Beep beep. Why are FX brokers still using legacy technology? We all need to move on

FX, CFD and listed derivatives brokers need to take heed of how to engage brokers properly. We look inside the developments that are vital to the growth and future sustainability of brokers, and why legacy opinion and sitting on the fence will not work out. Here is the solution.

The retail electronic trading business is certainly led by astute and tenacious professionals, whose leadership and adaptability has created an environment in which the most important capital markets sector for international market accessibility for retail traders is constantly evolving, despite continual regulatory evolution, fierce competition and the need to engage constantly more sophisticated client bases.

It is perhaps more than an anomaly that given the avantgarde nature of the electronic trading business and the importance of technology that many FX brokers, banks, hedge funds and listed derivatives providers are continuing to use legacy systems which limit their scalability and growth.

In other online industry sectors, solutions which bring as much data into one place are currently de rigeur. It is surprising that this has not been the case in the FX business thus far, especially given the fragmented nature of OTC and exchange-based electronic trading globally.

Recently, Andrew Gillibrand, a former Credit Suisse quant who is now CIO at UNION spoke to FinanceFeeds about this from an institutional trading perspective. Mr Gillibrand was an asset manager, having found that the timeline between engagement to commitment taking a long time. Mr Gillibrand had relationships in South Africa, Japan, Europe and realized that if the distribution issue exists for him, it exists for many.

“Some of this was addressed in Chris Anderson’s book called The Long Tail saying anyone can write a book, sell things on Amazon or run a fund. In order to build a sound record, you need good assets so you can commit time to it, you need to do it in a place where it costs very little, and use the idea of organizing for success.”

“You do not want to be fragmented and have an account with four different brokers and push signals all over the place. You need a venue with good suitability, and engage today with any potential customer you may have in the future as it takes a very long tiem to convince someone to give you $5 million and longer to get them to give you $5o million.”

That is indeed an issue that is currently not being addressed and which needs to be.

Fragmentation has been discussed very peripherally for quite a few years, however not very much has been proactively done about it from a trading platform perspective.

As last year drew to a close, FinanceFeeds investigate how global markets led by the Tier 1 banks can perhaps reform the fragmentation and set it back to a more unitary liquidity and execution methodology, NDFs could well be the darling of the retail brokerages with their own platforms that have until now been geared toward CFD trading.

There is more to it than this, however, because the user interface needs to address this matter clearly, so that traders can be more in control and have a single means of analyzing all data.

We certainly can learn from developments that are external to the electronic trading business and bring it into our industry.

Roman Nalivayko, CEO of multi-asset global markets trading platform development company TraderEvolution Global explained to FinanceFeeds today ” Fragmented technologies lead to the creation of products like Beeper.”

“Beeper is an interesting product that allows users to connect with 15 different messaging services. In the brokerage business, there are many companies that still use legacy fragmented technologies for accessing different markets and asset classes” said Mr Nalivayko.

“The TraderEvolution Global platform allows to aggregated access different markets and all the major instrument types including cash Equities, ETFs, Futures, Options, Fx, CFDs, physical Crypto, and Fixed income under the one umbrella” he concluded.

Beeper was launched this week by Pebble founder and Y Combinator Partner Eric Migicovsky who is revisiting this concept, but this time with a focus on centralizing access to modern-day chat applications, a format that can most certainly translate to the FX and CFD industry’s requirements for engaging good quality clients with properly aggregated information.

Mr Migicovsky rose to prominence with his 2013 launch of the now defunct Pebble smartwatch. Although the company no longer exists, Mr Migicovsky certainly knows how to work with the big companies especially when it comes to connecting various large and important applications onto a single platform. By the time Pebble began shipping watches to Kickstarter backers in January 2013, they could be connected to Android and iOS devices to show notifications and messages. An online app store distributes Pebble-compatible apps from many developers including ESPN, Uber, Runkeeper, and GoPro. The company was then acquired by Fitbit for $23 million.

