Currenex is shifting the focus of its white label business to increasingly target regional and mid-tier banks, citing a number of broader industry-wide trends for this change.
Traditionally, Currenex has focused on selling its institutional grade technology infrastructure to brokerage firms, which then re-brand it in order to provide FX trading services to their own customers.
The most recent example of this is the institutional platform launched by the retail broker Oanda at the start of May, which will utilise a branded version of Currenex’s HTML trading front-end.
However, as David Newns, global head of GlobalLink Execution Services at State Street, explains: “We’re now pivoting to address new market segments that we hadn’t explicitly catered our technology offering to, prior to now. Whereas in the past we have primarily focused on the broker segment, we’re now targeting the regional and mid-tier banks.”
He continues: “We’ve seen a number of trends in the market that are driving an appetite for new technology solutions for regional and mid-tier banks, driven specifically by regulation and the move towards ever increasing transparency. So we see an opportunity to actually facilitate and provide a robust, fully-featured platform, backed with a world class service offering for these firms.”
Specifically, Newns points to the continuing implementation of MiFID II in Europe and the “quasi regulatory evolution” caused by the FX Global Code of Conduct as major drivers towards greater transparency. Further, he claims that the code itself is in turn a response to a broader trend for market participants demanding greater transparency around FX trading processes and how the technology underpinning it functions.
The demand for third party technology solutions from regional and mid-tier banks also speaks to their role in an ever-evolving FX industry, according to Newns.
“The electronification of FX continues apace and it shows no signs of letting up. While this is of benefit to electronic trading providers like ourselves, it represents a challenge to other market participants, such as mid-tier or regional banks, because they are expected to provide the same full-service FX execution offering as their larger peers, who have significantly bigger technology budgets and can justify the economics of building, maintaining and enhance their FX execution technology ‘in house’. By contrast, the economics don’t work so effectively for a mid-tier player, and in that context, an off-the-shelf solution from a third party technology provider who focuses explicitly on providing FX trading technology can make a lot more sense,” he says.
Newns adds: “That can then enable those firms to satisfy the ever increasing demand for electronic execution that buyside customers are now presenting for some time now but and that demand that has now been accelerated still further by the implementation of new regulation. Specifically in EMEA, we see MiFID II explicitly articulating requirements around best execution and, as a result, end users increasingly expect a certain level of electronic execution services from their counterparty. A sellside which is providing just phone based trading will challenge their buyside counterparties’ ability to achieve best execution. As a sellside counterparty you will better be able to support your buyside customers efforts to achieve best execution when you can also offer those customers electronic execution via RFQ and algos.”
Currenex currently offers as a white label – although the firm prefers the term “private label” – branded versions of its trading front-end, what Newns describes as a “battle tested” pricing engine and an algo suite that has been developed and used by Currenex’s customers for over a decade. All of which are available as component pieces or an entire technology offering.
In particular, Newns sees a growing demand for algo products amongst regional and mid-tier banks that goes beyond simply reaching for a VWAP or TWAP for executing FX trades.
He argues that regulation is driving the wider adoption of transaction cost analysis (TCA), which is subsequently forcing firms to re-examine how they conduct their FX execution in order to achieve the best outcome for their trades. This, according to Newns, will serve to highlight that in different instances, certain execution methods are better than others, and in many cases firms will find that using algos will enable them to achieve the best execution outcome.
He explains: “Some ways of execution are clearly better than others, and indeed some algos perform better than others in specific contexts. But TCA enables firms to become more informed about the choices that they’re making when it comes to how they handle their FX exposures and which execution styles to use in which contexts because it gives them objective information that then provides that firm with an indication of the performance of a particular execution mode that they might choose in a particular context. The feedback loop resulting from this is going to drive the innovation of algos, as well as the performance of liquidity providers – assisting in that firm achieving best execution.”
Newns says that market participants will have little choice but to adopt algo execution in order to satisfy – and evidence that they are adhering to – their internal best execution policies. As they become more sophisticated in their use of TCA, he predicts that firms will continue to enhance and “course correct” how they’re conducting their FX execution based on this feedback loop.
“The idea that firms could just use a basic TWAP algo to satisfy their best execution requirements won’t fly when they have to justify why they always chose that algo. This need to explain why a specific algo was chosen for that specific execution and scrutinise the decision that led to the execution decision maker choosing that will algo then drive the evolution of algos themselves,” he adds.