Single Dealer vs Multi Dealer: Finding the Best FX Execution Venues

The major FX banks have been pushing their single dealer platforms pretty aggressively of late, looking to capitalise on established relationships with market participants. For example, earlier this year CitiFX announced that it had consolidated its portfolio of eFX trading platforms for corporate and professional investor clients into a new single dealer platform.

“BNP Paribas has hugely improved the analytics tools available to users of Cortex FX in the last two years, adding a real time holistic view into market liquidity across primary markets, options inventory and restructuring, and options grids and axes,” said Joe Nash, the bank’s Digital COO for Foreign Exchange, Local Markets and Commodities.

The main driver behind higher electronic activity remains volatility, although this needs to be put in perspective with other market trends such as stagnating customer volumes, higher internalisation ratios and other risk management techniques, as well as a larger share of direct execution between market participants, conditions challenging the growth of volumes on electronic platforms, either single- or multi-dealer.

That is the view of Guillaume Carreno, the Global Head of Electronic Client Connectivity at Crédit Agricole CIB, who observed that the best execution obligation requires buy-side firms to get the best trading outcome for their client, which is often defined as the lowest cost or best price in flow products such as FX.

“From a commercial viewpoint, recent surveys and client feedback indicate that, if anything, activity on multi-dealer platforms is not challenged by the growth of single-dealer platforms but rather by direct API connectivity, reflecting the greater automation and disintermediation sought by market participants to reduce execution costs,” Carreno said.

“Multi-dealer platforms remain attractive thanks to the various trading protocols they offer and the data they provide as well as the technology some use. Execution quality is no longer only defined by price and spreads,” added Carreno.

Tod Van Name, the Global Head of Foreign Exchange Electronic Trading at Bloomberg rejected the notion that improved access to best execution has reduced the appeal of multi-dealer platforms, suggesting that access to a deep pool of liquidity across a wide range of instruments, currency pairs and execution methods is required to achieve best execution.

“Very few banks can offer all of that – particularly in onshore trading, frontier currencies, or localised markets like Scandinavia,” Van Name stated. “Multi-dealer platforms can bring all those factors together and provide a seamless mechanism for price discovery, netting and aggregation of orders, account allocation, and a wide range of regional and global liquidity providers.”

Platforms can provide analytics to measure price quality, not just the inquiries that resulted in a trade. For example, a buy-side client may want to know how often a liquidity provider priced and won the trade, was runner up, or was back in the pack. They can also measure how often a counterparty declined to price, failed to pick up a request, or refused to quote.

According to John Stead, the Pre-Sales Director at SmartTrade Technologies, clients often comment that they like the service and direct relationship from single-dealer platforms but cannot prove the best execution.

“This is an undesirable conversation for the bank and the client and there is no upside except to the multi-dealer platform that makes money changing for its services,” Stead mentioned. “In response to this issue we developed, several years ago, a best execution report which enables the bank to provide a high level of transparency to the end client.”

As for whether this could help banks win back business from clients who have already migrated, Stead added that if they can offer improved pricing via their single-dealer platform and commit to provide best execution reports they can make a compelling case.

“It is not just a question of single-dealer versus multi-dealer platforms as other means of trading emerge, such as API trading,” Vikas Srivastava, the Chief Revenue Officer at Integral added.

“The costs of each distribution method need to be weighed up against the specific need when trading in certain conditions, with different currency pairs, and against specific counterparties. From here market participants can decide what the most suitable platform and technology is.”

Eurex has predicted that a growing number of single- and multi-dealer platforms will enable trading in FX futures as a result of an increasing number of dealer banks entering this market and using the bilateral trading models of FX futures as suitable instruments for transacting in short-dated FX with their clients, while reducing the impact of capital on their prices.

Stead suggested that it has already become easier to trade FX futures this way. “As technology has matured, barriers to entry have reduced for many vendors, banks and multi-dealer platforms,” he pointed out. “We have seen more and more clients interested in using our technology to add futures liquidity into their cash liquidity stack as a way of maximising liquidity sources and also to provide a broader breadth of sources.”

Van Name cautioned that although there are many initiatives to make futures/cash position management more accessible, it is still a small part of the market, albeit one that could grow if clearing ever becomes mandatory beyond UMR.

In July 2022, the Financial Markets Standards Board launched its final statement of good practice on trading platform disclosures covering all areas of the FX market and including platforms that are not considered to be trading venues under existing regulation, such as single-dealer platforms.

“The practices benefit buy-side clients by clarifying and standardising the type of information provided by all platforms regardless of how they may be classified,” mentioned Van Name. “These practices are complimentary to the FX global code.”

The statement reflects key areas of existing trading platform rulebooks, but while information transparency has improved work is still required on both sides to easily (and fully) enable access to critical information and its use in a productive manner, suggested Carreno.

“This is especially true for FX spot-only trading platforms, which are traditionally not subject to the same regulatory scrutiny and regime as those offering the full suite of FX products,” he concluded.