Data Remains the Key Battleground for FX Platforms

Platform providers are becoming more conscious about the value of data, both for their businesses and their clients. Galen Stops takes a look at what this means for the FX industry.

If there is one consistent trend that emerges talking to all of the major OTC FX trading venues in 2019, it is that they’re all keen to emphasise the importance of data, both with regards to how they operate their businesses and how their clients operate theirs.

On the one hand, FX trading venues are increasingly looking for ways to package and sell their market data, creating new revenue streams for the business. On the other, seemingly all of them are investing in developing trade analytics tools that will enable users of these platforms to derive greater insights from their trading activity and more effectively evaluate the liquidity and pricing available there.

“Data is becoming critical to the way the whole industry works in a way that it wasn’t even five years ago,” says a senior figure at one trading platform. “Five years ago, if you went to see the person who looked after e-trading within a firm you might have an analytical discussion, but you also might talk about customers, you might talk about the industry and you might be doing it over lunch. Now, when you go and see the e-trading head you’re having an analytics driven discussion, your relationship manager needs to be able to hold their own in that type of discussion and you need to turn up with data that supports the performance of the platform.”

An interesting byproduct of this renewed focus on the importance of data is to consider the extent to which it is, or is not, a democratising force in the FX market. For example, access to market data seems more likely to widen the divide between the “haves” and the “have nots” in not just FX, but financial markets in general.

“For people who want to generate alpha from market data, for whom data is an integral part of their sophisticated strategies, they will continue to invest in their capabilities to access, analyse and process this data. And they will reap the rewards of this,” shrugs the source at the platform provider.

They point out that with some platforms offering faster data feeds at higher price points or because market participants provide more volume, this inevitably lends an advantage to the firms that can afford it over those operating on slower data.

Copying Equities

Some market sources, however, express skepticism about both the viability and the value of the market data products that some of the platforms are now trying to sell.

“It feels like some of the venues are trying to copy the equities model, but I’m not sure that it necessarily works in FX, and actually even in equities we’ve seen this model come under pressure recently,” says the CEO of a New York-based hedge fund.

They are of course referring here to the news that broke in January that Bank of America Merrill Lynch, Fidelity Investments, Morgan Stanley, UBS, Charles Schwab, TD Ameritrade, Virtu Financial, E-Trade and Citadel Securities are planning to launch their own equities exchange, in part because they were frustrated at the prices that the existing exchanges charge for access to their market data feeds.

Echoing the hedge fund manager, the CEO of one technology provider questions whether the market data being sold in a fragmented market like FX has the same value as in a centralised market like equities.

“Market data sales in a centralised market like equities makes sense because you have centralised intellectual property and there’s insulation around where the price can actually come from because there’s only so many exchanges, whereas in a fragmented market like FX you really have to provide validation. If you want to sell market data, if you want to increase your margins by monetising that asset, you have to prove to people why that asset is actually relevant. So in FX you have to ask why a given platform’s data is interesting to me as a market data product, when I could figure out what banks are pricing into its system, get my own feeds from them – and they won’t even charge me for that as long as I’m trading with them – and then I can get access to even better quality data 

that’s customised to my relationships,” they say. “Margins are diminishing for every venue in this space and, if you follow the script from equities, then the next step is to start to monetising market data rather than transaction activity. But we have a fundamental issue here in that you can go get the market data for free in other places, so [platforms] have to really justify what they’re bringing to the table here for it to be a relevant revenue line and not just another feed.”

Likewise, a senior figure at one OTC platform provider takes a somewhat cynical view of the attempts to monetise market data in FX.

“I think that market data as a business line will increasingly come under pressure,” the source says. “Platforms have lost revenue because of changing market dynamics and so some of them are looking for new revenue lines and market data is probably the quickest, easiest, highest margin business that they can get into. Some of them probably have gone into the market data business without really considering the consequences of their actions.”

“No Substitute for Being Right”

One potential consequence of platforms producing and selling market data at faster speeds is that it could put pressure on the technology in the multi-dealer space more broadly. EBS and Refinitiv’s Matching platform used to tick once every one hundred milliseconds, then in 2016 with the launch of EBS Ultra and Matching Binary Multicast Feed they moved to 20 and 25 milliseconds, respectively, and there are plans at each to move towards an even faster tick rate.

