A Platform War Erupts in the Foreign Exchange Market

New electronic exchanges offer more trading options and tools to investors even as a handful of institutions tighten their grip on the interbank market.


Traditionally, when traders at AXA Investment Managers, the London-based arm of the big French insurance company, wanted to buy or sell currencies, they picked up the phone and called the firm’s bank, JPMorgan Chase & Co. Then in 2007, AXA’s traders began using an electronic currency-trading platform, FXall, for many of their transactions. But with new technology multiplying the number of potential trading venues, AXA is now undergoing another shift. It is in the process of moving most of its currency business to a new platform, called TradingScreen, a step it hopes will enhance and simplify its trading activities, says Lee Sanders, the firm’s London head of FX and money market operations.

“We want one screen with all the capabilities,” says Sanders, whose firm trades about $300 million a year in currencies. Among other bells and whistles, TradingScreen attracted AXA with its extensive range of algorithmic trading, flexibility in enabling users to set their own risk parameters and transaction cost analysis tools to help AXA ensure it is getting the best currency deals. TradingScreen “is bringing more ingenuity and enhancements to the market than FXall,” Sanders says. “We want to stay ahead of the curve.”

A platform war is intensifying in the global foreign exchange market, with more than half a dozen entrants jumping into the space in the past few months. It’s still too early to know which platforms will emerge as winners, but the proliferation of venues is already sparking declines in already-low trading costs, with banks earning less on each trade, in a situation similar to what’s happened in equity markets over the past decade. One banker estimates that revenue per trade has dropped by about 9 percent over the past year through a narrowing of bid-offer spreads.

“This is the beginning of a big change in FX trading,” says Rebecca Healey, a senior analyst with financial consulting firm TABB Group in London. “A revolution in technology is taking place, and this is just the tip of the iceberg.”

Although electronic trading has been part of the FX market for many years, it traditionally focused on interbank trading. Just two players — ICAP’s EBS and Thomson Reuters — dominate that segment today, with a combined market share of roughly 80 percent.


The rise of new players has effectively spawned four distinct market segments: the interbank market, which has attracted new entrants, such as Currenex and  traFXpure; a new wave of platforms like FXall, FX Connect and tpSpotdeal, which link end users like AXA with multiple banks; single-bank proprietary platforms such as Deutsche Bank’s Autobahn and Barclays’s BARX FX, which offer a wide range of customized services to clients; and so-called aggregator platforms like TradingScreen and MarketPrizm, which offer end users a variety of possibilities, such as multiple-bank price streaming, single-bank proprietary feeds and even access to other electronic networks.

“There are new market participants coming in, new methods of trading, and all in all it’s a huge growth opportunity,” says Healey. Some sophisticated traders now have seven screens on each of their foreign exchange desks just to keep up with the latest technology.

Although the proliferation of trading possibilities is shaking up the FX market, the big banks that have long dominated currency trading are seeing their market shares rise. To stay in this increasingly competitive game, banks have to spend hundreds of millions of dollars to acquire the latest technology; only behemoths like Barclays, Deutsche and JPMorgan can afford to make that kind of investment.

“If you imagine the FX trading market like a funnel, the rash of new platforms has widened the mouth considerably,” says Marc Chandler, global head of FX at Brown Brothers Harriman & Co. in New York. “But the narrow end, where most of the trading takes place, is getting even smaller as five big banks continue to dominate the market.”

One of the drivers of the multibank platforms was the series of federal and state lawsuits filed against two custodial banks, State Street Corp. and Bank of New York Mellon Corp., alleging that they had overcharged for FX transactions. Both have denied the allegations.

At issue in those lawsuits was whether the two banks were offering clients the most-attractive prices for currency trades on the days those trades were recorded. The U.S. government’s lawsuit alleges that BNY Mellon used the worst price of the day, even if the trades occurred at a time when prices were better for the client.

Although the suits have not been resolved, the allegations were disturbing enough to make institutional investors take another look at their currency trading to see if they were getting the most-attractive market prices, or what is known as best execution.

Simultaneously, in Europe institutional investors have been looking to overhaul their trading following the 2007 introduction of the European Union’s Markets in Financial Instruments Directive, which requires institutions to show their clients that they are getting best execution.

Michael O’Brien, head of global trading at asset manager Eaton Vance Corp., says his firm has implemented a best-execution policy and uses platforms to get quotes in liquid currencies from multiple dealers, from which it chooses the best quote available. “Electronic trading has lowered our transaction costs as measured by the bid-offer,” O’Brien says. “Five years ago most of our foreign exchange business was on the phone.”

