the Nordic countries Regional e-fx perspective on >>>

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1 Regional e-fx Perspective Regional e-fx perspective on the Nordic countries D enmark, Finland, Norway and Sweden are usually somewhere near the top of any league tables of the most technologically advanced and e-enabled countries in the world. No surprise then that e-foreign exchange services are well established in the region. Nonetheless the size and natures of their distinct economies condition the way that their currencies behave and the trading opportunities that they offer. By Richard Willsher Four hi-tech economies, three niche but liquid currencies and a number of banks and service providers competing tooth and nail to gain customer business, make the Nordic countries an intriguing case study in e-fx trading. 76 april 2013 e-forex Denmark with a population of 5.5 million, has staunchly opposed adopting the euro but over 50% of its trade is with the EU. Although the country punches well above its weight in terms per capita GDP, the Danish Krone (DKK) barely registers on the Bank of International Settlements (BIS) 2010 Triennial Central Bank Survey on global foreign exchange market activity accounting for just 1.6% of turnover. Yet its two largest banks, Danske and Nordea (technically headquartered in Sweden) offer worldclass e-foreign exchange services on e-platforms. Finland has a population of 5.3 million and unlike the other Nordics is inside the eurozone. Again technologically advanced, its major corporates, banks and institutions routinely use e-platforms to transact their forex business. Norway meanwhile stands on its own among the Nordics as a major oil producer, yet its 4.7 million people barely use the oil that is produced there. It runs a serial trade surplus with the rest of the world resulting from oil exports and has one of the highest per capita income levels on the planet. The Norwegian Krone (NOK) is in effect a petro-currency and accounts for 2.6 of global forex turnover, according BIS research. The problem facing the monetary authorities is keeping the lid on its value versus other currencies, especially in times when there is a constant demand for safe-havens. Sweden meanwhile is the largest of the Nordics with 9 million people. Its exports of highly engineered equipment and vehicles, and forest products enable it to achieve a healthy current account surplus. The Swedish Krona (SEK) accounts for 4.4% of global foreign exchange turnover. It s biggest banking hitters SEB, Handelsbanken and Nordea, all provide e-forex services. Consequently although turnover in the three Scandinavian currencies is small by comparison with the major traded pairs, the market is relatively deep and relatively liquid. And the word relatively provides a clue as to why they present trading opportunities. Liquidity can be challenged periodically, and economic and other news factors can cause volatility in these currencies. These can include knock-ons from other markets, equities in particular, trade statistics, (Sweden in particular) and oil price fluctuations (Norway). Against this geographical and economic background the Scandinavian currencies are routinely e-traded. Platforms There is no lack of platforms on which to trade Nordic currencies and on which Nordic clients can trade nonnordics. The Nordic region has embraced electronic trading on both single bank portals and multibank venues since the early 2000s, explains Paul Tivnann, Bloomberg s head of foreign exchange and commodities trading. At Bloomberg, we are seeing a shift to multibank venues within Nordic countries, especially in the corporate space. This trend is mirrored across other developed markets around the world. As in the majority april 2013 e-forex 77

2 of Western European countries, FX execution in the Nordic region has been slowly transitioning from voice trading by telephone to electronic execution venues over the past decade. What originally began as demand for spot trading has expanded, not only in breadth, but in complexity... Average daily values settled by currency (January January 2013) Chris Barrett, head of liquidity sales, marketplaces, EMEA at Thomson Reuters adds, As the FX market has contracted globally and banks have been looking for new business, the Nordic market has been crowded further by international banks trying to increase their market share of the local FX business. Average daily volumes settled by currency (January January 2013) The local banks do not have the resources and client base to justify investments in their e-fx businesses in the same way that global banks are able to. As a result they have to work smarter and look for technology solutions that make business sense and enable them to fulfil their ambitions and compete with the larger banks on a level playing field. The growth in e-fx is likely to come on the back of investments from the buy side, where further technology investments are likely to make them more competitive versus the larger banks and will enable efficiencies, which mean local partners can enhance their pricing over e-fx channels. Paul Tivnann We are seeing a shift to multibank venues. As in the majority of Western European countries, FX execution in the Nordic region has been slowly transitioning from voice trading by telephone to electronic execution The banks unsurprisingly are putting up a strong proposition against both multibank portals and international bank competitors. We are a leading Nordic bank with a full service offering to all tiers across all asset classes, explains David Steiner global head of e-trade at Danske Bank. We offer electronic forex platforms to all client segments of the market on all the multibank portals. e-fx in the Nordics is a fairly mature market, but it is still growing. You can see selective strong growth in certain segments. For example, in the demand for direct market access (DMA) of FX products by alpha driven clients such as asset managers, hedge funds etc. A significant majority of our trade and volume is through electronic trading. There are not too many new clients left to put on the platforms as there are very few tier one clients in the Nordic countries that don t trade electronically already. I don t think that you could find a single tier one client that doesn t trade electronically today. Therefore, at this stage in the development of this 78 april 2013 e-forex

