FX industry speaks out on Tier 1 execution and the age of the non-bank market maker. Efficiency is the future!

During the course of the past two years, the banks have been shown a clean pair of heels by the most advanced companies in the FX business.

It is with great hope that this paves a new way forward for OTC counterparty relationships and that execution and settlement is now the channel for innovation, and indeed with XTX Markets continuing to dominate the market share figures for all global Tier 1 FX order flow just five years after the company was founded by astute numbers genius Alexander Gerko, it is clear that the old guard is not equipped to serve the requirements of the OTC derivatives industry.

Citigroup is a name that is rarely even heard these days, which demonstrates the magnitude of the change in appetite for Tier 1 FX dealing among counterparties and liquidity takers, as Citigroup was by far the largest Tier 1 interbank dealer in FX for over 17 years before it was usurped by XTX Markets.

The interesting dynamic which has now brought another important dimension in the evolution of FX to light is that the non-bank market making sector, following XTX Markets’ incredible lead, is now being joined by the social media-driven revolution that has shown how much weight it carries over the past week, influencing the policy of large retail FX and CFD firms such as IG Group which locked its clients out of their accounts on Friday last week and suspended the acceptance of new clients as a direct result of Reddit users on WallStreetBets subreddit having fomented the fate among brokers of certain meme stocks.

The social media generation are now the trading influencers and democratizers. The non-bank  market makers are the forces to be reckoned with as the banks and their obsolete platforms are increasingly out of favor with liquidity takers.

The cracks in the b-book ‘you against me’ model are now fully visible, and the traders of today know what they are looking for.

Brokers are clearly eschewing the single dealer platform model offered by banks, and perhaps rightly so. It is, after all, a legacy model as is most things with banks, and the obnoxious attitude – started by Citigroup – that all OTC derivatives companies must have a continual balance sheet of between $50 million and $100 million to be able to maintain a prime brokerage agreement is clearly not a popular method.

Banks make most of their money from investment banking and tier 1 FX dealing, yet they treat their own counterparties with disdain, expecting high balance sheets, conducting last look execution and cherry picking. If an OTC broker did any of this, there would be a furore, hence brokers are now voting with their feet.

Holland’s Optiver has taken this one step further, having last week become the first FX options non-bank market-maker on foreign exchange trading platform FXall.

The move marked another milestone in the evolution of the over-the-counter FX options market – a market making ponderous progress toward electronic trading. The market-maker joins more than 66 other firms now providing electronic options liquidity on FXall, which has traditionally been a haven for banks dealing FX options to clients.

FXall is an absolutely consummate contender within the electronic trading business, and this union between Optiver’s non bank market making prowess and FXall’s stance is very likely to be a milestone in change for the FX industry, giving massive hope to brokers.

Eight years ago, Thomson Reuters, which acquired FXall in 2012 for $625 million, bringing with it FXall’s CEO Phil Weisberg to run Thomson Reuters’ Global FX division, has opened up access to bank algorithms with a new platform that aggregates FXall QuickTrade which is the firm’s request for stream service, along with Bank Stream which continuously streams prices, and the firm’s central order and limit books along with the conventional dealing platform.

The new single desktop solution that combines these elements is called “FX Trading” and according to Phil Weisberg “brings together access to all of Thomson Reuters venues liquidity on one screen which means that a segment of our customers will for the first time have access to bank algos that were previously unavailable to them.

This solves some of the difficulties associated with having to continually maintain direct relationships with banks for FX brokerages and primes, at a time during which credit is being restricted dramatically by banks and reluctance to take counterparty risk is at an all time high.

It is possible that this new evolution may release some clients from a house bank trading mentality, bringing them access to the enlarged pool of liquidity and algos that are now within accessible reach of firms that no longer have to access direct bank liquidity.

Mr Weisberg is absolute expert when it comes to OTC FX. He joined FX industry software provider oneZero in 2019 as Strategic Advisor as the company expanded its remit toward institutional participants and is now Executive Vice President of Strategic Planning and Partnerships at the company.

With this sudden and long awaited potential for alignment between all parties and their clients is most certainly a giant step forward in the future development and sustainability of the FX and wider electronic trading industry.

To gain perspective from within the retail brokerage sector, FinanceFeeds spoke today to Natalia Zakharova, Global Head of Sales at FXOpen, who explained “I think it is interesting to observe how big Tier 1 banks lose market share to more flexible and tech-savvy companies. Both bureaucratic workflows and confidence in their market dominance do not let banks move quickly enough and embrace change.”

“So it is a great time both for fintech and liquidity companies to take the niche, previously dominated by banks, as well as for the clients to enjoy better trading conditions and better attitude” said Ms Zakharova.

From a connectivity and market integration perspective, the need to establish multi-asset product ranges and provide full and diversified accessibility to global markets has never been more urgent.

In terms of multi-asset connectivity via dedicated trading infrastructure that is available to brokerages in order that they can keep pace with this important direction, it is quite apparent that a switch toward such systems is now on the cards for many firms.

Jeremy Kintslinger, Director of Global Prime FX in Australia outlined this during a conversation with FinanceFeeds last week, stating “Our multi-asset platform interacts directly with Global Prime clients in our online Discord community. The transparency of the team which provides the platform goes hand in hand with our business model, and the feedback loop this creates is beneficial to all parties.”

“We’ve worked closely with the TraderEvolution team to integrate with TradingView and we are really excited to go live with the project. This will enable our clients to trade and manage their positions across both platforms”

“You can imagine what would happen if your typical retail broker offered a room like this, they’d get ripped to shreds with complaints. Having our own community really helps to hold us accountable to our clients” said Mr Kintslinger.

Roman Nalivayko, CEO of TraderEvolution Global, the company which developed the multi-asset platform utilized by Global Prime explained to FinanceFeeds today “In our eyes, financial markets are changing and changing extremely fast, and it’s difficult to predict what will happen next.
For brokers it’s vital for their business to have a universal platform solution that allows them to work with any market and asset classes as well as a vendor that is ready to work with them hand in hand in order to handle new and new challenges.”

This is perhaps the set of conditions which may end the MetaTrader-oriented domination of inflexible third party systems which operate as a white label solution for spot FX and do not give brokers the opportunity to control their own asset range or develop their own execution methods.

Quite simply, the internalization model is under extreme scrutiny, and this time it is by users of social media and internet forums such as Reddit.

Mr Kintslinger said “Vive la revolution” during a conversation on this subject last week. Indeed, it is a fascinating time to see the end users forming the way of the future, which is exactly how things work in all other technology-led business sectors around the world.