Colin Lambert: Barracuda FX recently completed a review of the Global Code from an order management perspective, what were the findings?

Kieran Fitzpatrick: We looked at the principles that impact FX orders and highlighted specific aspects and requirements for institutions of all sizes from all areas of the industry; banks or buy side institutions.

From this we can ask four simple questions:

  1. Do you allow clients to specify if their order is monitored by machine or manually?
  2. Is your order execution policy clear and unambiguous?
  3. Have you a transparent charging structure?
  4. Do you have appropriate visibility controls?

Orders are still a hugely controversial area in which banks need to step up their game – a lot has been done at the top tier one and two levels, but beyond that there is still a lot that needs to be completed. Even now, some smaller banks are still writing their orders up on a board, that will – has to – change.

CL: It strikes me that the Code has been a help to you in getting your message out about the importance of good order management technology.

KF: We saw a big uplift in demand as clients realised they needed to get an OMS in place because past practices were no longer acceptable, so yes, it has. Those handling the orders know that more control is needed, as is accountability.

It’s not all about the Code, though, equally as helpful has been the availability of better data to measure execution quality – this has taken a lot of the emotion out of order handling.

Again though, we recognise that it is not just about top tier institutions, that’s why we launched OMScloud, making this efficiency accessible to smaller banks. They have really been the last segment to wake up to their requirements in the new world and they need to show their adherence – a good OMS is at the heart of that.

The Code has helped raise the profile of order management, but we started the business because we believed that orders in particular were very poorly served in the market. There was too much focus on how fast a player was, but there were, are, a lot of non-immediate orders that everyone sees and we thought they could be handled better.

CL: And transparency around order management has not always been that good…

KF: There needs to be control over order transparency and execution management. We built this on day one, eight years ago. Yes, the Code is working for us, especially the principles around segregated order flow, but the emphasis on establishing, maintaining and enforcing processes around the handling of orders has been a change process that has been going on for a few years now.

We have been stressing the need to reinforce the processes around who sees the order – everyone has a different perspective on this, be it trading, sales or both, or neither – and on how visible the name of the client should be. Ultimately, this should be up to the client, who specifies if they want it to be handled manually or automatically and by what desk. We built the OMS with this flexibility in mind and so clients can have their orders managed, at portfolio or individual order level, in a manner they like. What we have done is formalised a process and control framework around that.

CL: You placed a lot of emphasis on the specialist, regional players earlier, is that a key segment for you?

That’s where much of the hard work remains to be done, however our first deployment was with a very big bank and that was hugely educational. From there we built the product out further and in a fashion that could be easily replicated with, and rolled out to, other banks.

The regional players are a focus though because even in emerging markets where historically the footprint of the institution and market knowledge of the trader were differentiators, there is now a requirement to handle orders carefully – and that means a transparent process within which the client knows how their orders are being handled.

These regional players often can’t run segregated desks, or it’s not worth their while doing so, and they no longer have night desks. The challenge is there is still very much a place for these banks in the market – customers have realised that the tier one players don’t excel at everything so they understand that their orders need to be placed with specialist providers to achieve the best results. We estimate that most customers should use two or three service providers for their orders, especially the further away from G3 currency pairs they get.

What we do is allow firms to receive these orders and manage them in a transparent, automated fashion. Using Order Hub we also allow them to outsource their orders to banks that are open when they are closed, so all we are really doing is automating a bilateral relationship. This also opens up tremendous opportunities for banks with a natural franchise and can help them broaden their coverage and access more clients – and more providers.

CL: What about those tier one and two institutions – are there opportunities there?

KF: Certainly, if a tier one or two institution wants to stay at that level of the industry they must have a strong, robust OMS. I would question whether an OMS is a differentiator, though, especially in the era of the Code where we have a framework and standard for what is considered best practice.

Does a tier one or two institution need to build, maintain and update their own order management framework? Is it really a value add or is it a utility? They can differentiate themselves with consistent pricing and risk warehousing of larger tickets, but their OMS? That really only needs to be robust and transparent in how it works, which is what we are good at – there is no substitute for experience and depth of domain knowledge which is what we have, we are a specialist OMS provider.

CL: But in a utility world, doesn’t this mean the top tier institutions dominate?

KF: No, because – to repeat myself – there are specialist providers out there that can offer expertise and execution of orders in local currencies that the top tier players cannot. OMScloud and Order Hub can level the playing field for these firms, they can insource algos and deploy technology that is the match of anything at the top tier – that makes them competitive.

CL: I’m interested that you still offer the flexibility for clients to have orders handled manually, does anyone want to do that anymore?

KF: It’s a failsafe – what happens if your algo engine is unavailable, your pricing engine goes down, or, more pertinently, if we have another SNB-type event? The kill switch around automated orders is vital if we have a market dislocation and when it is hit, everything goes back to the voice desk. We manage that voice and ‘e’ interaction and ensure that the order is handled appropriately no matter where it is monitored and executed.

CL: Where are the growth opportunities for Barracuda FX now?

KF: There’s plenty of the FX landscape to cover! We talk a lot about spot but we also support NDFs, outright forwards and swaps – and demand for more efficient, transparent order management in these products is only now starting to grow. The Code has also heightened awareness of good order management processes amongst buy side firms like asset managers and other financial institutions, so inevitably we are starting to see some interest from those segments, which means we probably have more to do in that area as well on the sell side.

Beyond FX, the changing market structure in fixed income is very interesting, especially as the mood there seems to be for more utility-type solutions such as we offer. The changing market structure there very much reflects what we saw in FX, which means OMS capabilities are going to be relevant, especially in the more active product sets.

We have been through this evolution in FX, it’s coming in fixed income and we hope we can bring our lessons from the FX space with us to help clients meet the regulatory, technology and workflow demands of the future. Our sponsors in the banks used to be head of FX, now these same people are often head of FICC, that demonstrates the broader opportunities.

CL: Will we see a single cross asset class OMS at some time in the future?

KF: Definitely.

CL: Going back to FX, is the industry in a better place that it was when it comes to orders?

KF: Obviously what happened in the past around certain types of orders was not good, but one positive to come out of that issue was a greater awareness – on all sides – of the need to establish a fair and transparent process that protects allparticipants. This is the foundation of the Global Code – and those firms that sign to adhere to the Code are showing they are a good FX partner.

We believe that a strong, robust OMS is vital to achieving and maintaining that adherence. The OMS needs to be simple, lean and unobtrusive and it needs to automate the entire process to make it much more efficient. It needs to be transparent in how it operates so the compliance and audit functions are able to understand what it does and how it does it, because we shouldn’t forget that those functions are as much exposed to the risk of wrongdoing as other areas.

This all means that what was a very subjective area of markets is now more objective – everything is black and white and based upon data. This transparency allows clients to once again see the value in sensible, prudent risk management offered by limit or algo orders and give them confidence in leaving those orders with their banks.



Colin Lambert

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