Live from Hong Kong: The future of retail FX

Live from Hong Kong: Retail firms MUST move on. The future is API, multi-product wealth management, democratized prime brokerage and high tech execution

The boundaries of modern electronic trading must be pushed in every direction from prime brokerage to platform flexibility to multi-asset solutions in one, fully adaptable platform. Live from Grand Hyatt Hotel in Hong Kong, full details are presented to senior leaders of the institutional industry

Just as rapidly as the demands from ever astute retail traders with a collective comprehensive understanding of every component of today’s electronic trading topography continue to increment, the regulatory, corporate and once plodding traditional institutions also operate in an enlightened environment.

During the past few months, it has become very clear that simply operating as a very small white label of an anodyne and non-descript OTC brokerage offering one set of spot FX asset classes with warehouse execution is not likely to be sustainable in the future.

Quite clearly, the multi-product direction that is now, believe it or not, being embraced by giant banking institutions which are taking the step of segregating their technology in such a way that it is fully adaptable, will be the savior of the OTC electronic trading industry not from just the regulatory powers that be or as an antidote to the encroaching exchange lobby that is, according to many executives in the OTC sector, attempting to do collateral damage to the OTC business globally in order to ensure that retail electronic trading ends up on exchanges.

Add the prime brokerage element to the three pronged obstacle that has appeared recently, that being the restriction of credit by Tier 1 banks to OTC firms, and the need to evolve and innovate is greater than ever.

Here in Hong Kong, one of the world’s largest financial centers, this level of thought process is not just at discussion level, but, among global giants from the West and the Asia Pacific region alike, is already well underway.

Today, Saxo Bank held a conference at the Grand Hyatt Hotel in Hong Kong’s famous Wan Chai district, at which the subject of how the electronic trading world must disrupt itself completely in order to forge ahead into the future.

Saxo Bank’s Head of API Business Lucian Lauerman engages in discussion with wealth managers and hedge fund executives

The conference majored on institutional business, and was presented by senior Saxo Bank executives, one being Jennifer Hansen, who, in a precursor to a highly powerful delivery on moving the entire business forward, discussed the specialist method by which the company delivers liquidity, something we majored on in London with Lucian Lauerman, Head of API Business at Saxo Bank, and Peter Plester, Head of FX Prime Brokerage, in November last year.

At that time, Mr. Lauerman explained “If you lodge $5 million in total, use 5 prime of primes, put $1 mllion at each prime and then are long at number 1, and then short at number 2, then long at number 3, you will lose out on netting benefit re your use of collateral, and have a complex issue to manage re ensuring you minimize your funding costs.”

In terms of explaining how Saxo Bank conducts its bank relationships, Mr. Lauerman explained “Because of our balance sheet and our status as a regulated bank, we have stable, decades long relationships with the largest liquidity providers in the market, and are able to effectively evaluate the new entrants to the market. This is a major differentiator.”

Today, Ms Hansen, who before becoming Global Head of Institutional Business at Saxo bank spent 20 years with Credit Suisse and Goldman Sachs  where she was Global Head of Product Management within Fixed Income,  took this direction further, explaining ”

“Connectivity and liquidity management are two vital components that must be evolved via disruptive technology” said Ms. Hansen.

“As we are very active participants in FinTech, where are we going? If you think about it, FinTech as a concept centered on how to approach the market is really only around 5 years old. The electronification of markets has been going on for a longtime but the idea of FinTech as a way to build financial institutions is quite new.” – Jennifer Hansen, Global Head of Institutional Business, Saxo Bank

“User experience is the product that is being sold these days” said Ms. Hansen, “and therefore financial services products must be sold in a way that suits our digital habits. Google, Apple, Facebook, Amazon, Alibaba all took this lead in the consumer market place, and therefore we can tell that experience in one industry seems to affect experience in other industries and this was a wake up call for the financial industry which took everyone by surprise. We have seen evidence of this type of movement in the robo advisory and payments sectors, and new entrants into those two areas took traditional banks by surprise with regard to how quickly they could garner clients” she said.

