alan F. Schwarz

FXSpotStream celebrates excellent start to 2016FXSpotStream celebrated an excellent start to 2016 with MoM ADV up 52% in January. February ADV was up 5% vs January and increased 57% YoY. Client numbers have also increased significantly, up 27% on the same period as last year.

Alan F. Schwarz, CEO, stated: “We’ve expanded our customer support teams in New York,

Europe and Tokyo and will continue to do so as we believe

Online broker FxPro has partnered with Solace Systems to boost the capacity and performance of its messaging infrastructure, in what is the latest strategic step for meeting the demands of its growing client base. The broker has invested in the Solace Message Router Appliances and Solace Virtual Message Routers to power internal and customer-facing interfaces over wide

FxPro partners with Solace Systemsarea networks and via web and mobile devices.

Solace Systems CEO, Craig Betts, commented that: “It takes an innovative approach and world-class infrastructure to satisfy the trading needs of forex customers in over 150 countries, and FxPro has both. We’re proud that they’ve selected our technology as the framework that ties together their many applications,

locations and customer interfaces.”

our superior customer service has helped win business. As the FX market structure changes, participants are paying more attention to the fees that they are paying to venues and are demanding more transparency on the cost of trading. FXSpotStream is winning business because we focus on lowering costs for market participants combined with excellent customer service.”

Craig Betts

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CFH Clearing enhances execution

Alastair Brown

Nick Mortimer

CFH Clearing has announced a new matching engine in TY3 in Japan as part of the organisation’s ongoing investment in Asia to provide clients with enhanced execution and reduced latency.

The new matching engine will go live from the beginning of April 2016 and will replicate CFH’s pricing infrastructure in LD4, with cross connects to Tier 1 banks. It will reduce the round trip between London and Tokyo by approximately 200 milliseconds, enabling clients connecting to TY3 to maximise the number of trades processed per second.

Nick Mortimer, Head of Prime Brokerage and Clearing explains, “Our investment in TY3 ensures that clients trading in and around Japan who use our liquidity into MT4 or other platforms have the fastest possible execution and lowest possible latency.”

Lombard Risk launches AgileREPORTER Lombard Risk Management has announced the launch of AgileREPORTER, its next generation agile solution for regulatory reporting. AgileREPORTER paves the way for financial institutions to remodel how they meet complex regulatory reporting requirements by eliminating manual processes and generating added value out of reporting data.

Alastair Brown, Lombard Risk’s Chief Executive Officer says: “We are delighted to be launching our AgileREPORTER solution, which will enable

financial institutions to think beyond simply gathering and submitting data to meet reporting demands. Firms need a single solution that automates data collation, takes care of report generation for all relevant regulatory bodies and provides a clear line of sight from report to source data.”

Sigma Trading has chosen PFSOFT’s Protrader platform for its professional traders. The Protrader platform provides Sigma’s clients with an advanced front-end terminal incorporating all the tools for trading the full range of products, managing

PFSOFT’s Protrader selected by Sigma Trading

clients’ portfolios and currency exposure. The platform’s functionality is presented with classic panels such as ladder, market depth and charts alongside more sophisticated tools that allow asset and portfolio management.

News.indd 4 16/03/2016 15:14 GAIN Ad.indd 1 14/09/2015 08:56

New platform for Squared Financial

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FXecosystem launches Bondecosystem®

Xignite FX data available in the Oracle Cloud

FXecosystem has launched Bondecosystem® to enable bond traders to reap the benefits of its market leading connectivity services, previously only available to the FX market. Bondecosystem delivers a single point of contact to connect global bond traders to leading ECNs and banks. This enables the merging of asset classes and eliminates the need for multiple leased

Xignite has announced that its XigniteGlobalCurrencies API is now available in the Oracle Cloud Marketplace, offering added value to Oracle Enterprise Resource Planning (ERP) Cloud customers. The XigniteGlobalCurrencies API provides real-time and historical foreign exchange quotes for more than 170 countries and

lines. FXecosystem’s co-location facilities provide proximity hosting solutions to meet all bond trading requirements in LD4 and NY4, resulting in enhanced trading execution and operational efficiencies. James Banister, CEO, FXecosystem comments, “Merging platforms and asset classes together into one e-commerce platform makes clear sense and reflects the direction leading banks

over 29,000 currency pairs. “Xignite currency data is trusted day in and day out by leading companies to power currency converters, mobile apps and enterprise systems,” said Stephane Dubois, Xignite CEO and Founder. “Xignite’s participation in the Oracle Cloud Marketplace further extends our commitment to

James Banister

the Oracle community and enables customers to easily load foreign exchange data into their accounting solutions.”

Stephane Dubois

Squared Financial Services Ltd (‘Squared’) will bring ‘Merlin’, their new Professional and Institutional platform to the market in April 2016. The platform was developed on the template of their existing technology ‘Squared Trader’.

are taking. The development of Bondecosystem was driven by existing customer demand, especially from banks wishing to extend the benefits of co-location to their bond activity.”

The Merlin platform is best suited for Professional and Institutional clients trading in large sizes on a single account. Squared’s new Sales Manager, Mike Quirk states “The sophisticated technology behind Merlin will provide customisable setups that

allow clients to maximise trading opportunities. A significant feature of the technology is that clients will be able to view a number of ticket sizes on a single screen maximising execution values. Merlin is the next generation trading platform affording speed, precision, depth and control.”

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ICAP has announced that its Post Trade Risk and Information (“PTRI”) division has successfully completed a proof of technology test case for a distributed ledger using blockchain technology. The proof of technology successfully completed on 26 February 2016 and has the potential to significantly transform post trade operations, while complying with new market practices within the post-crisis regulatory environment.

The PTRI distributed ledger proof of technology leveraged the multi asset messaging and matching Harmony network, and blockchain infrastructure provided by Axoni to create a private, peer-to-peer, distributed ledger network using smart contracts.

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Green Key releases new Front End

DGCX boosts connectivity with Stellar Trading Systems

Green Key Technologies has released its first web-based platform, Voice Box, in conjunction with the launch of a third-party Partnership Program. Green Key will upgrade all current users to the new HTML5 voice workspace, the first in the industry to bring sophisticated trader voice capabilities to a broad range of devices that includes low-cost touch-screen tablets.

Green Key selected OpenFin’s market-leading, secure HTML5 container technology to eliminate browser dependencies and provide native application functionality, such as pop-up notifications and the ability to save workspace layouts. The

The Dubai Gold & Commodities Exchange (DGCX) has announced that Stellar Trading Systems, a multi-asset trading software and services specialist, has become an approved Independent Software Vendor (ISV) on the Exchange. Stellar Trading Systems has hosted its infrastructure at DGCX colocation facility to deliver its market making, low-latency order routing and algorithmic

OpenFin Container, which also powers TT Desktop, enables seamless integration between Voice Box and TT. Voice Box is a significant upgrade to Green Key’s previous Trader Voice Box platform, supporting the latest web application interoperability standards.

trading solutions to DGCX members. Gaurang Desai, CEO of DGCX said: “Our partnership with Stellar stems from our commitment to offer our Members access to the world’s leading trading technology solutions. This enhances our global connectivity which we have been steadily expanding via our ties over the last couple of years.”

ICAP division completes blockchain proof of technology

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Next-generation technology, old-fashioned partnership: e-FX redefined

The e-FX Engine Roomthe e-FX solution for institutions

www.mfxcompass.co.uk

MahiFX Ad.indd 1 16/03/2016 15:02

SS&C Technologies Holdings, Inc. has announced that it has entered into an agreement to provide FX software and services to the largest Indiana-based bank, Old National Bank. Together, the companies will implement SS&C’s online customer FX Trading portal to offer a full-service trading solution tailored to the needs of Old National’s customers. The move comes on the back of an increase in FX related activities at the bank.

“The SS&C FX Trading Portal gives Old National Bank a secure, integrated foreign exchange services platform that easily handles real-time, competitive currency transactions,” said Bill Stone, Chairman and Chief Executive Officer, SS&C Technologies. “Our proven delivery model and expertise in this space will generate substantial convenience to Old National’s growing customer base.”

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Audacity Capital selects Beeks Financial Cloud

MetaQuotes adds more languages and indicators to MT4 Web Platform

Bill Stone

Beeks Financial Cloud has announced that Audacity Capital, a Dubai-based proprietary trading firm, has selected Beeks as its connectivity and server hosting solution. Through hosting its infrastructure in Beeks’ cloud solution, Audacity will create a ‘best of both worlds’ structure, with the advantages of a

MetaQuotes Software Corporation has announced the addition of 30 new indicators to the web-based version of the MT4 platform, including 14 newly supported languages. The additional languages added to the web-platform include Croation, Czech, Dutch, Estonian, Finnish, Greek, Hebrew, Italian, Latvian, Lithuanian, Romanian, Serbian, Slovenian, and Swedish.

The update brings the total number of languages to 38, and the number of indicators

co-located solution combined with the flexibility and agility of modern cloud computing. Marco Duquette, Director at Audacity Capital, stated: “We have been extremely diligent in selecting Beeks Financial Cloud. Any solution we would choose had to be able to meet our requirements of flexibility, scalability, reliability and latency.”

matches that of the native desktop version. Some of the added indicators included various MAs, MACD, ATRs, several oscillators, envelopes, Bollinger Bands, CCI, Momentum and Volume related indicators, Alligator and Gator indicators, RSIs, Stochastic oscillator, Ichimoku and Williams percentage, among others.

Old National Bank chooses SS&C

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ABX soft launches

IPC launches MNaaS solution in ASEAN

New deployments from Exegy

Tom Coughlin

David Dodd

David Taylor

Allocated Bullion Exchange (ABX) has launched a global institutional electronic exchange for allocated physical precious metals, which will provide market participants integrated, transparent, and secure access to local markets and global liquidity pools. Through its unique proprietary and online trading platform ‘MetalDesk’, ABX provides instant electronic global trading, price discovery,

IPC Systems has enhanced its network capabilities in three major Association of Southeast Asian Nations (ASEAN) countries – Indonesia, Thailand and the Philippines. IPC’s points-of-presence (PoPs) in Jakarta, Bangkok and Manila have been enhanced to support all of IPC’s data and voice solutions. This expansion is intended to achieve seamless access to the Connexus extranet marketplace,

Exegy has announced new deployments of its hardware-accelerated Market Data System appliances and feed handler for the Tokyo Stock Exchange (TSE) FLEX Standard feed. “We are seeing increasing demand for direct feeds in Asia Pacific,” says

and clearing facilities to market participants worldwide, including

delighted to meet the demands of global investors by offering a comprehensive MNaaS solution that empowers them to capture alpha and manage risk in the burgeoning ASEAN markets.”

all physical industry participants, wealth managers, brokerage platforms and investors.

ABX CEO Tom Coughlin said: “At a time of high volatility in global markets and resurgent interest in precious metals, the launch of ABX is expanding access, enhancing efficiency and raising transparency in a market that historically has been opaque.”

latency-sensitive Ethernet connectivity and MPLS corporate WAN solutions. “Firms trading in the Philippines, Thailand and Indonesia are increasingly demanding access to a ready-made ecosystem of market participants and connectivity throughout the trade lifecycle across multiple asset classes,” said David Dodd, Senior Vice President, Managing Director, Asia-Pacific, IPC. “We are

chief technology officer David Taylor. “The ability to access data from direct and vendor-consolidated feeds using a single API and a fully normalized data model has proven to be extremely valuable. “

News.indd 8 16/03/2016 15:27 FCStone Ad.indd 1 13/03/2015 12:51

India has been a leader in economic growth over recent times. The “land of festivals” boasts resources such as sugar and steel, and infrastructure is becoming one of the most flourishing industries of the country, with public-private infrastructure projects supported by the UK, and India’s Ministry of Finance. The economy is at a

By Ayhan Chemal, Financial Analyst, R5

tipping point, but for this to be sustainable interest rates need to return to previous levels, as public expenditure must be at a level to support the economy.

Last year, IMF forecasts indicated that India would be the fastest growing emerging market economy in 2016, which highlights the opportunity for India to secure foreign investment. With emerging markets estimated to deliver only single digit returns over the next few years, as many of these economies move towards maturity, investment in India has soared. In fact, the Rupee has the potential to become one of the most liquid pairs in the foreign exchange market. But sustaining this growth will come at a cost to India’s system of taxes and subsidies.

Most emerging markets are in a period of transition, and India has positioned itself as a safe market, but one that can

The rise of the elephant

In January this year, I was invited to attend the India Investor Summit, which focused on economic developments undertaken by the Indian government since its election in 2014. Whilst, commodities are at the centre of the fall in global markets, not all commodity-pegged countries are sharing the same experience, with India bucking the trend.

India Investor Summit - London Stock Exchange - January 2016

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provide significant growth for investors. In order to boost economic growth Prime Minister Narendra Modi has initiated the ambitious Start-Up India Movement, which has provided more that 170 million people with loans for SMEs. The service sector grew by 9% in 2015, and the establishment of high technology firms in Bangalore (the Silicon Valley of India) is seen as a major pillar in the development of the economy. The start-up ecosystem in India is still at an early stage and a growing number of IT companies are choosing to raise capital through IPOs.

With this focus on economic development, India looks like it will continue to be one of the most successful emerging market economies. A measure of this comes from India’s Minister of Finance, Arun Jaitley, who said that he expects India’s economy to grow faster in 2016 than in the previous year.

India has positioned itself as a safe market

026 Recent Event.indd 1 16/03/2016 14:50 FXCM Ad.indd 1 16/03/2016 12:14

Back by industry demand, the 2016 conference brought the European trading community together and once again offered industry participants:

• An interactive program that addressed market needs, providing impartial, high quality content

• Significant networking opportunities throughout the day and into the evening

• Separate business and technical streams that generated intelligent debate

The keynote speech on the day was made by Rt Hon Sir Vince Cable, former Lib Dem Shadow Chancellor which was followed by an update from the FIX Trading Community Investment

Management Working Group.

Edwin Schooling Latter, Head of Markets Infrastructure and Policy, the Financial Conduct Authority then provided a short presentation focusing on Best execution under MiFID II which was followed by a panel discussion on the topic moderated by Rebecca Healey, Co-Chair EMEA Regulatory Subcommittee, FIX Trading Community.

After a morning break the event was split into four streams – two business, a technical and an educational stream.

The afternoon break was followed by a session focusing on the Blockchain which was presented by Nick Williamson, CEO & Founder,

2016 EMEA Trading Conference

The EMEA Trading Conference has become Europe’s largest one day trading event. Now in its eighth year, the conference is noted for its high quality speakers, relevant issues under debate and the significant networking opportunities it presents to the region’s trading community.

3rd March 2016 - Old Billingsgate, London

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Credits and moderated by Julia Streets, Founder & Director, Streets Consulting Ltd

More information is available at: http://www.fixtradingcommunity.org/pg/conferences/2538000/2016-emea-trading-conference/

026 Recent Event.indd 2 16/03/2016 14:50

New technology to enhance your tradingMaximise your trading with our proprietary professional solution

Access our deep liquidity and quality execution

See Market Depth through multi-size order tickets

Multiple order types and advance charting functionalities

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The year started poorly for the Australian dollar with it fi nding itself 12% lower than where it was a year ago trading against the US dollar. Trading at its lowest in the last half a decade during the early weeks of January 2016, every Australian dollar was only worth US$0.68. Will the Australian dollar head even lower in 2016 is the question in the mind of most people.

Since then the Australian dollar has begun to see a resurgence of bullish momentum in

There is defi nitely something that cannot be hidden, the current European crisis is deeper than expected. Few facts, overall unemployment rate in many countries is just increasing and debt amounts do not seem sustainable for most of them over the long haul. Until now, Germany, the European fl agship, seemed to be the single benefi ciary of the European Union. Indeed, it was the only country to be able to reduce its debt and to see its competitiveness increasing.

By Jerome Lee, forex dealer at Phillip Futures Singapore

Yann Quelenn is Market Analyst at Swissquote Bank SA

the following weeks which some might see as a possible rebound. However this recent upward move could simply be a momentary respite easing the way for further downward

This Europe was tailor-made for it. Behind this picture, recent German data confi rms it is not any more an exception. Factory orders have declined for the second consecutive month in January printing at -0.1% m/m. Yet, December data has been revised up to -0.2% m/m. Concerns are even growing that Germany is not very satisfi ed with current European monetary policies. It is clear that the European Central Bank is sending a wrong

signal by using same monetary policies used in the U.S. and in Japan over the last decade with no satisfying results. At last ECB meeting, on March 10, the consensus was resoundingly clear and the ECB has not disappointed fi nancial markets by boosting the pace of the QE by €20 billion to €80 billion. The deposit rate has been lowered to -0.4% from -0.3% while the refi nancing rate has been sent to 0%.

It is important to remember that downside pressure on the EURUSD is fading as markets start to question the true nature of the monetary policy divergence. The Fed is defi nitely struggling competitiveness increasing.

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BRIEF NEWS AND ANALYSIS FROM AROUND THE WORLD OF FX

Will the Aussie Dollar head lower in 2016?

The ECB tries everything

movement. This can be determined by examining the health of the Australian economy.

The pillar of the Australian economy is largely dependent

AUDUSD vs Shanghai Composite Index

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on its export market. The main bulk of Australia’s top exports consist of iron ore, mineral fuels such as coal, petroleum gas and crude petroleum as well as gold. In addition, the Australian economy has traditionally been strongly tied to China through its commodities export to the Asian giant. Accounting for 27% of total Australian exports, the voracious Chinese economy is Australia’s largest export market followed by Japan.

In recent years, China’s economy has weakened substantially with it recording its lowest annual economic growth rate of 6.9% in 2015, nearing numbers not seen since the Asian economic

to hike rates and for the fi rst time negative interest rate have been discussed. However, as we know this is not an option as Euro competitiveness would take the biggest hit in the event that markets further price in no rate hike this year. European infl ation forecasts has been slashed to

crisis in 2008. This has resulted in an overall decline of Australian exports fi gures, falling 13% from 2014 to the end of 2015.

The commodity market has also come under severe pressure in the past years with the price of iron ore printing a steep 38% drop from prices seen just last year in 2015. While oil prices has fallen to a third of its price in 2014 and is recently still hovering around US$30 a barrel despite talks by OPEC members to freeze oil outputs.

In all, unless there is a stronger buoyancy in the commodity markets, or a strengthening of the Chinese economy or

0.1% from 1% for 2016, which is far from the ECB infl ation target of 2%, while growth projection has been cut to 1.4% from 1.7% due to continued global uncertainties and weaker global demand. Mario Draghi has fi red the big bazooka. He gave even more than what the

both, Australia seems set on the slippery slope of continued economic weakening translating to an even weaker Australian dollar. However it is not all doom and gloom as countries in the Asia Pacifi c region are likely to experience similar slowdown in their economies.

market expected. Yet, we are afraid it will not be suffi cient in the short-term. After years of QEs, U.S. and Japan’s infl ation are stalling around 0. So, what to expect from the ECB ? Defi nitely not more than what is happening overseas.

april 2016 e-FOREX | 31

CURRENCY CLIPS

Jerome Lee

Yann Quelenn


Sometimes in the world of fi nance the simple approaches can work out the best. I’m not an equities person, but I’ve seen comparisons of the worst performing stocks/sectors for one year being the strongest in the following year. It can sometimes work better for currencies for two reasons. Firstly, companies can go bust or have irrecoverable shift in valuation, because companies can go bust, countries less so. Secondly, exchange rates are far more subject to over-shooting (see Dornbusch’s seminal paper

From the middle of 2015 through the start of this year Middle East investors and traders have moved into the currency markets, in large numbers, to hedge their local equities investments primarily buying the Japanese yen. From December to until February this year global equities have experienced a serious of knee-jerk reactions which have not been proportionate to the market data or conditions. The triggers for the moves has been either oil or disappointing data

By Simon Smith, Chief Economist at FxPro

on exchange rate overshooting back in 1976), in part because it’s harder to ascertain an equilibrium level or valuation. This can make them more prone to investor sentiment rather than valuation. I raise this point because we’ve seen this dynamic play out to a degree with Latin American currencies so far this year. Brazil was

hammered last year, down 35% against the dollar against a complicated backdrop of rising infl ation, interest rates chasing it higher, together with a slowing economy, not to mention the

either oil or disappointing data

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The Brazilian real: Every dog has its day

Middle East investors head for the Yen

from China supporting concerns over a global slowing down. Global equities lost more than US$4 Trillion moving them into bear market status, which has only just ended as some stability has returned to the oil market. For some time there has been an indirect correlation between the TASI Index in Saudi Arabia and the dollar yen. The TASI is the largest market in the Middle East, by volume, and it indicative of the behavior of the other main exchanges. When the TASI index reached it high of last year around

9800, the USDJPY was also at the top of its recent range at 125.63. From April 2015 the TASI lost around 30% from its value, reaching its lowest point in August of the same year. Through the same period, the USDJPY dropped from 126.90 to as low as 116.18, which is a decline of -7.52%.

The TASI advanced slightly for only two and a half month until Mid-October, trading around 7800, while USDJPY edged higher towards 123.80 again. In December when the oil and

By Noureldeen Al Hammoury, Chief Market Strategist at ADS Securities


political backdrop. Currently, Brazil is outperforming and is comfortably up on the year, whereas Mexico is dragging behind and still in negative territory (both against US dollar). This is against the backdrop of what has been a pretty volatile year for many asset classes. So, could this be the start of a reversal of fortunes for the Brazilian real?

At the time of writing, the potential of the end of the current political gridlock has provided some support for the currency. The thing is governments and leaders change, often the underlying problems don’t, so any euphoria

sentiment driven market moves started the Japanese Yen was trading around 123.50 and TASI was hovering around 7500. When the December OPEC meeting was inconclusive the TASI dropped sharply falling more than 27% until the end of January reaching 5348. During the same period, the USDJPY

likely to be short-lived. The problems facing Brazil are deep-rooted, especially the lack of investment over recent years (down nearly 20% YoY end of 2015), rising infl ation (above 10%) and continued current account defi cit (narrowing, but still more than 3% of GDP). It was no surprise to see lose its investment grade rating earlier this year (S&P) and even a change of government is unlikely to repair the credit outlook. For the currency, this is going to lead to some tough times ahead and the better performance seen in recent weeks is going to struggle to be sustained. Only once infl ation is under control

lost more than 10% even after the BoJ introduced negative rates as safe haven bids remained on the rise.

At ADS Securities, from December 2015 until February of 2016 our yen trading volume increased by more than 30% compared with the same period the year before, and our GBPJPY volume jumped by 148% and fi nally AUDJPY increased by more than 57%. This is a clear indication of the changing

we start to see longer-term investment in the economy can the currency have the chance of a more sustained turn-around. A move towards last year’s high on USDBRL near to 4.25 is on the cards for mid-year and the real will have its day, but probably not this year.

structure and the maturing of the Middle East market. Investors are now starting to use FX as a multipurpose investment tool, which is linked to the ongoing increase in volumes from the region.


CURRENCY CLIPS

Simon Smith

Noureldeen Al Hammoury


This year in FX is about engaging with the right type of liquidity for the specific needs of each FX trader. The market is in state of macroeconomic volatility but it regaining its center following the disruption of the Swiss National Bank (SNB), and the generational dislocation it created a year ago, and then the devaluation of the Chinese Yuan last summer.

At the same time, the regulatory environment, a changing liquidity world, more diverse technology offerings, and business model pressures have accelerated change. The year was also marked by the next wave of major strategic positioning, with global exchanges positioning themselves in spot FX. At the same time, the trend of interdealer platforms acquiring platforms and tools to better service a broader swath of FX traders.

TECHNOLOGYThe cycle of change in FX is rapid, and the overall ecosystem outside the major and minor dealers incorporates a variety of vendors across the spectrum:

data, analytics, TCA, tools (connectivity, aggregation), nonbank liquidity providers, FX electronic venues with focus on institutional space, and the processing space (reporting, allocations, and clearing/settlement).

The TCA grouping provides firms that offer tools for providing a framework for TCA in a variety of timeframes. The tools group includes firms that provide the key connectivity, or gateways to liquidity via LPs, exchanges, ECNs, and point-to-point liquidity solutions. Furthermore, they offer aggregation of pricing from venues and dealers. The processing grouping attends to straight-through processing in FX.

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Brad Bailey is a research director with Celent’s Securities and Investments practice

Some key themes in FX:

• The cost of primingcontinues to be majorfactor in how a large swathof traders engages withliquidity. As prime brokersinvest in better tools formanaging allocated creditacross venues, and movetoward advanced pre-trade risk functionality, thissituation will continue.

