Banks face tough choices over single-dealer platforms

Convincing buy-side clients to execute on a single dealer platform (SDP) is a tough sell. 

Even though banks maintain that executing on SDPs will result in zero information leakage to the wider market, best execution requirements mean it is almost impossible for asset managers to trade on a platform operated by a single dealer. And so most go to the likes of FXall and Bloomberg, where they can put multiple banks into competition for the best price.

True, SDP volumes have improved. According to a study by the Bank for International Settlements (BIS) published last year, average electronic spot FX trading volumes from 20 SDPs grew between 2019 and 2022 from around $300 billion-a-day to roughly $450 billion.

Some could say this growth may be down to banks offering more competitive pricing to woo clients.

At a time of continued margin compression, the issue for banks is whether the resources needed to build, maintain and upgrade their SDPs will be worth the volume they see on them

Others have put it down to a larger effort in making their platforms more of a value-add for clients by beefing up the analytics tools available on them, with an emphasis on an improved user experience. They have also been adding execution for illiquid emerging markets currencies and exotic FX options that can’t be done on the multi-dealer platforms (MDPs).

Even last year, Nomura launched an upgraded, low-latency SDP based on HTML5 architecture. The relaunch of the platform by the Japanese bank was one of the first new SDPs in quite some time. 

Yet their volumes are still dwarfed by the MDPs. Figures from the New York Federal Reserve’s FX committee’s semi-annual survey – which break out various execution venues – showed that average daily SDP volumes across FX instruments were nearly 60% of the electronic communication networks (ECNs) daily volumes in October 2023. 

At a time of continued margin compression, the issue for banks is whether the resources needed to build, maintain and upgrade their SDPs will be worth the volume they see on them. 

Furthermore, some dealers say larger corporates are becoming similarly cost conscious, and as a result they are turning to execute their spot and FX swaps trades on the MDPs.

Some banks are recognising this trend, and instead of forcing companies to trade on their own real estate are starting to think about how they can enhance client workflows and their experience on the MDPs – providing automated execution on trades under $5 million notional, for instance. 

There may come a point where the number of players that can be all things to everyone will shrink. This could mean the number of wholesale FX providers could go down. 

Faced with this reality, some suggest there will eventually be partnerships, with smaller banks focusing only on core services and clients and outsourcing everything else, including their SDPs, to their much larger peers.

At the present time, not all SDPs are down and out. Even those smaller banks that run an SDP say smaller and mid-cap companies prefer using them for convenience, instead of seeking price competition. There are also some cost-effective alternatives, such as third-party vendors to help build, upgrade and maintain their platform for them. 

Finally, as banks link up their SDPs to more aggregators and execution management systems, they could have a greater chance on competing with the MDPs on price.

The next release of FX volume data will really show if there is a bright future for single bank-run platforms.