Unlike equities, the spot foreign exchange market has never involved an actual exchange. Currencies trade over the counter, and there can be as many prices as there are market makers. The only way an institutional investor or other end user can be sure of getting anything like the best execution price is to compare quotes offered by a large number of banks.

Institutions like AXA and Eaton Vance that formerly relied on just one or two banks for their FX dealings now need to compare quotes from ten or more institutions to satisfy clients that each trade was conducted at the most attractive rate. Coming online nearly every month, new platforms share one feature: the ability to compare quotes. Some involve what is known as request for quotation, or RFQ, in which they basically post a potential trade online and ask banks to bid on it. Alternatively, some services offer so-called streaming quotes, in which the banks put their buy and sell offers for currency pairs, such as dollar-euro or dollar-yen, online.

“My goal is to give the traders who work for me as many tools as possible and let them pick what’s most appropriate for any given trade,” O’Brien says. “Each platform typically offers something unique that is useful to us in certain circumstances.”

For example, some platforms allow him to trade using computer algorithms, which chop up big trades into smaller pieces. That technique is useful because it disguises the fact that an asset manager is making a big purchase or sale of a currency; it’s harder for other market participants to adjust their prices and profit at the asset manager’s expense. Traders say Deutsche Bank has a particularly strong algorithmic offering. Another type of platform, such as EBS, goes out to 20 banks and gets quotes without revealing who the client is.

O’Brien believes there are more platforms today than the market can ultimately support, but he says the technology is so impressive that it’s worth waiting to see which ones emerge as the winners.

“It is a very daunting time to be keeping track, because the changes are occurring so fast and from different angles,” says Javier Paz, who follows foreign exchange trading for Boston-based research firm Aite Group. “I think the markets are still in flux and will remain so for the next year or so, until we can tell with certainty that one model seems to be prevailing.”

Although advances in technology have produced some clear gains for currency traders, there have also been some distinct downsides from the point of view of institutional traders. Perhaps the biggest concern is the growth of high frequency trading, which has roiled equity markets in recent years. Typically, high frequency traders go in and out of the market in a fraction of a second, posting bids and then removing them almost instantly, to the detriment of regular, slower traders like institutional investors and banks.

In fact, so great was the concern about market manipulation by high frequency traders that market volume on one of the largest trading venues, EBS, declined by 50 percent between July 2011 and July 2012. Several reasons were advanced for the drop, but one thing was clear: EBS’s traditional client base was abandoning the platform for other venues — an apparent snub by banks concerned about the influence of high frequency traders on the market.

In response, EBS’s owner, ICAP, moved to repair its tarnished image. In March 2012 it named a new CEO, Gil Mandelzis, to run EBS. Mandelzis is co-founder and chairman of   Traiana, a firm used by banks for its automated posttrade processing and risk management that ICAP bought in 2007 for $247 million. (ICAP sold a 12 percent stake in Traiana to seven major banks in January.)

By September, Mandelzis had pushed through a number of rule changes that make it more expensive for high frequency traders to dart in and out of the market to the disadvantage of more-traditional traders.

The main change was reverting from a decimal system to the old-style pip system, under which currency prices end in either a zero or a five rather than one of ten decimals. For firms that use high frequency trading for arbitrage strategies, primarily hedge funds, EBS’s move makes it more expensive for them to know where the market is heading. EBS also increased the fill ratio, meaning that traders are now required to complete a greater percentage of orders instead of just showing a price and then removing it in what are called flash orders.

“I believe the past decade has been dominated by ever-increasing speeds,” Mandelzis says. “The existing multidealer platforms have become too focused on the speed game. It was just too insane.”  The changes produced an immediate 17 percent rise in EBS’s volume in September. Mandelzis is promising more changes. In November, for example, he announced that the company would launch a new service, called EBS Direct, that will allow banks to stream tailored prices directly to their own customers on the same EBS screen.

While EBS is trying to regain lost market share, other players are moving quickly to try to eat EBS’s lunch and capture a larger slice of the wholesale market.

A number of big FX banks, including Barclays, BNP Paribas, Deutsche Bank, Royal Bank of Canada and UBS, have invested in a rival trading platform named traFXpure, aimed directly at the interbank spot market now controlled by EBS and Reuters. TraFXpure is owned by Tradition (UK), a subsidiary of Switzerland’s Cie. Financière Tradition. The London-based interdealer brokerage operates an FX options platform on a hybrid model using both voice and electronic transactions, and sees a move into the wholesale market as a logical extension of its business.

