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Electronification has steadily changed the way participants operate in the FX markets. From faster workflows to more market colour, data and analytics continue to transform different aspects of FX operations. However, this electronic shift has posed a few challenges. Vivek Shankar investigates.
Data volumes have increased significantly, and while the potential for firms to generate insights is high, this goal is challenging to meet practically. From resource challenges to dealing with the intricacies of data management, firms have found it tough to process data and reduce risk.
Andrew Ralich, CEO and Co-Founder of oneZero, adds another factor to the mix. “Over the last few years, there have been several macroeconomic events that have caused a significant increase in market volatility with more trades and data flowing through the markets,” he says. “Finding development talent to react to this change in structure, and sustain it in the long term, has led many market participants to the conclusion that they would be better off embracing managed services.”
Regulatory compliance is another significant factor pushing firms towards managed services – one that Ganesh Iyer, Chief Marketing Officer at IPC, cites. “The regulatory landscape is constantly evolving and rigorous,” he says. “Add to this the ongoing challenge of modernising systems and infrastructures that have evolved piecemeal over time, and it is easy to see why FX market participants are looking increasingly at buy not build, managed service solutions.”
Managed service models
Managed Service Providers (MSPs) highlight advantages such as cost-effectiveness (reduction in most cases) and efficiency while maintaining sophisticated risk management models to satisfy rigorous compliance needs. Industry research has long indicated that a significant proportion of FX trading flows will shift to the cloud or leverage a hybrid on-premise and cloud solution by the end of 2026. A managed service leverages the cloud and a Software-as-a-Service (SaaS) model to deliver these benefits.
Gordon McArthur, CEO of Beeks Group, the Infrastructure-as-a-Service provider, explains how the cloud powers the results managed FX services offer. “Cloud computing facilitates all manner of service provision to FX participants,” he says. “It allows quick SaaS deployments as well as platforms in colocation which can now utilise private cloud platforms to be rolled out quickly and securely. The old-school managed service model is under pressure due to the proliferation of the cloud, with clients preferring to have OpEx-only automated deployments rather than using classic Managed Service Providers (MSPs).”
Meanwhile Vinay Trivedi, COO of MaxxTrader Systems, notes that while SaaS is popular, some of MaxxTrader’s clients opt for a variation of the service. “We see a growing trend where some of our clients are also opting for the Platform-as-a-service Platform-as-a-Service (PaaS) model to have a seamless and low latency-based integration between our SaaS solution and their in-house developed solution,” he says.
IPC’s Iyer notes that there is no limit to the “as-a-service” model, whether it is trading, cloud, or Network-as-a-Service. “Many firms are looking at ‘Desktop-as-a-Service’ solutions to complement physical desktop strategies (high-performance virtual instances of desktops and apps managed in the cloud and delivered from any data centre or public cloud,)” he says.
Trivedi points out that the SaaS model works well for most clients given its simplicity. “Though for more sophisticated clients, there is a need for bespoke development,” he says. “This is why it is important to find a balance between deploying solutions under SaaS mode and having some flexibility to customise it for the clients to meet their business needs. This is the approach MaxxTrader follows by offering a turn-key end-to-end algo-trading, pricing, distribution and risk management solution with the ability for clients to write their custom algorithms, which has helped MaxxTrader become a dominant player with top investment banks, brokers, and hedge funds.”
Despite SaaS’ simplicity, the range of managed service models service providers offer can seem intimidating. When quizzed about how firms can choose the correct model for their needs, Beeks’ McArthur lists a few criteria. “The size and complexity of an FX trading firm’s operations, its trading style and objectives, level of risk tolerance, technology infrastructure, and the regulatory requirements it must meet all play a role,” he says. “For example, a firm with more advanced technology infrastructure can take advantage of more automated models.”
Despite customisation needs producing different managed service models at each firm, every solution’s ability to integrate and connect different systems remains the same. As an example, oneZero’s Ralich explains that his company’s flagship product includes customizable real-time pricing, market risk management, credit management, and trading.
“The Hub (oneZero’s flagship product) aggregates both custom-tailored streams from OTC liquidity providers and market data from listed venues across asset classes, allowing the construction of purpose-built liquidity pools which are unique and configurable for each client for pricing and market risk management,” he says. “Clients can use the programmable Algorithmic Pricing and Risk Management Modules to run their own algorithms within their Hub.”
The bottom line is that managed services operate on a simple SaaS model on the surface – this simplicity allows service providers to closely tailor solutions to their clients’ needs. As a result, every firm will likely create a unique model that works well for it, with the service provider assisting the whole way.
Digging deeper into service providers and customisation
Given the partnership-like role Managed Service Providers (MSPs) offer firms, evaluating one is critical. Trivedi notes that product capabilities, functionality, deployment times, support abilities, and upgrades to the product are critical evaluation metrics.
“A reputable and experienced managed service provider with a proven track record in the FX markets is essential for ensuring high-quality service and reliable results,” McArthur adds. “The Managed Service Provider (MSP) should have a robust and up-to-date technology infrastructure and a strong understanding of the relevant regulatory requirements.”