From across the West to mainland China, today’s buy-side clients are astute wealth managers and want fully adaptable multi-product solutions

“Banks handled the arrival of new, more advanced and adaptable participants badly, and lots of ‘us vs them’ provocative headlines adorned the newspapers, asking whether traditional banking had become obsolete and whether modern, FinTech-led companies would take over.” she said.

“Nowadays, our sales team works alongside the execution team to form part of a solution that has been visualized and take it to fruition” she said. “This is vital when providing entire solutions to partners that are comfortable with a multi-year iteration”, Ms. Hansen pointing toward the necessity to be able to future-proof the entire trading system ‘on the fly’ by being adaptable and providing multi-product environments with adaptable integration solutions to keep the commercial customer involved regardless of changes.

“Initially, in the middle of last decade there was a fear toward FinTech” said Ms. Hansen. Any industry that has been disrupted by new technological advances tends to fear how far that will go” she continued.

“Lets use hand held digital cameras as an example. When smartphones first came out, the users loved the new functionality and connectivity, but the cameras were lambasted as poor quality and inferior to separate, purpose-built digital cameras. At the time the digital camera market was pumping out millions of units a year, and had infrastructure behind it, but that all collapsed when the phone companies evolved the quality of their cameras” – Jennifer Hansen, Global Head of Institutional Business, Saxo Bank

traditional branches. “We are aware of a survey of this nature, which was conducted on a global basis and the results today were remarkable, showing that if Apple, Alibaba, and Facebook offered banking and insurance, 31% said they would use it, and half of that 31% said they would actually prefer it” she said.

“An important point here is that although we are not sure that banking will go all the way in that direction but that is a staggering change in consumer preference on how to use and package services, therefore it is better to take a stance, form the strategies of the future and play it out all the way.” – Jennifer Hansen, Global Head of Institutional Business, Saxo Bank

“Reducing costs is another important factor. All participants in the financial industry are concerned with the cost of client acquisition, and other factors such as cash flow burn, however the traditional financial world has massive reach, large capital bases, but may have a legacy approach, therefore they can partner with new entrants in FinTech and improve useablility within large institutions” she said.

Best execution, fair dealing and diversity

“We are at a tipping point at the moment across the industry” said Ms. Hansen. “The type of conversations our sales people have across the world are more creative than they were five years ago, and commercial customers are getting much crisper about what part of the value chain they want to build themselves. They are asking themselves which piece they do not have and what providers to use in each area” explained Ms. Hansen.

“Additionally, keeping ahead of regulatory change is part and parcel of keeping abreast of technology. Diversification, fair dealing, best execution are forces that are here to stay and need to be built into strategy. It is not practical just to be known from an FX perspective, as electronic trading firms need to continually be able to change their own user experience to stay ahead of regulatory change” – Jennifer Hansen, Global Head of Institutional Business, Saxo Bank

“If i mention an example here, it should be the way that a real multi-asset solution should be designed and provided to customers” said Ms. Hansen. “For example when we launched our digital bond offering we got a lot of focus because digitizing bonds is a major task. Working in a traditional technology stack with a series of services built around it is problematic these days because it means that a simple change could create up to 30 touch points.

Jennifer Hansen, Global Head of Institutional Business at Saxo Bank

Back in December 2015 at Saxo Bank’s global head office in Hellerup, Denmark, FinanceFeeds met Saxo Bank Senior Director and Head of OpenAPI Benny Johansen who detailed how this works.

“What is new with OpenAPI is that it allows a third party client, client company or application developer to not only integrate into our infrastructure, but to essentially completely rewrite the front end trading application. So if you take a step back, I would say that OpenAPI is a complement, and additional piece in the puzzle in the ways you may work with Saxo Bank” said Mr. Johansen.