Many years ago, a software program called Trillian introduced a way for internet users to interact with multiple instant messaging networks, like ICQ, AIM and MSN Messenger, in a single window.

Mr Migicovsky’s new Beeper solution builds further on this concept, but this time with a focus on centralizing access to modern-day chat applications. Through the newly launched app, Beeper, users can connect with 15 different messaging services, including WhatsApp, Telegram, Signal, Instagram and Twitter DMs, Messenger, Skype, Hangouts and others — even, through a few tricks, iMessage, with Mr Migicovsky having come up with the idea for a universal chat app while working on Pebble before its acquisition by Fitbit.

Indeed, this is absolutely the type of engagement technology that is needed within the platform sector in the electronic trading industry.

Whilst the FX and CFD world has somehow let NDFs fall by the wayside, the major Tier 1 banks and some institutional settlement firms are still very much involved in that style of trading.

Today, it has been stated that the market for non-deliverable forwards is becoming more complex and fragmented, much like spot FX. Trading activity in NDFs is now split across multiple venues, leading participants to seek new ways to optimise execution.

Less than a year ago, a single exchange provided firm prices both on and off swap execution facilities and the liquidity was easy to navigate, with credit being the sole differentiator between dealers.

Today, there are multiple pools of liquidity offering a combination of both firm and last-look prices. This shift has led large dealers to develop complex algorithmic strategies to optimise execution and better manage risk. In illiquid products such as NDFs, algorithmic execution helps minimise transaction costs over the long run by capturing a larger spread on passive orders than in more liquid products such as G10 spot.

With interbank top-of-book spreads on NDFs in excess of 2 basis points on average, there is significant opportunity for spread capture compared with G10 spot, where spreads are under 1bp. A critical component of execution algorithms is the depth and quality of the liquidity pools. To minimise price slippage, an algorithmic strategy needs unique and uncorrelated – or ‘orthogonal’ – liquidity.

When liquidity is not curated for orthogonality, end-users are exposed to wider aggregated spreads, high market impact, increased liquidity mirage and low fill rates.

According to data from HSBC’s execution algorithmic solution NDFlex, following the peak of the coronavirus pandemic in March 2020, interbank spreads and volatility in NDFs increased by more than 200%. Volatility and spreads have since returned to normal, but the NDF market continues to fragment and liquidity dwindle. This has led to greater demand for algorithms from clients who are seeking to minimise their market footprint, capture spread and optimise execution.

Interestingly, despite the move away from single-dealer platforms and centralized liquidity toward something of an emulation of the spot FX world, NDFs are beginning to wake from their almost 10 year long slumber among western counterparties, especially given the fatigue many firms have experienced with CFD products and the continual blasting from regulators akin to a pile driver onto solid concrete.

Unlike spot FX, an NDF has similar virtues that stand CFDs out as popular instruments, as an NDF is an outright forward or futures contract in which counterparties settle the difference between the contracted NDF price or rate and the prevailing spot price or rate on an agreed notional amount.

This type of trading has garnered its greatest popularity in regions in which forward FX trading has been banned by the government, usually as a means to prevent exchange rate volatility.

In established markets, NDFs were heralded as a means by which OTC FX firms could mitigate the risk of being exposed to, and exposing their retail clients to, sudden and unexpected bouts of market volatility.

Strangely, NDF trading did not catch on to quite the extent that CFD trading has done, with a loyal and dedicated client base in Britain trading CFDs with vigor on a largely domestic market, via established, often publicly listed British electronic trading giants, especially when you consider the global regulatory disdain for CFDs that ensued the disinterest by many FX firms in NDFs.

Surely going down the listed derivatives route is the way forward, and in doing so, providing a full set of instruments via a single broker-specific platform which offers proper aggregation of data in the vein explained by Mr Nalivayko of TraderEvolution Global.

Evolution is vital. Now is the time.

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