It is not over-stating the case to say that the process for this year’s Profit & Loss Digital FX Awards was unlike any other. For those of you who are unaware of how it works, the culmination of a year’s worth of feedback is a visit by Profit & Loss to the leading e-FX banks – firstly, to check what he have been told is accurate, and secondly, to get the very latest information on developments on the single dealer platforms.
Every year we express our profound appreciation of the time people take to show us their wares and discuss plans for the future, but at no time has it been more heartfelt than 2020. The reason is that our visits took place at the start of the Coronavirus pandemic, when banks had already separated their staff into on/offsite facilities and markets were tremendously busy. We are humbled that so many busy people took time out of what must have been ridiculously busy schedules to share their efforts and ideas with us.
On one hand, of course, this gave us an admittedly oblique look inside how banks were coping with the unprecedented conditions, very quickly you come to learn how to read someone’s demeanour during a meeting when the (often live) platform in front of you is spinning through numbers too fast to read!
We should note from the start that the lockdown in the UK started towards the end of the fortnight put aside to visit the banks, and as such, BNP Paribas and Morgan Stanley did not have the opportunity to present face-to-face, meaning, inevitably, that we rely more on feedback for Cortex and Matrix than we do other platforms where we can back up that feedback with our own observations. There were also one or two follow-up sessions planned that may have changed the shape of these awards a little, that had to be shelved. Equally, Barclays declined to participate in the process and therefore, in the absence of substantial feedback from users, is, for the first time in 19 years, not part of this year’s awards, which is a little disappointing to us given the mood of optimism and confidence we reflected upon in the 2018 and 2019 awards write ups.
Overall though, thanks to years of going in to see the banks and growing up with these platforms (there is not a single dealer platforms in its current guise at a major house that goes back further than P&L’s managing editor’s time in the role!) as well as to the many of you who happily share your feedback and, on occasion, even throw in a free demonstration of something new you are using, we are confident that once again we have been able to take the pulse of this segment of the FX market.
So, what is that pulse telling us? Firstly, the platforms have largely proven robust and a major piece of work that we mentioned last year – the upgrading of pricing and risk technology – has really paid off. Yes, not every bank stayed in the market to the satisfaction of all their clients, but the platforms and risk systems did not break down.
That is the good news. The bad is that the pandemic has probably delayed, maybe even put paid to, a lot of work planned for this year. We expect current work schedules to be disrupted by the word we confidently expect to dominate next year’s write up – “cloud”. There are many who have seen the benefit of the cloud but the sense is, in terms of the single dealer platforms, it is very much early days. Obviously not everything gets moved there – latency watchers would be a nervous wreck for example, but there is plenty that can be hosted there and if nothing else, this pandemic has taught us the benefit of a shared infrastructure.
At time of writing, we are now into the second month of this somewhat eerie and unprecedented environment and it is still very much a question of all hands on deck to firefight and make sure that water gets to the pump, than it is of rebuilding, or in this case enhancing, the infrastructure. In terms of these awards, however, that is our problem and it can be faced next year. For this year we are taking our traditional approach and reflecting a year’s work, rather than performance over a few weeks. Yes that performance is absolutely critical when it comes to maintaining, or building, a reputation, but it is impossible to judge how well a price engine is performing in all conditions without actually sitting there sifting through the data – with comparable peer data alongside. We say it every year and it remains true now as it was all those years back in 2002 when we first judged the platforms, it is for clients to judge the quality of pricing with their business, we are concerned with the usability of the platforms and associated services.
Last year we tapped into an air of optimism, budget was being released to bank technology teams and plans were aplenty. Roll forward 12 months and quite a bit of work has been done, but maybe not as much as the more optimistic hoped. The big factor remains the pivot to HTML5, which has been talked about for so long it risks becoming somewhat like the Northern Hairy Nosed Wombat of Queensland, Australia; we know they exist (115 of them apparently), but very few people have ever seen them.
The pivot to HTML5 is taking a long time; some banks are five years into the process (although the majority are more like three) and for those further back, the road ahead has suddenly got a lot longer. Enough banks have rolled out at least part of their platform on the new technology, however, which allows us to see the benefits and the future. The difference is stark – one bank demonstrated their pricing page on the old and new technology and not only were the graphics so much sharper, the response time is seriously quicker. Feedback from users supports this observation, several also pointed out the benefits of unbundling that HTML5 allows.
That last point is an interesting one also, because the single dealer platforms have had something of an upswing over the past two years as functionality, especially around the execution process, has provided a boost. That has not been matched with an upswing of GUI trading, however, more clients seem happy to consume content from one, maybe two platforms, and trade elsewhere – probably on aggregated liquidity. More than one user showed us how HTML5 technology has allowed them to build their own desktop, taking their favourite services and analytics from certain banks and having it there on the screen with the aggregated liquidity pool.
The upswing we mentioned is also going to be challenged over the coming year as multi-dealer platforms seek to host the banks’ analytics packages – as well as the execution algos themselves – on their platform. Whether the banks roll over and allow this to happen will be interesting to watch – probably the confidence a player feels in their pre- in-flight- and post-trade TCA tools will dictate whether they are happy to expose them to a wider audience (and their competitors).