• Global regulation surrounding spot FX hasdriven a new desire fortransparency driving newdata providers, compliancetools, analytics, and next-generation TCA.

FX Trading 2.0

Brad Bailey

034-036 038 040 Industry Report.indd 1 16/03/2016 14:52

• Legal ramification from the fixing scandals has altered trading and communication in FX and is one of the factors driving a new wave of tools such as secure messaging, compliance-friendly IM platforms, and voice capture systems.

• Trading volume is being dispersed and fragmented over a greater number of venues driving the need for better and easier connectivity, aggregation, and access to colocation.

• The continued automation, combined

with the ease of trading out of major FX pairs, has only increased the level of dealer internalization.

• Alternative (or nontraditional) liquidity providers are increasing their interaction with flow across the market and continue to become a more substantial component of trading volume, across the platform landscape and point-to-point liquidity spaces.

• Regional banks continue to leverage technology, in many cases via full-

service (i.e., white-label or broker in a box solutions) to protect and grow their market share.

• Wholesale retail flow continues to look for the right type of relationship and venue to engage for liquidity.

The FX market continues along the trend of greater interaction between traditional major FX dealer, smaller dealers, and nontraditional liquidity providers via direct interaction and trading on multi-dealer venues. The growth in specialized FX liquidity provision continues, with traditional electronic market


INDUSTRY REPORT

London Daily Average Turnover: A drop of 21% year over year from October 2014

Source: Bank of England (BoE)


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makers, HFTs, and specialized hedge funds continuing to build technology and hire sell side FX talent. Defining and developing additional tools for best execution and TCA continue to be key trends. Richer analytics and API-delivered data sets is another way FX providers are serving their clients. Liquidity and tools are merging by the day. Formerly distinct liquidity is resident in the same firms, and those firms are continuing to merge the delivery of their offerings. There is a growing technology universe in each part of the pre-trade to settlement value chain.

VENUE STRATEGIC POSITIONINGA new wave of consolidation is

taking place. We are witnessing the birth of megaplatforms that are buying trading technology and access to a variety of execution methods and analysis tools. At the same time the nature of venue trading is quickly changing, as the prime brokerage model evolves and “dealers” grapple to have direct contact with their clients. The commoditization of FX trading is driving demand to embed client tools into an overall offering.

Recent moves give some sense of how competitors have been viewing the evolving landscape. Essentially, this wave started in 2012 when Thomson Reuters brought FXall, with client side liquidity, and put buy side middle and back office

functionality under the same roof as the Thomson Reuters dealer platform. The theme of merging dealer side and client side functionality has been a key feature of recent acquisitions. The most recent example of this was the fall 2015 acquisition of Molten Markets by EBS; which will provide EBS Direct with better tools for needed functionality across a spectrum of client types as they consider the future of separate buy side and dealer liquidity moving into the future, and their potential separation from ICAP.

The dealer-to-dealer venue space has reacted to changes across the regulatory landscape to acquiring client venues and building a holistic suite

FX Ecosystem: A lot of different pieces

Source: Celent

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of liquidity. A key in these acquisitions is the ability to service a broad section of the client space, including: asset managers, hedge funds, regional banks, wealth managers, and corporates. The merging of dealer and client liquidity pools within the same platform is here; actual, increased interactions between these liquidity pools also continues to blur. The two largest dealer-to-dealer pools have both acquired into the client side-EBS with Molten Markets and Thomson Reuters with FXall. This is allowing global megaplatforms to deliver FX through a single portal for their client consumption, complete with robust access to multiple liquidity pools, a

variety of market protocols, pricing, analytics, and TCA.

Another theme this year is the continued demand for growth by large exchanges expanding their asset classes to FX, a bet on the continued growth and a future in FX that consolidates liquidity across the FX product set.

Expect to see more strategic alignment, for instance, last year there was considerable noise around FastMatch doing a deal. Where there is smoke there is often fire! Look for additional strategic alignments and deals in the coming months.

The complexity of the FX ecosystem is increasing. FX

market participants are looking to regain the center following the shocks of scandal and market dislocations. These forces are increasing the demand for transparency and tools around pricing and engagement with a variety of liquidity sources, as well as tools for acquiring accurate pricing and properly, analyzing price and trading information.

From the vantage point of any participant in FX, as a principal market, the view of the market is based on how many price makers, venues, and sources of dealer data are incorporated. For certain players, the more they can aggregate/sort and price across liquidity venues, across time zones, the greater


Schematic of FX Trading from the Front Office to Processing

Source: Oliver W

yman, Celent


The right solution360T is the centre of competence of Deutsche Börse Group’s global FX strategy. It provides a leading edge trading venue for foreign exchange, cash and money market products and FX/interest rate derivatives, which enables transparent and regulatory compliant trading. Count on us at any time – for the right solution.

Find out more at deutsche-boerse.com/therightsolution

039 Deutsche Borse Eurex Ad.indd 1 16/03/2016 10:19

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their informational advantage. One side of this spectrum are firms that combine access to low speed infrastructure, colocation, microwave market data/orders, and, regardless of platform speed rules, will have the ability to profit in millisecond space. Most market participants, however, have to accept that their frame of reference will be defined by the dealers they engage with, or the venues they choose, and deciding how to engage with high-speed fleeting liquidity (or not to engage) is a choice they will have to make.

The view of the FX market is very much a function of how a firm interacts with the market. Another way of stating this is, each firm that engages with

the market has to ask itself whether it needs to connect to another venue. For a firm that solely gets its view of FX from a single point of liquidity, the chance that some form of best execution occurs is greatly diminished. The other side of this is how many LPs, of varying types need be engaged to consider that they have the proper and current state of FX pricing.

Furthermore, is it necessary for a firm with this route to liquidity to then bring in additional views of the market from other venues, or is the view created by dealers in competition sufficient to provide the insight on the state of the FX market? Of course, in a diverse, principal market

FX Deals Bringing Everyone under the Same Roof

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like FX, there will be no total view of the state of the market. Participants must choose the frame of reference for establishing their view of the market from the LPs or venues they choose.

LOOKING AHEADOne area to continue to watch is the balance between trading in listed FX derivatives, spot and the methods of engaging disclosed or anonymous liquidity. We continue to see a drive for access to not only more liquidity, but the right liquidity. For certain traders that will come from direct relationships with banks, for others that will be through aggregated liquidity form a variety of banks or non-traditional dealers.

A key theme here is the ease in building connectivity for rapid deployment and engagement with liquidity. At the same time, we will carefully watch the macroeconomic conditions in China, for clues to the degree that the yuan will impact overall FX volumes.

Another, exciting, but nascent area is the implication of blockchain for clearing and settlement in FX pairs as well as whether cryptocurrencies like bitcoin will gain transaction and become a more important component of FX trading. Especially if a major central bank, like BoE, were to launch a crypto-sterling currency!

034-036 038 040 Industry Report.indd 5 16/03/2016 14:53 Thompson Reuters Ad.indd 1 14/09/2015 09:39

FCM 360 Ad.indd 1 14/12/2015 13:43 FCM 360 Ad.indd 2 14/12/2015 13:43

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A blockchain-based world:Is the vision too big?


When it comes to the Blockchain, keep taking the small steps, says William Essex. Then you can change everything

Fasten your seatbelt. If you’re flying into the UK, you may be about to witness “one of those potential explosions of creative potential that catalyse exceptional levels of innovation”. So say the UK Members of Parliament Matthew Hancock and Ed Vaizey, in their co-written introduction to a recent report on the potential of the blockchain to “deliver a new kind of trust to a wide range of services”, as the two MPs put it. They continue: “As we have seen open data revolutionise the citizen’s relationship with the state, so may the visibility in

these technologies reform our financial markets, supply chains, consumer and business-to-business services, and publicly-held registers.”

Not so long ago (e-Forex January 2016), we were discussing a speech by Andy Haldane, chief economist, Bank of England, on the future of monetary policy given the ZLB (Zero Lower Bound) problem: interest rates cannot be cut below zero by conventional means. How low can you go? was the title of the speech; not far enough, was the theme (for search

purposes, it was delivered on 18th September 2015). One of Haldane’s suggestions for an unconventional, get-out-of-ZLB-free policy instrument was the abolition of paper currency. “One interesting solution … would be to maintain the principle of a government-backed currency, but have it issued in an electronic rather than paper form,” said Haldane.

So that was the view of the chief economist of the Bank of England back in November 2015. Today, we’re discussing the view of the UK

044-055 Cryptocurrency .indd 1 16/03/2016 14:54

A blockchain-based world:Is the vision too big?


CRYPTOCURRENCIES



A blockchain-based world: Is the vision too big?

government’s Chief Scientific Adviser, Professor Sir Mark Walport, as set out in his (and his team’s, see below) report Distributed Ledger Technology: beyond block chain, which was published in January 2016. Not only does this have a preface co-written by those two senior MPs (Hancock is Paymaster General; Vaizey is Minister of State for Culture and the Digital Economy), but it also contains a sequence of usefully concise explanations: distributed ledgers; the blockchain; Bitcoin (see the box Contaminated crypto-cowries). There’s even a list of commonly used terms and their definitions supplied by Simon Taylor, VP for Blockchain R&D, Barclays.

DIGITAL CASH OFFERS POTENTIAL EFFICIENCIESWhat is Walport’s view? This is worth quoting at length. “Distributed ledger technology provides the framework for government to reduce fraud, corruption, error and the cost of paper-intensive processes. It has the potential to redefine the relationship between government and the citizen in terms of data sharing, transparency and trust. It has similar possibilities for the private sector.” We may comment that the private sector got there first, and that government is playing catch-up, but that’s to miss the point. There’s more.

Walport’s view is positive, yes,

but not only with regard to distributed ledger technology. Crucially, Walport doesn’t shirk the past. Discussing that more-or-less notorious first use of the blockchain, Bitcoin, Walport also says: “Bitcoin creates suspicion amongst citizens and government policymakers because of its association with criminal transactions and ‘dark web’ trading sites, such as the now defunct Silk Road. But digital cryptocurrencies are of interest to central banks

and government finance departments around the world which are studying them with great interest. This is because the electronic distribution of digital cash offers potential efficiencies and, unlike physical cash, it brings with it a ledger of transactions that is absent from physical cash.”

That’s a lot of quotation for two paragraphs to bear, but it’s justified. There’s an echo of Haldane in there, but more

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Mike Hearn, five-year Bitcoin veteran, announced in January 2016 that he’d sold all his bitcoins and withdrawn from any further Bitcoin development. “There’s no longer much reason to think Bitcoin can actually be better than the existing financial system,” wrote Hearn, citing disputes within the Bitcoin community and technical failures for his decision.

Assorted conspiracy theorists followed up Hearn’s announcement with suggestions as to his motivation. We’ll keep out of that. Hearn signed off his resignation post on a positive note. “All is not yet lost. Despite everything that has happened, in the past few weeks more members of the community have started picking things up from where I am putting them down,” he wrote.

Then Hearn responded to the conspiracy theorists with a follow-up post. He hasn’t gone completely; he’s actually joined R3. Hearn wrote “Bitcoin competes with some things banks do but a big part of banking is about lending and trading, and those activities would still occur even in a world where Bitcoin was the one global currency. It’s not a zero sum game, banks and Bitcoin co-exist, and R3’s fate is independent of Bitcoin’s.”

Bitquit



CRYPTOCURRENCIES

significantly for the future of crypto-currencies, and currencies in general, we should note, first, the explicit acceptance of the blockchain’s history, and secondly, the interest in digital cash. One notable feature of recent blockchain development has been a tendency to focus on data, as distinct from transactional potential.

This has arisen from a widespread, and understandable, reluctance to mention Bitcoin. To discuss data ownership, and changes in data ownership, is less contentious than talking about holding and spending a crypto-currency with a reputation for being handy in a drug deal.

We’re not going to go back through the old debate as to whether a crypto-currency element is necessary to a blockchain structure, but this is like discussing, oh, Ken without Barbie, or perhaps gun control without acknowledging, say, the important role of bullets.

THE BLOCKCHAIN IS MORE THAN JUST A LEDGERThat reluctance to mention Bitcoin has impacted on the big financial institutions’ approach to blockchain innovation. While various (typically, but of course not exclusively) retail-oriented start-ups have jumped straight in and used Bitcoin to solve high-profile challenges by (for example) offering low-cost cross-border remittance services,

the big institutions have got themselves into discussions, partnerships, initiatives working mostly towards digitising their ledgers. Maybe a few other ideas, but if we’re going to be just a little unfair about this, we could suggest that while the start-ups have been solving real-world problems; the established players have been digitising their back-office processes. There’s nothing intrinsically wrong with either approach, and building a better filing system will deliver significant efficiency gains, but – how best

to put this? – the permissioned, distributed-within-limits, digital ledger has been conspicuous by its presence in bank-led blockchain innovation.

At last, this is changing. Interviewed for this month’s Q&A, Brad Bailey, research director, capital markets, Celent, says simply: “The blockchain means different things to different people.” And that’s it. The blockchain can be exploited to deliver more than one solution. Efficient ledgers are a goal worth pursuing,

Cryptocurrencies are of interest to central banks and government finance departments around the world




of course, and a blockchain-based structure within a closed group that comprises, say, brokers, exchanges, clearing houses and others – or just banks, see below – will offer clear synergies. The Bank of Russia has just announced (end-February 2016) a working group on the likely impact of “prospective technologies and innovations in the financial market”. Deputy governor Olga Skorobogatova, who will head the working group, says: “The development of the present-day financial market is inseparable from the development of financial technologies.” You get the sense that they’re expecting more than just efficiencies in record-keeping. The Japanese government is debating the tax treatment of Bitcoin in advance of the G7 meeting in May, and as above, the UK government is really quite excited.

But governments aren’t having all the fun. The R3 consortium (see eForex January 2016) achieved a “transition from vision to execution” at the end of January 2016, by conducting a “ground-breaking distributed-ledger experiment involving eleven of the world’s largest financial institutions”. What actually happened was, the eleven banks connected to an “R3-managed private peer-to-peer distributed ledger” (distributed between the participants, you understand) and “simulated exchanging value, represented by tokenized

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The blockchain means different things to different people

assets on the distributed ledger without the need for a centralized third party” (so forget the bit above about bringing exchanges, etc., into the group). Tellingly, for our purposes, the experiment was conducted on the Ethereum platform, which uses its own Ether crypto-currency as its “crypto-fuel”. Ether has been covered here before, but today, let’s just pick up Ethereum’s own description, which suggests that: “Ether has a lot in common with the famous digital currency Bitcoin” (see the box Bitquit).

R3 conducted a further test at

the beginning of March 2016, in the fixed-income space, and replied to a last-minute emailed question with a statement: “R3 Global Collaborative Labs will be conducting project work and trials with R3 members banks and distributed ledger technology providers across a number of different topics and areas of focus in the coming months including but not limited to: smart contracts for derivatives, digital cash and settlement on distributed ledgers, trade finance, security, identity, systems integration and reference data.” You get the sense that the pace is quickening.


CRYPTOCURRENCIES

We apparently reached “peak blockchain hype” in October 2015. The term was used in an Innotribe session on the blockchain at SWIFT’s Sibos conference in Singapore (there’s a lot that’s worth watching from Innotribe on YouTube), and then at the end of the month, The Economist went with the blockchain as its cover story. The starting point, then, was that three elements get confused: Bitcoin; the Bitcoin blockchain; blockchains in general – and the suggestion was that we need to clear up that confusion. Worth saying, but once that’s all clear, the next positive step is not, repeat not, to pick the third in the list and pretend the first never happened. Speaking

after R3’s ground-breaking end-January transition, Stephan Hug, Group Chief Architect, Credit Suisse, gave a neat summary of the overall challenge. Hug said: “We feel it is critical to be engaged to identify the opportunities that innovative technologies like this provide and ensure we maintain our position as a globally leading financial institution.”

Also read Brad Bailey’s take on this, in the Q&A interview at the end of this article. The R3 consortium is not the only game in town, so to speak, but it’s new (started September 2015) and it’s already moving value around. Among other players, Lykke (see e-Forex January

2016) is through performance testing on its LykkeX exchange, and is due to launch a beta version of its Lykke wallet any time now (end-March 2016). “We’re starting with instruments that are easy, such as FX. Let’s rewire the whole financial system.” says Richard Olsen, founder, Lykke.

BANKS, START-UPS, CHEMISTRYSo you might get the impression that everything’s changed. It has, given that value is now moving around on blockchain structures openly supported by tightly regulated global banks, while government officials talk enthusiastically about the potential of crypto-currencies

Here’s the UK government’s official view on Bitcoin, as expressed by Chief Scientific Adviser Sir Mark Walport. “Cash as a means of exchange and commerce dates back millennia and in that respect there is a lineage that links cowrie shells, hammered pennies and Bitcoin.”

Sterling and dollar bills are in there too. But as Walport implies, paper rectangles are no more a means of exchange than little scraps of code – or sea shells, or representations of a Roman Emperor hammered onto discs of metal, or cigarettes, etc., in a movie set inside a prison. Significantly, they’re no less a means of exchange, either.

Bitcoin’s lineage as a means of exchange –

Contaminated crypto-cowriesas a form of cash – can thus be traced back to, er, the original Silk Road and the trade in camel-portable spices back and forth to Samarkand. In fairness, so can the US dollar’s. The point is, what makes one or both of them usable as a means of exchange is the consensus decision to use them that way.

For our purposes, given that we can only really innovate if we clear our heads of preconceptions (and legacy usages), the bigger point is that they can’t be held accountable for what has been done with them in the past. So what if 90% of dollar bills are contaminated with cocaine? So what if Bitcoin travelled the more recent Silk Road? Forget all that; let’s get on and innovate.




to restore trust and efficiency to the state. But in another way – it hasn’t. The vision is too big. The vision describes a blockchain-based, transparent, low-cost, et cetera, world populated by happy bankers and their happy clients. It’s achievable. Snag is, to get there, we have to start from here. What’s lacking is the set of mini-

visions, the half-way visions – the steps to take.

This is why that widespread reluctance to acknowledge Bitcoin was problematic. We need innovators to focus on the small steps, free of any negative associations that might hang around any potential component of a “small-step

solution”. We need them free to make it up as they go along.

There is a potential tension between start-ups – wacky, informal – and banks – typically not like that. But there is also a chemistry – at the point where you need that can-do start-up attitude, you need absolutely not to frighten them off with the scale and smart suits and strength in depth that a bank can bring to the table. Happily, there’s one final new development in this story, and it’s one that really will change the game. If innovators need to be free to innovate, wouldn’t it make sense to offer them open-source software?

After all, that worked with Java, and Linux, and come to think of

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Signing off his research report Blockchain in the Capital Markets: a smart distributed future, Brad Bailey, research director, capital markets, Celent, says: “While Bitcoin and other cryptocurrencies continue to evolve, we will leave the discussion of whether Bitcoin is the next step in the evolution of money that includes Wampum, gold, and dollars to others.”

Which is fair enough. Bailey’s concern is to identify use cases in the capital markets, and his report comes up with several. For example, he foresees “a time when issuers go right to the blockchain to create native digital securities … overlaid with smart-contract logic that manages capitalisation tables across the lifecycle of the issuer’s capital needs”. And while we’re waiting for those, how about a market in which “digital titles to securities are created on a blockchain to represent securities and distributed through existing exchanges or syndicate members”?

Warming to his theme, Bailey imagines “an infrastructure of standardised corporate debt with embedded smart-contract logic around coupon payments and inherent payment schedules”, which might come in handy if you’ve lost your diary. Bailey doesn’t use the term, but the suggestion has been made that what we’re discussing here is not best described as crypto-anything, nor digital anything, but simply, “intelligent money”. Or maybe this is what we’ve meant all along by the term – “smart money”.

Can’t do that with Wampum

The blockchain demands a cross-industry, open source collaboration



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it Bitcoin. In December 2015, the Linux Foundation kicked off a collaborative initiative to “advance the popular blockchain technology” by building an “enterprise-grade, open-source distributed-ledger framework” – the Hyperledger – in partnership with a range of companies including IBM, which will contribute “tens of thousands of lines of its existing codebase and its corresponding intellectual property”, R3 (see above), ANZ Bank, Deutsche Borse, DTCC, State Street and Wells Fargo. “As with any early-stage, highly complex technology that demonstrates the ability to change the way we live our lives and conduct business, the blockchain demands a cross-industry, open source collaboration to advance the technology for all,” says Jim Zemlin, executive director at the Linux Foundation.

There’s a well-founded tradition, in the IT-industry at least, that some of the most world-changing innovations are built by late-teenagers and twenty-somethings in garages in California. The final piece of good news for today is that finally, the blockchain is available to be worked on by garage-dwellers.

You may hear talk of the “Bitcoin halving”, or indeed of “The Halvening”. Unless you’re a big-time Bitcoin speculator, you can safely ignore this.

As every schoolchild knows by now, individual bitcoins are “mined” (generated using software) from a finite overall supply of bitcoins. Every time a miner mines, a block is added to the Bitcoin blockchain. The act of mining generates a reward for the miner. This is a fractional Bitcoin-denominated payment that makes mining worthwhile. [More techno-accurate explanations of the whole process are available, but that’ll do for now.]

It’s that payment – the “block reward” in the jargon – that’s halving, not the bitcoin in your wallet. To run the numbers briefly, there can only ever be 21 million bitcoins. Of these, somewhere short of 75% have already been mined. Halving of the block reward happens every time another 210,000 blocks are added to the blockchain. Around 150 blocks are added every day.

The block reward will halve (again) in mid-2016, to 12.5 bitcoins per trip down the mine. This reduces the incentive to mine more bitcoins, thus potentially increases the value of existing bitcoins … and so on. The exact date of the next halving depends on the miners, of course, and if you’re interested, there’s a hypnotic countdown at www.bitcoinblockhalf.com.

With tools like these, who could ever need to get out more?

Let’s go halves




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The future’s smart

William Essex: The future’s smart; the future’s distributed. Tell me more.

Brad Bailey: Suddenly, last year, the capital markets really saw the potential in the blockchain, but it’s all still very nascent. Some people are talking about the Bitcoin blockchain; some describe variations of a crypto-currency on some form of protocol; others remove the crypto-currency overlay and just think of the distributed ledger.

WE: And all those approaches are valid?

BB: The blockchain means different things to different people. Across the capital markets, people are looking at ways of simplifying data problems, simplifying access problems; of exploring different conceptions of what this is. Firms have spent considerable time and resources on trying to figure out where this technology can be used to maximum effect.

WE: They’re coming up with answers?

BB: It’s early, but there’s a lot going on. The challenge is, how do you go from a protocol that supported a crypto-currency that still makes most banks uncomfortable, that was run over the internet in an open and public way, to a secure, enterprise-grade solution? There’s a lot going on to that end. Behind it, the big point is that Bitcoin worked. It has overcome a lot of challenges.

WE: It worked as one thing, but the industry wants to use it as another?

BB: The capital-markets response has been: wow, this is really cool, but it’s really expensive to mine, it’s too slow and too open. But we can take some of the core concepts and make it into something we can use. Now, that’s the incumbent perspective, and we’ve seen a lot of positioning and investment by incumbent players. That said, there are still radical views held by fintech disruptors who see a full remake of certain models. It is fascinating to watch.

WE: We’re not quite done with the surprises, perhaps. I liked your idea of debt issuance with smart functionality.

BB: You could imagine a firm issuing directly onto a blockchain using simple smart contracts. As you know, the Bank of England has been saying that they could imagine a future with a crypto-Sterling. You’d have native ability to hold a digital asset, create a digital security. Even if that doesn’t happen, there are still a lot of people working on how to make title for securities – putting an existing security onto a blockchain to use that functionality.

WE: The other big issue is the blockchain’s capacity to break down the boundaries between firms.

BB: The vision of a single blockchain is too abstract, too far away. As people start to use their own private blockchains, how do you intersect those? There will need to be agreed reference data from outside, and a way of bringing non-trusted parties together. Imagine two competitors working with each other. They don’t want to share everything.

WE: Any transactional use of the blockchain necessarily opens firms up to each other, at least to some extent.

Brad Bailey, research director, capital markets, Celent, and author of Blockchain in the Capital Markets: a smart distributed future, spoke to William Essex about what’s going to be happening in fintech tomorrow.



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BB: When a bank starts working on a private blockchain, very likely they’re talking about some kind of permissioned way of getting on. There might be ten nodes. Once they have a protocol for securely entering and agreeing on data, every node recognises that data as immutable. There’s a history and a time-stamp – that’s some of the power that people see. Bitcoin moves on a blockchain piping system. Take away Bitcoin, and what remains is where people see the value for private blockchains. There’s a different layer in the technology: the crypto-currency is on that distinct layer.

