Over stretched pricing engines feeling the pain
John BrennanHead of Innovation at Cognotec
John Brennan sets out why upgrading and adapting pricing engines to
meet the demands of the marketplace is currently a priority for
many financial institutions.
Over the last ten years the foreign
exchange market has evolved to the extent where many banks pricing
engines are no longer adequate for them to remain competitive.
Upgrading and adapting pricing engines to meet the demands of the
marketplace is currently a priority for many financial
In the current environment of profit generation across a wide and
disparate range of clients, new and more segmented markets the old
bank/corporate/retail internal division of pricing is no longer
appropriate. Multi-bank portals, the growth of margin trading and
the opportunities offered by white labelling are compelling reasons
for banks to start to invest in pricing capabilities and to
integrate these horizontally and vertically through out the
The attack on banks competitiveness is happening on a number of
fronts. These include: speed of distribution, accuracy of pricing,
integration strategies and meeting the needs of new and emerging
customers.First and most important, there is a need for speed.
Banks need to be able to provide executable prices quickly to a
variety of trading channels if they are to attract and retain
business via online platforms.
Allied to this, is the need for accurate pricing: black-box driven
algorithmic trading models enable margin traders to take advantage
of arbitrage opportunities created by off-market prices in seconds.
A robust bank rate which is constantly changing to reflect market
conditions is a banks best defence against opportunist traders.
In fact, professional traders and in particular margin traders are
a rapidly-growing market for banks, however few banks have
harnessed technology to efficiently meet the specific needs of
different client groups, especially those that are newly emerging
and whose demands are still evolving. Many banks currently have a
variety of disparate systems with which to service corporate,
retail and internal customers. Now, new solutions enable all a
banks clients to be serviced from a single platform and prices can
be tailored automatically. This is financially advantageous as well
as offering efficiency benefits. In addition, the ability to
produce a single, reliable bank rate enhances the banks market risk
Finally, banks need the capacity to deal with increased volumes.
The competitive advantage leading-edge pricing engines offer banks
who have been early adopters has led to increased volumes from new
clients as well as those who have been serviced by other areas of
the bank for instance Wealth Management, Treasury or Prime
Brokerage. Again, a consolidated bank-wide pricing engine should
enable this business to be serviced from a single electronic
platform. However, this platform needs to be highly scalable if it
is to cope with vastly increased transaction volumes.
A step back in time
A brief consideration of the historical development of pricing
engines demonstrates that banks havent traditionally changed their
technology in order to deal with the forward movement of the
market. A decade ago, dealing via telephone was widely replaced by
online trading. However automation of the front end wasnt matched
by an upgrade in the automation of price discovery. Both systems
have largely been based on Request for Quote (RFQ) technology where
a price is generated on a demand basis, and then held for a period
time before a new price is generated in response to a customer
enquiry. The advent of online portals such as FXall, created a
demand for streaming prices however most banks responded to this by
creating what appeared to be a stream from the dealer side based on
RFQ information. In doing this, RFQ price engines have become
stretched beyond the task for which they were intended.
Pain in the market
The fall out from this situation has been that banks have
experienced pain in the open market either resulting from the
distribution of off-market prices, or because they have been slow
in comparison to true streaming rates and have lost out on
business. On top of this, banks have found that the cost of dealing
with its own customers has increased in line with the number of
available dealing channels.
The answer to this conundrum is the development of true streaming
models which distribute live, executable prices from the beginning
of the trading process.
For the dealing desk, the true depth of the market can be observed,
while safety features such as hit protection mechanisms can be
employed automatically. Further, changes in market conditions are
reflected in the prices distributed by every one of the banks
dealing channels with next to zero latency.
Opportunities and threats
However, while true streaming prices are essential for the safe and
efficient servicing of clients, it is important to state that the
RFQ model is still highly relevant to many customers. But it must
also be said that adapting a true streaming model for RFQ use is
easier and more secure for the bank than continuing to use an RFQ
engine to provide a customer-facing veneer of streaming prices
which isnt backed up by sophisticated protective tools, ie the
ability to automatically pull out of date prices in volatile
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