“OpenAPI is one part of the larger Open Bank Vision”: A quick screenshot of what Mr. Johansen explains as the Saxo Open Bank Vision. On the left screen you may discern the hub in the middle illustrating the Saxo Bank trading engine, and the boxes around it illustrating the various types of integration technologies available.

How does it work?

The diagram below shows how it works:

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Mr. Johansen elaborated on functionality. “Every application is identified by an Application Key. When the user starts the application, she is redirected to our security system, where the user must log in. Through this process we know who the user is, and which application she is using. If the login is successful, the application now has a token.

It can use this token to access any of the publicly available OpenAPI end points. The Saxo Bank OpenAPI is a modern WebAPI based on REST principles. All endpoints support traditional Request-Response, but we have also implemented streaming to ensure better performance and lower latency for things like quotes, position updates and trade confirmations. For the streaming we part we use SignalR technology to ensure that it works, also over bad network connections.”

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This is where it all started! Saxo Bank Senior Director and Head of OpenAPI Benny Johansen takes Andrew Saks-McLeod through the development of the OpenAPI

“Everything you see in the new SaxoTraderGO trading platform is accessed and executed via the OpenAPI but not everything is yet available to third party developers” said Mr. Johansen. Currently we are focusing on the endpoints necessary to support a good trading experience. As we get comfortable with the reliability and scalability of this section of the API, we will gradually extend the functionality on offer.”

“Technology stacks within institutions should be set up in a different way. User experience should be separated from the infrastructure, a type of design which we call Open Banking, using OpenAPI to connect the dots. This way, every participant can work with a wider range of Financial Services firms that would otherwise struggle, or could be spending up to 80% of capex maintaining a legacy style system.”

“It is important to understand that this is our own API and there is one API only. We do not use an internal API for our own systems and provide a different one for clients. The functionality of the entire SaxoTraderGO trading platform goes through this API.” With OpenAPI we really are “eating our own dog food”.

“If you want to work with the OpenAPI as a developer, you can get a developer login and then access the portal which contains over 100 pages of documentation as well as samples and a tutorial” – Benny Boye Johansen, Head of OpenAPI, Saxo Bank. The developer portal can be found by clicking here.

Meanwhile right now, here in Hong Kong, the discussion continues following on from this innovation, with Adam Reynolds, CEO for the Asia Pacific region at Saxo Bank taking the center stage here at the Grand Hyatt, explaining “We ask ourselves these days, what our clients demand. What is their learned behavior in digital and client space?” Mr. Reynolds posed the question.

“Customers want algorithmic capabilities and charts that interact with platforms, and to be able to clearly see what their holdings are. A true multi-asset strategy is a must these days, and from the point of view of a client, they’re looking at asset allocation” said Mr. Reynolds.

“Even with retail trading in today’s environment, the idea of having one platform for FX, another for shares, and another for exchange-traded futures is not a great user experience. That is the challenge that a lot of institutions have today. The history of banking has always kept a silo mentality, therefore today’s requirements are a new challenge for long established institutions” observed Mr. Reynolds.

“I spent 12 years at Merrill Lynch, during which time the bank spent an inordinate amount of money developing its own single dealer platform, which probably to this day many people have never heard of because it is not as good as Velocity, Autobahn or BARX, even though it cost a fortune. It was only designed for ISDA (International Swaps and Derivatives Association) and and CSA (Credit Support Annex) and due to this type of dynamic existing, trying to adapt that type of system alone to end users has been difficult for banks to do” – Adam Reynolds, CEO for Asia Pacific, Saxo Bank

Mr. Reynolds continued “many large institutions are stuck with expensive technology. Talking to hedge funds, many want to trade on ideas and they want their provider to bring them trade ideas. Some of the bigest traders in the world are the biggest hedge funds, and they want some direction and thus as a platform provider being able to provide the chance for these hedge funds to build algos, and share ideas with clients is very important part of the value proposition.”

