Mar 3, 2017

The Electronification of Capital Markets—Not Just for Tier I Institutions

Robert Gray, Numerix OTC Derivatives Market Expert

It may have taken 15 years of regulatory reforms (such as the more recent MiFID 2 in Europe) and technological innovations, but “electronification” is now a word firmly entrenched in the lexicon of asset trading. I must say, trading has certainly come a long way since my first-hand experience in the late 90’s with the Open Outcry method on the trading floor of the Futures exchange.

We first witnessed electronic trading with equities, then with FX, and in more recent times have seen success with OTC derivatives. The electronification of the markets subsequently ushered in a tailwind for electronic RFQs platforms.

Electronic RFQ delivers a number of benefits, such as efficiencies in cost, collateral, operations, scalability, price discovery—not to mention regulatory risk reduction.

This has put pressure on old-fashioned manual workflows in FX and interest rate derivatives, equity structured products, and even commodity and energy derivatives. Keying requests manually into several single dealer platforms (SDPs), a handful of ECNs (electronic communication network), plus phone calls, emails and chats, is just no longer sustainable.

For Tier 1 sell sides and buy sides, the electronification of RFQs is critical considering, for one, the huge challenges to cut costs and increase revenue. With “prop” trading a thing of the past, it is crucial to price out to customers quickly and profitably, factoring in XVAs while attracting flow business and offering a great customer experience.

To this end, the larger institutions have fully automated the pricing response to RFQ’s from multiple sources of all but the very complex or illiquid products. This frees up sales desks to concentrate on high notional, but crucially high-margin complex trades to key clients while in the background a complex process ticks over the best balance of price, execution and risk. Equally, this automated process has been instrumental in internalizing much of the business flow that would ordinarily have been executed by various desks within the organization.

But it needs to be noted that these firms fit in Tier 1 status, meaning they benefit from large IT and quant teams, financial engineers and the budgets to get the job done. So what of the rest of the market participants—the smaller sell sides and buy sides? Fortunately, their “electronification” futures can also be bright—it’s just a matter of considering alternatives.

For Tier 2 and Tier 3 firms, an outsourcing solution in the form of a product price discovery and RFQ automation platform may be the way to go. This can help to quickly, efficiently and compliantly execute trades without taking on the overhead demands of the big banks. And while most of the outsourcing providers on the market offer single asset class solutions, there are multi-asset class solutions that are available, such as Numerix’s Oneview Distribution.

It’s also useful to know that connectivity should not be an issue with outsourced trading platforms. The majority (if not all) back office systems and processing venues, such as Traiana, can be connected using APIs (application program interfaces), and most of these are standardized, even for exotic options and structured equity products. To put things even further within reach, the cost of hosting or buying dedicated servers is dropping due to competition from Amazon, Microsoft Azure and others.

I have personal experience with this. For example, I spoke to a European bank last year that could only physically respond to a few handfuls of FX option RFQs per day. Comparatively, we have an existing client in Asia that handles literally thousands of RFQs per day using an automated process, which has elevated the bank to considerable prominence and profitability in the region.

My point is that in the capital markets a lot of time and energy are spent hunting profitability, but if you’re overlooking efficiencies gained by using software to replace manual process in the RFQ space, which can be a key differentiator for efficiency, profitability and client experience purposes, you may be missing real potential to adapt this part of your firm into a flow business.

Learn more about electronification, best practices and how they're impacting OTC businesses by joining Rob and Numerix on:

*Available Now On-Demand* - March 16th at 9am EDT/ 2pm GMT for our US and Europe webinar Electronification of Illiquid Markets: Can Structured Products and Exotics Become a Flow Business?

Register Now to Watch On-Demand»


March 21st at 4pm SGT for our Asia webinar Electronification of Illiquid Markets Asia: Can Structured Products and Exotics Become a Flow Business?

Register Now to Join Us Live»


Robert Gray, Sales Manager, EMEA, Numerix
Robert Gray is an OTC derivatives market expert at Numerix and a long time industry veteran in the space. His career began in LIFFE trading for ten years in Futures and Options for Lehman, SGF (now ICAP) and Tullett and Tokyo plus a brief stint on the IPE trading Brent Crude Oil. Following the end of Pit Trading, Mr. Gray began a sales career with roles at Standard and Poor’s and SuperDerivatives, Saxo Bank and CMC Markets across EMEA.

A 3 year break as the Chef and Proprietor at The Butchers Arms in Great Dunmow was followed by a return to FinTech spearheading an OTC Derivatives Pricing and RFQ solution for a traditionally Back Office focused software company. He is currently a sales manager for the EMEA territory with Numerix.

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