FX Platforms Bridge Buy Side, Sell Side
Can e-trading facilitate more meaningful conversations between investment managers and Wall Street banks?
With more than two-thirds of foreign exchange trades now executed electronically, the relationship between trade handlers and the trade originators who are their customers isn’t what it used to be.
Correspondence that was once telephone-based now happens largely via keystrokes and mouse clicks. While undeniably less personal, the functionality and openness of today’s electronic systems can strengthen the overall buy side / sell side connection, according to Chris Matsko, head of FX trading services at Portware.
“We are seeing real benefits of capturing trades electronically in the form of enhanced reporting mechanisms and transaction cost analysis (TCA) that can help facilitate more meaningful conversations between a liquidity provider and the buy side,” Matsko said. “Instead of harming relationships, these platforms are improving them by fostering mutual transparency and trust.”
Much of the appeal of FX trading platforms lies in their horsepower and the array of capabilities on view, which in a high-touch world had been available only on an a la carte basis. This evolution is especially important given the increasing complexities and regulatory mandates faced by FX market participants.
Aside from execution, FX platforms can offer liquidity aggregation, algorithms, smart order routing, integration of multi-asset workflows, and pre- and post-trade analytics.
“Having a handle on data and analytics can improve the relationship such that providing data back to the buy side will help them identify which of their counterparties are stronger in various currencies or pairs or regions,” Matsko said. “It also might help the buy side direct trades to those counterparties, thus making the most out of the relationship.”
“The sell side wants to see good flow from the buy side, so having this enhanced reporting will inherently improve the relationship between the two through greater transparency on both sides,” Matsko continued. “It will also arm the well-prepared sell-side institution with the intelligence it needs to foster true differentiation in a sometimes commoditized space.”
Non-bank operators of FX trading platforms “are trying to solve a buy-side client problem and deliver aggregated prices — i.e. not just from one bank — and also solve software problems pre- and post-trade,” said Robert Savage, chief executive officer of quantitative hedge fund CCTrack Solutions.
Over the past five years, electronic platforms “have changed how foreign exchange is done on a lot of levels,” Savage said. “They continue to move the needle for the buy side in solving the issue of how do I talk to a bank.”
Platforms can facilitate regular buy side – sell side interaction, but given that Wall Street is a relationship business, the sell side may need to schedule supplemental face time to stay up-to-date on buy-side traders’ weekend jaunts and kids’ sports teams
“It’s easy enough for a lot of foreign exchange users, when it comes to electronic platforms, to be fairly anonymous and unknown to the banks that are actually servicing them,” Savage said. “Larger users in particular can have less real people-to-people connections, because if I’m trading a billion dollars a day, it’s going to be done electronically. across a group of banks. The salespeople at those banks — unless they’re a dedicated e-sales force — don’t even recognize it.”
But there is no buy side – sell side relationship if the sell side doesn’t deliver for the buy side, so lunch and drinks can come after the customer’s trading needs are met.
“Banks understand that FX market structure is shifting almost quarterly and now they are looking how to enhance their relationships through, for example, their algorithmic trading suites,” said Portware’s Matsko. “Over the past few years the integrity of liquidity providers has come under great scrutiny, and now more than ever, the banks need to show they can do the right thing for their clients.”
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