What to Expect From Edgewater in 2023 - Exclusive Interview With COO Matt Kassel
April 25, 2023 - Sam Low from LiquidityFinder recently caught up with Matt Kassel, Chief Operating Officer at Edgewater to get an update on how Edgewater’s business has evolved over the past few months and what we can expect from the company during 2023.
Sam Low (LiquidityFinder): We’re here to discuss what to expect from Edgewater for the rest of 2023 and beyond with COO Matt Kassel.
Matt, before we look to the future, can you give us a quick bit of background on Edgewater, and an update on what’s been happening at the firm since we last spoke a few months ago?
Matt Kassel (COO Edgewater): Essentially, Edgewater is the same business as it was the last time we spoke a while back but we've gone through three or four different iterations of the business over that time.
SL: Have those iterations been on the basis of growth in the company?
MK: Absolutely, we're growing fast with our revenues increasing 50 to 100% year on year for the last four years. This is good, but also quite scary! I was a bit concerned that 2023 was going to be the year that stopped, but we're on track for that type of growth again this year so - it’s all good!
SL: Have there been any challenges with that kind of growth?
MK: Yes, when I started, there were six or seven of us and now we've got over 100 full time staff. We have migrated from being a small company to a medium sized company, opened up offices in various countries and it's operationally quite a different beast than it was a couple of years ago.
I’m now trying to recruit operations staff in each country where we operate. It’s a challenge that we relish to get to know applicants in different regions, and just an enormous undertaking to staff up a business that's as scalable and growing as quickly as ours.
Once we put Edgewater out there, integrate it with leading venues over time – EBS, Hotspot, FXSpotstream, Integral, BidFX – before you know it, you’re getting dozens of names asking for bilateral credit with our PB. Managing this growth while maintaining the level of service that defines our business is an enormous task as well, so we've actually added another PB with Standard Chartered.And through increasing our distribution and scaling in that on-shore market liquidity, we've on-boarded banks and hedge funds.
All That said, I'm proud, I'm busy, and it's all good that we've built something that's got value to the market - it's really nice to be able to get out there and to get the word out.
SL: What is the core product focus at Edgewater?
MK: Well, we still have our bread and butter product of liquidity and aggregation but one of the big changes that took place from 2017 through 2018 was that we now use our own technology, pricing engine and matching. Not only that but we manage this through our own data centers and have built up 375 active clients on the system.
SL: Is this technology that you own?
MK: Yes, this tech has been built in house and it is actually good and I'm really proud of it. You could say that we have turned into a tech company - we now have 18 developers on staff. We’re still focused on our bread and butter execution services but technology is central to Edgewater’s business and our growth over the past five years.
SL: Are you providing this technology as a service now?
MK: That’s right, yes. We are now also in the white label product business, supplying our products and technology directly to a subset of our clients, customized to their unique requirements and workflows. We have a pretty unique kind of target audience for that technology because of NDFs, and currently have 24 white-label clients right now using our product. NDFs have become a big part of our business and you could say that we are the market leader in Latin American NDFs.
SL: Is Latin America a key focus for you?
MK: Our focus on Latin America was initially through the work that Rob Sanchez and I were doing in Mexico, and we have grown out from there. Since then, we've hired some key people including Andres Cifuentes who joined us from Morgan Stanley. Charles Achoa also joined the team from RBS where he was the lead on their Latin American business and has opened our Sao Paulo office - so we are currently onboarding more staff there. Also Jose-Antonio Buenaño who was the head of the LatAm business for Calyon for years. He now heads our office in Chile and runs the Latin American sales group and the US sales group globally.
SL: How is the Edgewater team working together in this period of rapid growth?
MK: Well, in Latin America, we've got a team of 15 people. It has all been about key hires, aligned goals and driving together to get there as a team. We’ve created a pretty flat environment at Edgewater and everyone, myself included, does what is needed to get the job done. We are all cut from the same kind of cloth which is really helpful.
SL: Are there any other markets that you are focusing on
MK: We are hoping to grow our business and achieve the same in Asia during 2023 as we extend our focus there. I'm actually headed out to Mumbai shortly, and then on to Singapore and Korea. So I'll be gone for quite a bit to take this to the next step out there.
SL: What’s going to be your core product focus in Asia?
MK: The message is that we can provide to clients free technology - to local, onshore regional banks. This is similar to what we have done in LatAm, like Banco Estado, BCP, XP Investimentos, for example. Wherever the country is, wherever the onshore liquidity rests, we've built technology to take that onshore liquidity, stream it into our technology and then have it priceout an NDF. And it's got a forward curve, of course, that’s left over, which can then either be sent to a partner bank or back to the onshore market makers to manage themselves.
SL: Is that offering new to these clients?
MK: Yes, at first, they were sending their Forwards out to other people because they had never managed that Forward risk before. Now they're finding it to be incredibly valuable, often in ways which we never really anticipated, such as, essentially, managing their interest rate exposure and risk. Turning the spread compression on the onshore rate into an NDF has been incredible. For example, I saw something not too long ago where one of the ECNs had posted that they had done record notional volumes in Latin NDFs of hundreds of millions of dollars.. On that same day, Edgewater was the provider of the entirety of NDF flow to that ECN.