IPC’s Iyer points out that firms must look for MSPs that “….offer services and solutions beyond old school ‘fire and forget’ connectivity and processing functionality. It’s not just about scale benefits – it’s a combination of processing efficiency and tailored service delivery.”
“Further, small FX retail houses will have vastly different requirements from major institutions,” he continues. “Provider-agnostic service delivery and platform independence allow firms to move application delivery environments around depending on a number of different and shifting factors like performance, cost, compliance, and geo-political events.”
Ralich explains that firms must dig deep to understand the MSP’s product. “Understanding the DNA of the technology solution is important,” he says. “Many of today’s markets require specific hardware, software, and personnel to manage a complex range of asset classes. Choosing a provider who has excelled historically operating on the high-end of market demands is a good barometer for their future ability.”
Given the varying needs firms have, how should the approach customisation, and how much tailoring can MSPs offer? Ralich cites a few examples while noting that SaaS is not a one-size-fits-all model. “oneZero’s programmable Algorithmic Pricing and Risk Management Module allows clients to run their own algorithms, their ‘secret sauce’, within their Hub,” he says. “Clients can configure and administer their system via GUI and API, but can also leverage the vendor’s support to monitor and assist in optimising their own instance of the technology, through one unified interface.”
When quizzed, McArthur also lists a few examples of customization Beeks offers. “MSPs can tailor trading strategies to match the specific goals and risk tolerance of the FX trading firm, risk management can be customised, reporting and analytics, and infrastructure integration can all be customised.” He adds that MSPs can tailor their SLAs to meet the requirements of the FX trading firm, including response times, service availability, and data security.
The role of the cloud
This seemingly endless customisation is powered by MSPs leveraging the cloud. The cloud can seem like a nebulous or trendy term for technology in FX these days – it refers to flexible infrastructure hosted by service providers, eliminating the need for firms to develop and host costly on-premise infrastructure.
IPC’s Iyer explains that the cloud can mean different things, depending on the size of a firm. “Public clouds are accessed typically with pay-as-you-go (PAYG) consumption models linked to different service-level agreements,” he says. “Some users have already learned the hard way that PAYG models can become very expensive in large-scale deployment. For larger firms, this may well be the catalyst to shift to private – or shared private – clouds underpinned by a Cloud-as-a-Service subscription model.”
“Public clouds may also be unsuitable given FX players’ particularly rigorous performance criteria around end-to-end latency,” he continues. “Another potential ‘sensitivity’ relates to data sovereignty in circumstances that require data to be held in a specific location. Rather than take the risk, enterprises may elect to localise high-risk datasets in a private cloud.”
He notes that the ability to access multiple clouds gives firms the flexibility to use all the specific advantages of each cloud provider’s development ecosystem. “Multi-Cloud is not simply whether you have connectivity to all the major public clouds, it includes the buildout of a private cloud domain conjoined to one or more cloud service providers,” he says.
How does this flexibility translate to MSPs offering services to their clients? “With cloud computing, MSPs can remotely manage and monitor clients’ IT systems, applications, and data, reducing the need for on-site support,” McArthur answers. “The cloud also offers various tools and resources for automating tasks, enabling MSPs to deliver more efficient and cost-effective services.”
He says that the cloud also enables MSPs to respond quickly to changing client needs by dynamically allocating resources and adjusting services on demand. “Overall, cloud technology has greatly facilitated the delivery of managed services, enabling MSPs to better serve their clients and deliver more value.”
oneZero’s Ralich agrees that the cloud is an essential part of the solutions MSPs offer. However, it isn’t a silver bullet for every problem. “Not all solutions fit in the cloud,” he cautions. “When it comes to real-time processing of market data and risk management, it is still essential to manage colocated solutions in the major financial data centres.”
Helping firms choose the right mix of colocation versus cloud is one of the many benefits MSPs offer their clients. Trivedi summarises these benefits succinctly. “Low initial CapEx investment, quicker time to market, savings on maintenance services, tapping on global wisdom for product coverage, leveraging the economies of scale for hardware, hosting, network, storage, data, and last but not least, high-quality professional team resources,” he says.
Iyer says that the cloud is ever evolving and explains that the industry is moving towards a multi-cloud option. “In fact, multi-cloud is emerging as the de facto target IT architecture and business model, with cloud native as the default approach for application and service development,” he says.
“Despite the cloud offering significant advantages for financial firms, no single cloud service or solution can ever meet all business needs,” he cautions. “Lower-cost public clouds support non-sensitive workflows (e.g., data storage), private cloud solutions handle mission-critical operations and activities (e.g., trading) and hybrid cloud solutions offer the best of all worlds in terms of satisfying myriad and ever-changing performance, security, risk, and regulatory compliance obligations.”
MSPs and the FX ecosystem
The FX trading ecosystem is vast, and legacy solutions struggled to align various stakeholders. From buy and sell-side participants to market data vendors, the number of participants can seem mind-numbing. MSPs have accounted for this diversity in their solutions.