TraFXpure, which is slated to go online early this year, will offer a “cost-effective way of accessing good price discovery and liquidity in an environment where everyone plays by a consistent set of rules,” according to Roger Rutherford, managing director of traFXpure, a former head of FX trading at the Chicago Mercantile Exchange who previously spent ten years at EBS owner ICAP.

Without directly referring to EBS’s problems with high frequency traders, Rutherford says that “if you’re there to try and game the system or to disrupt markets, then you’re not for us.”  The platform will use technology that eliminates the advantage of so-called low-latency trading, a tactic in which high frequency traders put their servers close to a currency platform’s servers in a bid to gain a microsecond head start over other traders. All traders on the traFXpure platform will have access to the same data, including the identity of counterparties in trades, something most systems don’t provide.

“I think people like transparency and openness,” Rutherford says. “You could argue that hiding names gives comfort to people to disrupt markets because no one knows who they are. Revealing who is trading with whom at what time makes it so much more transparent; therefore you’re less likely to try to game the system.”

Not all companies are eschewing the high frequency trader, however. Credit Suisse has partnered with Forex Capital Markets, an online foreign exchange brokerage commonly known as FXCM, to form FastMatch, an electronic network offering the kind of unparalleled speed that Credit Suisse developed for its equity-trading engine, Crossfinder. “We took what we consider to be the best-in-class technology that originated in the equities end and modified it to the FX market,” says Robert Maher, the London-based global head of fixed-income electronic sales at Credit Suisse. “Now we both have access to very good technology.”

FastMatch says it can conduct trades in 100 microseconds, ten to 20 times faster than any other platform, and maintains transparency by distributing trade prices in real time.

In June 2012, FXCM paid $176 million to acquire a 50 percent stake in Lucid Markets Trading, a London-based provider of currency liquidity, from its owners, Dierk Reuter and Matthew Wilhelm. Four months later Thomson Reuters announced that it was investigating whether Lucid Markets gained an unfair advantage when making high-speed foreign exchange trades by having more than one connection to the Reuters network. “As the operator of one of the largest FX-dealing communities, providing a level and fair playing field for the community is paramount,” a Thomson Reuters spokeswoman says. In an earnings conference call, FXCM chief executive Drew Niv said that Thomson Reuters had authorized all of the connections and that Lucid had paid for them. Thomson Reuters has not disclosed the results of its investigation.

For the institutional asset manager, perhaps the biggest news was that Thomson Reuters had expanded its footprint in the currency platform market by buying FX Alliance, also known as FXall, for $625 million. The deal, which closed in August, gave one of the largest wholesale dealers an entry point into the growing institutional market.

“FXall was interesting to us because of the customer base it served,” says Jasbir Singh, head of marketplaces at Reuters. “These are new customers for us. FXall is all about the work flows suited to institutional funds: the kind of institutional investor who says, ‘I am running all these different accounts and all these subportfolios, and I want to be able to do FX across them all.’ ”

According to Singh, Reuters will keep the two platforms separate because they serve different markets. But there is no question that technology is helping the wholesale and institutional markets merge. “Reuters buying FXall is a good example of people like us believing that there is an opportunity now, as these institutional markets start looking much more like our wholesale market,” says EBS’s Mandelzis.

Singh says that despite the growth in volumes in the institutional market, it is hard to see how all the new entrants can survive. “It will be tough for the new start-ups because what you need is community,” he says. “You need all the participants to be on your platform, and if the prices are low already and you have no real distinct thing that you’re offering, then I struggle to see how they will get traction.”

FXall CEO Philip Weisberg agrees with that viewpoint, asserting that most of the new platforms are really new features or enhancements, most of which are being incorporated into FXall, and not radical departures.

“The platforms are always competing in features, but I never feel that a single client will switch because of a single feature,” Weisberg says. “They look at the portfolio of features you offer and the portfolio of liquidity you offer and make decisions based on the total package.”

Daniel Royal, global co-head of equity trading at mutual fund firm Janus Capital Group, says that although his firm uses FXall as its main platform, many of the trades take place on the telephone because FXall does not yet support the netting of foreign exchange transactions. For example, if one of Janus’s mutual funds sells €100 million ($133 million) of Bayerische Motoren Werke stock and another buys €50 million of France Télécom, Royal wants the firm to net out the foreign exchange component of those transactions — selling only €50 million — before issuing a buy or sell order.

