It’s no secret that many of the technology firms that dominated the FX OMS and aggregation space for years are struggling to maintain momentum as the industry evolves. To those who attend industry events and follow the news, the writing is on the wall. However, it may not be evident exactly why these previously entrenched powerhouses are struggling to preserve their relevance.
From my perspective, sitting in the midst of the ongoing ‘connectivity revolution’ in the Retail FX space, the answers lie not in marketing struggles or lack of demand (FX volatility over the summer has been as high as I can remember), but in 5 key technology and product positioning challenges that will prove quite difficult to overcome in the long term:
- Pricing Pressure
For years, early movers in the FX aggregation space benefited, uncontested, from the ability to bilaterally charge both Takers (Broker clients) and Makers (Banks and non-banks). Unsurprisingly, the time when a technology provider could make $5/mio+ on both sides of an FX trade has ended. Brokers are demanding better pricing, and banks are reining in their willingness to spend on flow because their margins are under assault from the numerous non-bank pricing providers that have entered the space over the last two to three years. As a result, firms that built their marketing, technology and operational machines around these margins are now struggling to make ends meet.
Additionally, in the Retail FX space, stable connectivity into the MT4 platform has become a standard necessity, not an ‘add-on’ or ‘nice to have’. Rather than establish OEM deals with one of the 'Big Three' Bridge providers, many legacy firms spent years attempting to develop their own MT4 connectivity, at great expense and with questionable success. Over that time, several of those 'Bridge' providers evolved into complete Aggregation venues offering the combination of viable OMS/Aggregation functionality on the back of proven MT4 connectivity. Consequently, legacy aggregators have been forced to adjust their pricing to expectations that have evolved up from the traditional $2.50/mio Bridging cost, rather than down from the $5-10/mio their aggregation-only products made in years past.
- More LPs is No Longer More
In my early days in the FX technology space (2008-2009), the CEOs of major aggregation venues paraded through conferences and dominated panel discussions, championing the proposition that “if you are blending 50 LPs into one aggregated feed, then 51 will be better!” Though there was a time and place for this brute-force pricing approach, it is not viable in today’s market.
Relationships are now driving LP pricing terms. Many of the firms that approach oneZero for price Aggregation are doing so with two or three Liquidity providers and a desire for more regional, customized approaches to liquidity management. They naturally expect redundancy and quality of execution, but they also require relationship-managed flow control rather than 'winner takes all' pools that force dozens of LPs to battle for a share of the pie. In the face of this growing trend, old-guard firms that hung their hat on broad-based relationship-indifferent connectivity are now struggling to re-build their own relationships with market makers, and are re-evaluating their investment in single-source SaaS based deployments.
- Antiquated Technology Foundations
Through no direct fault of their own, firms that were the first to provide Aggregation/OMS services in the FX space are now reaching the “twilight phase” of their technology stacks. In this phase – which occurs after the 'early rush to market', 'clean-up' and 'productization' phases –successful software products enter a period of decline wherein making changes becomes as difficult as steering the Titanic. However, FinTech products require constant re-invention and re-implemention of major architectural components in order to remain relevant in a changing market. This comes with performance, stability, functionality and scheduling challenges that can be daunting for any team. For ancient legacy products whose developers have long since moved on, they can be insurmountable.
A good example of this can be seen with the influx of demand for CFD pricing by Retail FX firms. A seemingly trivial request from a broker such as 'bring in CFD pricing alongside my FX pricing in a single platform' presents a myriad of technical challenges for monolithic legacy platforms that built their margin, pricing and NOP calculations around the sole concept of CCY1/CCY2. It would require a an extensive amount of 'tweaking' (read: resource and time expenditure) for them to adapt to such a request, whereas a younger, more extensible code base would be able to adapt to such demands quickly and with a higher chance of success.
Considering that many legacy platforms currently struggle just to keep up with the most basic needs of Retail FX firms (e.g. ticket flows, distribution demands and performance), it seems clear that legacy providers will continue to struggle to maintain relevance as client demands call for new development.
- Degrading Operations Quality / Turnaround
The massive opportunity presented by the FX space over the last decade has drawn the attention of a multitude of new participants, many of whom come with pre-established distribution, support and technology teams. If there’s one thing I’ve learned over the past 6 years it’s that technical competency, solid architecture and extensive design and QA processes are not the only pieces of the puzzle when it comes to delivering successful solutions for the 24/5 global FinTech market. At oneZero, we know that Operational Support is an incredibly critical component.
As companies evolve, attrition takes its toll on an organization’s ability to provide the real-time support necessary to meet the stringent demands of the FinTech space. Not only do these companies start to shed the founders and architects of their technology, they also lose the 'go to' individuals who knew the platform inside and out and were capable of quickly responding to support requests.
When you are the only game in town, it’s easy to skimp on Operations. Unfortunately for the legacy providers, brokers now have options.
- Credit Challenges / Life After SNB
In what I’m sure will be referred to for years to come as an inflection point for the entire industry, the SNB crisis sent a tidal wave sweeping across the entire FX marketplace, forcing technology providers to sink or start swimming. The declining willingness of Tier-1 PBs to provide direct credit access, the demand for additional compliance and risk controls and a consolidation in the Prime of Prime space are all catalysts that have accelerated the effects of points 1-4 above on the legacy technology providers. Reliance on traditional 'many-to-one' aggregation models is challenged by lack of clearing, lower leverage and strained capital requirements. Functionality adaptability is an imperative, a result of mandates from clearing firms, brokers and traders. Operational efficiency is more important than ever, as firms are tightening their leniency for loose Risk Management practices and transparency. Regulators, brokers and clients are increasingly aware of systemic issues and are providing additional external pressure. As a result, brokers have accelerated their search for new ways to internalize and manage risk and cut costs, and are aggressively evaluating new options for differentiating client experience and monetizing flow.
Solutions to these challenges will not come from the same script and architecture that has governed platforms in the past. The need for quick movement and reactive shifts in business model design all tend towards a new marketplace of FX connectivity participants. Only time will tell if legacy FX Aggregation providers will be able to adapt, or if they will continue along their current trajectory and become a relic of a bygone era.
