Electronic platforms that combine pricing from multiple currency trading banks enjoyed significant gains in overall usage this year, according to the fourth annual institutional foreign exchange trading survey conducted by technology supplier StreamBase.
But satisfaction with the multibank platforms declined at the same time, according to the survey of 246 active market participants, 58 percent of whom identified themselves as buyside firms and 32 percent as sell-side.
Usage of multibank platforms grew 17 percent in 2012, reaching 69 percent of all respondents who executed foreign exchange trades using electronic methods. That compared to 52 percent a year ago.
By contrast, usage of single-bank platforms increased 7 percent, to 51 percent of all firms using electronic methods for broking trades. That compared to 44 percent a year earlier.
The five most widely use multi-bank platforms, according to the survey are Thomson Reuters, ICAP’s EBS system, Knight Capital’s Hotspot FX, Currenex and Bloomberg.
The top five most used single-bank platforms are operated by Barclays Capital, Deutsche Bank, Citigroup and J.P. Morgan.
And, while satisfaction is high for both the dedicated and the broad bank platforms, satisfaction fell over the past year for the multibank platforms, even as their usage grew.
According to the survey, satisfaction with the multibank platforms fell to 86 percent of users, from 91 percent. The 5 percent drop “is not significantly higher than single-bank platforms,’’ according to the report, but “it may be indicative of the need for stronger customer service” from the FX industry’s electronic communications networks.
“As a bank, you want to provide excellent service regardless of channel,’’ said James Taylor, executive director and global head of FX e-Distribution at J.P. Morgan, in an online discussion of the results.
But it can be easier to satisfy a customer, if you are working through a platform that only involves your own bank and your own systems, he said.
“If a bank is talking to a client on a single-bank or a direct connection, there’s a lot more control and understanding of what’s in between,” he said.
That means “things like latency can be much more closely monitored,’’ he said. “You can do more bespoke things for people to fit in with their specific requirements.’’
With spreads compressing to about half of one percent of a percent, aka, pip, “cost may be a factor as well,’’ in making it harder to provide custom service on a multibank platform, he said.
On one’s own platform, a bank can offer mobile applications for submitting trading instructions, alerts, special on-screen features for individual customers, pretrade analytics and even clearing information, Taylor said.
By contrast, “multibanks have to cater to the lowest common denominator,’’ he said. “By definition, they have to offer a fair service to everyone involved.”
The single-bank platforms also have the advantage of customer experience, said Soren Haagensen, managing director and heead of FX e-Commerce at Société Générale .
Customers “already like what you’re doing,’’ in terms of pricing and services, such as research, that they get supplied. So as long as the pricing stays “within the expected range,’’ satisfaction stays high.
In addition, the multibank platforms show just how fragmented the market has become, said Sang Lee, co-founder and managing partner at consultancy Aite Group.
But more platforms don’t necessarily mean more liquidity. And there remains a question of whether it means better execution of trades, Lee said.
“Even though there are new platforms, if you actually look behind at who is supplying liquidity to those platforms, they are the same exact people to whom you are connected directly,’’ said Ugur Arslan, chief executive offficer at AienTech, a multi-asset, multi-strategy hedge fund. “So even though there are more places to go on trades, that doesn’t necessarily mean there is more liquidity there.”’
And even if the multibank platforms allow you to connect to more liquidity providers at the same time, the details of the trade still have to “go to the same liquidity provider servers.’’
That means “there is always a middleman” and response times can be slower, than with a single-bank system.
Plus, “ there is a limit to how many connections you can get,’’ without introducing more latency, Arslan said.
Firms in a race to sub-millisecond execution, will, however, invest heavily in co-location servers and in-house proprietary algorithms, according to the survey.
Buyside firms may also negotiate prices with brokers; and use a “personal relationship” with a broker for “trading less liquid products such as emerging market currency pairs.’’
