The white-label solutions developed by large liquidity providers have had a considerable impact on the spot FX market over the last few years.
Traditionally, white labeling solutions were only available from Tier 1 banks that offered their liquidity downstream to partners with their own distribution channels. However, increased availability of technology and data has enabled technology vendors and providers to develop and offer their own algos which they white label to all FX market participants, including Tier 1 banks as well as the buy-side and broker-dealers.
“Proprietary trading firms have also entered the algo space and now compete directly with Tier 1 banks,” said Clinton Norton, the Global Head of Sales at Euronext FX. “This has shifted the spot FX market in that white labeling is not only for liquidity but also for technology and intelligence. Participants are now able to white label anything from smart order routing to transaction cost analysis (TCA) as well as algos and liquidity access.”
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Euronext FX has its own suite of algos which clients directly engage with on its ECN or white label to their own clients and it also white labels its matching technology and TCA to clients.
“Additionally, many of our clients connect their own (direct or white-labeled) algos to interact in our ECN liquidity pool,” added Norton. “This increased use of technology and intelligence has added both complexity and efficiency to the spot FX market.”
Kate Leaman, the Chief Analyst at AvaTrade described the impact of white label solutions on the FX market as "quite remarkable" with smaller financial institutions now having access to the same technology and liquidity as their larger counterparts. “This has really leveled the playing field and as a result, we are seeing increased competition and a much more efficient market,” she said.
White-label solutions increase access to new functionality and support faster adoption of best practices. As new partners set up white-labeled products with capabilities to host multiple entrants on the same platform, end users benefit from increased access.
“This means customers can access the same or similar products but also get access to a wider set of liquidity pools,” stated Rob Hale, the Managing Director of Financial Markets at Lloyds. “This can provide customers with a route to faster adoption of efficient risk management practices. A larger presence of white label solutions and brands could, however, make it harder for new firms to enter the market if a number [of them] become dominant.”
Patrick Guevel, the Global Head of FX algo execution at Societe Generale offered a rather different perspective, suggesting that white label has had little to no impact on the volumes traded on spot FX.
“These volumes are stagnating as we can see from the most recent BIS triennial survey and the market is so concentrated that the share of business targeted by white labeling is so tiny as to be barely visible,” he said.
From a market evolution perspective, there is a great deal of interest in the potential for electronic trading tools developed by technology vendors and buy-side firms to challenge the dominance of bank algos in the spot FX market in the medium to long term.
Guevel said that a bank algo platform is successful when it is possible to deploy bespoke technology and develop proper trading relationships between market takers and market makers .
“For sure, technology vendors will enable medium to small players to take some market share with a technological edge, but this is not sustainable if you do not develop proper taker/maker relationships and good credit management,” he observed.
“We will see some rotation between internalizing and outsourcing at these players, but no radical change in the market footprint of such solutions. A few hedge funds have tried to develop their own algo access to the markets, but they have gone back after some years and are now using the algo orders of the banks.”
According to Hale, while new technology will always change the role banks, and others, play in delivering innovation for their customers, there has consistently remained a role for banks to play when such new technology emerges.
“Banks are a constant source of insight and advice for customers and clients whenever new technology arises to challenge the status quo,” he said. “By reviewing their technological infrastructure on an ongoing basis, they are minded to innovate and improve experiences, such as in spot FX.”
Access to technology and data has made it easier to create quant trading models and has also blurred the traditional lines of FX algo consumption. Vendors, tech firms and the buy-side are increasingly using these quantitative tools to build their own execution intelligence and for the buy-side specifically, this may mean a reduction in bank algos and an increase in in-house execution tailored to their own specific needs.
That is the view of Norton, who says Euronext FX has seen several large buy-side firms moving in that direction by aggregating liquidity and data into a centralized algo execution model using their own expertise or leveraging that of a specialized technology vendor.
“This means that traditional Tier 1 banks need to continuously innovate to stay competitive and keep up with the buy-side and with companies, whose business model is smart order routing/TCA/algo creation,” he added.
Leaman agreed it is possible that technology vendors and buy-side firms could challenge the power of bank algos in the spot FX market in the coming years. Banks currently reign supreme and their algos are a major foundation of the market, but rising utilization of electronic trading instruments by buy-side companies is causing a transformation.
“Businesses are looking to decrease expenditure, boost efficiency, and get a competitive advantage,” she commented. “Although banks have considerable wealth and knowledge in this area, advanced, custom-made tools from buy-side firms and tech vendors may supplement the existing structure and maintain the market's progression.”
