Single Dealer v Multi-Dealer Platforms
May 04, 2023 - The most recent triennial central bank survey of foreign exchange and OTC derivatives markets – published last December based on data collected in April 2022 - shows an increase in direct execution reported via single dealer platforms.
Whereas the 2019 survey found little difference in terms of electronic trading flows, the latest edition reported that single dealer platform flows were 60% higher than those for multi-dealer platforms or anonymous venues.
Where spot matching operates as a primary market, it is well documented that during periods of volatility, trading volumes go up. For example, following the UK government’s ‘mini budget’ last September, LSEG noted exceptional growth in volumes in GBP/USD and EUR/GBP observes Geoff Jones, Director - FX Spot Venues, LSEG.
Tod Van Name, Global Head of Foreign Exchange Electronic Trading at Bloomberg refers to a number of factors that have impacted the volume of FX business done over the last 12 months:
- Rapid movement out of a zero-interest rate environment, particularly the aggressive hikes by the Fed
- Volatility in other markets, notably bonds
- Risk aversion, particularly on the back of the Silicon Valley Bank failure and Credit Suisse acquisition, but also contagion from the failure of FTX
- Increased use of electronic trading
Uday Chebrolu, Senior Vice President FX at FlexTrade, agrees that volatility has contributed to an increase in FX trading volumes, while increasing interest rates have resulted in market participants adjusting exposures in various asset classes resulting in additional FX volumes. “Rate changes have also affected volume as a result of FX hedges,” he adds.
These developments need to be put in perspective with other market trends, such as higher internalisation ratios and other risk management techniques and a larger share of direct execution between market participants, says Guillaume Carreno, Global Head of Electronic Client Connectivity at Crédit Agricole CIB.
“These are conditions that are challenging the growth of volumes on electronic platforms, both single dealer and multi-dealer,” he suggests.
One of the most widely discussed topics in the platform space is whether improved access to best execution has reduced the appeal of multi-dealer platforms.
Geoff Jones from LSEG reckons not, on the basis that multi-dealer platforms provide the simplest and most versatile solutions for clients looking to achieve best execution. “Additionally, liquidity providers are able to leverage the analytics we provide to enable them to understand and benchmark client behaviours and their own performance in ways they are not able to on a single dealer platform,” he adds.
According to Chebrolu, fragmented FX liquidity means multi-dealer platforms still retain their value.
“FX markets by nature are decentralised and tools provided by multi-dealer platforms – such as price aggregation and direct multi-venue execution - not only provide enhanced execution but also data for dealer rankings and transaction costs analysis,” - Uday Chebrolu, FlexTrade
According to Chebrolu, fragmented FX liquidity means multi-dealer platforms still retain their value. “FX markets by nature are decentralised and tools provided by multi-dealer platforms – such as price aggregation and direct multi-venue execution - not only provide enhanced execution but also data for dealer rankings and transaction costs analysis,” he says.
The best execution obligation requires buy-side firms to get the best trading outcome for their client, which is often defined as the lowest cost or best price in flow products like FX.
“From a commercial viewpoint, recent surveys and client feedback indicate that, if anything, activity on multi-dealer platforms is not challenged by the growth of single dealer platforms but rather by direct API connectivity, reflecting the greater automation and disintermediation sought after by market participants to reduce execution costs,” says Carreno.
In order to achieve best execution, access to a deep pool of liquidity across a wide range of instruments, currency pairs and execution methods is required. According to Van Name, very few banks can offer all of that, particularly in onshore trading, frontier currencies, or localised markets.
“Multi-dealer platforms can bring all those factors together and provide a seamless mechanism for price discovery, netting and aggregation of orders, account allocation, and wide range of both regional and global liquidity providers,” he says.
Platforms can also provide analytics to measure price quality, not just the inquiries that resulted in a trade, adds Van Name. “For example, a buy-side client may want to know how often a liquidity provider priced and won the trade, or were runner up, or back in the pack. They can also measure how often a counterparty declined to priced, failed to pick up request, or refused to quote.”
John Stead, Pre-Sales Director at SmartTrade Technologies, says clients often comment that they like the service and direct relationship from single dealer platforms but cannot prove best execution.
“This is an undesirable conversation for the bank and the client and there is no upside except to the multi-dealer platform that makes money charging for its services,” he says. “In response to this issue we developed a best execution report which enables the bank to provide a high level of transparency to the end client.”
As for whether this could help banks win back business from clients who have already migrated to a multi-dealer platform, Stead says that if they can offer improved pricing via their single dealer platform and commit to provide best execution reports they can make a compelling case.
Stead suggests that it has become easier to trade FX futures via single and multi-dealer platforms. “As technology has matured, barriers to entry have reduced for many vendors, banks and multi-dealer platforms,” he says. “We have seen more and more clients interested in using our technology to add futures liquidity into their cash liquidity stack as a way of maximising liquidity sources and also to provide a broader breadth of sources.”
Van Name acknowledges that there are many initiatives to make futures/cash position management more accessible, but adds that it is still a small part of the market – although if clearing ever became mandatory, the market could see an increase in futures trading.
“More dealers are enhancing their platforms to support multiple asset classes and provide additional analytics available only on their single dealer platform,” says Chebrolu. “However, multi-dealer platforms offer enhanced execution flexibility and analytics including dealer comparisons.”
In June 2022, the Financial Markets Standards Board introduced its final statement of good practice on trading platform disclosures, establishing best practices around what platform operators should disclose to their participants.
When asked whether this had improved client access to information, Jones suggests it was incremental to the changes that had already been made by liquidity providers adopting the FX global code.
“The practices benefit buy-side clients by clarifying and standardising the type of information provided by all platforms regardless of how they may by classified,” says Van Name, who agrees that they are complimentary to the FX global code.
“The electronification of FX markets has placed increased focus on the transparency of platforms involved in trading these assets,” says Chebrolu. “The statement lists best practices for platforms so users can make proper judgments regarding their trading costs and efficiency. It will take time to adopt and provide decision-making information like last look for end users, but this increased transparency will not only help current platform users but also attract new users to electronic trading.”
The statement of good practice reflects key areas of existing trading platform rulebooks. Yet, while information transparency has improved, work is still required on both sides to easily (and fully) access critical information and use it in a productive manner suggests Carreno.
“This is especially true for FX spot-only trading platforms, which are traditionally not subject to the same regulatory scrutiny and regime as those offering the full suite of FX products,” he concludes.
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