Banks are piling resources into in-house trading platforms to preserve the wafer-thin margins in their foreign exchange trading businesses after Bloomberg said it would become the latest multi-dealer FX venue to raise its brokerage fees.
Bank of America, Barclays, BNP Paribas, Deutsche Bank and Natixis are among the banks investing heavily in their single-dealer platforms, a once-crucial gateway for trading FX with clients that fell out of fashion over the past decade as users migrated to multi-dealer platforms.
Banks aren’t expecting to reverse that trend entirely, effectively conceding that many clients will always prefer the breadth of liquidity that multi-dealer platforms provide. But banks are nonetheless betting they can entice more flow back to their own platforms by offering clients enhanced trading capabilities – and potentially better pricing by cutting out the middleman.
“A lot of the large banks won’t advertise this but many of them are now seeing negative P&L with some clients notably due to these brokerage costs, and it’s unlikely that these fees will ever become cheaper given the increasing costs of regulatory compliance faced by MDPs,” said Pascal-Olivier Weber, head of spot trading at Natixis. “So, banks are trying to attract flows back into their SDPs instead.”
Once a central part of FX market infrastructure, banks’ single-dealer trading platforms lost their dominance to multi-dealer venues as clients prioritised securing the best prices on their currency trades, with the hundreds of liquidity providers available on these venues inevitably compressing margins for bank traders. Banks were also hit with brokerage fees that went towards funding client services such as transaction cost analysis and regulatory reporting.
Bloomberg was, until recently, viewed as the last high-profile venue with ultra-low fees. That is set to change from April when Bloomberg plans to increase its charges for liquidity providers across a range of FX instruments, although the company said its fees will remain “considerably less" than many of its competitors. LSEG, IFR’s parent company, also owns multi-dealer platform FXall.
“FX is a very electronic market and there are a lot of requirements from the buyside in terms of the workflows that platforms can provide,” said Tod Van Name, global head of FX electronic trading at Bloomberg. “We’re also providing these services in an increasingly regulated environment, which adds a tremendous amount of overhead to being able to deliver these services.”
Fighting back
Banks are fighting back against the relentless squeeze on their trading margins by looking to lure more flow back to their SDPs. Their main pitch to clients is discounted prices thanks to no MDP brokerage fees. Nick Hamilton, head of BNP Paribas’ electronic and digital platform distribution for EMEA, said their short-dated FX swap prices on MDPs can be as much as 70% wider than on the bank’s own platform.
“That can be a huge saving that clients can make from migrating over to our SDP,” he said.
Banks are also hoping that flashy trading capabilities will win clients over – essentially using their SDPs as a shop window for all the bells and whistles they can provide. That can include using the platform as a research portal, offering AI-powered trading capabilities and algo execution.
“Increasingly as data aggregation and technology infrastructure become more sophisticated, clients are able to be more selective about where they take liquidity from,” said Sonali Theisen, global head of FICC e-trading at Bank of America. “A strong single-dealer platform is a great way to transmit not only our pricing, but all the other services that we can provide to clients in a more bespoke manner."
Torsten Schoeneborn, co-head of G10 FX trading at Barclays, said that continuing to invest in its SDP is a key part of the UK bank’s FX business and offering.
"The success of our SDP isn’t only measured in how much volume we can execute with clients, it’s also about the overall user experience clients have with us," he said.
Uphill battle
Banks face an uphill battle in convincing some clients that they can still meet regulatory requirements around securing the best possible prices on their FX transactions when trading on SDPs.
Bankers say some sophisticated asset managers and large corporate clients are searching for middle ground by funnelling multiple bank prices through a direct API connection and then comparing them through an aggregator.
This set-up can still be problematic for banks as large client orders typically have to be split into smaller tickets, eroding the margin banks can make on each trade. The IT and infrastructure costs involved in creating aggregators also form a significant barrier to entry for many clients, despite the advent of third-party providers.
Nevertheless, some banks view these third-party aggregators as the main way in which clients will transact in the future. Some of these firms are looking to get ahead of the curve by plugging in their APIs in the hope they can win more client flow from competitors – and eventually entice clients to trade greater volumes with them on their SDPs.
"Clients no longer have the appetite to have four separate SDPs on their screens," said Oliver Jerome, head of European FX product at Deutsche Bank. "Instead, they want to try to receive everything via APIs and consolidate that information into visuals that are cohesive with the way that they look at the world."