FX firms in London at massive advantage as Ernst & Young reveals UK best country for digital business

Despite its online and completely electronic nature, the FX industry is a relationship business, not a digital business.

Whilst the entire product and service range of the FX business is delivered as a completely electronic and digital resource across the entire ecosystem from Tier 1 bank, through prime brokerage, technology vendor, ancillary service provider and eventually the customers, the traders themselves, engagement and interaction between each component and service provider that makes up the entire commercial infrastructure is as vital as continual engagement with customers.

Without a high quality digital environment, however, this would not be possible, and professional services consultancy Ernst & Young has now ranked Britain as the G20 country with the best environment for starting a digital business. And for Britain, read London.

Not Berlin, where coffee and hemp dominate the makeshift co-working spaces in which under 25s with art degrees and an overinflated opinion of their leadership abilities use words that most of us have never even heard of to describe why their marketing-over-function led ideas are something that ‘you do not understand how huge this is going to be’ whilst residing in an environment devoid of any institutional background.

London, by comparison, is the world center of financial technology and has been for several decades, its conservative and fiscally gigantic global leaders dominating the skyline, with the young developers of Shoreditch’s Silicon Roundabout nestling in close proximity.

Indeed, many young entrepreneurs in London, especially in digital businesses that support the financial sector, have the benefit of a very good start to their career. Internships at major banks, and technology divisions of institutional firms are common among London’s young leaders.

Ernst & Young considerations concluded that important considerations including regulation, recruitment practices, tax frameworks (in Britain, if a company commits a certain percentage of resources to R&D, it does not pay tax at all), time taken to start a business and legal efficiency, placing London at the top.

These are vital considerations for FX firms. As a very important example, Britain’s institutional financial sector has a longstanding bond with vast global telecommunications providers.

British FX firms, whether providing institutional services to brokers, or the actual brokers themselves, are able to benefit tremendously from this very specific and unique environment in which the digital capabilities complement the service-orientated nature of the business that relies on the comprehensive understanding of the providers of online services in order that firms can continue to forge relationships with existing customers as well as with their partners, extending from trade execution to risk management and down to customer engagement and effective marketing practices.

Britain has for three decades had a long standing advantage over the rest of the entire continent, and is on a par with New York in terms of the technological advancement of its financial infrastructure. Chicago is similar, however its emphasis is on the technology giants within the large futures and derivatives exchanges rather than OTC and interbank trading.

Ernst & Young’s Entrepreneurship Barometer listed Britain second only to the United States in terms of its digital knowledge base and communications technology market – yet more vital components to the FX industry.

During my tenure at British Telecom’s financial technology division between mid 1991 and early 1994, the firm had a vast department which concentrated on on institutional and interbank network connectivity, which British Telecommunications provided to London’s banks and institutional firms on an outsourced and managed service basis.

Arriving at the company’s Bristol facility which was a former telephone exchange that had been already condemned for dereliction, I considered that one day there would be less demand for large physical hosting facilities on the server and connectivity side of the financial services industry also, because the exchanges had already gone that way, digital and compact, and for sure, the same companies that had driven that corporate methodology of reducing real estate liabilities by not needing large exchanges and making systems adaptable so that they are not region-specific (the stuff of Buck Rogers back in the early 1990s!) would do the same to the financial technology sector.

This is just one example from the early stages of my own career 25 years ago in which Britain was leading before anywhere else in the entire continent had even started. BT Radianz, as it is called today, continues to operate a shared market infrastructure via a neutral platform that provides access to pre-trade, trade, and post-trade applications across the straight-through processing chain is the evolution of British Telecommunications’ pioneering efforts in the financial markets industry. Of course I have no allegiance to that particular company, but it does demonstrate how long established Britain’s digital financial environment is at this level of sophistication.

In 2005, British Telecommunications bought Radianz which was founded as a joint venture between Reuters and Equant. In April 2008, British Telecommunications (known as BT by then) added an alternative trading system, Chi-X Canada, to its Radianz Shared Market Infrastructure system, and the entire financial technology division of BT was amalgamated.

the founding in 1998 of North American multinational giant Equinix went some way toward securing this even further on a global scale. Founders Al Avery and Jay Adelson believed that existing data centers would not be sufficient to support the rapid growth of the internet and saw the opportunity to deploy data centers on a much larger scale to support this growth. Nowadays, colocation at the company’s LD4 an NY3 facilities is very common indeed with LD4 in Slough being the number 1 colocation center for the entire electronic trading sector worldwide.

British Telecommunications had also been a pioneer in the provision of IP connectivity and network development to the financial services industry, with almost three decades of large scale implementations behind it, predating any other region in Europe or Asia, and on a par with New York and Chicago.

Bearing all this in mind, Britain had a massive head start over other regions which have sprung up as ‘digital’ centers in recent years.

Therein lies the difference. Britain’s digital environment is, and has been for almost three decades, intrinsically linked to the institutional world, whereas other regions in the world which consider themselves ‘digital hubs’ are featherweights by comparison, their infrastructure and talent bases in the financial technology world a fraction of those in London, with the exception of New York and Chicago – but those two cities do not boast about being digital centers. Their infrastructure and massive emphasis on electronic financial technology is extremely high though – New York’s topography being similar to that of London, and Chicago being home to the world’s most advanced institutional futures exchange and listed derivatives technology providers.

Ernst & Young’s findings bode well for London’s young and fresh digital entrepreneurs, because the Silicon Roundabout developers which have transformed Shoreditch from an industrial wasteland into a technological development epicenter have the advantage of a vast corporate digital environment on their doorstep, for which they can create the latest developments.

Ease of gaining investment in order to do so in London is also a major factor, which means that any institutional or retail FX firm, or even large banks with their own in house development teams will be able to benefit from the fruits of the minds of the young developers in Shoreditch.

Investors are more likely to back switched-on young programmers with internships at Tier 1 banks, MCSE qualifications and ITIL certificates behind them who are bringing to fruition new products that can easily be integrated into London’s leading edge financial infrastructure than they are to back some cafe-inhabiting wearers of cloth wristbands with art degrees in Berlin or Melbourne who think everything is ‘rad’ or ‘far out’.

Rohan Malik, EY Strategic Growth Leader for Global Government & Public Sector, stated:

“Entrepreneurs disrupt business practices and reshape behavior. And today, the world in which they work is itself being disrupted by digital technologies. As G20 governments think about how to set up their economies to succeed in this digital environment, they must help equip young entrepreneurs for the age of digital disruption.

“Policy can play a critical role in turning digital disruption into a powerful opportunity for young entrepreneurs. Supporting an entrepreneurial environment that encourages young people to establish, grow and scale their businesses is a significant opportunity — even a responsibility — for G20 governments. It also creates opportunities to advance inclusiveness through entrepreneurship, particularly for young women.”

Indeed, with London’s unfaltering status as the world’s financial capital and the government continually making a priority of ensuring that it is the leading FinTech center for the world, FX firms in London and their institutional partners can be assured that a continued place at the very top of the combined digital and relationship business will prevail, with no other region being able to compete.