SL: I've always been a big believer in the NDF market and extending access to retail investors. How do you think the retail market can access this - can Edgewater provide that and how?
MK: So, we do provide liquidity to the retail brokers, mostly as spot NDFs. They have a very different kind of product that they offer out there for Crypto and CFD environments but we haven't offered this LatAm liquidity to the retail players yet, we're mostly just in spot. We do have plans and there should be some news coming out relatively soon.
SL: So you've got a Singapore data center. How is that going?
MK: That's actually been a big success story for the second half of 2022 and for 2023. We're off and running and having a partnership with the MAS [Monetary Authority of Singapore] that has been invaluable. They have very good connections with various sovereign wealth funds who have begun to use our product. I'll be out there meeting with them again soon.
SL: What will you be focusing on during your visit to Asia?
MK: Everyone is really focused on Edgewater getting involved in Asian NDFs, which is why I'm heading out there. We are going to spend some time in Asia this year in a more meaningful way than we have in years past. So I would say, the biggest project for 2023 from this point is going to be rolling out the on-shore/off-shore technology to Indian and Korean local onshore banks and getting that product up and running. Alongside that, staffing our Mumbai office, and staffing a Seoul office, and turning Asia into the giant that it should be are our goals and aspirations for the region.
SL: Looking at banks, is the relationship that a bank has with Edgewater purely a technology relationship or is there any kind of credit relationship?
MK: It can be either of the two - or both. Our market makers in Latin America – or, soon, in Asia – are in a relationship with Edgewater from a technology, credit and a distribution perspective.
SL: Do you have an example?
MK: Yes, let’s say that you have a small bank in Chile that has a phenomenal asset management and real money pension fund, strong inventory and a solid client base. As it stands, they don't really have the reach or the breadth to reach a hedge fund in Connecticut or an emerging market hedging desk, so they would go through a firm like Edgewater. We would use the credit that we can receive from our Prime Broker to connect. Edgewater would stand , not just on a technology basis, but also a credit intermediation basis, between that hypothetical hedge fund or EM hedging desk and the bank in Chile.
So that's one example of Edgewater acting as not just a technology conduit, but a credit intermediator. We have one large fund that does have the access to reach one of the market makers, for example, in Peru, and they have asked us to set them up in a bilateral way, which we have - and Edgewater is not a part of the trade. We don't use our credit or our Prime Brokers in this use case, we just provide the technology for them to connect with one another.
We're happy to do either setup, bringing solutions to the market and connecting people through technology and particularly through Edgewater technology, that is the goal.
SL: Does that mean that in some senses, Edgewater’s platform is a central limit order book (CLOB)?
MK: No, because it's not an order book. Although all of our onshore and NDF liquidity is firm with single digit millisecond response times, and over 99% fill ratio – which is all probably good news to the very focused, no last-look marketplaces that we are moving toward – but no, it’s not a CLOB. The rates that we're putting out there are streaming rates. They are not resting bids and offers on a central limit order book so I would not define it as such. I would just describe it as firm inventory liquidity the same way that JP Morgan does it with Eurodollar, for example.
SL: So the firm prices that come into your system can come from a regional bank in Mexico or Brazil or wherever, and are then distributed to people in other parts of the world, but through Edgewater as the central counterparty? Not different banks in Mexico putting bids and offers into the system and matching each other via Edgewater?
MK: That's correct.
SL: Does your technology allow those banks to become market makers?
MK: Absolutely. Each one of them that takes the technology as a market-maker has the ability to participate in streaming rates if they want to. They can add bids and offers into the system on their in-house rate engine, or we give them their own rate engine within our stack. There's an enormous amount of flexibility in what they can do, how they can show their interest and their skew and maximise their market making abilities.
SL: That's hugely valuable, not just to Edgewater, but to that bank down the line because they can reach counterparties in all parts of the world with Edgewater as the facilitator….
MK: Yes. Just to elaborate on how this has really developed: we have a couple of market makers using our platform in Chile. Chile has got some debt just like everybody else does – the US has enormous debt, the UK has enormous debt – but here in the US, for example, we have the economy and the financial markets to sustain that. But countries, perhaps in Latin America or Asia might not have the ability to reset their debt from say 9% to 16%. So, when you do an NDF and you have that forward curve being spit back to you, it's basically an interest rate.
The difference between the spot and the offshore rate is managing that interest rate risk. If you do it every month, and every quarter, and every year, you end up with this rolling interest rate. And this allows people to manage their interest rate risk, their issuances that they know are coming in 30, 60, 90 days or whatever it might be. And they can hold on to that forward exposure or dump it in the marketplace to manage their risk.
This is another tool in their sandbox that they never had before working with Edgewater. They're telling us that the vast majority of the market making that they're doing right now has less to do with the spot or the offshore NDF rate, and more to do with trying to get as much Forward exposure as they can get to manage this, which is a larger book in their franchise.
SL: Well thank you Matt. I think that has given us a pretty good overview of the business. Thank you for sharing your time with us and best of luck throughout the rest of 2023 with what is looking like a pretty busy year for Edgewater.
MK: My pleasure Sam. Great talking with you.
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