“Equally, digital onboarding, which although challenged in some areas particularly in Hong Kong when you need to see a client face to face, is a vital requirement. Although there are current barriers, the regulatory environment will become more evolved so that it becomes more possible around the world to onboard clients completely by digital means” said Mr. Reynolds.

“People want multiple investment and trading styles. For example, some customers want their core investment in low cost ETFs but want to trade around the outside of those with 15% alpha generators, hence we see that nobody wants to stick to one type of trade. They want cost, transparency and value for money. That part of the equasion changes every year and always gets cheaper as technology evolves to provide the service and thus if you are a broker that doesn’t have that kind of technology based investment, you’ll get left behind in terms of operating costs” – Adam Reynolds, CEO, Asia Pacific, Saxo Bank

Modern prime brokerage and API connectivity to live liquidity

Mr. Reynolds believes in a technology driven prime brokerage solution. “When we talk about working with partners, we are talking about APIs and trade execiton along with trade confirmation going backwards and forwards down the line” he said.

“It is very important for brokers to be able to provide client by client info for their customers, including real time holdings and real time margin information” he said. “Even end of day files for regulatory reporting is very big part of it. It is all about providing digital tools focused toward the end client to keep the cost of servicing brokerages down.”

“Looking at traditional banks with their prime brokerage services, usually, a designation notice is obtained, and is then provided to liquidity providers and they carve out some of that limit to give to each liquidity provider. Splitting for example $100 million amojng 5 liquidity is very ineficient and there is no means of using that type of set up on a real time basis. Banks also often subsidise their prime brokerage businesses by providing liquidity to clients. They then use that to help pay for the services they provide with prime brokerage” said Mr. Reynolds.

A discerning demographic of commercial business to business partners now dominate the upper echelons of the OTC world

“We do it differently. We are not a liquidity provider. Instead, we aggregate all of the liquidity from Tier 1 banks and non bank providers, and some from electronic communication networks (ECNs). Our pricing goes directly through a FIX API to clients and when the end client wants to trade there is a millisecond pre trade credit check, using limits that we have in place” explained Mr. Reynolds.

“Because we are able to perform that check so qucikly we can provide a reply and allocate the unused capital and fill the order” he said. “This way, we do not have the conflict of interest experienced by many banks as we are not are not subsidising the cost of providing liquidity in the way that I described many banks do.”

“FIX API and OpenAPI are the heart of what we do” – Adam Reynolds, CEO, Asia Pacific, Saxo Bank

Mr Reynolds noted that Saxo Bank’s biggest driver of growth over the past twelve to eighteen months has been Prime Brokerage with regard to credit intermediary and clearing.

Overall, with the absolute maturity that the OTC derivatives sector has now achieved, here today in Hong Kong there is very much a focus on the institutional range of services and technology products that Saxo Bank make as proprietary systems for institutional trading and powering brokerage infrastructure.

Imagery of sophisticated traders using SaxoTraderGo was present, and over 54% of attendees were in Fund and Wealth Management business, whilst only 11% were FX brokers, and 23% FinTech sector.

Adam Reynolds, CEO, APAC, Saxo Bank

In terms of what solutions they were looking for, API and Liquidity services customers accounted for 23% of today’s attendees, whilst Digital Wealth and Robo Advisory stood at 32% and Open API and Platforms amounted to 47%. There were absolutely no delegates who were under the age of 45, (makes me feel young for once!) and each had a pedigree career spanning at least two decades in institutional wealth management or senior derivatives positions within large institutions.

Similarly, there were no MetaTrader 4 white label owners, and no warehouse dealing desk retail brokers. 85% of attendees today said that technology has been an enabler of their business and unlike small brokers with warehouse/MetaTrader 4 setups, 59% of today’s delegates explained that they were optimistic about what 2017 holds for their business, difficulties with prime brokerage agreements and regulatory stick-poking not being a concern of theirs at all.

The way forward, it seems is diversity of both product and technology, and to not only emulate the existing institutional world, but better it and push the boundaries.

Photographs copyright FinanceFeeds

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