WE: That makes sense, but every layer has potential, and it would be a pity to miss out on some of that.

BB: In fact, there are people experimenting with the crypto-currency on top; my point is that there are a lot of things going on, and they are at least somewhat contradictory. Many of the capital-market incumbents have seen that power without the crypto-currency layer, but there is certainly also a lot of experimenting with bank crypto-coins. The more time you spend with this, the more you have to go back and study what money really is.

WE: While reinventing – or maybe just inventing – what money can do. These are interesting times.

BB: We’re at the point where people get excited about the term – like Big Data, or The Cloud – but it’s still very early. When you think about the Bitcoin blockchain, it’s clear to imagine what you could do with a blockchain with a currency overlay. You can think about tokenising assets. You can just think of having some kind of multi-signatory way of getting on. There’s a lot of power.

WE: And now it’s going open-source.

BB: That’s interesting too. The Hyperledger project has already attracted the greatest interest

ever, of a Linux project. The model is, let’s have it open’source, and innovate around that. It’s not locked in stone, though, because there are others who are building proprietary blockchains as well.

WE: How do you see it all playing out?

BB: Something will come of the blockchain. It might take some time to make significant inroads, but then it will become so commonplace that we won’t even be thinking about it in a few years.

WE: Brad Bailey, thank you very much.

Hyperledger project members




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What a difference a year makes

William Essex: In our interview a year ago, you spoke about waiting for institutional fund flows to come into the Bitcoin ecosystem. Are the funds flowing?

Paul Chou: A key thesis for LedgerX is that institutional involvement, due to their significant assets under management, is critical to growing bitcoin’s overall market value. This growth is important because it would indirectly fund research and infrastructure development being undertaken all around the world.

Institutional funds are not yet flowing at material levels. However, increased regulatory oversight and new platforms coming online will greatly accelerate institutional involvement, in our estimation.

WE: How could distributed-

ledger technology fit into the derivatives market?

PC: In the case where the derivatives are on BTC itself, there are a lot of natural and intriguing use cases of more advanced Bitcoin features. One example is HDM (hierarchical, deterministic, multi-signature) wallets which would allow customers 24/7 visibility of collateral yet still have appropriate privacy for the participant. There are many others, but this is one basic example. As for how distributed-ledger technology would be applied to derivatives on traditional financial assets, such as securities, I have not yet seen a sensible application.

WE: Why is LedgerX pursuing a clearing license?

PC: Clearing is perhaps one of the least visible yet most critical functions in financial services.

Clearing houses ensure that trades are properly settled and that counter party risk is minimized. This service is especially important for Bitcoin, which in a lot of ways acts as a digital bearer asset. You can imagine that trading participants about to send BTC to support a trade need to have confidence in the institution they are sending their coins to. That is why having a federally regulated clearing house with Bitcoin expertise is necessary for the broader ecosystem.

WE: Is Bitcoin necessary to the blockchain? Why?

PC: Bitcoin is necessary for the blockchain, but we keep asking the question backwards. We would find it strange to ask the question: “Is the Internet necessary to TCP/IP?” TCP/IP is one technical element (of many) designed to function in conjunction with a constellation of other technical protocols to collectively produce the open-access publishing platform of the internet. This seems obviously now, but it certainly wasn’t in the 90s when the internet was coming to market.

What is completely missing in the recent “blockchain will save my bank billions in back office software inefficiencies” press coverage is that Bitcoin is way more than just a data structure. Bitcoin is a clever mechanism to bootstrap a system from

Paul Chou, CEO, LedgerX, has been appointed to the Commodity Futures Trading Commission (CFTC)’s Technology Advisory Committee. Given that LedgerX is awaiting CFTC approval to trade and clear options on Bitcoin, this clearly puts Bitcoin and the blockchain on the CFTC’s agenda. William Essex interviewed Paul Chou for e-Forex April 2015: what’s changed?


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scratch with the right financial incentives to maximize the probability of success. Think about the problem set. If no company or government is tasked to maintain this ledger database, then who does? How are they paid? How can a perception of its value be initially bootstrapped?

The answers to these questions are the critical ingredients for Bitcoin’s organic success over the years and why we are even discussing the subject today. As an empiricist by nature, when I look at the data, it appears that all of this is working.

WE: Paul Chou, thank you very much.

Paul Chou


Andrew, what are the latest products and services 360T is focusing on and in what ways are you helping senior FX buy-side traders to add more value to their trading desks?

AC: Our conversations have changed dramatically from more functional requirements, to working side by side with the buy side to implement change whilst minimizing operational risk. Regulatory change, driven by the recent scandals in FX, is clearly having a contagion effect on the buy side where their FX execution will be a focus of regulators, management and, in some cases, their own clients. This has presented an opportunity for the buy side to formulate a more holistic view on how they process orders and execute risk. These conversations are leading to solutions that include:

1. Enhanced order management2. Increased automation3. More quantifiable data for both pre and post trade analytics to achieve:

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360T Extending the value chain for all their clients


e-Forex talks with Andrew Cromie, Global Head of Product Management for Institutional Investors, 360T Group, the award-winning multi-bank, multi-asset trading platform for OTC financial instruments.

Andrew Cromie

• Validation and improvement of decisions

• Increased counterparty measurement

• Greater oversight for management and risk controls

• Greater transparency in decision making

At a higher level, since 360T became part of Deutsche Börse, our clients are thinking about the market defining possibilities in connection with the products and market infrastructure offered by Deutsche Börse, which, in turn can allow them to help re-define their execution as well as capital usage in the context of a new market structure.

Who are typical 360T customers and what are their key drivers for seeking your FX solutions?

AC: 360T customers all have different workflows but what they have in common is a need

to achieve efficiencies and transparency in the way they organize and execute FX risk and the way they interact with the wholesale market.

Almost all have challenges in:

• Accessing transparent market data, execution performance and analytics data

• Maximizing efficiency and scalability of their trading operations

• Tightly controlling the risk around their trading operations

The key drivers for customers seeking 360T’s FX Solutions are the interest in what the market structure will look like in the future and how regulatory change will impact them. The customers are thus embarking on finding partners to work with that are capable to help them create better outcomes from their trading. This is where 360T comes into play.

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PROVIDER PROFILE

How is 360T customising their service to meet the need of the buy-side and what innovations are being developed in this respect?

AC: There are really two answers to that question in terms of what we can do now and the capabilities we will have in the future as the market structure changes. Bilateral execution and credit in FX presents unique challenges for the buy side.

360T has an absolute focus on:

• Delivering decision support tools to aid in better pre-trade actions

• Delivering a solution to help with transparent execution

• Delivering data and analytics to demonstrate best practice

• Developing new market structures to provide even more transparency in the future

With the purchase of 360T by Deutsche Börse Group there is rapidly growing excitement from the buy side about the long term opportunities to fundamentally change the market structure to facilitate more efficient and transparent exchange of FX risk. Realizing this requires new ways of ability to manage net risk and execute in an open access marketplace with an underlying credit model. Working through the value chain and leveraging the assets of Deutsche Börse

Group in clearing and collateral management will make this possible. This is why we are engaged by the largest buy sides in the market when formulating short and long term strategies.

How do you stand out from the competition and what do you do differently?

AC: There are very clear differentiators between 360T and the competition, in terms of our core business structure and capabilities, potential for conflicts and approach.

• 360T is owned by a global market infrastructure company with assets that cover the entire value chain of market data, indices, execution, clearing, settlement and custody, this is a fundamentally unique structure in the FX market

• As a technology company at the core, our trading venue represents a completely un-conflicted solution acting in the best interest of its clients

• 360T has a very consultative, solution oriented engagement model where the constant focus is on improving the outcome of our clients.

In your opinion, what are the main factors that influence how buy-side traders choose their trading technology?

AC: Even 5 years ago the answer would be different where relationship based trading and STP were the most important things that you could get from the technology employed on the desk-top. There is a new breed of traders who are questioning inherited archaic practices and are looking at regulatory modifications as a way to drive change in their organizations. They are looking at time consuming, in-transparent and in-efficient work practices and thinking about how they can be improved. These advanced thinkers will definitely take advantage in being well prepared for regulators looking into practices and enforceable rules around, acting in the best interests of clients.

What are 360T’s objectives for the next 12 months?

AC: 360T will continue to innovate and work closely with its buy and sell side side clients to meet their objectives. We will extend the value chain for our clients using group infrastructure assets to lay the foundations for a hybrid market. We really see two types of conversations that we will have, one is the buy sides who are trying to formulate or have a strategy in place to drive their organizations. The other is panic when the buy side has not thought about these issues and has been hit by a train when they realize they don’t have an effective solution in place. Either way we are ready.

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The Single Dealer Platform (SDP) has come a long way since the early Nineties and if the past 20 years are anything to go by, they will continue to develop, perhaps at a faster rate as the technology available improves and lowers the barrier to entry, and client demands and the regulatory environment continue to shape the offerings.

What is central to the concept, and continued survival, of SDPs is the bank/client relationship for while MiFID, Dodd-Frank, the introduction of swap execution facilities (SEFs) and other new regulatory programs have impacted the grey areas of price discovery and execution, negating the price differentiation an institution can offer through its SDP, this has simply increased the focus on servicing that relationship, and adding value. With the growing demand for a single point of

entry across the different assets and products, banks are now unifying and simplifying their e-trading delivery, and in most cases using browser-based technology to do this.

Wells Fargo Bank offers a multi-channel e-Commerce offering made up of SDPs, multi-dealer platforms and direct system connections between Wells Fargo and its wide range of customers. Its SDP is still a very important part of its e-Commerce offering and the bank continues to invest in providing services to clients via the interface of the Wells Fargo application, Foreign Exchange Online, which is part of the Wells Fargo corporate banking portal, Commercial Electronic Office.

Stephen Godfrey, Head of FX e-Commerce at Wells Fargo Bank, says that while its client

base has differing needs, depending on the market segment, there is a lot of commonality in the services the bank provides, so they can share some infrastructure, while still delivering unique services to specific customer segments.

MORE THAN PRICE DISCOVERYWhile fair pricing is important, both the customer and the provider need to feel the pricing is fair and comfortable with how the pricing was developed and applied, whether it is the provision of transaction history with time-stamps or accommodating a market data request, Godfrey believes it is just one piece of the overall offering. He says: “Much of what customers need is not just price discovery but the processing benefits they can

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Single Dealer Platforms: the quest to deliver a more impressive digital experience.


Multi-channel, multi-asset and multi-dealer: The Single Dealer Platform continues to evolve. To discover more, Frances Faulds talks to two leading FX providers to see how they are adapting their e-commerce offerings to the changing landscape in FX.

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FX E-COMMERCE & PLATFORMS

get from doing transactions online – this could be reporting, security, or variable workflows with user entitlements to manage how many people must touch a transaction before it is executed or money is sent. We also have quite a number of clients that use our platform to make payments, so there is functionality around payment management, stored beneficiary information and the ability to upload files of payments to efficiently enter multiple transactions at the same time.”

All these features can be managed in whatever workflow or model clients want to use, says Godfrey “After the transaction is completed they need to report on it, and they may have some of their own compliance requirements, for which we can provide them with data. Our view is that the real value proposition of our platform extends much beyond its role as a price discovery tool,” he says.

For Godfrey, the main goal is to help customers become more effective. A lot of time that means achieving greater efficiency, and processing transactions more efficiently. “The vast majority of our customers need an online application for some of their transactions. Anything that is



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routine can probably be done more efficiently using an online tool, because we have designed some workflows to make it efficient, plus we save all of their information making the next repetitive transaction that much easier,” he adds.

Wells Fargo’s e-Commerce offering is multi-channel. Alongside the user interface applications are system integration tools since it can be more efficient for a customer to send Wells Fargo their transaction requests electronically rather than having to re-key anything.

However, Godfrey says that not all transactions lend themselves to being processed just through the e-channel and the Wells Fargo e-offering is complementary to the voice offering and acts as an integrated service. “Some customers need to talk with a salesperson when they want to discuss strategy or need guidance on best practices when executing a large deal, or to understand the risk of

new markets and managing cash in regulated currencies. This service is best delivered by a sales person, even if the transaction is actually done online. Any transaction that is done over the phone is visible to the client online and any post-transaction processing or reporting can be done online,” he says.

INTEGRATION TOOLSAccording to Godfrey a number of customers do some transactions online and a portion through voice; there are some who execute on the desk but then use the online application for some part of lifecycle management, which is possible because the bank presents all transactions, from all channels, back to the client through the online portal. Using the system integration tools, most of the transactions can be managed through the

online portal and Wells Fargo ensures that all three delivery mechanisms – voice, the SDP and any systems connections to Wells Fargo – are seamlessly integrated, co-ordinated and allow clients to choose which transaction to send to which channel depending on what their goals are.

A large number of financial institutions integrate with Wells Fargo to support their

Single Dealer Platforms

Stephen Godfrey

“Much of what customers need is not just price discovery but the processing benefits they can get from doing transactions online – this could be reporting, security, or variable workflows with user entitlements...”

Both the customer and the provider need to feel the pricing is fair

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clients using their own in-house systems. When they need a currency transaction to support that service, rates and other foreign currency and global cash management services are provided by Wells Fargo using a combination of online tools or direct systems integration. Another integration mechanism is via SWIFT since Wells Fargo supports a range cash management and foreign exchange services over this network.

Godfrey says: “We need to be providing value to customers; we need to understand what our customers are trying to

accomplish and how we can help them do that. As long as this is the value proposition I think that SDPs will play a very important role, and it should be seen as a lot more than price discovery. Multi-dealer platforms also need to consider their value proposition beyond price discovery because if that is the only service that is provided it is hard to differentiate and remain relevant in this market.”

TRANSACTION PROCESSINGFor Godfrey, it is about understanding the entire lifecycle of the trade and understanding why customers


are doing the transaction in the first place, so that Wells Fargo can assist them in that initial phase of setting strategy. He says: “We have a team in the risk management group to help customers understand their currency and interest rate exposure and then what hedges might be appropriate, given their underlying exposure. Similarly, we have customers who are looking for best practices around transaction processing and we consider assisting them with these questions as value-added services that are a very important part of the relationship. There is still a need for this, even in the digital world. It extends beyond just the electronic foreign exchange team and it drives what we do and ensures we are investing in assisting clients as part as an overall banking relationship.”

With the focus of banks on the client’s differing needs, the size and sophistication of the target market will always determine the form of the offering developed. DBS Bank’s state-of-the-art FX platform, DealOnline, offers companies competitive pricing, transparency and efficient execution across more than 20 currencies, and provides access to FX and forward rates up to a year in advance.

Peter Soh, Managing Director, Foreign Exchange & International Locations at DBS Bank in Singapore says that the bank

Some customers still need to talk with a salesperson




has taken several initiatives to sharpen its e-FX offering including internally improving on post trade and real-time trading activity, MIS data mining as well as providing trade cost analysis to provide more accurate pricing and higher fill ratios. Additionally, he says, the bank as been embedding post trade affirmation and trade reporting workflows, continuing ongoing efforts to reduce latency by upgrading systems and co-locating closer to execution venues, and moving towards greater use of cloud-based applications to increase scalability.

One of the biggest challenges in the highly competitive SDP space is the need to keep up with the global ‘flow monsters’

but there is an upside to this, in that the larger banks are in fact creating a influx of e-trading talent into the FX market. Says Soh: “There is definitely a large pool of talent out there. However there are still challenges in finding the most suitable candidate, at the right cost. More often than not, these talents from the global players tend to be very specialised and costly. On the other hand, banks in the region are just starting out and require an ‘all-rounder’ (talents with hybrid skills) instead.”

SERVING THE SMEsAs competition, and levels of sophistication amongst users, grows, many banks are stepping up their game with the

provision of TCA tools, some using live mid-rates or disclosing the spread of prices from the independent mid-rate, in order to give their clients greater confidence to trade on the bank’s SDP.

For Soh, the need to offer such tools depends on the sophistication of the clients. He says: “Our current strategy is to target the small and medium-sized enterprises, which are less contested by the big players. With that in mind, we are consistently offering feature upgrades, like charting, price alerts, research etc, that are features normally offered to the larger clients. Further additional features, such as trade analytics, are in the pipeline.”

What is central to the concept of SDPs is the bank/client relationship


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In terms of offering fully integrated transaction capability along side FX, Soh says that DealOnline is currently available either as a standalone platform or part of the bank’s transaction banking platform, IDEAL. “This is to ensure we provide a complete customer journey from start to end. As part of our digitisation efforts, we have also recently launched a mobile version, IDEAL Mobile, as part of DBS IDEAL 3.0, a new banking platform, with a user-friendly interface, designed to meet all the corporate online banking needs,” Soh adds.

Soh also believes that there could be opportunities for banks to rework and strengthen relationships with asset managers, following the recent ‘unbundling’ of research from execution, by providing more differentiation and quality of

research in specific areas of strength. He says: “Different strategies could be adopted in research funding (crowd-funding), and with greater transparency with our research pricing structures. Asset managers may increase their scrutiny in their buying process to ensure good value of their purchases.”

IMPROVING THE USER EXPERIENCEFurthermore, with the continuation of e-enablement by top tier institutions, and with the second tier banks and regional players joining the bandwagon, Soh says that as trading desks continue to shrink and the ever increasing flow of trading talent permeating the buy-side markets, it is increasing the demand for ‘sales trader functionality’ and MIS-rich content in SDPs.

This value proposition is further strengthened by the easily available pricing market data on public channels, which increases transparency and enables new market players to leverage the latest technologies, not just in pricing but in improving the customer’s user experience.

The FX market is seeing increasing platform

consolidation, more specialised liquidity provision, an increasing burden of compliance and a new focus on benchmarks as ways to minimise reputational and regulatory risk. Despite this, Soh, believes SDPs will continue to grow increasingly important to a bank’s strategic penetration and retention of customers by focusing on personalisation of the customer needs, specialised workflows, targeted news and research, integration and straight-through-processing, as well as offering multi-asset class execution, increasing transparency, via MIS, and cross-asset single portfolio views, with improved compliance controls. He says: “The SDP may soon evolve into the SCP (Single Customer Portal) and become representative of the single channel in which a customer accesses the entire bank’s offering.”

CLEARINGSDPs grew out of the OTC market, namely the FX and fixed income markets, and with the approach of MiFID II, which will change how most OTC products are priced, traded, cleared and reported from January 2017, many believe that clearing for OTC products will in fact create a new business environment that will increasingly elevate the need for the direct e-delivery channel, offering essential customer services and aggregation in a multilateral marketplace that could become even more fragmented.

Peter Soh

“The SDP may soon evolve into the Single Customer Portal and become representative of the single channel in which a customer accesses the entire bank’s offering.”

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The primary objective of many banks in deploying a Single Bank Platform (SDP) was to get an electronic presence out to their end-customers in the hope of encouraging self-service trading. According to John Ashworth, CEO of Caplin Systems, “There was always the hope that certain segments of their customers would trade directly, but for regional and super-regional banks it was also about a real-estate grab as a defence mechanism against disintermediation from the larger banks. What has changed markedly in the last 12 months is the emphasis banks are placing on making

John Ashworth, CEO of Caplin Systems talks to Frances Faulds about the evolution, and the changing face of Single Dealer Platforms.

the SDP a tool to improve internal sales efficiency.”

Recent investment in platforms has been driven by regulation, and making all the workflows handled by and through SDPs compliant with the new directives. However, Ashworth adds that the general need for cost control within banks is also causing them to think very hard about which customers they want (i.e. are suitably profitable), and of those they choose to retain, whom they want to offer a high-touch human sales interaction and whom they would prefer to service through a call centre.

He says: “The objective of the SDP to enable the customer to self-serve is as great as ever. But now SDPs are becoming very much more focused on internal ‘customers’ (the bank’s sales staff) and providing workflow and product support internally, to make the sales person’s job more efficient.”

AVAILABLE TECHNOLOGYThe availability of technology

is narrowing the gap between what the larger banks and the tier two banks can offer. Furthermore, Ashworth says that by componentising the building blocks of the SDP, the technology has become more available to lower tier banks. He says: “We have spent a lot of time making out-of-the-box reference implementations which are then very easily customised. Ten years ago, SDPs were either phenomenally expensive, or looked very similar. We have put a huge amount of software architecture into making the components so that the front end can be easily tailored to each bank”. This component approach, using HTML5 technology, lowers time to market and Ashworth adds that with regulation and compliance taking up more time and focus, banks have less time to build to from scratch.

Greater regulation around best execution is having an impact on the use of SDPs. Bank providers need to be transparent about price construction and negotiation, and end-customers need to be very transparent about demonstrating that they have achieved the best price. Ashworth believes there always has been, and always will be, a place for multi-dealer platforms, to serve certain types of customers, who only really need a comparison capability, in certain markets, whereas in other markets, best execution

John Ashworth

“The objective of the SDP to enable the customer to self-serve is as great as ever”

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The Platform Provider Viewpoint




will be accomplished from an SDP. “Banks are at pains, as part of the sales process, to demonstrate why the narrowest spread or best rate is not necessarily the best value because the probability of getting filled comes into play”, he adds.

As a result, transaction cost analysis and best execution analysis tools are increasingly being included in SDPs, as well as broader product coverage, in order to include block trading, flexi-forwards, time-options and regular options increasingly being offered by the banks, along with algorithmic capabilities.

With the increased news and research available from numerous different sources, and the aggregation tools being widely available, the regulations to separate news and research from SDPs are having less of an impact than expected. Says Ashworth: “The days of only looking at one bank’s view, published by a bank’s economist, are long gone. On the flipside, the more intelligent SDPs will increasingly include predictive and behavioural analysis. This lends itself to dynamic personalisation of the

individual user’s experience. We are investing in this technology.”

Today, SDPs are built using Caplin’s suite of FX Motif solutions, which are a set of pre-built starter points for delivering highly differentiated and fully customisable single-

dealer platforms, and include FX Professional, FX Corporate, FX Sales and FX Mobile.

FUTURE DEVELOPMENTGoing forward, Ashworth believes the most immediate focus is on further sales automation and presenting screens that assist the internal sales user in doing a better job in communicating with the trader or communicating with the customer, using links to customer relationship management systems, much

better access to prior trading activity of the customer, and also in the area of product education. “Here technology can help them reduce the bottlenecks of having to go to the structuring desk or the head office of the bank to get that sales support advice. This frees up a log-jam and helps sales

people to be more productive,” adds Ashworth.

SDPs will continue to evolve, in both functionality and use, whether they are being used to self-service, as a back-up for phone trading, or even not used directly by the end-customer at all but simply used by the sales person. The value proposition of SDPs continues to strengthen through this greater enhanced sales trader

functionality and the MIS data mining available to support high value clients, which benefits both the banks and their customers.

With increasing platform consolidation in the FX market, more specialised liquidity provision, the burden of compliance increasing and a new focus on benchmarks and ways to minimise reputational and regulatory risk, it is becoming increasingly clear that SDPs, and the underlying technology, have still a key role to play.

A component approach, using HTML5 technology lowers time to market


Performance analysis –new toolsets for improving the operational oversight of FX trading operations


New solutions that can deliver more granular analysis of FX trading activities are increasingly in demand from both buyside and sell-side firms. Nicholas Pratt examines some of the critical components of these services.

Participants in the FX market have always looked to analyse the performance of their trading strategies. After all, this is what they are ultimately judged on by their investors. But as trading becomes increasingly reliant on technology, it has become just as important to analyse the performance of the systems and tools used to implement the strategies.

New products and services are

emerging aimed at improving firms’ operational oversight. There are visualisation tools aiming to give firms increased visibility into the performance of their FX trade lifecycles, liquidity streams, network architectures, software applications and managed trading infrastructures.

There are also new ways to analyse real time market data feeds via metrics such as tick

quality, relative latency, conflation and volume analysis. And there are methods for assessing the live performance of pricing information and the overall health of FIX engines and gateways. All of these different functions contribute to a firm’s trading performance and therefore have to be measured. The trick for the vendors and service providers in this space is to develop a single product or service that can measure all of these elements.

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PREDICTABLE LATENCY“Reliability and predictable latency of the streaming pricing connections is one of the key factors in building out the software and network infrastructures for any over-the-counter (OTC) broker,” says Stanislav Stolyar, of Devexperts, a provider of financial software for online exchanges and brokerages. However achieving this level of control is far from simple. “Frankly speaking, I

don’t think the silver bullet exists in this area,” says Stolyar.

There are various ways for a broker to understand that the pricing stream that he is sending to his clients is lagging and the worst way is to realise that when being hit by orders based on stale prices. Consequently it is vital that this scenario is avoided through prior detection. However there are numerous points within a

trading infrastructure that have to be included in the analysis.

