As FX electronic trading becomes more widespread, banks are turning to white-labelling to offer online execution. Frances Maguire looks at three different approaches to white labelling.
The speed to market gained by using a tried and tested system, along with avoiding the high start-up technology costs, has prompted banks to take a fresh look at white labelling, and more recently, to quickly break into the retail fast growing e-FX trading arena. In response to this growing trend to buy rather than build, software vendors are packaging their technology as a full service rather than selling components.
Alan Scott, chief executive officer of Velocity Systems International, an Australian software company launched in the late Nineties, which has recently expanded in the US and Europe, says that the company is at the point of changing its business model, and moving from licensed-based model to service-based.
Velocity has built all the components – the pricing engine, customer-facing GUIs, rate management, position-keeping, risk and order routing systems – to provide software as a service, or a white label solution to regional banks, primarily in Asia.
Scott says: “Regional banks are looking to fulfil customer demand for an end-to-end e-commerce solution for FX. On the other side, the liquidity providers can no longer offer a proprietary system that only hooks up to them.”
Scott stresses that Velocity is focused wholly on FX and money markets; it is not planning to build a multi-asset class system. “There are multi-bank portals, out there that do a good job, but we are not stepping into that space. We want to focus on one asset class and do that well,” he says.
The system, Velocity V-banking, is a complete FX and money market trading system for e-commerce, now being offered on a white-labelled basis. Scott says: “E-commerce has still a long way to go, particularly in these markets, and amongst the regional banks. Most of these trades are being executed by voice and managed through their internal systems. There is very little automation, as it is very much relationship-based.”
CMC Partners - a division of CMC Markets - concentrates on building relationships with third party banks and brokers who wish to distribute CMC's products and technology. The trading platform has now been distributed, either through a white label on an introducing broker relationship, to more than 100 banks and brokers worldwide. The firm was established in 1989 and was first to launch an online FX trading platform over the internet in 1996. The company provides services both under its own brand, direct to a retail audience, and by white labelling its solution to third party banks and brokers. CMC has developed and also hosts its proprietary trading system Marketmaker, offering a platform for both FX and contracts for difference (CFDs).
Marc Aspinall, head of partners, EMEA, at CMC Markets says that by hosting the software, CMC provides both the technology and the order execution on an outsourced basis for the bank. "The electronic FX market is becoming extremely competitive, giving retail and corporate investors alike exposure to some very competitive pricing and technology. Through CMC Partners, we provide the technology to service the retail and corporate clients of the banks."
He believes that banks are now understanding the complexities involved in developing their own technology solution, particularly the importance of a highly scaleable back office. The marketplace is becoming so competitive that the banks and brokers are looking for speed to market to generate new revenue streams and maintain their client offerings. Although banks and brokers typically look to distribute these services under their own brand, thereby retaining client ownership and the relationships, there are some instances where an introducing broker relationship may be more appropriate due to regulatory or resource factors. However, the company's reputation for excellence with technology allows third party brokers to leverage the fact that the client relationship will be held by another organisation - namely CMC.
Aspinall says: "This approach enables the bank to maintain its focus on marketing and distributing new products in order to satisfy client requirements. CMC will manage the whole trading and operational process, from pricing and execution through to settlement and reporting."
White labelling also enables a bank to provide corporate clients with a consistent level of service whether they trade once a quarter or hundreds of times each day. Aspinall added: "By using a white labelled solution like market maker, all clients have access to the same trading ideas, charting, news and analysis. Essentially they can trade when it suits them, as the traditional phone based broker will naturally favour the more active clients who in turn present the best revenue opportunities".
\For their part, Portware has introduced a number of key enhancements to support its clients’ advanced algorithmic trading strategies, which include an enhanced FX trading user interface to streamline the process of creating proprietary FX algorithms, either on a standalone basis or as part of complex cross asset strategies.
Ary Khatchikian, president and chief technology officer at Portware, says even though the FX dealers and ECNs have had to build this technology in the past, they are now looking to software vendors and taking on the buy versus build approach. “Their main focus is not software development. Their business model is making FX available to clients and they realise building software in-house is very expensive and risky, and they would rather white-label products that are already successful”
Portware incorporates multiple FX ECN and dealer access within its Global Portfolio Trading product, a multi asset offering across equities, FX, futures and options. He adds: “Dealers have a very difficult time providing their clients with risk controls, and risk metrics, from a technology perspective and that is what we enable in this whole process. Our risk metrics are not only used for FX but other asset classes. When trading international securities there is a currency exposure and algorithms automate the hedge needed, from the equity trade.”
Khatchikian also says there is a strong demand from the buy-side to deal with multiple dealers, from a single platform, and the sell-side have to respond to this. “Portware provides hubs to the buy-side and we are seeing a move away from single dealer platforms,” he says. But while the dealers are being forced to integrate with the trading platforms the buy-side is using, Khatchikian says that this actually reduces cost for the dealers.
Rather than building expensive front-end trading systems to trade their specific FX products, they can partner with trading systems vendors to make their market data and order routing available, in an ASP or through FIX, which dramatically reduces development costs. The buy-side is now demanding a choice of FX ECNs and dealers, so that they can co-mingle that with trading other asset-classes, such as equities.
Says Khatchikian: “Portware is bringing everything together – the FX dealers don’t necessarily need to offer trading in other asset classes as Portware has built the software to aggregate the different services.”
While Portware does not white label its entire FX trading platform it does have white label arrangements with sell-side firms for redistributing the Portware platform. In some cases clients need to upgrade from this to the higher end Portware product to access trading in other assets.
These three slightly different models show that there is a growing demand for customised solutions that enable banks to offer a full FX dealing service quickly. For many, the recent surge in retail FX investors offers banks a fast route to a new revenue stream, but all banks have corporate customers, which trade FX at various frequency. While the large corporate customers are likely to have proprietary electronic execution systems in place, many of the smaller and more infrequent corporate deals are still conducted over the phone. The increased number of FX dealing solutions and lowering technology costs means that low volume is no longer a barrier to using more efficient ways of trading and processing FX trades.
