For many years, Symbiont deliberately avoided touching FX. But now, having partnered with Vanguard, it is building a decentralised network for FX trading that it claims could represent a major inflection point for the industry. Galen Stops reports.
One thing that the team at Symbiont, a blockchain technology company founded in 2013, are adamant about is that their technology solutions should only be applied where they are appropriate to real problems within financial services.
To this end, Ben Spiegelman, corporate development and strategy lead at the firm, says: “On the business development side, we often say ‘no’ to a substantial number of opportunities based on the fact that a blockchain is not the appropriate tool to solve the problem.”
Until recently, one of the things that Symbiont had said ‘no’ to was the foreign exchange market. Some might consider this surprising, given that the firm’s CEO and co-founder, Mark Smith, has a history in the FX industry, having previously founded Matchbook FX in 1999 and later, Lava Trading in 2003 (which started in equities and later branched into FX). However, Smith insists that it was actually his background in FX that initially convinced him that blockchain technology was ill–suited for this market.
“My experience in FX made sure that we avoided it at all costs in the early stages of our development,” he says.
Smith adds: “When I looked at the big problem sets that needed to be solved post-financial crisis, spot FX was certainly not one of them. The evolution of technology in FX meant that there were already high levels of efficiency with very small margins being squeezed, whilst speed and balance sheet leverage are the name of the game. All this has nothing to do with blockchain technology, and to actually execute the way you need to in FX specifically requires a central system.”
A new custody technology
Blockchain rose to prominence because bitcoin was built on top of this technology, and Smith suggests that because bitcoin is widely considered as a digital currency, there has been a tendency to assume that the technology behind it must somehow be applicable to the currency markets. But in fact, the team at Symbiont viewed bitcoin as merely another instrument that was being custodied by a new technology. In their view, it was the custody mechanism, not the underlying instrument, which was of interest.
“We looked at the technology and realised that it could be used to custody anything and so we asked: what has a huge problem with reconciliation and workflow? That’s how we began to build our thesis, which is that the origination of an instrument natively to the blockchain means that the blockchain can be the single golden source of truth and then you can use Symbiont’s powerful smart contract language, SymPL, to create automated workflows around it,” says Smith.
He notes that this doesn’t sound particularly applicable to FX, it sounds more like a syndicated loan or an asset-backed security, which is why Symbiont focused on those markets when it first launched.
Given all this, why is the firm now making a concerted effort to apply its technology solutions to FX?
“When we started breaking down other problems within financial services, we identified that there’s a collateral problem underneath non-spot FX products that needs to be addressed, and that collateral problem actually layered very nicely onto the solutions that we had built. So we’re solving for collateral, it just so happens that in this case, the collateral problem happens to be around FX products,” explains Smith.
Identifying the problem
The Symbiont team insists that this collateral problem in FX was not identified by them, but rather by market participants – in this case asset managers – with whom they partner with and rely on to match their in-house technology expertise with market or asset-specific expertise.
At a fundamental level, the problem identified was that if two counterparties want to deal with one another (or are currently being hampered by existing credit limitations), but aren’t able to accept the counterparty risk associated with doing so, there is currently no mechanism for them to do so without a prime broker (PB) or a central clearing counterparty. Symbiont claims that its technology can solve this problem by more actively managing the collateral provided under the terms of the transaction in both a safe and automated way, which can mitigate this counterparty risk.
Joe Ziccarelli, FICC sales and strategy lead, explains that beyond this, there are still significant inefficiencies in the existing collateral management processes being used in FX. Having spent four years at CLS prior to joining Symbiont, he is particularly well versed in how and where such inefficiencies occur today.
“CLS obviously offers an incredibly valuable function in solving for the settlement of FX, but I would frequently get calls from clients asking: why isn’t anything being done about this huge collateral problem? Because to manage collateral today, there needs to be a calculation agent involved and there has to be some agreement between the counterparties about the value. This process may take several days to sort, plus – and this is what a lot of the calls I was receiving were about – once the transaction expires, how do these firms get their collateral returned to them in a timely manner? This process currently represents a credit risk while also chewing up capital, there are a lot of inefficiencies here,” he says.
