Sellside FX e-trading technology spend for investment banks, except those in the Tier I camp, is moving towards buying vendor provided offerings rather than building their own home grown solutions,in order to be more competitive in the face of a rapidly changing FX market structure, according to a new report from Greyspark Partners – Buyer’s Guide: Sellside FX E-trading Solutions 2020
The report found by 2023, 21% of Tier II banks expect to buy, up from 17% in 2018 while more notably, the figure is 36% for those on the Tier III rung compared to 28% during the same time frame
Russell Dinnage, manag
ing consultant, capital markets intelligence practice and author of the report, attributes the change in behaviour to the growth in the electronification of dealer-to-client (D2C) execution processes and workflows as well emerging or niche markets on a currency or product basis.
He notes t
hat unlike cash equities and fixed income, the FX trading technology landscape lacks a dominant player, Instead, it is characterised by a wide array of different fintech vendors competing for a constrained amount of client wallet.
Together with “the shift from a preference for pure in-house built technology to include increasing amounts of vendor technology going forward, the current equipment phase drives a tumultuous market landscape in which vendors compete both on functionality and price,” adds Dinnage.
The report also shows that the vendor community is shrinking as the larger plays aim to carve out larger market shares. For example, the past two years has seen Ion Group purchase Aphelion, Market Factory, and the FX components of Broadway Technology, pending regulatory approval. Meanwhile, Broadway bought Barracuda FX while State Street acquired BestX and Northern Trust purchased Bex.
The activity ha
s made vendor technology more attractive from a cost perspective and in total, GreySpark estimates that there are around 400 clients globally who spend above $1m annually on FX e-trading platforms across front-, middle- and back-office functions.
The report also documents the long-running changes to the structural dynamics of the cash FX market over the past three years which has led to a divergence of approaches within different types of institutions on how best to capitalise on opportunities to consolidate or rationalise hybrid in-house built / vendor-provided technology stacks.
It points to developments such as the growth in agile, new, FX trading-centric solutions that have challenged the incumbents that historically developed FX components as bolt-ons to cash equities or fixed income OMS / EMS offerings.
Moreover, the popularity of component and modular based architecture and designs led to commoditisation in key areas of the sellside FX e-trading stack.