“Latency can be introduced on different levels of your trading architecture: network, liquidity gate, price making engine, messaging middleware and other factors,” says Stolyar. “This especially becomes an issue when trading infrastructure is upgraded from 100+ FX pairs to thousands of contracts for differences, spread bets and OTC options. Architectures that could easily handle spot FX may no longer be capable of serving growing appetites of traders looking for multi-asset offerings.”

Monitoring and visualisation is an important part of the performance analysis function, however in order to visualise and pin point the hot spots one has to introduce monitoring sensors in every place where data is received, processed, generated and sent, says Stolyar. “This is not always feasible. However, a combination of a decent monitoring system, trading platform core and FIX gates with enough sensors, open and healthy communications between dealing/risk desk and IT team usually does the trick.”

JOINED UP ANALYSISThe world of performance analysis has evolved from several separate products used to analyse different facets of the trading process, cobbled




together to produce an overall picture, to something more joined up and comprehensive that provides an end-to-end view, says Steve Colwill, chief executive of Velocimetrics – a company that has operated in this space for some time.

“Three to four years ago people were using traditional network health tools and latency metrics along with separate tools to achieve post-trade profit and loss analysis for market data feeds and pricing engines. What we’ve tried to do is develop a complete service.”

There are multiple dimensions to performance analysis says Colwill. These can be categorised as vertical and horizontal axes. The former is the technical infrastructure: comprising the

network infrastructure, servers and applications, the latter relates to the flow of business data through those systems: from market data feeds through pricing engines to client quote and streaming, to the handling of subsequent trades. The key, says Colwill is to tie all the business data together so you can analyse the complete order or trade, and connect it to the technical infrastructure.

“Fundamentally, the guy at the FX desk doesn’t care about the technical side but is concerned with the business side: the ability to get the most efficient pricing and trade profitably, whereas the operations guy is concerned about the bottlenecks in the system. Ultimately it is about providing the most competitive pricing and ensuring that there is nothing operationally hindering this objective.”

For example, there may be numerous instances where an operational frailty can cause pricing problems – network congestion can cause pricing ticks not to propagate properly or inefficient applications may mean that prices are not generating quickly enough due to either bad coding or an overloaded server.

There is also an external aspect. In today’s FX market nearly all trading is automated and driven by the ability to have market data delivered quickly and with good quality. Without this an FX desk can be doomed from the start.

The typical tool used to analyse the quality of market data feeds spots gaps in the sequence of these feeds, however these tools will not detect more subtle problems.

Streams maybe coming in from different providers and one of these may be slower than the others. Or there may be a disparity between the bid and offer sides of a trade, whereby one side is ticking but the other isn’t, which is putting a pricing engine out of kilter.

“It is about having tools that are able to operate at a more granular level and able to distinguish whether a problem is due to an external provider’s market data feed or with your own internal systems,” says Colwill.

Should there be a problem with an external market data provider, firms will have to be careful about how they are pricing and employ a tool that can provide real-time analysis. The idea of using real-time analysis rather than end of day diagnostics is becoming more widespread in the FX market, says Colwill.

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“Reliability and predictable latency of the streaming pricing connections is one of the key factors in building out the software and network infrastructures for any OTC broker. Frankly speaking, I don’t think the silver bullet exists in this area.”

Stanislav Stolyar

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BLURRED LINESIt is also becoming easier to link the aforementioned horizontal and vertical axes because the lines are increasingly blurred between the operational and trading staff in the FX world. “People that were previously working for me as software engineers are now on the trading desk so the two roles are becoming tightly related.”

Performance analysis is also becoming more user-friendly with the development of dashboards and so-called ‘wonderwalls’ that enable users to get a clear view of what is going on, says Colwill. The information contained in these wonderwalls is both real-time and also end-of-day.

“Velocimetrics comes from a background of analysing pricing in real-time but we also capture that end-of-day information that enables people to do more forensic work. For example, if you have a latency measure that is out of normal bounds, with real-time analysis ops people will dive straight in to fix it. But there are also more end-of-day issues that can be dealt with offline, where the P&L analysis shows that money has been lost on a trade. We

can go back through all the hops that the pricing data took and see if there is a technical reason for the loss or if there is a systemic problem with the infrastructure.”

Engineers are most interested in the outlier conditions when it comes to performance analysis, says Colwill. “It is not the 99% of quotes that were timely, it is the tail, the 99th percentile, and we give them the tools to drill into that tail. For example, it could be that all the quotes in that tail came from one pricing engine among many. It is about seeing the wood for the trees for FX traders.”

It is likely, given current global regulatory trends, that performance analysis will become even more important

for firms, says Colwill. “Many regulations are about trying to create an orderly market and for an electronic market like FX that means making sure that the systems work and that the people running the systems have their arms round any problems, like capacity management and how their systems are operating at peak times in the market. The senior managers, they have to demonstrate that they can manage all of this and a performance analysis system can help them to do this by providing in effect an independent and objective observer.”

INCREASED VISIBILITYFXecosystem launched its flow and network performance enhancement tool, FXeco-eye in September 2015 with the aim of giving banks and brokers increased visibility into the performance of their FX trade lifecycles, liquidity streams, network architectures, software applications and managed trading infrastructures.

FXecosystem CEO James Banister says that the tool is designed to help business units and network/trading system support teams speed up the process of establishing the root cause of any network and trading issues. In addition, tools like FXeco-eye also provide post-event analytics to help clients identify and investigate risks in their environment.

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Steve Colwill

“It is about having tools that are able to operate at a more granular level and able to distinguish whether a problem is due to an external provider’s market data feed or with your own internal systems,”



“The visualisation aspect is key to any performance analysis service given that the aim is to present data in a clear, graphical format that gives a real-time overview of all flows. Using our dashboard, organisations are given a clear, visual overview of all their Capital Markets connectivity links and business flows,” says Banister, “They can examine the network fabric / traffic and business flows in time-series windows, receive automated alerts when SLA thresholds are breached, benefit from timed reports and use visual aids on screen to pin point potential issues.”

FXeco-eye also aims to provide analysis at a granular level - including individual orders and

market data ticks. “Users can troubleshoot network, application and connectivity issues without creating disruptions to business critical flows. It is easily accessible via a web browser and works across multiple asset classes,” states Banister.

One of the most important developments in performance analysis is its decreasing cost meaning that the technology is now accessible to a wider range of participants. “Until now, visualisation performance monitoring tools which provide such an in-depth assessment have only been available to the very top end of the market because of the huge investment needed for such technology,” he says. There are now

more cost-effective tools that therefore enable a far wider pool of banks and brokers to access such a valuable resource.

It’s worth highlighting that clients don’t necessarily need to monitor their full network from day one, says Banister. “We can implement the solution very quickly, in a phased approach – which may be an ideal deployment for some banks and brokers, depending on their resources and the complexity of the network.”

“As FXeco-eye monitors the flow coming through the client switches, we can grab the data coming through it and present it in a clear way,” says Banister. “We can take a complete trade

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There are now new ways to analyse real time market data feeds




or market data tick and break all the pieces down to the core data, analysing it in many different ways and mapping on to key metrics which are important to the client. In effect, we do all the ‘heavy lifting’ to extract the business logic. Clients can then assess all key parameters in real-time.”

In addition to real-time analysis, it is also important that these tools are able to assess the live performance of pricing information, including the overall health of FIX engines and gateways, especially between FX sell-side firms and their intermediaries and end user clients.

“FXeco-eye extracts the business tags within any data it sees either on the FXecosystem infrastructure or from the client

applications,” says Banister. “Once this extraction has occurred, FXeco-eye correlates these events from multiple points and stores the orders and ticks in a repository. The visualisation tools then use the repository to present the information in real-time.”

The ability to deploy network intelligence and other types of analytical toolsets within their day to day FX operations is another demand from FX traders that providers have to

cater for. FXeco-eye is software as a service (SaaS)-based, making it easy to deploy and manage, claims Banister. “It’s not based in the cloud. The monitoring equipment is based within our infrastructure. The network intelligence provides vital information for the front-end dealing desk, middle office and support teams who are managing connections for the bank or broker. We make it very simple for our clients in terms of the set up and management. Our clients simply look at the screens to get their data. All the underlying infrastructure is managed by the FXecosystem team. We can give key stakeholders in the business a very clear, simple and

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“When something fails, the bank or brokerage will want to see when and why it failed. The historical data can be as important as the real-time data when looking in-depth at the issue.”

James Banister

One of the most important developments in performance analysis is its decreasing cost

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concise performance analysis overview by sending intra day reports relating to volumes, performance and any issues which have occurred. Banks could potentially choose to send the information to key clients, too, broadening the reach of people who have access to some of the data available.”

Software providers have also taken steps to make performance analysis in FX a more user-friendly activity by making it possible to pin-point potential issues, says Banister. “FXeco-eye has a real-time alerting mechanism. This means that when there’s an issue, it’s fl agged up visually and

the relevant people are alerted by email. At that point, users can fi nd out more about the issue – either at a high level or by drilling down to a spike or individual business transaction. We provide access to all the information so that users can see exactly what’s going on – where the problem is

and why it’s happened. Users can do additional analysis forensically to dissect the issue, hopefully preventing it from recurring. Our forensic analysis capability is a key component of FXeco-eye. When something fails, the bank or brokerage will want to see when and why it failed. The historical

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Real-time monitoring techniques are especially important with algorithmic trading systems

Source: Velocimetrics

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data can be as important as the real-time data when looking in-depth at the issue.”

REGULATORY TRENDSGlobal regulatory trends are all concerned with increasing transparency at every part of the trading lifecycle, making performance analysis a vital capability for market participants, especially FX brokers. “Compliance is key in this industry – having an independent solution with full security controls which shows the full repository in real-time, enabling you to drill down to individual trades is important, particularly if regulators need

to investigate any issues. With MiFID II, the timing accuracy of the data is critical,”says Banister.

Given that the importance of performance analysis is only likely to increase, FX traders can expect to have a wide range of tools to choose from and there are a number of factors likely to influence their purchasing decisions and the choice of technology they eventually choose to adopt. Ease of use, price, deployment flexibility and integration with other internal systems are the key factors likely to influence vendor selection.

Clients should be mindful not

to opt for a separate island of data, concludes Banister. “For the product to be most effective, the repository of data needs to be fully integrated with existing systems. We can capture the whole piece of the trade. We don’t need to rely on any other parties providing us with the access to some of the information. We can accurately timestamp the trade and give value to the market data that passes through our network. Having the repository of data is absolutely key to the overall efficiency and effectiveness and clients should be aware of this when making their vendor selection.”


Charles, you have been involved in the FX and private banking markets across Europe for over 25 years. What has your broad experience taught you about how to meet the challenges of running a leading financial trading firm? I have worked in this industry for over 25 years and have encountered and surmounted many challenges within that time. Experience counts for a great deal with regards to running London Capital Group. This coupled with an experienced senior management team which can help develop strategy is the path to success. You learn what works and what does not work very quickly and if I have made any mistakes in the past I have learned from them and use this to my advantage. As the CEO, I ultimately set the direction and ensure it is implemented well. It’s important to have a strategy in place with respect to which markets the company

London Capital Group –building success upon a new strategic focus


e-Forex talks with Charles Henri-Sabet, CEO of London Capital Group (LCG)

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enters, how we compare with our competition, what product lines to focus on as well as ensuring that the company differentiates itself in such a competitive space. All these decisions ultimately lie with me and it’s as a result of my experience and that of my management team within this industry that will enable us to make the correct decisions and face up to any challenges in order to run this business successfully. What do your day to day responsibilities within LCG involve? I take quite a hands-on approach to the business. I think it’s important to be involved in all aspects and I make sure I speak several times per day with my direct reports and with all employees regularly. Good communication, idea generation and implementation are the cornerstones of any successful business and while there isn’t really a traditional job

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THE e-FOREX INTERVIEW

Charles Henri-Sabet

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London Capital Group – building success upon a new strategic focus

description for any CEO; my main objectives are to set strategy and direction, ensure a profitable business model and foster a positive work culture.

While I get lots of useful input from the senior executive team, it is really down to me to ensure everything is running well. So my day to day responsibilities are broad and can vary but I place a priority on risk management, adherence to FCA regulations and the ongoing improvements in our business flows. LCG is a leading provider of online trading services. In general, what types of client are you catering for? Our main segment is private clients that we reach directly or indirectly. Our product offering suits institutional, HNWI and

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or the popular MT4 platform. Our clients benefit from the ability to trade either CFDs or spread bet on a wide range of over 7,000 financial markets across forex, indices, shares and commodities. As we build our client base and grow our brand globally, we always strive to improve our offering for our clients, whether it’s via our price improvement technology or our industry leading spreads in order to make sure that we are always ahead of the competition.

What do you see at the key strengths of LCG and the reason why increasing numbers of clients are choosing to trade with the firm? We have a new cutting edge trading platform and because we are fully cognisant of the fact that many traders like to place and check trades on the go, we also provide an excellent mobile solution. We provide best in class pricings in OTC products such forex and CFDs. Our technical analysis and economic research is some of the best in class. Our latest commission free offering on FTSE100 and Dow Jones constituents, launched very recently, is working and attracting new business.

What with the massive rout over the past two months in risk assets there are definite bargain hunting opportunities and our clients, both existing and new,

retail clients. FX and indices are the predominant and most traded products but as we expand, we intend to be more balanced. Our latest commission free offering on FTSE100 and Dow Jones constituents is working. What with the massive rout over the past two months in risk assets there are definite bargain hunting opportunities. Having some of the tightest spreads in the UK for FX and these individual share derivatives gives us an edge over our competitors and indeed our active trading clients also gain an edge with cheaper trading costs.

Contracts for difference and spread betting; both versatile instruments and can be used for speculation or for hedging purposes. The ability to short gives traders double the number of trading opportunities. Over the last few years other asset classes have become more popular amongst the traders, notably commodities like gold and Oil and FX. I think the financial crisis opened up possibilities to the non-financial set, people are interested in how markets work and moreover how to gain a profit from them.

What core range of financial trading products does LCG currently offer?

LCG allows its clients to trade in its new world class multi asset trading platform LCG Trader

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recognise this and are well placed to take advantage. Having some of the tightest spreads in the UK for these individual share derivatives gives us an edge over our competitors and indeed our active trading clients also gain an edge with cheaper trading costs. We offer a range of different educational material such as on-demand videos and e-books and regular online trading webinars which aim to both educate and inform. How would you describe the company’s business model and in what ways do you see it as being fundamental to your future growth and success?

A global presence is something we aspire to. Through our product innovation, class leading dealing platforms and excellent customer service, we strive to give the best

possible service and experience for our clients and know that this will produce dividends.

Our comprehensive digital marketing campaigns and the benefits that come from a hefty presence on social media means that LCG’s offerings won’t just be constrained to the obvious markets. Growth will be both organic as well as astutely sought.

Last year LCG undertook a major restructuring of all parts of its business. What was involved with that and how will it help you to achieve a clearer strategic focus?

We had to replace 100% of the technology, rebuild the organisation, and implement new, more efficient processes. I have had to rethink capital allocation, rebuild the brand and have a new website built from scratch.

“While still important, being aware of what clients want is a bigger priority than what competitors are doing.”

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All of this necessitated us having to select the best people to work with us and as would be expected, an overhaul of this scale implicates a very large turnover in staffing.

Having the right organisation allows LCG to be scalable in all business areas, more nimble and more adaptive to any material

changes. The fact that we offer our own trading platform as well as MT4 gives us great scope.

LCG recently launched a powerful new multi-device platform called LCG TRADER. Why was the company so committed to building this and what new functionality does it offer?

Having done the research and asked for client feedback, we wanted to offer the latest new technology to our clients. Fast trade execution, an excellent mobile trading app, and regular, relevant actionable trading research is about providing the complete package to active traders. Our technology will allow us to offer many more

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useful tools that are currently being tested and we plan to put live in the next few months. How important is it for leading providers of Spread Betting, CFD and FX products like LCG to continually improve their platform scalability and investment in “best in class” trading technology?

This industry is constantly evolving and it’s important not to become complacent. There is a constant need to move with the times. While still important, being aware of

what clients want is a bigger priority than what competitors are doing. Traders want an intuitive trading platform that offers the right type of user friendly functionality. Speed of execution is a priority for all but not at the expense of quality training and customer service when the need arises. LCG was one of the first financial spread betting organisations to provide white label solutions.

What range of partnership services does the company offer and will you be maintaining your competitive strength in this area?

LCG is keen to maintain its competitiveness in the partnership space and to work with partners to expand its reach in both its core markets, and to help us gain a presence in new markets that would benefit from working with a respected UK based counterparty. Our partnerships range starts from simple affiliate deals, helping partners to direct prospective clients using their services or websites to an established broker. The

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next step up is working with introducing brokers who have a client base they are actively engaged with and are keen to trade through a trusted provider. Finally we will be offering both fully branded and neutrally branded solutions using our new technology for brokers wishing to provide their client base with a complete solution. We have the potential to offer these services across multiple platforms and devices and are happy to engage

with potential partners over customised options. Although the UK remains your primary market what steps will you be taking to expand the LCG brand internationally and what plans do you have for extending your client acquisition efforts into new regions around the world?

The UK will continue to be a core part of our market especially

since spread betting is still a product very much in demand and with volatility reigning supreme since the beginning of the year, we would expect that to continue in the run-up to the Brexit referendum. We may also look to more actively extend this service into Ireland. We already have a core client base there. We have launched in Italy, Poland and Germany and we plan to build on this quite quickly. The comprehensive digital marketing strategy that we have employed has helped us to identify and realise where the best opportunities lie. I will also tell you that we like Eastern Europe and Asia; and the Middle East is also on the radar for future expansion.

Founded in London in 1996 as a proprietary trading business, LCG is a firm with a long heritage. What are your key objectives for the business over the next few years and where do you hope to take it? We intend to take the best parts of the old heritage while embracing the future. We have recently moved our Headquarters to Knightsbridge which underlines my vision for LCG. We look to build a brand that reflects and builds on this. As one of the UK’s leading spread betting companies we will continue offering great value for money and an unrivalled customer service to our clients.

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While New Zealand falls squarely within the Australasian geography and has a small number of significantly sized institutions and corporates, it is the Australian buy-side that promotes much of the demand from the area’s foreign exchange market as a whole.

Defining the buyside, Michael Correa, managing director and global head, corporate and institutional sales and debt capital markets at Westpac, divides the constituency into two main groups, the top 50 corporates who are essentially customers of the banks who

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Australasia –an emerging powerhouse of digital FX innovation


Richard Willsher reports on how a strong regulatory environment coupled with increasing demand for new, more efficient trading technologies, particularly from buyside firms is driving the development of e-FX across Australasia.

borrow money, and the superannuation funds, other institutions, asset managers, central banks, insurance companies and hedge funds who are broadly investors of money. Below these in size of turnover is a layer of medium and smaller sized firms that may

By Richard Willsher


REGIONAL e-FX PERSPECTIVE

also have international dealings and so seek foreign exchange services.

These groups represent the demand side of the picture. The supplyside are the main banks in the region that comprise the large international universal banks and the large and smaller local Australasian banks that handle the bulk AUD and NZD liquidity – though this is changing in character, as we shall see.

BUYSIDE DEMANDSIn this context technology is underpinning as well as changing the entire market across the region. Corporates of all sizes are focused on achieving greater price transparency which they are achieving with improved market data and competitive

tension, according to William Richardson, head of corporate and institutional salesfixed income and currenciesat Macquarie Group.

“Companies that have historically met their FX needs through their transactional bank are receptive to creating an FX panel of both bank and non-bank providers,” he says. “While the growth of multi-bank platforms has been driven in part by the desire for more competitive pricing, some corporates have had to adjust their expectations regarding service levels and proactive engagement on hedging ideas.

Some are starting to shift their focus towards getting their strategies right and executing at a price that is reflective of value. Asset managers that we deal with are already

William Richardson

“Companies that have historically met their FX needs through their transactional bank are receptive to creating an FX panel of both bank and non-bank providers.”


Australasia - an emerging powerhouse of digital FX innovation

close to where the interbank market is trading so are more interested in achieving straight through processing (STP) of trades and allocation of large trades, efficiently across many portfolios or sub-funds.”

Mark McCall, head of electronic trading at National Australia Bank (NAB) reflects a similar viewpoint. “Among the top 100 listed companies we have seen a shift away from traditional phone dealing to multibank electronic execution,” McCall says. “The drivers include ease of execution, access to the best available price, STP and post trade functionality as well as a

reduction in operational risk. More recently, those companies outside the top 100, who would typically have smaller treasuries, are seeking similar efficiencies in their FX dealings, but not necessarily within a multibank environment. Local banks are responding with their own single bank offerings. We expect online execution to increase in place of traditional voice execution as banks work with clients to offer execution tools that are cost effective, transparent and reduce operational risk.”

Westpac’s Michael Correa notes that the major corporates have

been heavily marketed over the last five years if not longer by the multidealer platforms. He says that in that respect Australia is mature market.

“There shouldn’t be any surprises with the way we operate in Australia as compared with anywhere else in the world. But further to the sub-top 50 group, the middle market, this is where our single dealer platform has had an impact. If you look at the landscape in Australia, there are substantial changes that have been happening over the last two to three years in the upstream and downstream

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Foreign Exchange Turnover by Instrument a,b

Foreign Exchange Turnover by Currency a

Source: AFXCSource: AFXC

Source: 1. Euromoney FX Poll 2015. Measure of market share from 3,794 FX industry votes. Westpac Institutional Bank is a division of Westpac Banking Corporation ABN 33 007 457 141 AFSL 233714 (“Westpac”). New Zealand: In New Zealand Westpac Institutional Bank refers to the brand under which products and services are provided by either Westpac Banking Corporation (NZ division) or Westpac New Zealand Limited, the New Zealand incorporated subsidiary of Westpac Banking Corporation. A copy of the general disclosure statement for each is available from any branch in New Zealand. Both entities are under the prudential supervision of the Reserve Bank of New Zealand. U.K.:Westpac Banking Corporation is registered in England as a branch (branch number BR000106), and is authorised and regulated by the Australian Prudential Regulatory Authority in Australia. WBC is authorised in the United Kingdom by the Prudential Regulation Authority. WBC is subject to regulation by the Financial Conduct Authority and limited regulation by the Prudential Regulation Authority in the United Kingdom. Details about the extent of our regulation by the Prudential Regulation Authority are available from us on request. Westpac Europe Limited is a company registered in England (number 05660023) and is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. China, Hong Kong, Singapore and India: Westpac Singapore Branch holds a wholesale banking licence and is subject to supervision by the Monetary Authority of Singapore. Westpac Hong Kong Branch holds a banking licence and is subject to supervision by the Hong Kong Monetary Authority. Westpac Hong Kong branch also holds a licence issued by the Hong Kong Securities and Futures Commission (SFC) for Type 1 and Type 4 regulated activity. Westpac Shanghai and Beijing Branches hold banking licences and are subject to supervision by the China Banking Regulatory Commission (CBRC). Westpac Mumbai Branch holds a banking licence from the Reserve Bank of India (RBI) and is subject to regulation and supervision by the RBI. U.S.: Westpac operates in the United States of America as a federally licensed branch, regulated by the Office of the Comptroller of the Currency. Westpac is also registered with the US Commodity Futures Trading Commission (“CFTC”) as a Swap Dealer, but is neither registered as, or affiliated with, a Futures Commission Merchant registered with the US CFTC. Westpac Capital Markets, LLC (‘WCM’), a wholly-owned subsidiary of Westpac, is a broker-dealer registered under the U.S. Securities Exchange Act of 1934 (‘the Exchange Act’) and member of the Financial Industry Regulatory Authority (‘FINRA’). This communication is provided for distribution to U.S. institutional investors in reliance on the exemption from registration provided by Rule 15a-6 under the Exchange Act and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors in the United States. WCM is the U.S. distributor of this communication and accepts responsibility for the contents of this communication. All disclaimers set out with respect to Westpac apply equally to WCM. If you would like to speak to someone regarding any security mentioned herein, please contact WCM on +1 212 389 1269. DW_WBC749A1_EFX

Our first rate credentials mean that we are strongly positioned to assist customers in the regions in which we operate. As a global leader in AUD and NZD, we are committed to investing in our eFX technology, expanding our global market coverage and continuing our investment in Asia.

To find out how a relationship with Westpac Institutional Bank can benefit you, contact [email protected]

No.1 for client services globally in the AUD/NZD/CAD bloc1

No.1 Global AUD/USD Trading1

No.1 ranking for client service in the APAC time zone1

No.1 ranking for Quantitative Research1

Australian Bank for FX, globally1.

