Bloomberg challenges FX multi-dealer incumbents

SINCE GOING LIVE more than a decade ago, Bloomberg’s multi-dealer FX platform FXGo has struggled to gain traction, while other providers, such as FXall and Currenex, have flourished. Now, though, Bloomberg’s perseverance seems to be paying off. FXGo now appears to be a competitive threat in the multi-dealer e-trading market, which is worth an estimated $48 trillion.

FXGo’s terminals are ubiquitous on buy-side professionals’ desks, the platform features a no-brokerage-fee model, and there is new improved functionality. The platform’s volumes are beginning to attract more liquidity.

Volumes on FXGo have surged 40% in the past 12 months, and the number of trades has jumped by 50% over the same period, says Bloomberg’s head of FX and economics, Tod Van Name. He declined to put a number to trading volumes.

Specifying trading volumes is problematic in the multi-dealer market because the MDPs are notoriously protective about revealing their numbers, perhaps with the exception of Knight Capital’s HotspotFX. However, FXall this month revealed its trading volumes as part of its application to the SEC for an IPO.

FXall, the persistent market leader for the past decade, controls almost a third of the multi-dealer market across its platforms. In 2010 it registered volume of just over $16 trillion, up 40% from the previous year. In 2011, volumes in the first half rose 33% from the same period a year earlier.

Thomson Reuters and State Street (which operates both the FX Connect and Currenex platforms) declined to provide growth and volume data. Anecdotal evidence suggests, though, that volumes seem to be rising across all trading venues.

HotspotFX, whose volume grew more than 300% between January 2009 and April 2011, achieved a record second-quarter 2011 volume of $4.09 trillion, 16% higher than in the first quarter. Hotspot double counts its volumes. Second-quarter 2011 average daily volume was $63 billion, nearly 56% higher than in the second quarter of 2010. In Euromoney’s annual FX survey in May, Bloomberg jumped three places to third, with a market share of 12.45%, while Hotspot was in seventh place, with a market share of 3.45%.

The opinions of market makers on FXGo fall into two camps. The first group argues that the recent healthy growth rate is from a very low base and is therefore still a small proportion of the total volume traded. The second group argues that FXGo is a liquidity channel that can no longer be ignored.

Without volume data, it is hard to disprove the first assessment, while the second, largely made by banks with less well-established single-dealer market platforms, suggests barriers to entry in operating single-dealer electronic trading platforms mean multi-dealer platforms such as Bloomberg’s represent good value.

"In the past the banks that showed little or no interest in showing clients prices over Bloomberg are now coming to us and asking how they can be more successful on our platform," says Van Name. FXGo now streams prices from 35 liquidity providers, including 19 of the top-20 banks, although, as Van Name admits, those top-20 banks are not all equal in the amount of liquidity provision they provide.

As one top-five market maker says: "You need a piece of disruptive technology to replace what is already out there in the single-dealer platform market. That’s really hard."

He continues: "I don’t think there’s a lot of appetite to build new platforms, because it’s now expensive to try to displace what is already out there. If you’re not going to do that, Bloomberg is a good option because it’s everywhere. "

As far as Bloomberg is concerned much of the recent success in attracting increasing volumes is the result of the continued development of its cross-asset-class terminal model and the flexibility to add new functionality without apparent disruption.

While fixed income has been Bloomberg territory by default for a long time, there hasn’t been the critical mass of functionality in its FX window to mean those executing trades in other asset classes are comfortable to trade in it, argues Justyn Trenner, who runs financial markets infrastructure consultancy ClientKnowledge.

Now Bloomberg has managed to find the right mix of functionality and customizable pricing. Trenner says: "One of the limitations of Bloomberg was that you couldn’t customize pricing by end user, in the same way you could in the Windows-API world. They have that capability now. That critical-mass capability has then allowed them to win adoption from a user base that always had a willingness to use their existing installation that sits on their desktop."

