Can single-dealer and multi-dealer platforms happily co-exist?
Client behaviour has demonstrated that there is room for both SDPs and MDPs in the foreign exchange markets. The combination of SDPs and MDPs has consistently driven innovation in the marketplace and serviced the multitude of functional requirements across the various client sectors.
What does a SDP offer that a MDP might not?
SDP should generally be more feature/functionality rich, have greater breadth of products, more liquidity and greater price precision than a MDP. That’s because a SDP can typically focus investment in a more targeted fashion than a MDP, given there are fewer stakeholders.
That focussed investment should result in a platform that accurately aligns the capabilities of the platform provider to that of the platform’s target clients.
In the case of Autobahn, the SDP delivers many compelling advantages over MDPs. These include: Zero brokerage cost for either side of the trade; execution management services such as inside fill and ATOM that allow our clients to interact with all the trading desks of Deutsche Bank to reduce spread cost; seamless introduction of new products; cross-product execution capabilities; and access to the full suite of Deutsche Bank’s pre- and post-trade analytics and research through the Autobahn toolbar.
Are there services that a MDP can provide that a SDP can’t deliver?
There are certain subsets of our clients who want to use MDPs, and there are elements of functionality that MDPs are better positioned to meet their needs than SDPs – specifically in meeting certain fiduciary responsibilities and elements of client workflow. To facilitate such client needs, we actively support MDPs by providing competitive liquidity and pricing.
Proving best execution is becoming an important requirement for your clients, and MDPs can deliver that, for the cost of a brokerage fee. Are there any other costs they need to be aware of?
From a client perspective, there are additional costs associated with the use of MDPs. These costs are not confined to the most obvious case, namely brokerage; there is also a cost in both functionality and pricing precision.
Some MDPs can introduce latency into the price, or limit the number of price updates that reach clients, particularly in volatile market conditions. Some streaming models use technology that effectively makes it impossible to offer the precision and bespoke flexibility of pricing that many clients demand, compared with what we are able to offer on our SDP. This effectively creates an indirect cost to both the end user and to the liquidity provider.
How do you plan to one step ahead in the electronic platform race?
Part of our leadership role in the market is to drive innovation, creating new solutions for our clients; that role requires continuous investment in people and technology. The solutions we devise can manifest themselves in many forms: award-winning cross-asset margining; pre- and post-trade analytics with algo execution strategies; or complete trade repositories with full post-trade amendment capabilities. But irrespective of the nature of the functionality, we will remain committed to investing in solutions that enhance our relationship with our clients.
MDP market share is now one-fifth of total market volume. Isn’t that at the expense of larger dealers such as Deutsche Bank?
We have found no evidence that the volume growth in MDPs resulted from a shift from traditional voice business, or indeed a transfer of business from SDPs. We believe the recent growth in MDP volumes is a function of the overall growth in electronic business and that it has not come at the expense of voice trading. Rather, the growth is due to increased trading activity that is enabled by greater transparency of liquidity and price, ease of electronic execution and improved workflows for clients. To a greater or lesser extent, both SDPs and MDPs have delivered this functionality to the market and have experienced the benefits of increased volumes.
It’s become easier and more efficient to trade for everybody. But how does that benefit a customer where FX is not a minute-by-minute concern?
Clients trade more when they find greater transparency, when trade execution is painless and when trade booking, cash-flow forecasting and post-trade reporting are simplified. Until recently, a portfolio manager trading equities at a real money institution may have passively hedged his or her FX exposure because it was a second-order risk, rather than their primary focus.
The portfolio manager may have been unsure of price, ill-informed regarding liquidity, and then the associated workflows were frequently labour intensive. Greater transparency of liquidity and price, combined with improved pre- and post-trade functionality, means that the portfolio manager can hedge their FX exposures actively and without losing focus on their first-order risk. All of these dynamics result in greater FX trading activity across the board, for both the MDPs and the SDPs.