WBC749 Euromoney FPC 170x225 FA1.indd 1 24/02/2016 11:07 amWestpac Ad.indd 1 16/03/2016 12:52



way through to payments. From the corporate to the commercial and SME segments we offer different solutions. We have not specifically invested in competing with [Deutsche

Bank’s] Autobahn or some of the other portals of the major international banks. We’ve deliberately not done that. We felt that there wouldn’t be the value that we were creating for

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way that finance departments are working on the use of technology. Whether it be accounting systems and the like that have given them a greater visibility or an ability to look at where they can start using single dealer platforms. There is definitely a trend that we are seeing now, that’s occurring within the banks and our clients. It’s evolving but it’s evolving from a marketing tool to an efficiency tool.”

Correa’s colleague and head of financial markets e-commerce Giulio Katis adds, “We provide an end-to-end solution for our customers. It’s targeted for our core banking customers although we do have some non-bank customers who use our portal for FX. It’s all the Product Usage – Australia Corporates Electronic trading users

Electronic Trading – Australia Corporates FX users

Source: Peter Lee Associates - Market Dynam

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our customers versus what they might already have.”

GEOGRAPHICAL CONSIDERATIONSTom Robinson, head of sales at MahiFX, the market making technology provider, compares Australasia to Scandinavia, saying the Australian firms invested in technology early on, so are quite advanced generally. There is a high penetration of technology among the population. He says it also helps that it has a reasonably large

population but significantly is on the doorstep of greater Asia, particularly of China.

Certainly the large banks in the region see themselves as players in the greater Asian marketplace. For example, Michael Correa, defines Westpac’s activities very clearly. “We’re not a universal bank. At the end of the day we are an Aussie / Kiwi specialist. Our credentials depend on our ability to deliver Aussie / Kiwi. It’s not about trying then to compete for the rest of the G10 or the EM space. It’s not our strategy.”

“We are part of Asia,” says Correa, “so we’ve got an Asian business and that is focusing

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Advantages of Electronic Trading Platforms – Australia Corporates Electronic trading users

Mark McCall

“We expect online execution to increase in place of traditional voice execution as banks work with clients to offer execution tools that are cost effective, transparent and reduce operational risk.”



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back to our Aussie core. What we are trying to link into is the people, the trade and the capital flows that operate between Australasia and the rest of Asia. You can’t cover every market in Asia. Our focus is based on China, India, Singapore and Hong Kong where our hubs are. We have a very big presence in Asia and doing very well there. But we are not trying to be all things to everybody in Asia at the same time. We are market makers in the markets where we are present.”

IMPACT OF REGULATION AND OTC DERIVATIVE REFORMSRegulation is also pushing the market towards technology as NAB’s Mark McCall explains, “Regulators are pushing for increasing levels of electronic trading and automation to increase transparency and reduce the potential for the misconduct issues that have affected the industry. Attention is now turning to the detailed behaviour of algorithmic execution and market making systems, which is a positive development to ensure a level playing field for those competing in the best interests of customers. The development of a global code of conduct should clarify the standard to which electronic participants should be held,” he says.

In this regard the Australian Securities and Investments

Commission (ASIC) in December last year released Derivative Transaction Rules (Clkatisearing) 2015 (DTR) providing detail of the mandatory central clearing and reporting of over-the-counter (OTC) derivatives. This represented the last piece of the Australian regulatory authorities’ response to the G-20 commitments to reform the market following the global crisis.

The new rules cover interest rate derivatives denominated in AUD, USD, Euro, GBP and Yen. They include fixed-to-floating swaps, basis swaps, forward rate agreements and overnight index swaps. DTR also defines the domestic and foreign entities that will be subject to mandatory clearing. The rules will take effect on 4th April this year.

SKILLSETS AND NEW CHANNELSMeanwhile the shift by the banks to new technology does present them with some challenges. With

Giulio Katis

“Fixed income is something where Australia isn’t as electronic as the rest of the world. It will be interested to see at what rate that develops.”

Michael Correa

“If you look at the landscape in Australia, there are substantial changes that have been happening over the last two to three years in the upstream and downstream way that finance departments are working on the use of technology.”




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small, specialist, technology companies developing disruptive technologies (see panel) which may enable either competitors or new market entrants to steal a march, the banks face the decision whether to engage in a costly and time consuming

Product Usage – Financials Electronic trading users

Electronic Trading – Australia Financials FX users

build-your-own approach or to buy in the solutions they need. Fortunately however, the banks are finding what might be termed a middle way.

Perhaps the reason for the way Australia has become one of

the world’s leading regions for capital market e-commerce innovation is that it is able to easily draw on international technology. For Alex Mackinnon General Manager of leading regional MT4 broker AxiTrader it boils down to personnel. “It comes down to having a highly skilled workforce. We’ve got a lot people that have returned to Australia with a good deal of global experience working in major financial centres, and for large percentages of their careers. Those are the kinds of people you can build your local industry on the back of. When you add that to the overseas talent we can attract, whether they be from a financial or technological background, you end up with a very accomplished and multifaceted workforce. The blend of



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expertise and experience, combined with an open-minded attitude, puts us in a great position to be able to take our service to the world.”

Macquarie’s approach according to William Richardson is to build its own platform while adding a range of supporting services. “In building our e-FX platform, we were focused on ensuring clients had access to a range of market information and news feeds, analytical tools to assist them with their decision-making process and two-way pricing. Our platform is supported by bespoke currency market analysis, appropriate hedge solutions and tactical trade ideas. In making markets we are agnostic on whether clients are buying or selling.”

Advantages of Electronic Trading Platforms – Australia Financials Electronic trading users



The embedded skillsets, scale and sophistication of Australia’s superannuation and funds sectors and the country’s ability to develop wealth management and investment products to meet the increasing demand from Asia’s burgeoning middle class and institutional investors has all strengthened the value proposition for it becoming a leading a Renminbi hub. Sydney has a strong case for being the centre of renminbi related trading activities but it is also looking to work closely with Melbourne to capitalize on the strengths of both centres.

Australian banks are currently focused on providing the full range of services to companies trading with China, including foreign exchange, derivatives products for hedging, trade financing and RMB banking facilities. The major Australian banks are also focused on Australian companies looking to invest in China, and providing assistance to Chinese companies looking to invest directly in Australia. Chinese banks with a presence in Australia are also looking to assist Chinese companies investing there.

Australian Renminbi hub




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There is an active and growing retail trading market throughout Australasia. A recent online broking report by Investment Trends shows that the number of active online investors trading shares rose by 4% in the first six months of 2015. 620,000 unique Australian investors placed at least one share trade through an online broker in the 12 months to June 2015. Another finding was that six out of ten Australian online investors

used a mobile device in relation to share trading up from 53% the previous year, ranking Australia middle of the pack rank among seven key markets surveyed by Investment Trends.

This upward trend is being driven by higher adoption of mobile trading amongst new investors and Gen Y traders. Investors under 35 years of age were overwhelmingly more likely to be mobile users.

A dynamic retail sector Although the Australian Securities and Investments Commission (ASIC) restricted leverage trading for retail investors back in 2012, FX still remains a hugely attractive market for them. Last year’s Swiss National bank event and the volatility in the renminbi are still fresh in the memory, but there are plenty of ways into FX trading for private individuals in a well-regulated market.

“From an AxiTrader perspective,” says Alex Mackinnon, “regulatory

and services. One of these is Westpac, as Giulio Katis explains: “We expect to follow suit with some other parts of

the world with our offerings. In terms of distribution itself or methods of access, there are always new platforms or new ecosystems arriving. So there are a number cloud-based providers and accounting platforms that are plugging in new banking products and services that are more for the middle market than the larger corporate segment. It is unclear what will happen in that middle market space. Mobile is definitely getting a lot of traction among our consumers and our business banking customers. That’s a new delivery channel that we expect to see growth in. FX is a pretty mature

Meanwhile a number of sellside firms are exploring new channels through which to deliver their products

Technology is underpinning as well as changing the entire market across the region

Source: InvestmentTrends




market electronically, I guess because it’s global. But fixed income is something where Australia isn’t as electronic as the rest of the world. It will be interested to see at what rate that develops.”

He goes on to add that the bank is currently looking at proof of concept tie-up with Ripple, the global settlement network. “A typical user,” explains Katis, “might be a migrant that wants to send a few hundred dollars overseas and the fees are traditionally prohibitive. So we are looking at alternative solutions in that space for example.”

Also looking ahead William Richardson admits that while it is difficult to predict the future, the outlook for the incumbent banks looks moderately

secure. “We would anticipate the continued dominance of Australian retail banks given the scale of their corporate lending, transactional banking and integrated payment solutions

developments aren’t likely to impede our strategies. Nor should they for any broker that is already regulated. If further regulatory developments happen to show up any brokers operating in an unregulated manner, I can see flow-on effect of traders seeking out brokers with a sounder reputation and accreditation.”

While the scale of retail FX trading in Australasia may not be on a par with that of private individuals in

Japan, nonetheless there is vibrant activity both in the major currency pairs, and in other instruments with similar technology access. Mackinnon explains: “One

Alex Mackinnon

“If further regulatory developments happen to show up any brokers operating in an unregulated manner, I can see flow-on effect of traders seeking out brokers with a sounder reputation and accreditation.”

of the key aspects is the continued centralisation of portfolios. While there’s still plenty of demand and growth within the traditional or core services like forex and metals, the breadth of products available to trade has expanded, and continues to expand, considerably.

As you add more instruments, for example non-deliverable forwards (NDFs), diversification is encouraged. And when you can add that capability within existing platforms and infrastructure, it’s much easier for buy-side clients to broaden their outlook beyond just the traditional or more familiar instruments.”

Australia has become one of the world’s leading regions for capital market e-commerce innovation




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- albeit with the non-bank providers and investment banks continuing to gain market share. It would also be reasonable to expect greater scrutiny on pricing FX deals correctly to meet minimum ROE/RoRC hurdle rates and consequently, greater consistency in pricing for all clients segments.”

CONCLUSIONIn summary, what emerges from an overview of e-FX trading in Australasia is how quickly the scene is changing. On the one hand regulators are rapid in reflecting new regulation and best practice that is being forged in Europe and North America. On the other hand banks are moving to more efficient and effective single bank portals as well as supporting activity on the global multi-bank platforms.

Their focus is increasingly on customer convenience and efficiency at all stages in the trading cycle. At the same time new technologies and capabilities are being brought to market by young, agile innovators, enabling customers from across the buy-side spectrum, from large institutions to individual retail investors, to gain better more cost-effective e-access to global FX. Australasia currently presents a very vibrant digital FX trading scene.

Even as buy-side customers of all sizes are gaining increased focus from the major banking groups, there is cold wind blowing from technology providers. These are looking to erode the traditional buy-side to bank to market model and disintermediate the banks.

“When we speak with the different clients types from asset managers through leveraged money to banks and brokers one of the biggest next developments is in their e-FX trading business. All the players are all taking more control of their execution, looking how to reduce execution costs and reduce dependancy on LPs by being market makers themselves,” says Tom Robinson at MahiFX.

“Clients are all becoming more accountable for their trade execution. In the past buy side firms might have used a single/multi bank platforms to cross spread and transfer risk, what these firms are doing now is taking reponsibility for the execution. They can do this using the MahiFX MFX Vector platform. Ultimately the way to minimise trading cost is to be a market maker. We have asset managers in Australia that we are helping to become market makers. They no longer want to cross spreads for a significant percentage of their flow. The clients also don’t want information leaked to the market in illiquid timezones or when executing large trades. So in my view a major change in prospect is this move to buy side firms becoming 1 sided market makers to passively reduce risk.”

So it plays to providers such as MahiFX for would be e-FX market participants to quickly consider what they want to do in the market, what technology they need to do it and then decide whether to buy or build their technology. It takes time and money to build, so buying can be the more suitable solution.

Disruptive technologies

Tom Robinson

“Clients are all becoming more accountable for

their trade execution.”

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e-Forex speaks with Peter Plester, Head of FX Prime Brokerage at Saxo Markets, the Institutional Division of Saxo Bank Group.

Saxo Markets

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MEET THE TEAM

Peter, you joined Saxo Markets in 2014 after nine years at Rabobank. How would you describe the state of the FX Prime Brokerage industry today and the way that it has recently been evolving?

The FX Prime Brokerage industry is generally in good shape, despite the drastic changes

experienced in the past 12 months. On a daily basis, hundreds of thousands of trades are entered into, by thousands of counterparties, given up and settled with great speed and accuracy. Even when stressed (during the SNB event for example), the prime brokerage plumbing held together – it’s

Saxo Marketsa remarkably efficient network operating in milliseconds and involving trillions of USD every day.

The main changes in the past year have been with regards to the best way to further mitigate or control risk. We all know that some of the traditional bank prime brokers have



stopped offering FX PB service altogether, some now only offer it as a complimentary service for very large clients, and some have changed their fees and client acceptance criteria –all which have raised the bar for the size and creditworthiness needed to utilize their services.

As well as scrutinizing the client more closely, prime brokers have also been looking at ways that a new generation of low latency technologies can be used to reduce risks. The introduction of dynamic limit allocation, kill switches and ‘pre-trade’ risk controls (where a client’s exposure is calculated before a trade is allowed) are a key part of the rapid evolution of the FX PB market.

What do your day to day activities within Saxo Markets usually involve?

I have three main roles. Firstly, as a product expert, I head up the sales effort for our FX Prime Brokerage service. Secondly, I work with our clients and explain the best setup for their needs; and thirdly, I interact with our API specialists and E-Trading Client Services team to ensure services are delivered in an efficient and timely manner for clients.

Saxo’s institutional business provides trading, liquidity and post-trade services, as well as well-established white label solutions. How does the FX PB unit fit into this overall structure?

FX prime brokerage relies heavily upon connectivity, liquidity, credit and post trade reporting, so it is reliant on a number of different people and teams all operating in unison. Saxo Markets operates from three geographic hubs, which each containing members from relevant teams to offer seamless 24/5,5 support globally.

Given our rich retail heritage and disruptive use of technology for innovation, Saxo’s infrastructure (systems, people

and processes) is cutting edge and built to scale for hundreds of thousands of concurrent clients. Leveraging this capital toward addressing FX PB client’s pain points is a natural extension of our core business that enables us to easily support hundreds of institutional clients in a very efficient way. This gives us a huge lead over other prime brokers, which tend to operate in silos. To date, customer feedback has certainly supported our approach.

Who are the other key members of your FX PB team and what responsibilities do they have?

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“The introduction of dynamic limit allocation, kill switches and ‘pre-trade’ risk controls are a key part of the rapid evolution of the FX PB market.”

Peter Plester

Saxo Markets



MEET THE TEAM

Saxo Bank Group is present in 26 countries around the world

Kurt vom Scheidt is Global Head of Foreign Exchange

Lucian Lauerman, who heads up the API business, makes sure that the bank’s infrastructure and market connectivity are optimized and that solutions are delivered to our meet clients’ needs, whilst Christian Lonborg Thomsen ensures that clients have access to the best possible liquidity by managing relationships with numerous bank and non-bank liquidity providers.

Nicolas Khouri heads our global E-Trading Client Services team, who manage our FX PB clients’ progress through pre-sales and on-boarding, monitor & optimize their execution & liquidity, and provide support

for any problems they may face—around the clock.

Kurt Vom Scheidt is our Global Head of Foreign Exchange, and is responsible for the overall strategy of the business. He is based in our Singapore office, underscoring how important the Asian region is to our business.

Neil Browning heads up FX Sales for the bank and is based in Copenhagen.

What types of institutional clients are your team mainly providing services for? Saxo Markets’ strength is in



servicing mid-sized clients such as hedge funds, asset managers, brokerage firms (which may have both institutional and retail clients), proprietary trading firms and family offices. Many of these clients previously used the traditional bank PBs but are now looking for a more technology driven/multi-asset product. Unlike most traditional Prime Brokers, by default, Saxo does not also provide its own FX pricing and liquidity to our Prime clients, making us a non-conflicted service provider that focuses on aligned client interests regarding optimized executions.

Most of the risk management in FX PB has traditionally been on a post-trade basis but things changed after the SNB event last year. How important are pre-trade risk controls for Saxo Markets and how do you leverage them to allocate credit more freely and effectively?

Traditionally, client activity was controlled on a ‘post trade’ basis. This meant that only after deals had been executed and given up to the prime broker could an accurate calculation be made about clients’ overall exposure. This is less inefficient for a client doing relatively few trades per day with minimal NOP usage, but is far from optimal when it comes to a high frequency trader, which could potentially transact thousands of trades a second.

Saxo places great importance on controlling risk on a pre-trade basis and has proven to be a thought leader in our industry, including due to our pioneering roll out of pre-trade risk management practices. Our market access infrastructures allow us to provide clients with access to abundant liquidity across multiple venues/sources, whilst providing efficient protection for both the bank and the client against breaking their trading limits. This is one of the reasons why Saxo is still able to provide a comprehensive FX PB service to mid-market FX PB clients.

Why do think Prime of Prime (PoP) brokerage has become so popular and what do you see as the key operational advantages that it offers?

Other bank’s PBs have been more reluctant to service the small to mid-tier clients looking

for credit intermediation. Saxo’s technology-driven FX prime brokerage however, offers much more than just access to credit.

Our tripod of FX PB services of course includes the essential service of credit intermediation, but also includes low-latency co-hosted connectivity, which then supports the third leg of provisioning customized liquidity that is optimized for market access for our clients, based on their own unique flow characteristics. We are able to offer this service to clients in a scalable fashion because we have decades of experience tailoring liquidity pools and measuring execution effects for our own hedging purposes, ranging from multiple systematic and algorithmic approaches to manual trading.

The FX PoP space has started to get quite crowded so what key factors should influence a firm’s choice of provider?

What is essential is to choose a well-capitalised PB with broad and deep access to liquidity. It’s not enough to just provide clients with access to a price stream; there should be a choice, including bank and non-bank LPs as well as a wide range of ECNs on offer.

We offer clients true direct market access (DMA), with connectivity options ranging from making markets directly

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Lucian Lauerman heads up the API business

Saxo Markets



into ECNs to taking via relationship feeds (either on a pre-aggregated anonymous, or semi-disclosed basis). Saxo is very well regarded and positioned in the top tier of the PoP market, being the innovators in providing clients with access to cutting edge risk management tools.

Post-trade services such as the ability to clear large numbers of micro tickets, block trade allocation (available to investment managers at no extra cost) and real time account management are also key differentiators to look for when choosing a prime broker. Post-trade reporting that address a particular client’s specific needs—for example, an FX broker: EOD files for reconciliation, daily swap rates, and LP flow split transparency reports—should also be considered.

For the buy-side, real-time notifications that can feed into a middle office system—such as ‘STP’ing’ trades to eliminate manual re-keying, or automated credit utilization alerts—can help clients monitor and reduce risk. For those looking at platform building, firms can look for products like Saxo’s OpenAPI, which allows our clients to hook directly into our front- and back-office infrastructure.

Additionally, Saxo is being disruptive in digitizing

capital introduction, with its ‘SaxoSelect’ product, an important new service for emerging investment managers. Beyond this, users can also have access to trade many other asset classes on the same platform. The depth and breadth of our offering is what makes Saxo Markets unique.

Many large banks still feel they have compelling FX PB offerings. Do you think that competition between these banks for the big clients, and among the PoPs for the smaller clients, is more intense than that between the banks and the PoPs?

Yes. One of the most apparent changes in the PB market over the past year has been the ‘rightsizing’ of clients to providers meaning that the cut off point for clients between a traditional PB and a PoP is much more clearly defined. Clients now need to look at how far down the chain of PoP providers they want to go, and where they want their assets held. That said, Saxo are also achieving success with larger clients that realize the benefit of additional value-added services that some PoPs can offer

MEET THE TEAM

Nicolas Khouri heads up the global E-Trading Client Services team

Saxo is being disruptive in digitizing capital introduction, with its ‘SaxoSelect’ product



compared to other traditional relationships.

Increasing numbers of firms are now looking at multi-asset trading. In what ways can a PoP make trading in multiple instruments more margin-efficient?

One of the benefits of prime brokerage is the ability to net trades and exposures from multiple sources. When you add to that the ability to cross collateralize different financial instruments against each other within the same Saxo account, the advantages are clearly apparent.

Saxo Bank Group has always invested very significantly in new technology. Why is that so important in providing FX PB services and how does it help your firm to differentiate itself from competitors?

The vast majority of trading is now done electronically at very high speed. Being able to efficiently clear a huge number of trades whilst managing the risks in a controlled manner relies on having the latest technology.

When Saxo assessed the opportunities in the PB market several years ago (well before the SNB event), it was apparent that the efficiencies of a technology-led FX clearing solution for our clients by making use of pre-trade risk controls, built on Saxo’s high volume transaction infrastructure, could be a key differentiator for attracting clients. As we have built out the offering, choice has also been important as one size doesn’t fit all – Saxo provides a wide range of liquidity options in multiple data centres around the globe.

What plans do you have for further expanding your FX PB business beyond its traditional hubs of London, Copenhagen and Singapore?

We feel our clients are well supported by these three main institutional hubs. Beyond this, Saxo is present in 26 countries around the world, so we are already close to our clients. The three centres of excellence make it more efficient to service their needs on a 24hr basis.

Many large banks remain reluctant to do business with smaller funds. What impact is that likely to have on the future growth prospects of Saxo’s FX PB unit?

We have seen strong growth in this area, as Saxo has the tools, products and expertise available for these smaller funds to operate and flourish.

Our legacy in working with emerging institutional clients on their path to growth over the past 20 years has given us a huge amount of experience with clients of this size.

We have extremely flexible back-office solutions and account structures that can be adapted to grow with our clients and support their expanding requirements over time. We expect this client segment, and Saxo’s share of it, to continue to grow.

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Christian Lonborg Thomsen manages relationships with our liquidity providers

Neil Browning heads up FX Sales

Saxo Markets


Please e-mail this form back to:

[email protected]

165 Subscription Ad.indd 1 18/09/2014 15:57Subscription Ad.indd 1 16/03/2016 11:37

For the international FX community, this moment has yet to occur. The world of automated cross-regional trading operates differently to most asset classes. This is because of the intrinsic link between lower latencies and fi nancial advantages. There are very few comparative commercial events where a single millisecond can have such a powerful impact.

Latency defi nes an individual company’s success or failure. It affects how trading fi rms develop their strategies. Latency is even fundamentally rewriting how fi nancial exchanges run their operations and how they present their value to the global marketplace. A whole industry of specialist telecommunications providers,

IT colocation operators and industry innovators has arisen to meet the relentless drive for faster data transmittance. Latency matters – this is a fact that will never change and a statement that applies to both the institutional FX and retail markets. If the opposite was true, resources such as these would no longer exist.

THE OPPORTUNITIES AND CHALLENGES OF EMERGING MARKETSSo why are we collectively still talking about it? Arguably because more work is still needed from a telecommunications standpoint, especially if the FX community is to realise its vision of a truly globalised economy. Major investments in recent years to European, North American and

Latency and FX – Why it still matters


In every industry, there is always a milestone moment when network latency decreases in importance and is replaced by other IT purchasing considerations – for example, network reliability, overall cost, risk management or security.

Latency and FX –

transatlantic infrastructure have simplifi ed regional point-to-point connectivity, however this plateau effect has certainly not diminished the relevance of latency. Data speeds have merely faded into the background for these markets. European and North American currency traders still require extremely accurate pricing and the ability to react as rapidly as possible. The fact intra-day rises and falls still make international mainstream news highlights this need.

Where progress is needed is with the converse, emerging markets. Take Asia as a case study – the growth opportunities are extremely lucrative, yet new exchanges lie within diffi cult-to-access regions that are overly costly and diffi cult to

By Michael Ourabah, CEO, BSO Network Solutions

110-113 Expert Opinion.indd 1 16/03/2016 15:32


interpret. Less regulation, currency restrictions, market transparency and governmental telecommunications underinvestment only add to the challenges facing FX traders.

There is a strong demand for integrated network, data and infrastructure services that improve on existing speeds, market intelligence and the cost of collocating directly with an exchange. High frequency trading (HFT) has accelerated this demand considerably.

2015’s currency falls are still fresh in everybody’s mind, however there is a degree of resilience in certain Asian economies when we move away from core pricing trends. This is echoed in Credit Suisse’s latest investment performance update on the sector.

According to its analysts, the majority of Emerging Asia countries – as per Credit Suisse’s definition; a set of ten countries includes China, India, Malaysia, Philippines, Singapore, South Korea and Thailand – are strong performers in the ‘FX reserves / external debt’ categories and dramatically outperform their Latin American counterparts in this measurement.