Ralich explains how oneZero’s product accounts for this vast network. “oneZero maintains a network of highly optimised market gateways, our EcoSystem product,” he says. “We maintain not only the APIs and connectivity required to interface with a broad range of market participants, but also monitor and manage the increasing performance demands of LPs, venues, and an expanding range of asset classes.”
Customers can thus source their liquidity seamlessly. Iyer notes that while connecting participants is one thing, deciphering data and organising it into actionable insights is critical. “Beyond efficient connectivity to multiple endpoints in the trading lifecycle, service providers must also be able to consolidate data between multiple market data sources, technologies, and trading venues, and deliver it with seamless technological and workflow integration and interoperability,” he says.
To this end, McArthur cites the various modules and resources MSPs offer their clients to help them meet this goal. “MSPs can provide access to real-time market data and sophisticated analytics tools, trading platforms customised for each market participant’s specific needs, including access to a variety of liquidity providers and execution algorithms, real-time risk monitoring and reporting, access to the latest market intelligence, guidance on best practices, and assistance with regulatory reporting.”
Powering innovation in managed FX
Given the pace with which the market is evolving, updating functionality is critical. When quizzed about the work being done to deliver more innovation in this sphere, MaxxTrader’s Trivedi says, “The key change which has happened is a deep focus on raising security and compliance levels in the hosted/managed set-up. This has given many clients the comfort to outsource their eFX solution to a managed service provider like MaxxTrader.”
Ralich explains that the cloud is powering innovation due to its scalability. “The elastic capabilities of the Cloud have allowed our engineers to manage, process, and derive insights from over 40TB of client data generated daily,” he says. “This simply would not have been possible 10 years ago at the scale, and cost, we are able to provide it today. Particularly with cloud-based analytics, the scale of the cloud allows us to equip our customers with advanced insights that previously only the best quants would have delivered.”
Iyer talks about data delivery methods as a core focus of IPC’s innovation programs. “For real-time systems the challenge is moving data as fast and securely as possible into and out of myriad clouds,” he says. “Multi-cast is the common format and mode of transport for distribution of real-time capital and financial markets data streams. It is a huge technological challenge to carry multicast into and out of a public cloud.”
“Since external networks and market data feeds rely on multicast, it needs to be integrated natively at the cloud boundary,” he continues. “This will likely be far too complex for FX firms to tackle on their own. As such, this is a key area of focus for us and others.”
McArthur chimes in by noting that the potential for automation, thanks to next-generation tech, is significant. “Artificial Intelligence and Machine Learning technologies can enhance the automation of services, improve the accuracy of data and analytics, and provide more sophisticated risk management tools,” he says. “Blockchain is also being explored to enhance security and transparency in the FX market, enabling faster and more secure settlement of trades.”
With innovation comes growth. McArthur points out that an MSP’s expertise can help a firm enter a new market seamlessly and scale quickly without incurring significant costs. “FX trading firms can reduce the costs associated with expanding into new asset classes and regions, freeing up resources for other initiatives,” he says. “MSPs will also ensure their clients comply with the regulations and requirements of new regions, reducing the risk of regulatory violations.”
Trivedi explains that the SaaS model automatically supports growth and scaling initiatives. “With managed service, your service provider can deploy a new asset class or product easily if they have the capability,” he says. “Replicating the setup in another region is also streamlined, which allows clients to grow their franchise without any hassle. We have clients who are hosting with us to fill eFX offerings from software to hosting services across four different locations globally.”
“Case in point,” he continues, “MaxxTrader recently helped a major Singaporean bank add digital asset trading capabilities with access to major Crypto market makers and advanced trading algorithms such as TWAP, VWAP and Crypto Basket trading. This was achieved in just a few weeks and with very little capital investment.”
The way forward
As technological innovation continues, where can we expect managed services to go? Where will the next round of growth come from? Iyer believes MSPs must differentiate their products beyond merely offering efficient market access.
“Highly interoperable, multi-channel communications technologies are needed to bring together an increasingly ‘distributed’ workforce (and customer base) while meeting the growing burden of transparency and conduct-driven regulatory compliance obligations,” he says. “Low latency execution is an expectation with any trading partner, platform, and service provider.”
As cloud use increases, he believes MSPs will support the paradigm shift this technology brings to the market. Trivedi is bullish on the investments his firm has made in AI providing a single API to access multi-dimensional liquidity, utilising AI for smart order routing, and building a wide array of downstream clients’ distribution adaptors sophisticated technology. He adds that an increasing number of firms will likely offboard their legacy infrastructure.
“We witnessed a very interesting change during COVID when movement restrictions made many clients realise SaaS as the way forward,” he says. “We still see some clients dealing with costly to maintain legacy on-prem in-house systems. We see the next round of growth coming from these clients migrating from on-prem to SaaS solutions – especially when finding specialised technology professionals are hard to find.”
Ralich and McArthur believe innovation within MSP services and product suites will continue, powering the next wave of improvements. “We can expect more customised and personalised services, tailored to the specific needs of each market participant, to help them achieve their unique business objectives as a result,” McArthur says.
While time will reveal where the market goes, the constant investment into innovation and customisation in the MSP world will certainly take FX workflows to a new level of efficiency.
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