By contrast, Symbiont’s technology is able to do collateral calculations and then automatically send instructions to move funds on a customised basis, particularly in scenarios where counterparty credit risk is more of a concern or credit limits are being stressed. With this credit risk being constantly mitigated, it should enable counterparties to both be more efficient with their use of capital and to transact in greater size with a wider range of counterparties.
Building the network
Symbiont says that it can offer all this through Assembly, its blockchain platform which underpins all the different use cases and business lines that the firm is pursuing.
“When Symbiont first launched, one of the insights that the founders of the firm had was that an Enterprise blockchain solution could be used to enable multiple institutions to have a shared data store on one ledger while still maintaining privacy. Because it also prevents double spending, they realised that it could eliminate this massive reconciliation issue. That’s why the company spent a lot of time on R&D early on to build an infrastructure platform from the ground up using this technology in a way that offers privacy, decentralisation and scalability. That platform is Assembly,” says Spiegelman.
Assembly is the software that Symbiont is selling, which encompasses the blockchain technology and the smart contract layer. On top of this, the firm is now building what it calls a “portfolio of networks” for different applications, one such network is focusing on applications within FICC markets. Each bank, asset manager or market participant in this network will be running individual nodes, with the logs on every single node on the platform being identical and connected. But although the underlying logs are identical, firms will only get the keys to decrypt the transactions that they are part of, thus maintaining the privacy of the platform.
The “network” concept should not be underplayed here, as it is crucial to Symbiont’s deployment strategy.
“I think that we’re in transition from an engineering and development company into a sales organisation where we’ve built the product and solved for various problems and now we’re starting to add clients onto the solution set,” says Smith. “Our model, which I think has been quite successful, is to partner with domain experts that have their own centre of gravity and create their own network effect.”
He adds: “When Vanguard moves, there’s a whole universe that moves with them, because they bring their custodians and their bank partners with them and suddenly other buy side firms start looking at the same solution.”
A new inflection point
It has been well–documented in the press that Vanguard is working with Symbiont’s blockchain technology for currency trading, and the firm itself says that it is keen to work with other industry players to try and improve how the FX market operates.
“Vanguard’s Investment Management Fintech Strategies (IMFS) team is dedicated to building partnerships and capabilities that can significantly improve our investment performance or make capital markets work better for investors. Our efforts in the FX space, including partnering with Symbiont and other key industry participants, fully align with these principles. The outcomes we’re working toward will help modernise currency markets, improve liquidity, and eliminate counterparty risk for participants,” says John Evans, head of blockchain strategy at Vanguard.
Thus Profit & Loss understands that multiple sell side organisations are in the process of opening accounts to join Symbiont’s FICC network, while staff at the firm say that there are more asset managers who are eager to join the network, but that they need to sign up the custodians that service those firms first before they can participate in it. With each firm that joins the network, the value of being part of it increases and the newness of the technology seems less daunting, meaning that in theory it should become easier to sign up new participants.
Vanguard’s business model is focused on driving efficiencies and lowering costs in order to improve returns to investors, which is why this new model is so attractive to the firm, says Ziccarelli. Indeed, with a firm the size of Vanguard pushing to change the way that collateral is managed in FX and using smart contracts to do so, Ziccarelli suggests that the industry as a whole is at an inflection point.
“I’ve personally seen two inflection points in FX during my lifetime – one of which was the advent of PB and the other was e-commerce. I was fortunate to be a part of both,” he says.
PB enabled a much wider range of firms to participate in the wholesale FX market, which in turn ramped up trading volumes and significantly increased the amount of liquidity available. The introduction of e-commerce, meanwhile, vastly increased the efficiency of FX trading and thereby allowed much more to take place. It also paved the way for the rise of algo trading that has occurred in recent years.
“I feel that what we’re doing now is the third inflection point that I’ve seen. All three started in the same way, with innovative ideas targeting a very specific problem. Then, as people start to get their heads around these ideas and lose some of the fear about what they might mean in three to five years’ time, they start to adopt them and the market improves as a result. The same end-goal exists here, to improve liquidity by enabling more participants to be able to trade with one another resulting in a greater reach for all, both on the buy and the sell side. I believe in some cases this will also allow firms to further focus on where they can provide real value–add, how much additional FX trading they can do and who they can now do it with,” Ziccarelli concludes.