Yes, there are certainly still several severe macro factors that threaten these Asian economies, however some analysts are cautiously optimistic about the general

health of the region once China’s currency is removed from the equation.

For example, the same Credit Suisse report states when discussing Asian emerging market currency declines, “The only exceptions are MYR, and INR where faster growth and fairly high inflation should keep rates high. In China, policies to internationalise the currency and an improving current account should provide support.”

DELVING DEEPER WHERE IT COUNTSSo what do these interpretations have to do with latency? Well, three months into 2016 and the observation on INR seems to be accurate. This is partly because some Asian exchanges have invested significant amounts of capital in developing their network technologies to court international investors.

Let us analyse Singapore. Its competitiveness on the global stage has risen – an unsurprising fact considering traders can now connect to Singapore Exchange (SGX) from London in just 163ms. The benefits for FX traders from such a low latency are well documented, however an underreported point of view is how it supports the exchange’s FX objectives. Latency is crucial, as the organisation must be able to cope with intensive surges in demand. The results have been impressive. In January 2016, both the Indian Rupee and Chinese Yuan spiked considerably compared to the same period in 2015. INR/USD Futures volume was up 27% month on month, 125% year on year. USD/CNH Futures showed a 24% monthly drop, however year on year growth was up a colossal 504%. SGX’s


EXPERT OPINION

Latency defines an individual company’s success or failure



overall FX Futures volume was 119% up on the same period in the previous year.

Similar outcomes apply to the Middle East. Dubai occupies an attractive geographical position between markets in the east and west. Last year, Dubai Gold and Commodities Exchange (DGCX) delivered a number of network enhancements and innovative new market data functionalities.

What has been the result so far? In December, the exchange celebrated its tenth anniversary with its highest ever trading volume and the launch of its Chinese Yuan Futures contracts. Many commentators expect Chinese currency devaluation to occur for a sustained period of time, which is why traders are searching for low-latency access to FX products that mitigate this risk and lessen the impact of the slump, e.g. DCGX’s ability to track CNH price returns and being able to settle in USD.

Another positive result for DGCX has been Indian Rupee Options volumes growing three-fold year on year –an increase of 352% in January 2016 compared to the year before. This is in part due to, as the exchange puts it, “the increasing use of derivatives to hedge foreign exchange volatility particularly in emerging market currencies such as the Indian Rupee and South African Rand.”

LATENCY MATTERS MORE THAN YOU THINKIn a way, these examples demonstrate the influence that latency still has over institutional and retail investors, whether or not they are consciously aware of the technology decisions they are communicating to IT departments.

Obviously, the above volume increases will have occurred irrespective of network investments because of market conditions, however from the perspective of international traders, it would have likely been a more frustrating, costly and potentially less profitable trading experience.

With more volatility on the horizon and little respite being predicted for the majority of

currencies in the emerging market class, it is more important than ever to have a resilient, multi-class emerging market strategy. Network reliability is definitely critical, but availability is little use when financial results are impeded by sluggish market data, recurrent slippage or inaccurate quotes.

One area to remain cautious of is regulation. Many emerging markets are heavily deregulated or unregulated. This can change abruptly, as can the sentiment for trading subsets. A case in point is the negativity associated with high frequency trading and how China’s market regulators have reacted.

The shift in attitude accompanies worldwide concerns of market spoofing. Essentially, the creation of

Traders can now connect to Singapore Exchange (SGX) from London in just 163ms



mock orders to unfairly influence pricing. There are a number of regulatory options being debated by authorities. These include timed delays on high-frequency trades or transactional penalties if a trading house cancels a large volume of trades in a short


EXPERT OPINION

time period – both of which are clear examples of the authority that latency has over modern markets.

The same applies to colocation, when traders physically host infrastructure in an exchange’s data centre to further minimise the effects of latency. China’s proposed changes include assessing the impact of these technical agreements and the legitimacy of ever-increasing trading speeds.

Developed markets are ahead in this respect. The Japanese financial watchdog recently announced its intentions to evaluate colocation following the news that HFT now accounts for 53% of trades on the Tokyo Stock Exchange.

As Bloomberg’s Yuri Nakamura points out, Japan is following, “the European Union [which] has sought to make electronic

traders more accountable, while Australia’s watchdog said in October it would investigate futures trading after conducting a second, detailed review of HFT in its markets.The operator of Canada’s largest stock exchange last year adopted a speed bump to slow trading on one of its venues, while the U.S. in March proposed requiring HFT traders to register with regulators.”

SLOW DOWNDo developments such as these suggest that latency is reaching its saturation point? Not just yet. Having the ability to adapt immediately to pricing signals occurring locally, within the region and those marketplaces further afield is a core requirement for institutional FX. From the retail perspective, as more affordable global connectivity and easier market data access continues to occur, latency will increase in importance. Swiss National Bank’s (SNB) decision in 2015 to stop Swiss Franc (CHF) trading and Alpari’s insolvency remain a tale of caution for retail FX traders, but also a valuable lesson in the speed of which the market can change and the need for accurate pricing at all times.

That reason alone is why latency still matters and why it will be an essential consideration for the foreseeable future.

There is a strong demand for integrated network, data and infrastructure services


Financial Cloud Services –utilising scalable solutions for FX trading applications

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Dan Barnes investigates why Cloud computing is challenging the status quo in FX and how a diverse range of ecosystems are now available to cater for banks, FX brokers, asset managers and high performance trading firms.

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On 12th February 2016 the UK’s Financial Conduct Authority closed a consultation on the use of cloud technologies by financial services firms. The initiative, reflects a growing awareness amongst authorities that technology innovation needs to be provided with a regulatory framework, as its use increases – the Monetary

Authority of Singapore has also made amendments to its rules to ensure cloud servicing is captured.

These moves are positive for the FX trading environment, in which the adoption rate of cloud components in an end-to-end model has become increasingly common. Until


SPECIAL REPORT

recently, individual components and elements of a system that made up an FX trading environment tended to be discrete and developed in a privately engineered fashion. A firm would often select the component pieces, the systems, the storage, the application of the services, the networks, and the location to engineer it


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Financial Cloud Services – utilising scalable solutions for FX trading applications

in accordance with the trading demands.

“The availability of cloud components have become more widespread and the ability to utilise them has become more prevalent and more feasible,” says Michael Cooper, �Chief Technology Officer for Radianz, BT Global Banking and Financial Markets at BT. “That’s come off the back of an underlying trend around IT provision towards cloud models, from people like ourselves at BT providing more mature cloud capabilities with location sensitivity.” INCREASING ADOPTION RATEThe trend is towards an ever-increasing rate of adoption of cloud, assisted by the formalisation of a framework by regulators and the increasing comfort of traders and

institutions with the level of service that cloud can offer.

The way that market participant are interacting with one another is changing, which in turn has an impact on their need for technology to support and connect with clients. For example, mid-sized players are starting to use direct application programming interfaces (APIs) for customer engagement rather than going through multi bank platforms or publishing through third parties.

“We are starting to see some of the smaller players develop a niche strategy which means they want to directly interact with their end customers and not go via one of the top tiers guys or multi-bank platforms,” says Jay Hibbin, technology strategist, Financial Services for CenturyLink. “So I think we

saw the rise of the multi-bank platforms a few years ago and their ubiquitous use for that market, but now we are seeing the smaller banks who are not in the top five, six or even top 10 looking to establish themselves with a niche strategy focused on a handful of clients who they want to directly interact with. There is some disintermediation.”

The virtualisation of compute power also creates the potential for smaller firms to access major processing resources which can allow them to develop technology more quickly and cheaply than ever before, creating testing environments that can expand and contract in terms of resources as they are needed.

“When you hear about the fintech incubator strategies of pretty much all the major banks

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now, you know that this roughly translates into small tech firms being given a combination of resource at the banks which helps the products they are developing to be better for the banks,” Robin Manicom, head of financial enterprise at data centre provider Equinix. “Banks don’t want to become disintermediated by the fintechs so the banks are just a back office. But it also

means the banks gets to build the technology really that they need and the fintech gets to sell some pretty good business to the banks.”

Both exchanges and banks are moving into FX which gives them a requirement for flexible resource as they establish themselves; where previously they may have been a derivatives market before or a fixed income market they are now becoming a fixed income/FX market.

“That’s really interesting for us because we are seeing that happen only really for FX not the other way around,” says Manicom.

MAKING CONTACT When considering the use of cloud-based technologies in the FX space firms have to weigh up the key things that will enable or inhibit the model to work effectively in the FX market, particularly assessing latency, location and the capacity to reach multiple counterparties or data sources. Traders who were not traditionally interested in low-latency, high-frequency access to liquidity are finding that it is more accessible and therefore interested in that trading model is expanding.

“Previously conversations around cloud were quite disjointed; potentially if you went cloud you almost admitting that you weren’t latency sensitive,” says Hibbin. “It was a business to

Michael Cooper

“The availability of cloud components have become more widespread and the ability to utilise them has become more prevalent and more feasible.”

The availability of cloud components has become more widespread


SPECIAL REPORT

consumer (B2C) play really. Now actually it’s not a B2C play it’s potentially a more mainstream activity because maturity on the cloud side means that platforms are available in proximity to liquidity data centres and so the latency trade-off for going cloud is not necessarily a significant one anymore.”

The maturity of cloud platforms also means that provision is not based upon public cloud alone, it is possible to get isolated or dedicated instances of cloud.

“I have got bare metal services that offer cloud economics but on a physical rather than a virtual kit and I have got private cloud and managed services as well,” says Hibbin. “So I can actually deploy a platform where maybe my trading engine is still in a traditional dedicated model, co-located next to the FX liquidity pools in the market.”

Gordon McArthur, CEO at Beeks FX, a leading provider of virtual private servers, notes that the capacity for provision offers the flexibility to cater for traders at every level.

“Many people using virtual servers are more the retail-type traders who are just starting out and don’t need the resources of a dedicated machine,” he says. “We have a plethora of those users along with many institutional clients who use our dedicated servers; we have brokerage firms who use us to

offer servers to their clients and to host their infrastructure. A lot of our clients are using the Metatrader MT4 platform and often NinjaTrader; there are multiple different softwares, but MT4 is the most common,” says McArthur. “The number of instances they are using and the number of products they are trading will determine the resources they need. The smallest virtual server can handle an MT4 platform and trading while a dedicated server can handle 20 instances and trading across eight connections to multiple firms.”

TECHNOLOGY CONSIDERATIONSAs it considers the technology that will support an FX trading operation, a firm has to look at IT, models and processes that complement the existing system and are consistent with it as well. In the current market environment for many businesses, this must include an awareness that the specific role they play may change as a consequence of regulation. Specifically, where liquidity is becoming shallower – even in what have been considered highly liquid currency pairs – and the sell-side is withdrawing from liquidity provision, there

is the potential for market infrastructure providers, buy-side firms and non-traditional liquidity providers to offer new ways of working.

“In traditional capital markets margins are really being squeezed, markets have completely fragmented over the past eight years, which will be furthered exacerbated by regulation such as MiFID II,” says Manicom. “We also know that all of the market operators are trying to cover each other’s markets; domestic exchanges trying to compete with other exchanges in their own market. So you have got the exchanges and the banks who are obviously happy to support that type of cross regional and global trading, on one hand, while at the other end of the scale you have got the

Jay Hibbin

“Maturity on the cloud side means that platforms are available in proximity to liquidity data centres and so the latency trade-off for going cloud is not necessarily a significant one anymore.”


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new MiFID and Basel regulations coming downstream that require firms to report on everything, driving more investment into being compliant.”

This perfect storm of crushed margins and rising costs creates a real challenge for firms seeking to be competitive. The potential exists for global growth yet that requires investment in technology to support that global presence. With the bottom line is rising higher while the top line is coming down, profitability is compressed making the economics for the usual models for supporting growth harder to operate.

“With cloud technology we can’t create liquidity, we can’t create more trades, but what we can do is we can help drop the bottom line therefore bring in some more profitability into every transaction,” says Manicom.

He asserts that Equinix, along with other technology providers are doing just that with the promise of what cloud is able to deliver. The maturity of the technology, its proven resilience, and the development of new models that allow data to be run across applications without crossing borders are all increasing the confidence that regulators have in supporting its use.

“The year before last the Monetary Authority of Singapore (MAS) had really

been against cloud technology for banks, because it was mainly concerned with data security going offshore,” he notes. “There was sovereignty in Singapore and it more or less decided it didn’t want to see any of the Singapore banking customers’ businesses venturing off with third party cloud providers.”

Then in late 2014 MAS published a set of rules around the inclusion of software as a service (SaaS) within the outsourcing arrangement guidelines, making cloud acceptable as long as it adhered to the existing outsourcing rules; it also addressed the

concept of ‘multi-tenancy’ technology provision which specifically referred to a single platform that serviced multiple tenants.

“Some firms have helped MAS basically understand that data can move around in a highly-encrypted more or less unbreakable fashion and I think that made MAS a little bit more comfortable and understanding of the benefits of cloud coming into financial services,” says Manicom. “That acted as a beacon for the industry as if it managed to convince one of the biggest doubters of cloud that must be seen as a positive step to move forward.”

The maturity of the technology is increasing confidence in it by regulators

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CAUTIOUS PROGRESSResilience is crucial in order to maintain the confidence of traders and regulators; crucially this includes defence against cyber-attacks as well as a sturdy infrastructure. Where clients are not in direct control of the systems that manage data, concerns can be higher.

“I personally am not of the belief that the organisations and service providers specifically servicing financial markets did not providing that level of security,” says Cooper. “Arguably security has become more critical than it’s ever been before. My personal view is that a segment specific service provider like BT, and others, have been best placed to implement,incorporate and maintain best practice security policy.”

As MiFID II will require institutional investors to record the personal details of traders that execute specific orders, even greater defences need to be put in place.

“We have put all of the security measures in place for clients,” says McArthur. “We have got multiple layers of network, a security layer, a front end layer and we give clients

multiple ways to access their infrastructure. Our engineers see people have tried to attack our infrastructure before, and you learn more about those attacks every time.”

To be confident that the cloud capability a trading firms is selecting will be suitable for purpose, it should be made available in a suitable location, which may mean being physically resident in a particular data centre.

“Then your ability to use cloud as part of your system depends Gordon McArthur

“We have got multiple layers of network, a security layer, a front end layer and we give clients multiple ways to access their infrastructure.”

Resilience is crucial in order to maintain the confidence of traders and regulators

on availability in that location,” says Cooper. “If you want to use cloud —either compute or network — in your trading system, then you have to consider whether it’s has an appropriate level of security, the correct levels of availability and a suitable performance profile.”

With FX becoming more regulated as a market, a framework of rules is a useful assist when onboarding new technologies. In the selection process for a third-party provider, certain best practices need to be considered. Among those are the commitment to the provision of cloud services in finance and the extent to which they are underwritten from a regulatory perspective.

“Financial services firms need to ask if they have the sort of


SPECIAL REPORT

infrastructure, the elasticity, and the operational flexibility to respond to dramatic changes in the market” says Cooper. “And as service providers, we need to offer a service with these attributes and the ability to anticipate and adapt to evolving market requirements”.

ALL ABOUT COSTThe effect of reduced liquidity and tighter regulation also changes the priorities of trading firms, so that performance has to be balanced against cost, to mitigate reduced capacity to generate alpha.

“Dial back a few years there would have been FX players, buy and sell side, who would have told you that it wasn’t about cost it was about latency, access to liquidity and about speed to market,” says Hibbin. “Cost was a fourth or fifth consideration and if it meant spending a bit more money to get access to the right datacentre, the right compute, the fastest possible switch, the fastest access network or the right liquidity platforms they would throw everything at it.”

That attitude reflected the high volumes and the huge potential returns relative to the costs, which

meant that firms did not need to focus on element of expense as much. Now there is a more granular focus on cost because the volumes are not as high.

“Returns are not necessarily as great and the level of compliance and focus on FX as an asset class means that actually there are other considerations that you have got to weigh into the balance, in terms of the cost of being compliant, and best execution obligations which are coming down the road for FX,” says Hibbin. “All of that is adding to the cost, meaning that people are going to take a much more pragmatic mature approach. Can they afford to have the lowest latency access to 15 liquidity pools for a given currency pair? Do they need to focus more on a certain specialism, on key customers?”

Latency can often be critical in one or two areas, or particular markets and the traditional FX vendor conversation which would involve a trader wanting to be in all of the points in Tokyo, and in London and in New York, at very low latency, where cost is not an issue are fading away according to the vendors.

“I think those type of opportunities certainly from a supplier side are dwindling because clients are taking a more cost focus pragmatic approach,” says Hibbin.

Robin Manicom

“With cloud technology we can’t create liquidity, we can’t create more trades, but what we can do is we can help drop the bottom line therefore bring in some more profitability into every transaction,”


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Seizing the opportunities of new disruptive technologies in FX


Dan Barnes explores the nature of some of the so called “disruptive technologies” and where competitive advantages may lie for FX fi rms who are fi rst to seize the opportunities that these can deliver.

A revolution is happening in fi nance. Legacy technologies are facing replacement, not from new iterations of themselves, but by entirely new models of technology-enabled working. The blockchain – a distributed ledger system that is used to underpin bitcoin transactions – is being looked at as a model for exchanging central bank money. The ability to query every internet document via Google is being replicated within the enterprise by Apache Hadoop, an open source big data storage and retrieval system that is based on a paper written by Google engineers.

Consequently data no longer needs to be stored in a pre-defi ned database, it can be broken into chunks and distributed across hundreds of servers, then pulled back

together using simpler queries than are needed using traditional relational databases.

GETTING AN EDGE IN FXFor fi rms trying to get an edge in the FX market, speed of execution is still key and fi rms are addressing market fragmentation and manage liquidity mirage, says Terry Roche, head of FinTech Research at analyst house Tabb Group.

“Speed is just a component of that,” he says. “As trading is more multi-asset FX is key, particularly in Europe where a vast number of trades have currency dynamics - there is a sterling-euro exchange all day long - so providing analytics that make sense of venues is a priority.”

The breadth of ideas is considerable says Franck Mikulecz, Managing Director of BAXTER-FX, a provider of FX trading tools and services.

“Recently all of the talk has been about distributed ledgers, this is basically what everybody is thinking about, however when you enlarge the scope of discussion you are going to hear about many other Fintech

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TECHNOLOGY

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developments, which are also very interesting,” he says.

Hundreds of new ideas are currently being tested and developed by financial technology (Fintech) innovators, often start-up firms that are working independently or with larger sponsors to bring their concepts to fruition. This model of Lean Product Development is well-suited to firms that are otherwise under severe cost pressure with limited capacity to take risk.

“If you are a Citi or an RBS, for example, or any large company with lots of resources and an established franchise in your area, you can always wait until you see a disruptive technology worth owning,” says Mikulecz. “You buy it and you can even hedge yourself by diversifying your portfolio of Fintech acquisitions.

The Agile development model, which supports an expression borrowed from Silicon Valley - ‘fail fast’ - is a model many start-ups operate along. If something they are trying doesn’t work they pivot their business and try a new angle. Very large banks can monitor all of what is happening at the grassroots, and even if they wait until a model is proven, with a value of US$100 million for example, they can still buy it and have a higher chance to bring it to a billion US$ valuation.”

THINKING LIKE A START-UPFirms like Facebook are leading the way to innovate or acquire innovation, and the big banks are watching how they do it; as soon as they see an opportunity like WhatsApp which is getting extraordinary traction, they dare to invest a considerable amount to buy it.

“To spend a lot of money on something that is already proven is not that foolish, but investing a little on early stage startups requires a lot of knowledge and perseverance,

because the risk involved in multiple failures is not one the finance industry is used to dealing with,” says Mikulecz.

In 2015 a report by consultancy Accenture found that Investment in Fintech companies grew by 201% globally in 2014, compared with a 63% growth in overall venture-capital investments. However 24% of banks surveyed in the study felt they were culturally ill-equipped to cope with the new wave of digital technologies.

Tom Higgins, founder and CEO of risk management and trading technology innovator Gold-i, says, “There is a real mix of maturities of clients in the market. Some want everything

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Franck Mikulecz

“Firms are addressing market fragmentation and manage liquidity mirage,”

“By being agile you are going to break down this one- or two-year project into two week periods and very quickly see whether you are doing good or not. If you are not doing good you have just lost two weeks, that’s what being Agile is about.”

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TECHNOLOGY

now, but don’t understand that if you put something in immediately without testing anything you are going to have problems. If you look at it properly, specify it properly and test it properly you will have fewer problems. Firms who want everything immediately don’t always understand managing risk. We sometimes turn potential clients away because what they want is far too much risk for themselves and is reputational risk for us.”

Firms that can utilise the Agile methodology for software development have a great advantage in their ability to spot failure early on and minimise time wasted on projects that will not succeed.

Mikulecz says, “I think Agile and Lean Product Development are the biggest disruption or

the biggest leap forward in technology this decade. It has actually made some ripple effects outside of technology too. Everybody wants to be Agile these days, but there is a good reason for that: being Agile allows you to deliver faster and more frequently what the market wants”.

A bank or investment manager could quickly correct problems using this technique, rather than embarking on a long-term project that will only be sanctioned by success or failure six months, or even several years down the line.

“By being agile you are going to break down this one- or two-year project into two week periods and very quickly see whether you are doing good or not. If you are not doing good you have just lost two

weeks, that’s what being Agile is about,” he adds. “Fail early, fail fast and therefore you can correct and move forward. Large players in general have difficulty to adopt this model because they have a waterfall style engrained, which means that in order to start a project someone has got to convince 20 people, get the signature of five divisions, and it takes too long to make a decision and to implement something and to see if it’s good or not.”

As firms move up the maturity scale, they tend to understand the risks involved in putting systems into a business and disrupting it, taking a longer term approach rather than hoping that a radical change overnight will still leave everything working fine.

“They need a much longer strategic partnership with the technology vendor to get the system that they need,” Higgins says.

Firms who are very mature understand what they need to do their business today, what they need in the medium term to prepare for the future and then how to build up longer term project where they are looking a year or so ahead. “That level of planning allows them to influence what vendors like us are producing for their own advantage,” says Higgins. “Those are clients that we have a really good

We are now seeing the deployment of machine intelligence

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long-term relationship with, and we develop our products in collaboration with those types of people so that we get the best in the products and they get what they need in the products as well because they have had functional input into it right from the beginning.”

THE NEXT BIG THINGMany new digital technologies are finding their way into the FX space as ways to identify trading opportunities and risk or compliance objectives. The threat of rogue internal trading activity and predatory trading from high-frequency traders are both encouraging trading firms to look at smart market surveillance style technology.

Roche says, “We are seeing the deployment of machine intelligence and pattern matching that goes further, than answering questions, it is starting to tell firms the sorts of questions they should be asking.”

Digital ledgers are being developed by technology providers and supported by a range of banks and financial infrastructure providers. One of these, Setl, has built a ledger that will allow the transfer of real currency initially in the form of central bank to commercial bank payments, replacing the real-time gross settlement systems currently used.

By providing a real-time

settlement system for central bank money, it would remove the need for commercial banks to deposit large amounts of cash in these systems to act as buffers, says Setl chief operating officer Peter Randall. “The first thing banks do is make single-sided payments – bank ‘a’ pays banks ‘b’,” he says. “The second thing they do is make delivery vs payment for securities. The third thing is payment vs payment – foreign exchange. All they do is make payments. That involves making a transfer across a real-time gross settlement system. Sending a message via the CHAPS system in the UK ‘please debit one banks account and and credit another’ and you have achieved settlement finality. To make any sense of

the settlement process it has to be using central bank money. It is the only way to make payments.”

MOBILE TRADINGThere has traditionally been a great deal of technical innovation and pioneering product development in the field of mobile communications over the last few years which has filtered down to the FX market. However Higgins says that, “Mobiles are becoming more standard now and probably less disruptive. I think we will see more provision of signals trading, signals following, and graphical signals that can draw a chart for a human trader to evaluate signals and then trade, or will automatically generate the



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Mobile trading has seem much pioneering product development

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trading signals from that chart.” Nevertheless many commentators believe there still remains much untapped potential for the use of mobile devices in FX whether it’s for trading, research or investment activities.

Selerity, a startup that tracks unstructured data and then provides personalised alerts to investors and traders has seen considerable support from Wall Street firms, raising a total funding to date of US$12.3 million since its inception, with US$4.2 million in a recent funding round led by Citi, which uses the Selerity algorithms to push recommendations to clients through its Citi Velocity platform, an FX and rates

trading platform that carries investment research.

