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Blockchain and the Internet: Is it a Good Comparison? The comparison between blockchain technology and the early days of the Internet is one that is perennially made in articles and at industry conferences, but is it accurate or even helpful? This was the question posed to Cristina Dolan, co-founder and COO of InsureX, and Adrian Patten, the co-founder and chairman of Cobalt, at the Forex Network Chicago conference. “The Internet was a lot easier to deal with because it was a linear process: you had a database, there were users, you had a web interface and although you were still training people how to use the web interface, you could control that whole ecosystem that you put up, you just had to drive people to the page,” said Dolan.
Stories from the Trenches: Building a FinTech Simon Wilson-Taylor, head of EBS Institutional, reflected at Forex Network Chicago on the challenges that he faced as the owner and head of a fintech firm, Molten Markets, prior to being acquired by EBS. “The first thing that I would say to any budding entrepreneurs out there is that building something, building a product, is the fun part and the easy part. Even finding clients is relatively easy,” said Wilson-Taylor, before adding: “The really difficult part that’s kind of out of your control is: how are my clients going to react? How is the market going to react? What are my legal, regulatory and insurance obstacles?” Going through the different business lines that Molten Markets operated, he explained that consultancy is a good way for fintech firms to generate some revenue and pay some bills as the barriers to entry are not particularly great.
The FinTech Challenge: Scale or Independence? There comes a point for most successful fintech startups when they face a decision: either join part of a larger organisation in order to scale up their business or continue to remain independent. There are trade-offs on each side of this decision, as Mike Harris, president of Campbell & Company, noted at Forex Network Chicago. Speaking from a client perspective, Harris said that he could see benefits from either side, but added that when senior figures at a fintech leave post-acquisition it is normally a warning sign. “One of the things that we watch are the people, not just the founders, but the core people that you’re working with - the relationship managers, the technologists - if they start to depart, either because they’re asked to leave or because it’s not what they signed up for, that’s usually kind of the writing on the wall,” explained Harris.
Why Platforms Need to Offer More Than Just Liquidity In an environment in which liquidity has become increasingly commoditised, how do FX trading platforms offering access to this liquidity differentiate themselves? This was the question put to Jill Sigelbaum, head of FXall, Refinitiv, during a recent video interview with Profit & Loss. Sigelbaum responded that providing transaction cost analysis (TCA) and pre-trade analytics tools are examples of ways that platforms can offer increased value to clients, but also highlighted a number of other services that are being developed. “What really differentiates us, and I think how we move forward, is the pre-trade workflow, the artificial intelligence that we plan to use around analysing the post-trade data so that we can make suggestions to clients, automating the process as much as possible without actually trading for our clients,” she said.
Competition Continues to Heat Up Amongst Liquidity Providers As more non-bank liquidity providers become active in the FX space, firms need to find ways to differentiate themselves to their counterparties, says Giovanni Pillitteri, portfolio manager at HC Technologies. “I do think that there will be certain consolidation in some counterparties,” he said in response to a question about increased competition amongst liquidity providers. “If your edge is only based on speed, that’s going to be commoditised, so you need to have the full spectrum of solutions and offer that full spectrum of solutions to counterparties to be able to compete in this environment.” Pillitteri also emphasised the importance of having a broader, cross-asset approach to trading in order to be a successful FX liquidity provider.
Do We Really Need Decentralised Systems? For all the hype and excitement around distributed ledger technology (DLT), speakers at the Forex Network Chicago conference debated the real value of decentralised systems such as blockchain. “If you’re trying to build a business you need to make it cheaper, quicker, with better customer services and hopefully allow people to have more access. Let’s be honest, blockchain fails on nearly all of those things,” asserted Adrian Patten, co-Founder and chairman of Cobalt. Patten added that the existing system for agreeing contracts has some elements that are beneficial, such as mediation, that decentralisation doesn’t necessarily allow for. By contrast, he described some of the things that he’s witnessed in the decentralised crypto trading space as “bloody scary”, adding: “A lot of these exchanges are being run on laptops and they’re lucky if they have Excel”.
Which Firms Will Drive the Next Wave of Crypto Adoption? One of the interesting characteristics of the cryptocurrency markets is that trading in these assets has predominantly been driven by retail players, with proprietary trading firms being the first institutional size firms to start getting involved. So which firms are likely to enter the market next, and will they propel the mainstream adoption of crypto trading? “Naturally a lot of prop desks are looking at the space in a discrete but very active way,” says Francisco Portillejo Hoyos, CEO of CRYPTALGO. “The other wave is that a lot of family offices are seeing a very nice diversification on their allocations.”
Crypto and FX: More Alike than We Think? FX industry veteran and Profit & Loss 2012 Hall of Fame inductee, David Ogg, reflected in a recent video interview on how the rapidly evolving crypto markets resemble the FX markets of the past. “It’s like FX in the 1980s,” said Ogg, who is currently the head of FX and trading venues at OTCXN, before adding, “The front-end technology is pretty primitive.” By contrast, he said that OTCXN has developed “cutting edge” technology in terms of how it displays liquidity, offering visual tickers that enable traders to get a visual representation of what is happening in the market with just a glance.
FX Aggregation: When Less Can be More There’s an intuitive logic which states that the more liquidity providers (LPs) that a client puts in their aggregator, the better prices they should get. After all, increased competition should cause LPs to tighten their prices in order to win the trade. However, as Roel Oomen, managing director, electronic FX spot trading at Deutsche Bank, explains, this logic only holds up in a static environment, which the FX market most certainly is not. The reality is that LPs alter their spreads depending on how they perceive the liquidity environment to be at any given point in time.
Why FX is Still “Under-Futurised” The FX market is still “completely under-futurised” right now, according to Carlo Kölzer, CEO of 360T and global head of FX at Deutsche Börse Group. Deutsche Börse announced plans to buy 360T in 2015 and this deal can subsequently be viewed as part of a broader trend of large exchange groups buying OTC FX platforms. This begs the question of whether these exchanges will try to replicate the “vertical silo” model that they have developed in other markets, whereby they effectively manage to keep customer transactions within their business silo for the entire lifecycle of the transaction by offering pre-trade data and analytics, execution and post-trade clearing and settlement services all in one venue.