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 institutions

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 organisation.

Black boxes
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 management.

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 trading conditions.