Gold-i has seen a lot of interest in app-based trading where people want to add on additional applications to the platforms that most traders provide. These can allow a third party to have input into trading, rather than the trader clicking to buy and sell based on their own ideas. The main limit on innovation with mobile is the communication bandwidth, as it creates much higher latency and much more likelihood of outages because the user is

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“If you look at it properly, specify it properly and test it properly you will have fewer problems. Firms who want everything immediately don’t always understand managing risk.”

likely to be moving around and therefore going off network.

Higgins says, “What seems to be developing are very rich mobile platforms that allow users to monitor what’s going on but not actually generate the signals, and then they will have something based on a virtual server on their PC at home or in their office that is actually generating the trading signals. There is a sort of hybrid between the two. I don’t think you are going to get a professional or semi-professional trader trading on a mobile. It is just not worth their risk. There is no way you can guarantee a signal with mobile communications. That will always create a differentiation between the two.”

Many new digital technologies are finding their way into the FX space

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HERE’S A QUICK ROUND-UP FROM SOME MEMBERS OF THE CFH TEAM:

Paul Groves, CFH Clearing, Sales Director (Europe)“The market in Europe is very mature and CFH Clearing, as an FCA regulated Prime of Prime Broker with a strong B2B offering, is highly respected in this region. ClearConnect – which provides institutional clients with access to a diverse liquidity pool - has proved to be very popular. Our modular ClearVision technology also goes from strength to strength – particularly our risk management tool, ClearRisk, which offers a real-time overview of all client accounts. Perhaps the biggest change for us in recent months has been becoming more open-minded about putting CFH liquidity into other platforms and ECNs, such as Hotspot and Currenex. This was driven by client demand and we are open to adding our liquidity to other platforms moving forward.”

Marcus Willaume, CFH Systems, Regional Director (Switzerland)“I am responsible for CFH’s Swiss offi ce, where we have a growing client base of professional clients such as fund managers and asset managers. There are a lot of sophisticated proprietary organisations here in Switzerland who value the fl exibility we offer in terms of choice of technology and liquidity. Our clients benefi t from our local knowledge combined with the investment and developments of the CFH organization – such as our recent partnership with Olfa Trade, another Swiss business, which extends our portfolio of high quality white label solutions.”


Global growth at CFH Clearing: With clear benefi ts for banks & brokers worldwide

With recent record sales, new team members and new offi ce locations, CFH Clearing continues to experience signifi cant growth. According to Global Head of Sales, Paul Jackson, “Business is strong because we have a compelling offering – in terms of technology and liquidity – for clients across the globe. Organisations who have found it diffi cult to secure a Prime Broker are seeing the benefi ts of working with us to access institutional liquidity and this has contributed to major growth for CFH Clearing and CFH Systems over the last year.”

Paul Jackson

Paul Groves

Marcus Willaume

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Mohammed Mulla, CFH Clearing, Vice President (MENA) “MENA, with Dubai and Abu Dhabi as the main hubs, is a complex territory for brokers to operate in, particularly in terms of regulation but it’s a region in which we are very experienced. We have helped many start-up and mid-sized brokers as well as ultra-high net worth individuals over the last six years. Relationship building is critical to success in the region and we spend a lot of time in the Middle East forging strong relationships with our clients and local business partners. It helps that we speak the local languages and understand the local business etiquette and protocols. CFH Clearing is highly respected in the region as a pioneer of STP interbank liquidity for retail FX brokers.” Mohammed Mulla

Dr Alex Iakobachvili

Sue Cheung

Satomi Toyoshima

CFH Clearing is one of the largest interbank STP venues in the market, with over 500 institutional clients in over 80 countries. It is authorized and regulated by the Financial Conduct Authority (FCA). For more information, please visit www.cfhclearing.com

Dr Alex Iakobachvili, CFH Clearing, Vice President (Russia)“Despite local regulatory changes and economic difficulties, we have grown in Russia and the surrounding countries through strong relationships with banks and high level business partners who understand the value we can bring to the local market. What’s interesting in this region is that there are many banks and brokers who are headquartered in Russia but have become international players. With many of our Russian clients, we are not only helping them to grow locally but also globally. It’s a market with huge potential for further growth.”

Sue Cheung, CFH Systems, Vice President (Hong Kong)“We can help brokers in China with their exact requirements. They are generally looking for a reputable liquidity provider with low latency, tight spreads and a high volume of liquidity as well as a choice of White Label solutions. With our matching engine in TY3 and a Point of Presence in Hong Kong, we can reduce latency and enhance execution. Our team of Chinese speakers based in CFH Systems’ offices in Hong Kong and Shanghai further strengthens our offering as we are able to provide excellent 24 hour support.”

Satomi Toyoshima, CFH Systems, Regional Director (Japan)“The FX market in Japan is increasingly sophisticated and we have high quality solutions to suit brokers offering all styles of trading. We can help start-ups through to established brokers with all the tools they require to run their operations effectively, both now and in the future. Our matching engine in TY3 which is cross-connected to Tier 1 banks ensures that customers trading in and around Japan have the fastest possible execution and lowest latency, giving them a competitive edge.”

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Explaining why increasing numbers of institutional firms and FX brokers are looking to trade and expand their product range with CFDs, Simon Smith, chief economist at FXPro, states that although CFDs are not a new phenomenon, having been developed in the early 1990s and employed by institutional traders since those days as an easy way to hedge against exposure in other instruments, they are now truly mainstream. He says that: “As far as retail trading goes, CFDs started

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Liquidity, platforms and technology –greasing the wheels for more efficient CFD trading


Increasing numbers of institutional firms and FX brokers are looking to trade and expand their product range with contracts for difference (CFDs), as they are now a mainstream product with genuine appeal. Yet, as Heather McLean discovers, CFDs pose interesting challenges that need to be addressed.

being offered in the late ‘90s, or the wild west days as they are affectionately termed in the industry. The earliest adopters of CFDs in the retail space are true pioneers and are largely responsible for the online trading industry we have today. They had to contend with forbidding barriers to entry in terms of capital, margin requirements and a user experience that was extremely far removed from what traders enjoy now. The real explosion in retail trading took place in the mid 2000s and this was the push into the mainstream that many FX businesses were hoping for.”

Smith believes that the popularity of CFDs comes down to several key points. He says the overwhelming majority of speculative traders are not interested in taking physical delivery of the instruments they

trade, “but rather to profit from differences in value over time; CFDs are ideal for this”. He notes that, “this flexibility is also apparent owing to the fact that CFDs do not have expiry dates like traditional contracts, but are rolled over each day, their expiry being continually deferred until a position is closed”.

He states that: “The fact that CFDs are traded on margin allows traders to take command of very large positions that would be prohibitively expensive if they were traded outright, which is also why they were historically reserved for large institutional trading desks and high net worth individuals. Finally, CFD contracts allow traders to access all manner of underlying instruments, which is one of the main reasons why you’re seeing this push towards multi-asset brokerage in our industry. With a single margin account a trader can effectively jump between markets with a fluidity that was unheard of in previous decades.”

INCREASE IN DEMANDBrandon Mulvihill MD, global head of institutional sales at FXCM PRO, observes that Retail FX and CFD traders are intraday traders, meaning they

seek short term yields. He says that “the most obvious reason we see the increase in demand for CFDs relates to the increased volatility in the market and thus that potential for higher yields. US and European indices have been increasingly volatile in the past two years. DAX alone has not only been volatile over the last year but has provided such volatility during pockets of time when EURUSD was relatively flat.”

“Moreover, FX brokers’ appetite to add CFDs as a product offering also stems from increased regulatory oversight,” says Mulvihill. “Regulations in western markets have significantly increased the cost of doing business. This comes at a time when brokers have engaged in a global pricing


FX BROKERAGE OPERATIONS

“We believe that the CFD market is where FX was back in the mid 2000s. The lack of central clearing for index and commodity CFDs explains why CFD brokers are all market makers or are simply passing their flow to one market maker.”

Brandon Mulvihill


Liquidity, platforms and technology – greasing the wheels for more efficient CFD trading

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war on FX instruments. Thus, the cost to operate a retail FX brokerage has increased just at a time when profit margins on retail FX are at an all-time low. CFDs present one way to hedge against this business risk.”

Nearly every CFD product runs on a profit margin much higher than FX while the increase in cost to offer CFDs adjacent to FX is marginal, explains Mulvihill. Of all the CFDs available, about 20 or so represent the vast majority of volume across all CFDs and to add 20 CFDs to an FX platform is not difficult, he states. Mulvihill adds: “In fact, nearly every FX platform already comes with CFD instruments available. Similarly, from a marketing standpoint, the added instruments offer a way to maximise efficiency of spend. If an FX broker is spending several million dollars a year to attract FX traders, adding CFDs provides an additional way to monetise that spend. As a result, when considering the recent volatility in US and European indices, adding CFDs to an FX offering is a no brainer.”

POWERFUL INSTRUMENTJeff Grossman, Managing Director of Squared Financial

comments that the CFD can be a very efficient, flexible, and powerful instrument. He explains: “It allows brokers and liquidity providers to create MiFID-regulated tradeable products derived from virtually any underlying market or combination of markets. This enables an unlimited scope for innovation, and end user driven solutions.”

Originally CFDs were exclusively OTC instruments developed to help large corporates execute market neutral or risk reducing strategies on listed securities, observes Grossman. “The real cost benefit was simple but significant as it eliminated all the overheads in physical delivery and settlement of the underlying. The big innovations were triggered when this product type gained traction

with market segments that were interested in speculation as well as hedging and active on a broader range of underlying markets,” he says.

Grossman states that today, most CFD transactions still take the OTC form, but recently exchanges and MTFs have successfully entered the space. “This shows that the growth in CFDs is not just about the cost or ‘more favourable’ OTC conditions. From the smallest professional to the largest institution all CFD traders will tell you cost is a factor, but the main driver is flexibility, and more often than not that also includes convenience. Undoubtedly, the increasing sophistication of the High Net Worth (HNW) retail trader and the small capital management firm is an unseen driver here. Many of today’s sophisticated HNW traders and start up firms have worked in the industry and have significant portfolios of their own or substantial direct trading experience. These traders are now demanding the same low cost, multi asset, Direct Market Access as the institutional traders from not so long ago.”

Crucially, says Grossman, these client segments are also engaged in equally sophisticated strategies. He notes that the CFD is, “their obvious instrument of choice now and going forward this is unlikely to change”. He adds:

“CFD contracts allow traders to access all manner of underlying instruments, which is one of the main reasons why you’re seeing this push towards multi-asset brokerage in our industry.”

Simon Smith



“That is particularly so as it applies to the growing interest in copy trading systems and advanced technologies which enable clients to construct and or hedge their own portfolios across diverse asset classes.”

NEW TRADING OPPORTUNITIESMeanwhile Luis Sanchez, CEO at BMFN, comments that while trading traditional stocks is still a very popular option today, and that some cultures are actually restricted to trade only them, many people are, “looking for new trading products and opportunities”. He explains: “Stocking their money in the bank without having any interesting return (and in some countries banks even offer negative interest rates,) is no longer an option. So what happens now is

investors, in this search for a diversified trading option, find out about CFDs and all the opportunities they present.”

On why a CFD is attractive for investors, Sanchez says there are two main reasons; leverage and the ability to place short trades. He explains: “The use of leverage requires investors to put up less cash (margin) than

they would on a similar trading transaction that involved the movement or exchange of a traditional asset. They can find at some brokers high leverage (1: 200/400) even though the higher the leverage, the higher the risk, but they also get higher returns on the opposite side. If there is no leverage, the best way to invest is via traditional investment vehicles, like in the past (deposits, mutual funds, stocks, etc.)!” He continues on short trades stating that with a broker trading CFD, you can go short without having any of complications, “and this is the beauty and

Luis Sanchez

“Brokers must expand their CFDs, because investors will demand more and more CFD trading products and if they want to remain competitive, their CFD offerings must become more diversified.”

Speculative traders are not interested in takingphysical delivery of the instruments they trade



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simplicity and centralised approach or facility that some brokers can now, and will increasingly, offer to investors.”

Sanchez observes: “Brokers must expand their CFDs, because investors will demand more and more CFD trading products and if they want to remain competitive, their CFD offerings must become more diversified. Increasing numbers of new investors are learning what a CFD is, even in frontier markets, (such as parts of Latin America). Brokers are therefore utilising more educational materials, webinars, seminars, videos, and the like, so that

their future client prospects will become more educated about using and trading CFDs.”

CFD LIQUIDITY ISSUESOn what key liquidity issues need to be addressed in trading CFDs, and how these may vary and differ amongst client sectors, Grossman comments: “When assessing the risks of trading any particular instrument, market liquidity is always a major factor. The institutional and professional segment will always as a rule have one or more alternative liquidity sources for every instrument they trade. As we move down the chain toward

With a single margin account a trader can effectively jump

between markets

retail this is less common but becoming much more frequent today. Sourcing alternative liquidity for OTC traded CFDs tends to be more complex than sourcing alternative liquidity for derivatives that are traded on exchanges or MTFs. In the latter case, fungible off exchange OTC trading is frequently available via clearing members. However, this is not the case with many CFDs which are counterparty specific pure OTC derivatives and clients need to be particularly careful in this regard.”

He warns that, “Because the CFD is so flexible many



iterations based on the same underlying are not compatible and their liquidity cannot be aggregated in a straight forward manner.” He states that, “CFD traders need to ensure that they fully understand the contract specifications and trading conditions in detail, in order to arrange alternative liquidity which is on demand and compatible from a risk management perspective. And in all cases, traders especially those in the advanced retail segment need to ensure they are up to speed on the lost art of voice trading.”

Additionally, Grossman believes that all client segments need to ensure that they have a solid understanding of the underlying market and precisely how a CFDs pricing is derived and any overnight charges that apply. Accurate information on the contract’s notional size and the use of any multipliers are critical for calculations of actual leverage relative to the underlying, Grossman says. “Most Institutional and professional traders will have direct access to pricing and or trading in the underlying so these aspects can be calculated independently. Even for the advanced retail trader this type of independent verification versus the underlying is quite difficult,” he continues. “However it really is essential to foresee the liquidity and liquidity related issues which may develop. For these

reasons, although the CFD can be highly efficient and cost effective, traders in the retail segment need to have advanced trading experience and dedicate significant resources to benefit from the leverage that is usually available.”

While Smith states that: “Obviously, your typical retail trader is not going to have the same liquidity requirements as an organisation does. Most of the larger retail brokers are more than able to cater to the needs of retail traders, even those with very large accounts. Now, if you’re a hedge fund or a company attempting to hedge segments of your portfolio’s exposure, or to inoculate yourself from future currency risk, not all CFD brokers are going to be able to service you at the volumes and prices you require.” He adds: “An interesting trend since the 2008 crisis, however, is that now many smaller firms with existing Prime Broker relationships are able to aggregate liquidity in ways that make it extremely cost effective, even for those trading larger volumes.”

CATCHING UP WITH FXMulvihill says the CFD market needs to catch up with FX:

“We believe that the CFD market is where FX was back in the mid 2000s. The lack of central clearing for index and commodity CFDs explains why CFD brokers are all market makers or are simply passing their flow to one market maker. In the words of my CEO Drew Niv, “all of us CFD market makers suffer from the same disease, we just treat the disease differently.” Some brokers offer a fixed spread but requote trades during times of illiquidity such as news releases. Other brokers, such as FXCM offer a no requote system, thus the spreads move dynamically with the underlying market. Either way, market making comes with trading restrictions and that means some client types are not well accommodated. Take

Jeff Grossman

“CFD traders need to ensure that they fully understand the contract specifications and trading conditions in detail, in order to arrange alternative liquidity which is on demand and compatible from a risk management perspective.”



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automated traders for example. An automated trader in retail FX has a plethora of choices regarding APIs, platforms, charting packages, and historical data. In contrast, an automated trader in CFDs has extremely limited choices and in fact, there are more brokers not offering an API for CFD trading than there are those who do.”

Restrictions exist in CFDs predominately because, “each broker is offering a price that is good for a quantity known as the maximum contract size”, notes Mulvihill. He says this quantity is normally a multiple higher than what is available on the underlying exchange. For example, a CFD broker may offer a price on GER30 (or some other abbreviation for DAX) similar to the EUREX DAX price. At the same time however, this broker will allow upwards of 3,000 contracts available at this price whereas the underlying exchange is offering only 500 contracts, says Mulvihill, who adds: “Obviously, this presents a risk so brokers utilise restrictive tools such as re-quotes, or manual intervention to mitigate their risk. Some client segments, due to their inherent style of trading, cannot trade effectively with these restrictions in place.” On the latter point, he refers to automated traders, latency arbitrage, and large ticket sizes, all of which create risk for CFD brokers.

He adds: “A market maker’s

primary role is to net customer trades so as to generate a profit with as little risk as possible. Thus, a broker ideally wants customers buying and customers selling the same instrument so that their book remains flat. When this occurs the broker does not have to place a ‘hedged’ trade in the market. Hedging costs money as the broker pays the inherent spread. As a very

generalised rule of thumb, the more a broker has to hedge, the higher their trading costs, and subsequently the lower their profits.”

Concluding on the issue of liquidity, Nenad Naumovic, BMFN chief dealer, comments that: “CFDs are traded Over The Counter (OTC) and that makes it difficult to determine who has the best liquidity. Thanks

Brokers are utilising more educational materials to help clients with their CFD trading



to today’s technology the CFD market is one of the most liquid in the world, even though it is not traded on a centralised exchange. Most FCMs have a relationship with the biggest liquidity providers so it’s not unusual if the customer uses different brokers but still trades with the same banks.”

Due to this OTC nature he says that it is difficult to define the real liquidity and states that “Liquidity for each CFD is different. Liquidity for DAX 30 CFD is much smaller than liquidity for Gold CFD due to the trading volume of these respective CFDs. The best indicator of liquidity and spread is the average daily volume. Instruments with lower volume usually have higher percentage moves due to the lack of liquidity.”

“If you are looking for a more conservative approach, trade CFDs that have a higher average daily volume, which will insure better trading conditions and much better spread,” he recommends.

PLATFORM CHOICESPlatform choices today are a dime a dozen, says Mulvihill. This offers little edge to an institutional partner, he notes, adding, “the edge lies in innovation at the liquidity and execution level; having said that I can agree that this point is not yet necessarily accepted unanimously”.

He comments that: “Every tier one retail broker offers a white label version, including FXCM, Saxo Bank, IG, and Gain Capital to name a few. Independent platforms such as MT4, PF Soft, and C Trader can accommodate CFDs. We are even seeing a pick up in traditional FX aggregators now accommodating CFDs, such as Flextrade and First Derivatives.” Yet he adds that, “very few platform enhancements are unique these days.”

Mulvihill says that while until about 2010 most brokers white labelled a proprietary platform from a tier one provider, now in Spain, Portugal, France, Germany, and the UK,

institutional momentum has, “shifted drastically in favour of institutions building their own platforms or buying a third party platform, versus white labelling a competing brokers’ platform”. He notes that, “at FXCM for example, we have received about 15 times more requests for distribution of CFDs via API than we have for a white label product”. However, he says that: “Accessing CFDs via an API is an awfully revealing story. If you were to take the top 10 FX/CFDs brokers (sans Japan) in 2014, you would find that less than half offered CFD trading via an API. Once again, we arrive at the fundamental challenge in CFDs, the execution model behind them.”

Traders also need to ensure they are up to speed

on the lost art of voice trading



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He goes on to say that, “Automated traders or anonymous traders who trade via a single API connection within an Omnibus account present significant risk to CFD brokers. This type of trading is generally not welcome for the simple reason that CFD brokers struggle to monetise this business, or worse off lose money altogether. In the past 18 months, IG and CMC have finally launched an API, while Gain Capital went public, citing they are no longer accepting Omnibus partners. This paradox reveals a simple truth; there exists conflicting interests between the style of trading an API promotes, and the execution model on offer by principle, market making brokers. Therefore, as institutions demand API

access versus traditional white labels you can rest assured this story line is not going away anytime soon.”

MORE TRADING OPTIONSToday brokers must offer multiple trading options for their clients. The old fashion trading style is gone and no longer valid, states Sanchez who says that: “We are in a fast and constantly changing world, where the brokers that quickly adapt to new environments and needs will be the only ones that will survive and succeed. And these new needs and demands are coming from clients within entirely different markets; Asia has a different demand than Latin America and Europe, but all have the same common demands of technology and simplicity.”

Sanchez states that multiple trading solutions that need to be deployed include desktop, web, mobile and white label.

On white label solutions, Sanchez notes that this, “allows traders to use a broker’s technology within another broker”. He continues: “For example, BMFN holds a unique technology called Unitrader that we white label to many brokers, facilitating the entire trading process for them. Remember there are hundreds of brokers in the world but only a few that have their own proprietary trading platform and solutions.”

Firms looking to enter the CFD trading space have all manner of options open to them, says Smith who notes that whereas historically a Prime Broker relationship was required in order to source liquidity, “this has changed in the wake of the last financial crisis as the big banks became more risk averse and started making it more difficult for newcomers to meet their criteria”.

Smith continues saying that: “Today there are many lower tier institutions able to offer sound liquidity solutions, as well as Prime-of-Primes (PoPs) who have sufficient capital behind them and existing liquidity relationships with the big boys to service the needs of smaller start up brokerages. Many of these PoPs are also able to white label their

Every broker offering CFDs suffers from a singular point. Their market data is slow

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platforms, be they desktop, mobile or web, as well as providing consulting services to help new brokers ensure they have all their bases covered before entering the market.”

NEW INITIATIVESLooking ahead towards new CFD product offerings and more advanced functionality Smith comments that algorithmic trading has yet to make the impact many were predicting a decade ago. “The explosion of HFT use on exchanges is a different story as those algorithms play a different game for different ends. Algo trading in the retail space has hit several hurdles, mostly due to the fact that programming algorithms is an extremely specialised skill that requires all of the trading

chops we associate with seasoned veterans, as well as the ability to turn those chops into something a computer can understand and execute without human intervention. At FxPro we launched Quant, one of the first algorithmic strategy-building platforms for retail traders, which does not require the use of a scripting language, but rather, allows traders to formalise their trading strategies in a visual way, by connecting different technical indicators and mathematical functions in a drag and drop interface.” He continues by stating that, “It’s an extremely powerful product that has been very well received, but even in this much more user friendly guise, most traders are still going to find it challenging to turn their trading hunches into something more formal. There is an enormous amount of potential here though, and I think it’s just a matter of time before more and more traders start experimenting with these things. There are already a number of very vibrant algo trading communities out there; I just think we haven’t hit that wider mainstream adoption yet.”

Whilst Mulvihill says that

FXCM is constantly innovating. “At FXCM, our single largest initiative is what we dubbed ‘enhanced CFDs’. This initiative focuses on how we both price and execute customer orders. Our quest to offer an enhanced CFD is a quest to aggregate prices and execute trades against a best bid offer system, the way we have done in FX. This is no easy task and requires many steps to reach our ultimate goal, but we have taken step one, which has been to license pricing and execution from a high frequency market maker.”

“Today, every broker offering CFDs suffers from a singular point. Their market data is slow. As a result, CFD brokers offering an API are subject to being “picked off”, which is one of many reasons why those brokers invoke trading restrictions. In contrast, we have found that the HFT market making community has the technology resources to be faster than the fastest retail customer. As a result, we can price API users without the fear of latency arbitrage users picking us off, an advantage nearly no other retail broker offers. In turn, this has allowed us to offer a CFD product with ‘no trading restrictions’. While this is just step one, it is a monumental step to take in a world that has not advanced even this far since its inception nearly 16 years ago,” concludes Mulvihill.

Nenad Naumovic

“The best indicator of liquidity and spread is the average daily volume. Instruments with lower volume usually have higher percentage moves due to the lack of liquidity.”

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What is Gold-i Matrix 2.0?

Matrix 2.0 is a modular liquidity management system designed to be super-fast and extremely flexible. It offers multiple routing and aggregation methods to allow brokers to offer the most effective execution model to different client types. The full multi-asset capabilities of Matrix 2.0 make this product unique in the retail sector and offer brokers an easy way to extend their FX offering into CFDs, futures and equities. The


Gold-i Matrix 2.0 Make more money and reduce risk

Gold-i Matrix not only provides a platform to allow brokers to aggregate in-coming liquidity feeds but it also enables them to offer their own liquidity out to clients – a simple and cost-effective tool if they are looking at alternative revenue streams.

We are really proud of this latest innovation. It’s been built from the ground up to be the fastest and most flexible tool on the market. The user interface has a really fresh look – so it’s a very appealing and easy to use product.

Who is the product aimed at?