“We’ve been working with our current platform to build that capability, and it’s been a slower process than we’d like,” Royal says.

Because of the demands for new types of services, TradingScreen, which was originally set up by two former Credit Suisse bankers to trade equities, is now getting a lot of attention. It has a number of liquidity providers available on the screen, including bilateral bank feeds and multibank networks. But it also offers software services to institutional investors like AXA. So a trader buying a foreign stock will automatically know his or her currency exposure on the screen. At the end of the month, TradingScreen’s system does a transaction cost analysis to show whether any of the FX trades were far out of the average price at the time of the trade.

“Both single-bank and multibank platforms come to TradingScreen to provide them with access to all the liquidity, as well as the functionality, which isn’t available anywhere else,” says Jean-Philippe Male, who heads the outfit’s FX and fixed-income divisions.

Another type of new entrant is FXSpotStream, which is trying to bridge what it sees as a gap in the market between single-bank platforms and multibank platforms like FXall.

CEO Alan Schwarz explains that his platform will not match prices but is an infrastructure company. It offers to connect seven banks to an institutional client on just one computer circuit instead of seven, saving the client the communications charges for seven hookups and the commission fees it would have to pay FXall.

“We’ve reduced what is a significant cost of trading for both the client and the banks,” Schwarz says. “We do not decide who the banks trade with; that’s their decision.”

With all these new platforms in the marketplace, one might assume that the bilateral platforms long offered by banks directly to their clients are suffering, but that is not the case. In fact, EBS’s Mandelzis says most of the trade volume that his platform lost last year moved to single-bank platforms, not competing multibank platforms.

“We have benefited by offering up our high-quality product without some of those negative influences,” says Marek Robertson, head of electronic sales for Barclays bank and its BARX FX platform. BARX is available to clients on multidealer platforms as well as to clients bilaterally, but only to buy-side institutions that have a preexisting relationship with Barclays.

Robertson says the proliferation of new trading platforms has tended to reduce concentration in the market and erode the position of  big banks. With the rise of a “credible number” of electronic market makers, including nonbank financial entities, “it feels like you are actually getting a little bit of broadening-out as the capabilities have become more broadly available,” he says. Kevin Rodgers, London-based global head of foreign exchange at Deutsche Bank, which II’s sister publication Euromoney ranks as the largest FX dealer in the world, says banks now feel the need to be present in many different venues besides their own to meet customer demand.

“We’re in this business to service our clients,” Rodgers says. “We can’t tell how they’re going to want to deal, and so we need to be flexible in terms of how we service them. If we say we’ve decided the only way we’re going to service them is by phone, we’re out of business. We’re dead. So that’s why we spread our bets.”

Rodgers says that although many market makers may play a role in spot trading, banks are as essential as ever to the market because of their ability to provide clients with currency derivatives and forwards.

“The specificity of the risk that’s being managed means that you need to come to a market maker,” Rodgers says. “In the world of derivatives, banks take risks and they try to offset it with other things. They’re sort of a risk conglomerate, really.”

Spot trading, the kind done by many electronic platforms, is in fact not a very profitable business, Rodgers notes. “The cost to end users per unit of risk for transacting and hedging foreign exchange has collapsed,” he says. “The reason we’re still in business is obviously the volumes have massively increased.”

Richard Anthony, head of e-risk for FX and metals at HSBC Holdings, says that although eight banks might compete for an asset manager’s business on a multibank platform, there is a new phenomenon that he calls the winner’s curse. It happens on some platforms because the banks that don’t get the business can see the winner’s bid and build positions in that currency using that as a benchmark. This is a relatively new development as banks ramp up their computer power.

“Sometimes you don’t want to win a trade, because there is an information leak to the other seven liquidity providers who haven’t won the trade, who are then able to transact around that piece of information themselves and might make risk management more difficult,” Anthony says.

Because of concerns that information leakage can tip the market to investors’ currency trades, telephone trading will always have a place in the foreign exchange market, especially when complicated trades are involved. But when it comes to bread-and-butter spot FX trading, the race is now afoot to handle this business in the most cost-efficient manner. Institutional investors recognize they can reap significant savings and use them for generating profits in other areas. The solution is to pick the best technology, but it may be some time before it is clear which platform can succeed in embracing the right mix of tools and liquidity providers that customers are seeking.