Foreign-exchange benchmarks, notably the WM/Reuters 4pm London fix, have come under fire since accusations materialized last year that traders were colluding to fix the benchmark.
Regulators around the world investigating the allegations have requested feedback on proposals to improve the benchmark, and there is no doubt the industry’s reputation has taken a hit.
However, the news could not come at a better time for P2P FX platforms, which encourage their users to trade currencies with one another, thereby bypassing banks and brokers altogether.
A number of providers have sprung up in recent years targeting businesses and individuals alike, including Kantox, Midpoint and TransferWise. London commuters have been bombarded with the latter’s advertisements – “F¥€K: your bank is overcharging you on your overseas money transfers” – which Transport for London tried and failed to ban.
P2P ideology
P2P foreign exchange works by matching buyers and sellers of currencies on a shared platform, a model that promotes buy-side liquidity over traditional market makers.
Kantox is one such platform that offers mid-market rates for spot and forwards in more than 25 currencies, and transparent fees that are published on its website. They range from 0.09% to 0.29%, depending on the transaction volumes, compared with approximately 0.5% to 2.5% or more at a bank, according to Kantox estimates.
“We look to offer mid-sized companies a simple, transparent solution,” says Philippe Gelis, co-founder and chief executive at Kantox. “When it comes to foreign exchange, big companies have dedicated resources and leverage to negotiate. Mid-sized companies go in blind.”
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| When it comes to foreign exchange, big companies have dedicated resources and leverage to negotiate. Mid-sized companies go in blind Philippe Gelis |
Founded in 2011, many of Kantox’s clients are SMEs with revenues of up to $100 million, and around 5% to 10% of clients are in the $100 million-to-$1 billion bracket.
Monthly trading volumes are between $15 million to $100 million, and Gelis anticipates that total trading volumes since inception are expected to reach $1 billion by the end of this year.
Midpoint is another P2P FX platform that charges from £10 to between 0.3% and 0.5%, depending on the transaction size. Approximately 30% of its customers are businesses, the rest individuals, according to executive director Mike Hampson.
One of the biggest challenges in the foreign-exchange industry is opaque pricing, says Hampson.
“Customers say that their bank or broker has given them the midpoint but they haven’t,” says Hampson. “There is a lot of education [required] amongst consumers, small businesses and even bigger businesses on how to question current providers.”
Ignacio Sanchez Miret, global treasurer and risk manager at international shopfitter HMY Group, is a convert to P2P FX. He benchmarked the cost of using Kantox against HMY’s partner banks and found Kantox to be cheaper and more transparent.
“Banks’ commissions are integrated into the bid-offer, where Kantox uses the mid-market rate plus a commission,” says Miret. “This makes the final cost very clear.”
He now uses Kantox more than HMY’s partner banks, and recommends the platform to other corporates.
“The banks know we are using Kantox and are not happy, but at the same time we give them other kinds of income,” says Miret. “I have recommended Kantox to two companies in Spain and once in France – of those one has started to use it.”
Furthermore, he says using Kantox preserves HMY’s risk lines with it banks. Previously he traded forward contracts through the banks, but this consumed valuable risk lines that were needed for other purposes.
There is more buy-side liquidity coming to the market that was previously locked in with the banks, says Dmitri Galinov, chief executive officer FastMatch, an FX matching system which offers a buy-side-only dark pool called AgencyFX.
The benchmark scandal is changing the way the buy-side execute foreign exchange trades, says Galinov.
“Instead of using a benchmark and trading with one bank, the buy-side is starting to use systems like ours to trade with each other as well as an aggregate of banks, and use algorithms that trade throughout the day,” he says.
Landscape evolving
The landscape of foreign-exchange trading is evolving, but banks still dominate the picture. The snag with P2P platforms is that liquidity is coming from non-market makers who have no obligation to make a price, says one head of e-commerce FICC at a large European bank.
Indeed, all the aforementioned platforms offer wholesale liquidity, should an internal match prove unavailable. They acknowledge that, for now, buy-side liquidity alone is not enough to power these platforms.
However, the long-term dynamic is changing as third-party providers start offering functions that were typically only offered by the banks, such as supply chain finance, says Enrico Camerinelli, senior analyst at Aite Group.
“The banks will be forced to be more transparent and, just like with supply chain finance, let more experienced third-party players in. Banks instead can focus on lending money and making the most out of it.”