What Are Multi-Dealer Platforms?
Multi-Dealer platforms are a great example of how technology continues to improve markets. These electronic platforms are non-exchange financial trading venues which enable trade matching between counterparties, offering pricing from a selection of investment banks.
After the introduction of electronic broking systems in the inter-bank market, some Foreign Exchange vendors created electronic trading systems for their customers to transact with them electronically. Initially, these systems, known as “single dealer platforms” (SDP), were provided by large Foreign Exchange trading banks as a means for broker clients to deal directly with the bank. The decreased profitability of the interbank market, alongside growing demand for foreign exchange services from a range of clients, led to the development of new software. Notably, client demand for more diverse pricing led to the development of MDPs such as FXall and 360-T.
These platforms quickly rose in popularity with the prevalence of algorithmic-based trading further flourishing in this new diverse landscape allowing algos to take advantage of a wide range of pricing inputs and liquidity sources.
Whilst the majority of agency trading takes places on these multi-bank platforms, some liquidity providers do still use single-dealer platforms such as Barclays’ platform BARX. Many banks prefer for their clients to use SDPs firstly due to the obvious reason that there is no competition from other providers but also because it helps them to develop more relationship-based pricing as they increase their understanding of specific client needs and finally because the platform provides a good opportunity for the bank to upsell and cross-sell its clients to various other services and products. In a clear move intended to retain clients as well as attract new clients, who might otherwise have opted for the diverse pricing of the MDPs Barclays has recently introduced GATOR, an add on it to its renowned single dealer platform BARX, which uses a hybrid execution model combining external liquidity with Barclays own liquidity and thus combines the benefits of both SDP and MDP models.
Improving Best Execution
The prevalence of algorithmic trading has also been employed by brokers and liquidity providers to help achieve best execution with, for example, the advent of “Smart Order Routing” (SOR) which benefits both the liquidity providers (sell-side) and the liquidity takers (buy-side). Sell side SOR helps firms choose between execution venues to achieve the best possible price and minimise fees whilst buy side SOR seeks to minimise execution costs and offset market impact by managing multiple execution venues. The BARX Dynamic Router is an example of SOR which looks to route orders to venues with the greatest likelihood of filling the order so as to minimise information leakage.
Better Trade Cost Analysis
Algorithms are also being increasingly employed to achieve best execution by real money players too who might, for example, need to use a time or volume-weighted approach to filter a large order into the market whilst minimizing market impact. Technological advances in electronic trading are also helping traders monitor their trade costs with MDP platforms providing increasing means of monitoring trade cost analysis which seeks to identify the cost of any delay in execution, the cost of demanding liquidity, opportunity cost and also performance against a specified benchmark.
Better Reporting & Analytics
Platforms such as 360T distinguish themselves by their enhanced reporting and analytics which offer a highly granular breakdown of trade capture metrics measured against industry benchmarks. The benefits to clients are plentiful: 360Ts FX platform (360TGTX) offers over 500 pricing streams offering clients unique differentiated liquidity which can be specially customised for individual client needs. Clients also benefit from ultra-low latency matching technology with 360T providing rea-time tick data at 67 seconds allowing for ultimate price transparency.
More Effective Transaction Cost Analysis
This better level of price transparency is what makes platform such as FXall so popular with corporate users. Clients are able to undertake much more efficient transaction cost analysis. Through optimising trade execution, users can better evaluate the cost and effectiveness of their execution strategies to make better pre-trade decisions such as liquidity provider selection.
With the technological advancements of these platforms continuing to benefit business needs, these platforms look set to gain further market share as clients pursue more advantageous trading conditions.