“EBS and Reuters, the seed to pricing for our whole universe, are moving towards a five millisecond tick rate. This is going to put tremendous pressure on the plumbing that services the institutional market, it’s like opening the spigot more, and our analysis suggests that some of the platforms people use for aggregation or distribution are about to fall over if this thing gets any faster,” says the CEO of the technology company.

Again, this focus on data benefits the incumbents and forces other firms to keep speed with them. However, Tod Van Name, global head of electronic execution at Bloomberg, argues that firms paying more to access information faster than the rest of the market is nothing new and that in fact more market participants have access to good FX data than ever before.

“I think that not just market data, but market information has become democratised. If you think about 15 years ago, the people who had access to all the market data were the large financial firms that could pay for all the data feeds for real-time information and then clients would call them to find out what was going on in the markets, because otherwise there was no way for them to figure that out. Now, everybody has access to roughly the same amount of data, you can go to any number of websites and get what is basically real-time FX data,” he says.

Van Name adds: “So there’s data all over the place, the challenge is: what do you do with it? And one thing I’ll say here, and I’ve been saying this as long as I’ve been in this business, there’s no substitute for being right. So you can crunch the numbers all day and it doesn’t necessarily mean that the model that you developed by doing so is going to work tomorrow, or even next week. Markets are very cyclical, sometimes the carry trade is the flavour of the year, in fact the carry trade was the flavour for almost 12 years and then it blows up and everyone who bet the ranch on it struggles and everyone who survives adopts a new model. So data is always going to be valuable, but it’s got a price.”

Levelling the Playing Field

Moreover, other sources point to the increasing availability of trade analytics to a wider range of market participants as evidence that data can be a democratising force in FX. Anyone who attended a Profit & Loss event in 2018 will no doubt have heard buy side speakers emphasise the growing importance of transaction cost analysis (TCA) with regards to their FX trading, and platform providers have responded to this in many cases by offering these firms better tools to study their trading activity and the liquidity available on that platform. Whilst banks and proprietary trading firms have utilised sophisticated TCA tools for a long time to drive their trading activity, the buy side is just catching up.

David Newns, global head of Global Link Execution Services at State Street, explains this trend thus: “It’s taking the analytics that were the purview of the HFT space and making them available to the real money community, who haven’t the technology investment dollars or the time to focus on building out those tools. Having that functionality available to them to analyse their liquidity and then help them have better informed conversations with their counterparties is exactly that: a democratising effect within the marketplace.”

In a market where liquidity is increasingly commoditised, certainly in spot for the more liquid currencies, platforms need to find new areas to differentiate themselves to clients, but is data and data analytics really one such area? The CEO of one trading platform says that the analytics suite it offers helps them attract and keep clients. “It’s as simple as that,” they say.

But pressed on whether it could become a differentiator between venues they seem less certain. “I don’t know whether or not if you have ‘x’ data tool and someone else has ‘y’ data tool that a client would pick one versus the other just based on that. I think that price, getting done, market impact, etc, will still be the factors that drive this decision, but these tools can help clients with all of these things and so that’s why they play a role,” they say.

The head of another trading platform says that both market data and data analytics is a battleground in the multi-dealer platform space right now, but adds that increasingly these tools and services will become requirements for clients rather than value-adds that the venues can offer.

“It’s very clear that data is too expensive, just look at what an FX desk has to pay for pretty standard market data. So I think data becomes a battleground because market practitioners always need more data – every model, every execution algo, all the post-trade analytics relies on data – but they don’t want to pay very much for it. But for me it’s not particularly a unique selling point for anybody, it’s just that post-Global Code, postscandals, it’s become a necessity for anyone executing client orders to produce the post-trade analytics and that requires data. I think it’s a service that you expect, the same way that when you start a phone contract you now expect to get data as well as phone calls,” they say.

Whether or not it is considered as a minimum requirement, as execution quality replaces liquidity as one of the key differentiating factors for multi-dealer platforms, data analytics tools are becoming an ever-more important part of clients’ execution.

“I think that pre- and post-trade analytics are going to become more and more important, and firms that have data and an effective way of delivering that data to clients have something pretty valuable,” says a senior figure at one US-based platform provider.

They then add, however, “On the market data side, I definitely see firms looking at how they can monetise the data that they have, but it’s an interesting proposition because there are many firms that have a lot of valuable data and there are many firms that just think they have valuable data. And there’s a spectrum that’s very wide.”

Galen Stops

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