Most enterprises and investors have exposure to global trade and to international financial markets.
By Stephan von Massenbach, Co-Founder and CEO Howard Grubb, Co-Founder and CTO
Modular Financial Technologies
This makes foreign exchange an essential requirement for risk reduction (hedging) through a transfer of FX risk, and for foreign currency payments. The latter being a composite product consisting of an FX risk transfer and a payment component. Lately, this payment component has attracted considerable interest, as innovation has driven improvements to the customer experience.
The wholesale FX “market” is distributed, with many trading venues and participants. Some market participants act as “market makers”, accepting risk from other participants and “warehousing” this risk while waiting for offsetting transactions. Other participants operate an “agency” model, aggregating liquidity from multiple sources to seek an instantaneous match, without intermediate warehousing. A mixture of both of these models is typically used by most liquidity providers. Market users generally access this market via intermediaries and agents such as banks and brokers.
New business models and an evolving regulatory landscape put increasing pressure on existing operations and lead to an erosion of margins for the entire marketplace. Higher capital requirements and the capital expense of large trading operations have contributed to a reduction in risk warehousing capacity. Some of the initial benefits of aggregating liquidity sources are increasingly offset by reductions in liquidity, as more participants move towards an agency model, and by greater market-impact costs, not only for the intermediary, but also for the market user.
Other market participants, such as large corporate and institutional clients, are increasingly exposed to a degree of market risk in this market structure, as well as to greater market-impact costs when executing risk transfer trades. Some clients have adopted “algorithmic execution” as a way to mitigate market-impact, but this brings both costs, for using these services, and risks, since the client retains the market risk throughout the execution lifetime.
Access to wholesale financial markets previously required significant investment and costly trading infrastructure. However, technological advances and a maturing of the electronic marketplace now make wholesale markets accessible to all participants at lower cost, without significant up-front investment and development costs. Risk warehousing and more passive execution strategies to reduce market-impact are available to more market participants and not just the largest banks and intermediaries.
Increasing automation is also a means to mitigate conduct risk. Modular Financial Technologies provides automated risk management, trade execution, client pricing and advanced analytics solutions as-a-service. These services greatly extend access to the “risk transfer” product of wholesale financial markets, allowing market participants to efficiently transact in a complex and rapidly evolving market structure, as well as to scale their operations at the lowest cost.
Modular Financial Technologies is an independent wholesale financial markets technology provider servicing all financial markets participants – from banks and financial services firms, corporate and institutional clients, to payment services providers and new innovative business models such as peer-to-peer marketplaces.
Modular Financial Technologies is a member of Innovate Finance and an exhibitor at the Innovate Finance Global Summit 2016.
Modular Financial Technologies Limited 86-90 Paul Street, London EC2A 4NE United Kingdom www.modular-financial.com