It is aimed at MT4 brokers who use single or multiple servers. With Matrix 2.0, Gold-i can provide a wide range of liquidity from all asset classes and Liquidity Providers via single or multiple bridges into each MT4 system. It’s ideal for brokers of all sizes – from small start-ups to large global brokers. The product has not been designed exclusively for MT4 – it has a bridge into MT4 which is why we are initially focusing on

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Gold-i’s CEO, Tom Higgins describes Matrix 2.0 as the most significant Gold-i product since the inception of the company. With an investment of almost £1million to bring Gold-i’s new liquidity management tool to market, Tom explains why Matrix 2.0 is such a game changer for the world leader in trading systems integration and how it will help brokers and banks worldwide to make more money and reduce risk.

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the MT4 broker market. In the future, we hope it will be used by smaller banks and will open up broader opportunities for us outside the MT4 world.

What are the main benefits?

Matrix 2.0 is an invaluable tool which gives brokers a huge amount of flexibility in spreading prices. It offers multiple routing rules and supports multi-asset classes. It is completely Liquidity Provider agnostic and leverages our existing connections with over 70 Liquidity Providers. I believe it’s a best of breed product which is made even more appealing by our pricing strategy. There are no up-front costs or set up fees so brokers can get up and running very quickly at low cost.

Gold-i has a broad and ever-evolving portfolio of products. Why is the Matrix such a significant product launch?

Post SNB there has been a move to smaller Liquidity Providers who have less liquidity. This has

created a need for some brokers to aggregate feeds to increase the liquidity they can obtain. Matrix not only addresses this need but also supports brokers’ increased focus on risk management post SNB. It offers automatic failover to a back-up, with or without aggregation.

PRODUCT LAUNCH

Matrix 2.0: Key Facts• Advanced aggregation across multiple asset classes

• LP redundancy with primary/secondary failover

• Flexible deployment options – installed in broker’s own datacentres or Gold-i’s hosted facilities

• Leverages our existing 70+ connections with Liquidity Providers, ECNs and other technologies

• Low set up costs. Up and running quickly



Matrix 2.0 is the most significant product we’ve ever developed because of the huge role it can play in helping brokers both to make more money and to reduce risk. It’s also the biggest investment

we’ve ever made in bringing a product to market. Matrix 2.0 is the product that will take us into the institutional space. The next generation of Matrix will be an institutional and retail product so it is a strategic investment in our future – a catalyst for significant growth.

What did the development process involve?

We have had a team of six developers dedicated to Matrix for the last two years. The process has involved significant market research, extensive internal architecture design

and a great deal of time spent perfecting our

user interface. The team focused on developing the fastest and most flexible tool

as well as providing the best possible user experience.

How easy is the Matrix to use?

The user interfaces are simple and can be configured by the brokers themselves. Set up time is minimal. It’s an out of the box deployment which takes just a few hours to get up and running. As with all our products, we provide 24x7 technical support.

Gold-i is thriving, with a broad product portfolio. Which Gold-i products are currently most in demand?

Our product portfolio consists of a range of products which help brokers with their key business priorities – making money, cutting costs, reducing risk and differentiating from

Gold-i Matrix 2.0 – Make more money and reduce risk

Martyn Smyth, Software Development Manager at Gold-i, headed up the Matrix 2.0 development team



competitors. Every product in our portfolio helps brokers with at least one, if not more, of these business drivers. Currently the top five most popular products are our Bridge, MAM, Visual Edge, IB Profit Share and Managed Services.

Gold-i Visual Edge has really taken off over the last few months since we have added business intelligence capabilities to the product. It’s an invaluable tool which provides brokers with unparalleled insight into their trading operations, making it easy for them to analyse P&L, manage exposure risk and identify toxic clients whenever they trade. The visualisation aspect of the product is particularly impressive, giving brokers a clear overview of the key metrics that drive their business in real-time.

Our Managed Services, in which we provide an outsourced technical team to help brokers to run MT4 effectively at all times, is particularly in demand. We now have a team in our Shanghai office who can provide local language support to our Chinese clients, too. We have an excellent Head of Global Support, Ian Bunn, who ensures we offer high service levels 24x7, whether helping clients to set up MT4, proactively monitoring their systems or fixing issues whenever they arise. Because we are responsible for the smooth running of MT4 for over

140 clients worldwide, when issues do occur, they are usually things we have seen before and therefore we tend to be able to resolve them quicker than most in-house teams, keeping any downtime to a minimum.

Gold-i is renowned as an industry innovator. What other innovations are you working on?

Over the next few months we plan to enhance some of the functions of Matrix 2.0. We have a good roadmap leading to Matrix 3.0 which will include full position management and margining.

What are your plans to fuel further growth over the next year?

Since opening our office in

Shanghai we have seen significant growth in Asia and expect continued growth in the region over the next year, with new team members on-board. We are looking to take on additional agents or regional offices in multiple locations and will be making a number of hires, including expanding all our teams in the UK.

We’ve recently moved to larger premises in our Guildford-based office, which gives us the capacity to employ more people in QA, development and support.

We are a rapidly growing global business with very ambitious growth plans. Having a physical presence in China and a major new product in our portfolio puts us in a strong position to achieve these plans.

PRODUCT LAUNCH

Gold-i has a team in its Shanghai office who can provide local language support to Chinese clients.


DDoS attacks in FX –

taking steps to protect your bandwidth and IT resources

by Dick Pirozzolo


Last year’s wave of DDoS attacks on financial institutions that targeted forex brokers and banks in particular, renewed worries over cyber security and whence the next attack will come. These attacks were particularly worrisome for the foreign exchange industry. As of last year, everyone has been on guard — especially trading infrastructure companies, software platform providers, forex brokers and traders who count on reliability and security to conduct their business.

DDos or Distributed Denial of Service attacks are crude assaults. Simply put, the

is deny service for periods of time. Companies victimized by these attacks can range from major banks to retailers to information providers such as International Movie Database (IMDB). Imagine, for example, the cost to HSBC when it was unable to serve its customers due to massive DDoS attacks that resulted in multiple outages a few months ago. The attacks were not long lived, but the cost in lost revenue could have easily

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hacker initiates a DDoS attack by overwhelming the target’s system—sending so much data so quickly that customers can no longer gain access to services. According to Jubin Pejman, Managing Director of FCM360 (www.fcm360.com), a managed services provider focusing on ecommerce and managed cloud hosting services: “Hackers do not have to destroy the victim’s servers and Internet operations. All they have to do

Dick Pirozzolo


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reached millions of dollars per attack—this is to say nothing of the reputational loss and depreciation of brand equity.”

OPERATION ABABILOne of the more infamous DDoS attacks was code named Operation Ababil. It was a multi-year, DDoS campaign by a hacker group against American financial institutions. Some sources in Congress say the attacks may have been state-sponsored by Iran.

According to Nick Karram of Silver Sigma Group, a cyber security consulting firm, “Several phases of this attack caused banks financial loss due to their customers’ inability to perform transactions. As a result, institutions have since invested heavily in traffic optimization, DDoS prevention, and other cyber-security tools that help fortify against future attacks.”

DDoS attacks are as ubiquitous as they are relentless. Pejman, whose company continually monitors DDoS and other attacks, says. “We receive alerts by the minute, notifying us of break-in attempts across our network. Most of the

hackers are trying to compromise our edge devices in order to take them over for illegal purposes or to steal data. To thwart their efforts, we deploy lures called honey pots throughout the world. They attract hackers like bears to honey, and allows us to monitor their attack behavior. The most typical attacks start off as Internet-wide network subnet scans looking for any response from a device that is on the Internet. As the attacks come in, we capture their IP addresses, attack patterns and country of origin so that we can take measures to block them from our network.”

STRATEGIES TO COMBAT DDoS Some of the strategies to thwart DDoS hackers amount to common sense and continual vigilance. If anyone tries to log into a device unsuccessfully numerous times, it needs to be deemed a hacker and their IP address has to be put on a black list. Until it is cleared, it won’t be allowed through the firewall.

“Blacklist jail, so to speak, can last from a half hour or so to indefinitely depending on the

profile of the intruder,” Pejman says.

The average attack on a small or medium size business can range from one to 10 gigabytes with 20 gigabytes being among the largest of such attacks. Big attacks have been about 70 Gigs and, on the high end of the scale, large corporations have experienced record breaking attacks of well over 100 Gigs this year. Industry observers believe the larger attacks are state sponsored.

To thwart these current DDoS onslaught, FCM360 increased all

Nick Karram

Source: Extracted from KPMG research document: Embracing technology for rapid transformation


DDoS attacks in FX

of its upstream ISP bandwidth to repel attacks of up to 20 Gigabits per second internally. “As an additional layer of protection for its customers, FCM360 is also contracting with industry security providers to increase its DDoS prevention capability to over 300 Gigabits per second

would need a multi-talent approach for increasing security including skilled network security engineers who are paid upwards of $150,000 per year, approximately $500,000 of network equipment per site including 10Gbit+ routers, unified threat management devices(UTM) and multiple 10Gbit+ Internet connections from various ISPs which will cost upwards of $10,000 per month on yearly contracts in order to defend against attacks.”

Pejman adds, “A more cost-effective solution is to outsource the staff and hardware to a professional cyber security firm that offers all the services needed to protect ones network. Monthly subscriptions to enterprise solutions involve a financial commitment typically starting at $10,000 a month on annual contracts depending on the amount of clean inbound traffic needed for the business.”

Some have flippantly suggested thwarting DDos attackers by building a larger pipeline that cannot be overwhelmed. “But this is impractical and costly. Rather than increasing the pipeline, it is far better to identify attack signatures and patterns so that you can separate the normal from abnormal. Then deploy specialized boxes that stop the abnormal traffic,” according to Pejman.

Another strategy hackers

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IP addresses of anyone deemed to be a hacker need to be put on a black list. Until it is cleared, it won’t be allowed through the firewall.

“Hackers do not have to destroy the victim’s servers and Internet operations. All they have to do is deny service for periods of time.”

Jubin Pejman

in New York and London. This means the company will be able to withstand and mitigate nearly all current DDoS threats targeting the financial services and e-commerce industry,” says Pejman

Silver Sigma Group’s, Karram, points out: “DDoS and its more menacing sibling DrDoS, which stands for Distributed Reflection Denial of Service attack are notoriously difficult to deal with,” adding, “As a result, we deploy a wide range of mitigation services that include smart monitoring systems that help defend against attackers while adjusting distribution of traffic in real-time,”

APPLYING BEST PRACTICESWhile there is no perfect defense to DDoS attacks, financial services organizations need to apply best practices such as using the right software and routinely evaluating load and security systems. Solutions must efficiently protect against attacks, enable continued access of the site during any DDoS, and run regular hardening tests on the system.

DDoS protection, while crtitically important, can be costly. According to Pejman, “Typically a broker or bank


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employ to compromise systems is called password grinding where the hacker uses software scripts to repeatedly guess at user names and passwords in a systematic fashion. Pejman explained that this attack signature cannot only breach ones system, it can render many servers and network devices useless by exploiting the system resources to overwhelm them and prevent you from accessing the devices when you need to manage or use them.

COMPUTER HYGIENESteps one can take to thwart DDoS attacks often fall in the category of computer hygiene:

• Limiting the number of times someone can attempt to log on with the wrong password before they are placed on a blacklist—blacklist jail so to speak

• If one’s company does not do business in certain foreign countries, do not allow access by computers with IP addresses from those geographies. For example, credit card companies have been geographically blocking access for years.

• An institutional investment firm can simply allow access by only existing customers and block all others.

Recent DDoS attacks have been largely attributed to nation states, terrorist groups and lone wolf terrorists who are working on their own. It has also come to light that hackers who work for their government by day, are often so obsessive that they often continue to hack at night for personal gratification. Futurist Ted Gordon says. “I worry about the future when a sophisticated lone-wolf SIMAD terrorist decides to penetrate the financial sector.” SIMAD stands for Single Individual Massively Destructive.

Gordon, the lead author of Lone Wolf Terrorism Prospects and Potential Strategies to Address that Threat, sees us “in

a race between the destructive capacity of an individual who can inflict harm on the level of, say, putting out all the lights on the Eastern seaboard, and the tools of detection and interdiction that might be available to thwart such efforts.”

THREATS FROM NATION STATESOn the nation-state side of the threat, China’s behavior has been particularly worrisome. The reason for China’s hacking may be more in the Communist Party’s DNA and view of the Internet than anything else, according to Sharon Hom, executive director of Human Rights in China, a Chinese

Source: Extracted from KPMG research document: Embracing technology for rapid transformation

Cyber Intelligence Process


DDoS attacks in FX

Non-Government Organization. Hom points out, “While in the US and most of the world citizens regard the Internet as a big open international and transparent communication phenomenon, the Communist Party wants control of society and information. Though the path from censorship and control to hacking the Internet is not linear, the Party needs to manage expression online.” In China, “Cyber security means security of the Party.”

Adam Segal, director of the Digital Cyberspace Policy Program at the Council on Foreign Relations added, that the Chinese government sees the Internet from the perspective of “cyber sovereignty and as an entity that the government can develop as it sees fit.” Segal, emphasized that a big part of China’s incentive to hack other nation’s computers is to obtain intellectual property from foreign companies.

Though China’s theft of 22 million personnel records from the Federal Office of Personnel Management is widely known, private companies have been closed mouthed about such intrusions until Google announced, “We’ve been hacked along with 30 other companies,” according to Segal.

Cyber security authority Michael Sulmeyer, director of the Belfer Center’s Cyber Security Project

at the Harvard Kennedy School, blames individual companies whose security protocols are so shoddy that it “is like leaving a bag money on your front lawn and being stunned to learn that someone stole it during the night. At least make it harder. Make them work.”

While it might be comforting to think about like-kind retaliation, it is not always possible. Segal explained relationships between the US and China are complex and come with competing values, “Fifty percent of Apple’s revenue comes from China. One of the world’s biggest technology companies is not likely to want heavy-handed retaliation.” The same can be said for financial institutions that have interlocking relationships worldwide.

INTERNATIONAL NORMSIs there hope of establishing international norms that will discourage DDoS attacks, especially state-sponsored attacks? Hom is not optimistic. She points out, “Whenever the subject comes up, China, Iran, Russia, Pakistan and other bad actors, unite to pose obstacles in a, “race to the bottom.”

A bright spot though may be the meeting of the G7 nations, convening in Japan on May 26-27. Among the G7’s goals this time are to come up with norms of what would be acceptable, as has been done with chemical and nuclear weapons.

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Sharon Hom

Anders Corr


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Complicating matters, though, are privacy-protection disagreements among some G7 nations, particularly between the U.S. and some of its European allies, about the surveillance of digital activities—namely cooperating with Google, Facebook and Twitter. These disagreements can sometimes make joint action hard to achieve when technology companies fear exposing their users’ information to governments—case in point Apple’s refusal to provide the US Government with a backdoor to an iPhone used in connection with a terrorist attack.

Similarly Boston Global Forum, a public policy think tank with ties to Harvard University, has developed a framework for Internet behavior titled Ethics Code of Conduct for Cyber Peace and Security, that has

been has been endorsed by Prime Minister Shinzo Abe of Japan and Vietnam’s Prime Minister Nguyen Tan Dung. It’s a modest initiative, but a start in combating DDoS and destructive hacking activities by nation states.

Anders Corr, PhD of Corr Analytics in New York, a cyber security consulting firm sees promise in greater involvement by governments, and international entities such as NATO, “For example, NATO held a cyber-security drill at a cyber-range near its cyber-security headquarters in Tallinn, Estonia in November. Thirty-three countries sent 400 representatives to participate in the exercise.”

CONCLUSIONIn addition to coordinated action by NATO as well as the G7 and G20 nations, Dr. Corr

also encourages corporations to think outside the box when it comes to lowering the rising tide of cyber attacks, “Major technology and increasingly non-technology companies with a major interest in cyber-security, are offering bug bounties to hackers who find and report, privately, the existence of cyber-security vulnerabilities. United Airlines, for example, provided a million free miles to each of two hackers who provided information to the company on its cyber-vulnerabilities in July of last year.”

Whether on a governmental, major corporate or small business scale, “Cyber defenses are a stopgap. The real solution is more evolutionary,” says Hom and will come about, ‘When governments like China stop using the Internet as a tool of social engineering.”

A DDoS attack is initiated by overwhelming the target’s system


Klaus, could you broadly talk about your role and what you aim to achieve in it?

KP: I’m head of currency and overlay strategy for the EMEA region. What that really involves is educating both prospects and clients on the implementation services that Russell provides, helping our clients with currency, derivative and other implementation strategies that we could do from them. Everything that we do at Russell is bespoke to our clients’ needs.

On the foreign exchange side, Russell provides currency hedging overlays, where we do bespoke hedges. We also have an index-based overlay strategy called Conscious Currency that we implement for a lot of clients. But also we do a lot of individual FX execution as part of our services. Much of our fl ows are from our own fund managers and for our transition management and derivative overlays. Then we also have directed execution from our third-party clients, either managers

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A never ending pursuit for Best ExecutionRussell Investments is one of the oldest and most well-known buy-side fi rms in the world. Established in 1936, the fi rm has some $266 billion in assets under management. That creates massive currency trading needs. e-Forex speaks with the man in charge of handling those needs in the EMEA region, Klaus Paesler. He’s ready to use any method at his disposal to provide bespoke services for clients, whether that involves voice, netting and matching or algo-based trading.

Klaus Paesler

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themselves who outsource all their FX execution to us, or pension schemes that will direct their managers to have their FX execution directed through Russell’s desk.

As far as Russell’s overall philosophy, how would you sum it up?

KP: For everything we do we act as a fiduciary and an agent. What that really entails us to do is put our clients’ interests first. As a pure agent, we have no book of assets we can trade in or out of. We’re not a principle, so for everything we simply get a fee for our services rather than receive remuneration off of the spread. We seek to get the best price and reduced risk and cost for our clients. Our interests

are very much aligned with our clients in not only our FX execution but all of the different strategies we do, whether it’s physical execution – equity, fixed income, even commodities derivatives etcetera – or other transitions assignments, derivative and currency overlays.

Returning to FX execution, those two words cover a wide range of styles and methods for achieving execution, what are the salient features of how you handle execution and work with other parties to service the clients?

KP: We do cover the range, obviously mostly forwards and spot trading. We do some FX options but there hasn’t been as much interest in our client

base for that. We can trade most currencies, however with some of the restricted currencies of course we have to go through the client’s custodian or local banks, as everybody else does; but even in that sense we’re more working more and more to try to execute some of the restricted currencies more competitively.

The way we work is we have a centralised currency trading desk, that’s basically a 24 hour a day desk based in Seattle, Washington. We receive orders in various ways. We also have our electronic platform called the RFX network that we’ve developed with Integral Technologies and some clients can send trades to us directly through that network. We

Russell runs a centralised 24 hour a day currency trading operation



occasionally still get orders from emails and spread sheets, but the majority are electronic files. Those trades get centralised and, depending on the clients’ needs, we can go out various times a day to execute.

We have a lot of clients that still want to trade at the WM or try to get the WM pricing as close as possible, due to benchmark or other needs. But generally we try to go out to the market several times a day, as well as market orders. We try to net and match as much of the activity as possible. If clients are relatively agnostic as to when they go out it increases the chance of matching up activity, not only within their own legal entities

– say for a pension scheme with multiple managers, but we also do a lot of peer to peer matching. Especially on our new RFX network. What it does is it allows both our own trading desk and outside managers that can get the RFX network on their desks to submit trades, to try to match off first internally as much flow as possible at the mid, and then do a peer-to-peer match which if that’s done at the WM we can actually get the mid. Basically going out to get mid on your own with a counterparty is all but impossible now. So it aims to be on our clients’ side and get back to getting mid-price on WM. And then any residuals that don’t get netted off and matched the system uses an

algorithm to try to execute the residuals at as close to a mid-price as possible.

If we can zero in on that, what sort of algorithms are you using? Are they supplied by banks or developed in house?

KP: The technology we use is Integral Development Corporation and then we’ve added other features that Russell is able to bring to the table. It’s their technology, going through various trading techniques, using over 50 counterparties to try to get streaming prices and try to get the best prices right around the WM and to try to minimise the spread. Integral has had long experience in being a FX technology firm and because we have a lot of interests aligned with them, we’ve come together to try to develop this technology to not only use their algorithms and their systems but also

A never ending pursuit for Best Execution

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Spot “Trade” Currencies ProcessWM utilises data from three transaction systems and uses four key data points to publish

the fixing rates - best bid, best ask, last traded bid, and last traded ask.

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The RFX Network helps deliver advanced netting, best execution and fair allocation



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anymore and I can do a TWAP trade or something of that nature, to try to get better execution or different execution, because it may not be as relevant anymore’. That said, we still do have a large number of clients that, even though there is a cost now of trading at WM, still want to trade at the WM, which is also why we’ve developed this RFX network as well, to help try to claw back the mid.

In terms of the ones starting to think of, let’s call it life beyond WM, what would you be looking to offer them?

KP: The RFX network can do a net or match at other times during the day. It doesn’t have to be at the WM – that’s just been what’s demanded right now. Then you’d either do an algorithm throughout the day to

get best pricing. Or, if there’s a specific time during the day, or a TWAP or VWAP, the algorithm can do that. That said, that’s really what that technology does. Our model though is really bespoke about what our clients need. We have clients, if they want a best ex, where we’re going to go out and bid out that trade against our various counterparties and get them the best trade, not necessarily needing an algo.

If you get some big orders – and we get some very big orders – using an algorithm may help break up that trade and reduce the footprint in the market in various ways. Algorithms are one way we do it, but we do telephone trading, we use other electronic systems, plus we have a lot of relationships with many different counterparties.

provide Russell’s knowledge base and our ability to do peer to peer matching. So it becomes the best of both worlds.

It sounds like your client base is very much weighted towards their deals being done at or as close as possible to the WM. Why is that? In some situations, if there’s a large exposure to take care of, why not just go out at whatever time and try to get the best execution possible as opposed to the WM?

KP: It’s a good question. A lot of clients are still benchmark targeted, so their aim is to reduce tracking error. And as most index providers still use the WM pricing as the way to calculate the local index levels, if clients, especially asset managers, are concerned about any tracking error against an index they’re going to want to trade as close as possible to the WM. Now that said, we are – especially with what’s happened to the WM being in the news and the changes around that – we are having many discussions about moving away to see if it’s worth it, because WM trading, unless you’re able to get a match or get mid price somehow, is increasingly expensive.

Given that there’s a cost now, which means there’s going to be tracking error one way or another, some of our client base are starting to think, ‘Well, perhaps I’m not as concerned

The firm provides a pure agency-only execution desk

The RFX Network helps deliver advanced netting, best execution and fair allocation



The RFX network, what’s the background on that?

KP: We’re rolling that out globally. We’re talking to a lot of individual asset managers about it. But we’re also discussing it with some large schemes that do a lot of FX execution themselves. We use it in our own desk as part of our trading. People can outsource all of their FX to us, for which we’ll use RFX plus a lot of other trading resources we have, or the RFX network can sit on a client’s – say an asset manager’s – desk and they can submit some or all of their FX activity through that as well. It’s very flexible. It really is bespoke.

It sounds like you’re actually competing with the sell side in that regard.

KP: I wouldn’t say we’re really competing on the sell side. We provide a service that we feel is relatively unique in that it’s a pure agency-only execution desk, and RFX network is an execution outlet that aims to try to match as much activity as possible, both internally and peer to peer. And then it allows us to get as close as possible to any residuals that have to be executed in the open market to a particular time, WM being the one in demand. But that can be at any time of the day, depending on our clients’ needs. So, I wouldn’t necessarily it’s competing per se. It’s just an enhancement to a service we already provide.

The last thing I wanted to talk about was the future in terms of the take-up of algorithms in the market. You’ve witnessed the changes in the market over quite a long time. There’s been a lot of discussion about how FX algos are gaining traction and how various buy-side players, particularly on the real money side, are starting to get more comfortable with them. What’s your broad take on all that and some of the benefits algos might offer?

KP: I think what is changing is really clients’ awareness of what’s happening in the foreign exchange market. It previously was seen as an operational activity without a lot of view

A never ending pursuit for Best Execution

into the potential cost and the implications of currency execution and pricing and spreads. I think that has changed a lot, especially with the press around the WM and other trading issues. That I see as a positive thing. In terms of where I see algos could be used in the future and would be used, if people think that it will reduce a footprint in the market and take some of the power out of some large counterparties that they have concerns about, I can see that as a potential benefit. For us especially, it’s all around finding ways to get the best execution, to reduce footprint in the market, to reduce spreads. And algos could help with that.

Russell Investments is one of the oldest buy-side firms in the world.

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