In Emerging Markets, the FX Landscape Is a Case Study in Disruption | The Financial Technologist

Who disrupts the disruptors? In emerging and frontier markets, local banks are answering that question with modern technology and unique paths to liquidity. The global foreign exchange (FX) landscape is a perfect example. In recent years, large financial institutions have entered emerging markets for the first time by trading local currencies and establishing their presence in the local markets to better serve their global clients. With powerful technology and deep pockets, these firms have wrested significant market share from both the local banks as well as the smaller, more regionally focused banks that have historically dominated their currencies. How? It boils down to a lack of modernization. In most emerging markets, FX trading is defined by outmoded processes, from manual price discovery to voice trading. The global insurgents have robust electronic capabilities in these areas and more – particularly in the equities market, but increasingly in FX as well. The combination of their technology, headcount and reach means they can fill more trades and serve more clients with a wider array of execution solutions – all while maintaining more bandwidth to innovate. This dynamic has caused significant disruption in emerging markets – but the incumbents aren’t going down without a fight. Instead, they’re fighting back with disruptive technology of their own. The result: local banks aren’t just surviving the influx of global competition, but thriving. It starts with the right strategy. For many banks, outsourcing their FX trading technology represents the best path to modernization – their internal development teams simply aren’t big enough to move at the speed required. But to outsource successfully, the platform must be flexible enough for these firms to make this technology truly their own, with custom-built liquidity pools, a wide range of maker and taker capabilities, configurable visualization tools and choice of anonymous or disclosed matching. It must offer integration with any backend system that may play into the workflow, including the complex homegrown systems that are prevalent in emerging markets. Finally, the traders, who may not be used to working with cutting-edge technology, must have access to training and IT support as they ramp up. Once the local banks have determined that they can retain this special sauce, they need the tools to make the most of it and to scale, with the goal of replacing their manual, voice-based workflows with consistent pricing, reliable fill ratios and extremely fast and secure trade execution. Core requirements include high-performance rate engines and smart order routers to fuel price discovery and algorithmic trading, as well as low-latency network and execution algorithms and efficient post-trade processing. All of these must be augmented to fit local requirements and workflows. At Edgewater, we work with emerging markets banks every day to implement these foundational elements, helping them achieve faster, better results for clients. That efficiency can go a long way toward helping these banks win back their local market share – but the counter-disruption doesn’t stop there. By working with the right partners, with the right connections and worldwide recognition, these firms can source order flow and resting interest globally, whether in their home currencies or G5 pairs. With support for all regions, trade sizes, time zones and execution methods, they become more competitive across the board. It’s a natural next step once the necessary technological foundation is in place. Once this playing field is leveled, the business results come naturally. All else being equal, local banks will always have a natural advantage over global players. The local market wants to transact through the entities that have built their identities on being established players in their home market. The global market wants to trade with banks that actually control, warehouse and specialize in their own home currency. The right technology makes these approaches viable. In this way, the emerging markets banks are turning the disruption equation on its head. Instead of losing local market share at home, they are winning global market share from global competitors. This has created a virtuous cycle of innovation that has benefited FX markets on the largest scale. The first movers in each emerging market obviously stand to gain tremendous benefits for themselves, but they are also applying significant pressure on their local competitors, driving modernization for all. That means FX markets today are more transparent and more efficient than ever before, with smoother information flow and a better foundation for new ideas and innovative strategies. All of this has a powerful impact. These capabilities have the potential to create significant workflow benefits for an increasing number of trading functions (including in other asset classes, like fixed income), as well as an increasing number of frontier markets and overlooked regions. Thanks to the cloud, modern networking capabilities and other advancements, markets that were once too small to warrant a local presence from global players and technology providers are now attractive targets. This has the effect of bringing the entire world closer together, helping emerging markets to emerge faster and global markets to become more efficient. There’s one final aspect of this story that often gets lost in the context of business priorities and competitive pressures: pride. Local banks feel strongly about protecting their longstanding status as market leaders and being their clients’ first call for any need in the markets – as they should. Technology is helping them reclaim and maintain this position, yielding not just business growth, but also a greater sense of excitement, engagement and focus among employees. These benefits extend across the entire locale. When local banks are able to credibly make the claim that their firm and their country is a hub of global activity, everyone is more likely to buy in. This disruption hasn’t come without a few business casualties, but ultimately, the local banks that have adapted and embraced modern technology are ushering in a better, more global FX ecosystem. That means easier market experiences for all and clearer paths to helping clients meet their financial goals – and that’s something everyone can get behind. Read more articles like this in The Financial Technologist. Download your free copy here.