Chauncy Stark, General Manager of Foreign Exchange and Cross Asset Trading, NAB, explains the Australian banks’ approach to technology spending.
The banking world is evolving at break-neck speed. Global banks are retreating to their core markets and new regulations are changing the fundamentals of foreign exchange and fixed income trading. Banks, especially those in Australia, are reconsidering how they deploy technology to remain relevant and meet new demands.
Foreign exchange markets were early adopters of electronic trading platforms. Over the past decade we’ve seen fundamental shifts in volume and liquidity and the very nature of the way customers trade. FX technology development is ongoing and will continue to shape the distribution and risk management of all FICC products.
NAB continues to invest in building out our digital capabilities from front office through to back office. Within trading alone we have a team of 10 dedicated e-FX specialists and they handle a range of tasks from building automated risk management algorithms through to managing databases that enable us to measure market impact across trades and clients. Conventional traders are also becoming more tech-savvy.
Opportunities at scale
As outlined above, there has been an explosion in investment in technology. New foreign exchange market-making technologies have drastically expanded banks’ ability to attract volume. As an example, the top five global banks now account for roughly 40+% of global FX volume and they are increasingly operating like exchanges in the way that they internalise risk. Therefore, in recent years, competing in FX has become a scale game and investing in technology one of the only tickets to playing in that game. The magnitude of investment required to maintain a top 10 ranking creates barriers to entry though as technology matures cheaper solutions are emerging.
That said, technology advancements also bring opportunity. Traders and sales people are able to be more innovative in the products and services they deliver to customers. The changing regulatory environment has squeezed the expansionist technology drive in favour of compliance and monitoring solutions.
FX trading technology has filtered into fixed income, commodities and other areas. Fixed income cash has successfully adopted some of the FX technology, but the picture is less clear in products such as interest rate swaps. Current electronic trading platforms cannot handle customised products as well as vanilla products. So, at this point in time, it would appear the fixed income market may be close to reaching its limit in terms of how much can be electronically traded but that could change in the very near future.
Buy-side bears the cost
Market liquidity has been quite topical. Firstly regulation is forcing banks to hold more capital and limit proprietary trading activity. This means fewer price-makers and less balance sheet available to clear client risk. In terms of liquidity, this means the buy-side will have to accept higher transaction costs. If you combine this with the SNB abandoning the Euro peg earlier this year, there is an even bigger impact on liquidity.
Though, liquidity has now normalised, we are still seeing more “liquidity holes” when markets start moving. The conclusion is that the larger liquidity providers have become more defensive in their risk settings and technology investment will help manage these risks.
Value for clients
We have multiple ways of helping each client and we appreciate that each customer is unique. Technology makes it easy for clients to get access to the products and services they need which in turn helps us develop more meaningful relationships with them.
As I’ve mentioned before, in Australia, global investment banks have retreated away from Australia and back to their core markets. Learning the needs of new clients and exploring how to best meet their trading needs will continue to be a focus for NAB.
New challenges, new technology
Providing a point of differentiation is vital. Creating a more efficient trading environment – in terms of trading, access and user experience – and combining multiple systems into one trading platform is the way forward. There is no need to duplicate multiple single-dealer platforms when they could be run together.
At NAB we are looking at opportunities to apply different technologies in unique ways particularly in the business and consumer space. We are adapting trading technology and using it in innovative ways to support other businesses.
The obvious choice is to extract as much value as we can from our investment in sophisticated technology. If we just confine investment to FX products, we are missing tremendous opportunities.
This interview has been prepared for education and information purposes and does not constitute financial product advice.
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