Why Single-bank Systems Are Losing Ground

As the operator of FX Grid, a global inter-institutional connectivity and trading network, linking market making banks to FX market participants, we are getting good visibility in how other systems are performing. During the hectic days in May that put strains on everybody’s systems, we know for instance who had outages. (Integral did fine by the way. Read more in our press release and in an earlier blog post.) Single-bank systems were among the ones that suffered the most severe outages. I see this as a clear indicator that their decline is ongoing, despite some marketing hype.

Greenwich Associates already reported in April 2008 that “single-bank systems are failing to keep pace with the growth of multi-dealer platforms.” (E-Forex Comes of Age, Greenwich Associates, e-Forex Magazine, April 2008). In analyzing the results of its 2010 FX survey, Euromoney magazine made several observations that substantiate this claim. Euromoney writes: “The top three banks in the survey accounted for 40.44% of the total market in 2010, compared to 45.99% in 2009.”While Euromoney doesn’t say to where the market shifted, the fact that it continues to move away from the largest financial institutions suggests that single-bank systems are still losing market share. In my opinion, multi-dealer systems have clear advantages and the market seems to agree. Here are the four key arguments that proof my point.

Point 1: Mind the dealer in dealer-sponsored systems

Single-bank systems are also known as dealer-sponsored systems. If you are an active FX market participant looking for a partner to provide you with better technology and access to great liquidity, single-bank systems might be on your short list. My question to you is what is it worth to you? Is it worth providing a potential competitor with detailed information about your customers, your deal flows and yourself on a daily bases? It’s the modern times Trojan horse! Also, consider the switching costs and headaches if your requirements change, or if you become unhappy with the execution of the deal. How easy will it be for you to divorce yourself from something that is so entangled into your systems?

Point 2: More is better when it comes to liquidity sources

While single-bank systems started to offer some access to multiple liquidity sources, they just cannot match what multi-dealer platforms deliver in that respect. Our system offers access to 60 liquidity providers with over 170 streaming data feeds. As importantly, Integral is always looking for ways to increase that number and build out the network. We actively encourage what we consider positive network effects because it benefits all of our customers and entices them to trade more. As a neutral technology provider, increasing volume is our way to increase our revenue.  A single bank system is much more guarded in that respect since the operator of the platform is also a broker or a bank: As such, they compete directly with every other liquidity provider for market share.

Point 3: Flexibility keeps everyone honest

Competition is good for business. This axiom is true as well when you are selecting your business partners for a successful FX trading operation. Just by selecting a provider, you don’t want to surrender your right to choose. Since all of our solutions are provided On Demand, switching out liquidity providers, prime brokers or trust banks is extremely easy to do. I am not saying you need to do so in order to be successful but the fact that everybody involved knows you can, keeps them honest and forces them to provide you with the best offer they can afford, day in and day out.

Point 4: No judgment, pure facilitation

Integral automates the FX business you already have in place. We don’t force changes upon you so you fit into an existing mold as many single-bank systems do when forcing you to fit into their existing platform. We offer a utility-like superstructure, for you to use the way you deem best. Whatever works for you, we help you automate it and make it more profitable.  If you think you’re getting the same from a single-bank system, I encourage you to inquire about the layers of filters they put in place before giving you access to their market.

The best of both worlds

Let’s say you are really happy with the liquidity stream from your single-bank system provider but want to increase your flexibility. I encourage you to get in touch with us to explore your options. Chances are your single-bank system is also a liquidity provider to our network. You will be able to continue trading on that feed.  It just won’t be your only leg to stand on anymore in an emergency.