HTML 5 then, remains a big thing, but we are in a position now where the bulk of the work has been done by the major players. The other big things over the past 12 months have been further efforts to integrate into the client workflow – which of course makes the client ‘stickier’ – and, relatedly, the push of analytics to clients to help them manage their business.
Something that was not a big thing, however, and this surprised us a little, was algo execution. Obviously it depends upon the business model – those banks that have built big agency-style businesses are still keen to push the benefits of algo execution, but even those players have changed their approach. Others acknowledge they have algos and that clients are using them, but there wasn’t much else – more on this in the Report Card for the Best Execution Award.
Something that was interesting from this year’s judging process was how the thinking amongst banks was shifting yet again. The rollercoaster that is the perceived worth of the SDP is taking another turn, if not dip, as banks who have developed huge behemoths of single dealer platforms now seek to break them down. Yes, we are talking about HTML5 again, because the technology allows this unbundling, but it was a little surprising to hear some talk in somewhat downbeat terms about the unbundling efforts.
Understandably there is immense pride in the full service platforms that have been built and in an ideal world (for the creators) customers would take the entire platforms and everyone would be happy. The reality is, of course, that nothing of the sort happens and huge platform deployments have become harder and harder to justify over the past two years – hence the unbundling.
Our view is a little different, however, because, putting it simply, it is much easier to break something down than it is to build it. Componentising a platform can be technologically tricky of course, but at least it has been built on the same technology and as such does not face the challenge that so many (all in fact at some time) banks have faced over the past two decades when different tech teams have built different services, often on different technology stacks! The sense is that unbundling is a more efficient and effective long-term play than trying to maintain control over disparate teams working on different channels (especially if remote working becomes a mainstay of our world). The single dealer platform world is not one that benefits from democracy and freedom of action – a (hopefully benign) dictatorship is the best path!
In terms of products, the popularity of structured options has continued unabated – just about every bank is keen to show their pricers in this field and, in spite of the ubiquitous “unique” and “innovative” descriptions given to the products there is, to be frank, very little – if anything – between them. The structures themselves occasionally have different names, but they are really – as is the case with algos – a different name on the same product. Just as in 2013 we heard from 10 banks stressing how they were “differentiating themselves in NDFs” so we hear the same this year (and last) in structured products. All we can say is when 10 banks say they are differentiating themselves in such a narrow field, the difference rarely exists. These are important products for clients – and fingers are crossed that we don’t see the same sort of accidents with them we witnessed post the 2008 volatility spike that led to seriously large losses for some corporates – and the competition to sell them is red hot, and any time that is the case, picking a winner is very difficult. In all reality, it probably comes down to the relationship more than anywhere else, for so much has been spent by so many on this product that not only is the choice for clients superb, it solidifies in the minds of us at Profit & Loss structured products’ position as the number one money earner for the banks!
It is also the case that the FX options market has become even more homogenous, although one or two banks are looking to push the envelope here, which is good to see. Overall though, the FX options space has stagnated – and has not been helped by the events of the past couple of months during which desks have struggled thanks to the lack of underlying product liquidity. Nowhere is this more obvious than in the schedule most banks have set for their HTML5 pivot, for in just about every case, FX options is going to be one of the last products to move over.
Looking ahead, we suspect that the genuine differentiation over the coming years will not actually be in FX at all. Of course some institutions have FX USPs that will bear the test of time and challenges of current conditions, but as we go through the next couple of years – especially as the HTML5 pivot ends and FX development work slows down – the opportunity set may be in fixed income.
Yes, Rates markets have a different structure, but liquidity sourcing, execution quality and innovative products are still in their relative infancy here. The past couple of years have seen a small subset of banks develop their fixed income functionality alongside FX, but it has often been the poorer cousin when it comes to investment – after all, the thought was just a couple of years ago that most of these markets would go to an agency, CLOB-style, model. Prolonged and frequent periods of illiquidity have seen customers shy away from that model (which was largely regulatory driven it has to be noted) and are now going back to their banks for help. Any time that happens, the opportunity set is good – hence why we think there will be more competition and more wares on show, in fixed income products over the next couple of years.
As for the awards themselves, this is the second year of our new format, and it was heartening to get so much positive feedback from the change instituted last year (although that change was originally due to reader feedback so it would have been disappointing had it been otherwise!). To reiterate, the change has been brought about because the e-FX space is becoming more mature – certain services look similar on many platforms and as such it becomes even more difficult to pick winners and losers. The idea behind the Awards for e-FX Excellence is to highlight to readers where certain banks stand out. It is not to say that other services aren’t good, just where we, and often their customers, feel they go the extra mile.
The idea is not to give banks awards for everything they do, merely the outstanding stuff. By doing this we hope to paint an accurate picture of where the investment dollars have paid off, where great ideas have been brought successfully to market, and where a bank can, in a very small way, actually differentiate itself. In previous years we have provided a Report Card for every category presented, last year this was trimmed down to just the top group of awards, and this year we have nuanced it further by providing something of a Report Card on the bank itself – hopefully it works as well as last year’s changes.
With that said then, and with a reiteration of our thanks to everyone who gave up their time to present, here are the 2020 Profit & Loss Digital FX “Eye on the Client” Awards.
Please note that small editorial adjustments have been made from the print edition to provide clarification of certain services.