In many ways the Bloomberg terminal model is the envy of any multi-dealer platform and, for that matter, any single-dealer platform. It has guaranteed reliability, cross-asset functionality (both pre- and post-trade) and a plethora of other services that is unmatched by any other financial information services provider. Indeed, cross-asset product delivery has been considered the prime objective for all banks in their bid to create the best e-commerce offering.

Few question the breadth of Bloomberg’s product offering, and in the FX market, as is the case across most of the world’s trading floors, its ubiquitous IB chat is the bank-client communication tool of choice. However, some big market makers question its capacity to deal with the liquidity challenges of heavy-duty trading.

The head of e-trading at a European bank says that because of Bloomberg’s "shared pipe" system, the user experience is less than optimal, whereas a single-dealer platform can operate individual client pipes. Should an individual client trade in large size, the risk is that the pipe could be shut down because pricing cannot be differentiated for the various clients within the same pipe – the same market data must be fed down the shared pipe.

Van Name responds to this by saying that Bloomberg can accept individual streams for "tiers" of pricing from the liquidity provider, or one stream from which the banks can manage groups, or tiers, for spreading on their side.

Another big market maker says the key client bases that banks seek to tap on the Bloomberg platform are typically those real-money and corporate users that trade less frequently and that use other FX services on the terminal, such as its portfolio order management system, which offers integrated order management, compliance, execution and middle- and back-office tools for institutional assets managers. He adds that the volumes that his bank puts through FXGo are just 100th of 1% of its total volume.

Van Name says that FXGo is still very much a work in progress, and integrating customer workflow is at the heart of building its FX franchise.

"Our integration efforts have been substantial. We actually built an integration team, specifically for FX integration last year," he says. This is not just in straight-through processing, but also in pricing integration and order management systems. "We have hundreds of projects going on, not just in banks, but integrating with OMS, which is quite frankly a big part of our business, and also integration with prime brokers. All those touch points with integration we’re capable of doing, and can do on a broader scale because we’re already connected to everybody."

Bloomberg is now connected to all the main prime brokers and has wired up to seven order management systems this year. It will probably sign three more up this year. Van Name says FX users are now equally split between real money, hedge funds and corporates, with the latter its fastest-growing segment. All trading is done on a full-disclosure basis, so anonymous trading isn’t provided, and thus high-frequency trading firms are not a feature of the platform.

While some market makers argue that Bloomberg’s offering is plain vanilla, predominantly spot and forward, Van Name has his sights set on the options market. He says Bloomberg will certainly register as a swap execution facilities provider for FX options and non-dated forwards, and it has just rolled out a new, more robust version of its option pricer, OVML.

The new version has adopted the stochastic local volatility model, which has become the benchmark for pricing barrier options. Van Name says: "I challenge people to find a better pricer," adding that there has been widespread acceptance by clients for the results that can be generated using the SLV.

"We know we’ve got features that allow them to model and structure options effectively, so the logical next step is for us to add a trading capability."

Bloomberg is developing a multi-dealer RFQ model, but Van Name says there will be a variety of different models required to satisfy the demands of the client, whether it is pricing up volatility surfaces, or through RFQ. He adds that one of the other challenges for the options market in the new SEF world will be the pricing of multiple deltas and multiple tenors, because platforms can’t possibly stream all of the information all of the time, because of bandwidth limitations.

The solution will need to be one that can standardize the requests, provide price transparency and then provide a medium for the market makers that makes it easy and practical from a risk management standpoint, he says. That’s something the main single-dealer platforms can do already.

Bloomberg’s arrival as a SEF across all asset classes puts it in a powerful position when combined with its unrivalled functionality. The question will be if it can leverage that to pick up more market share in spot and forward FX. For Van Name, the work Bloomberg has put in lays the foundation for more market share.

"Clearly the investment Bloomberg has made in the FX product over the past seven years has put us on the map, and not just from an electronic trading perspective," says Van Name. "We want to be the application and FX solution of choice in the marketplace. That’s our goal and that’s a pretty lofty goal."