3 in order to have an even stronger footprint across the customer segments that we serve, and to have a state of the art platform, we are creating a new proprietary platform that we will launch this year. This will cover more services than the existing one and will be more tailored to individual customer segments. Copenhagen service, it is more about adding more services and products to benefit the existing community. That is why we are launching towards the end of this year a new one-point of entry platform which will go above and beyond the trading needs of our clients. Arch rival Nordea also has strong e-offering as Thomas Vinding the pan-nordic bank s senior director, head of e-markets explains. In FX we cover all customer segments. We serve institutions, hedge funds, large corporates, SMEs and retail. Our approach has always been to have a proprietary platform. We have offered something on the web since the year Then came a second version of our e-markets platform in 2006 and recently we have made a total re-engineering of the e-trading backend and starting to use algo-based techniques to improve quoting and speed also towards multi portals. The majority of our users are Nordic customers but we also have clients in the Baltics, Russia, Poland and the US. That 2006 platform has been great success. It has given us a very strong footprint in the mid segment, for example among SMEs doing corporate hedging, risk management, FX and rates. On the platform we do spot and forwards, swaps and some additional variations of those. Whereas our former strategy was one-size-fitsall, albeit customisable, I don t think that strategy works anymore because competition for customers is growing. Banks are trying to niche their offerings. So To complete the picture Stina Norrhede Global Head of e-fx Trading and Distribution at Sweden s SEB, the third of the big bank players in the Nordics adds, I think the use of electronic trading will continue to increase especially for larger ticket transactions with algorithmic execution. There will also be a continued focus on cost for both banks and buy-side clients leading to more electronic of flows in general. Our clients often have very long-term relationships with SEB. Still that doesn t mean we re not facing tough competition from the tier one banks. It s important that we continue to be on the break of the wave for new technology. For SEB that means to constantly evolve our offering to suit the Nordic region and be the number one bank for Scandi currencies globally. Also growing in popularity among our clients globally, both FI and Corps, is Blocktrading on our proprietary platform. Here we ve seen and are expecting a big boost in electronic volumes. Probably because we offer streaming prices rather then RfQ together with fully automated post trade allocations. David Steiner Our vision is to integrate products from across all of Danske Bank, not just the Markets space. It is about adding more services on top of the core trading services hence the launch of a new platform towards the end of this year to better service the changing needs of our clients 80 april 2013 e-forex

4 Buy side clients Despite these offerings and technology leading position of the Nordic countries, research by Greenwich Associates suggests that migration from voice to e-trading has been rather slow as compared to the rest of Europe. Interviews with over 200 buy side clients including large corporates, institutions, fund managers and hedge funds found that only 60% by volume of trades were transacted on-line. Also the migration from voice to single platform to multi-dealer platforms has been slower in the Nordics than elsewhere in Europe. Volumes of voice trading are also quite stubbornly holding up as compared to other European markets. Talking to technology platform providers in the region, whether banks or multibank portals, it quickly becomes clear that there is a dual push towards bringing as many buy side clients into the e-environment as possible and offering them the most attractive package of e-capabilities. Not only large multinationals see benefits in using electronic execution. You also see medium sized and smaller buy side organisations finding added value in using e-tools, says Alfred Schorno, Managing Director 360T Group. There is still room for a higher level of integration among tier two and tier three buy side clients. At the same time large corporates are always interested in becoming more efficient, in using additional products, in optimising their intra-group trading and keen to lower operational risk by using electronic tools like 360T s Multi product portal or our I-TEX intra-group solution. Among institutions, I believe we will see an increase for growth on Alfred Schorno Among institutions I believe we will see an increase for growth on multibank portals because of upcoming regulatory requirements and transaction cost analysis... multibank portals because of upcoming regulatory requirements and transaction cost analysis. Chris Barrett at Thomson Reuter spots other changes in the way that buyside clients such as corporates, asset managers, hedge funds and institutional investors now behave. Historically the buy side in the region has been very active with FX traders running treasury operations with sizable risk mandates. The Nordics have traditionally been an early adopter of new technology, one example being how the Nordic buyside were leaders in adopting the new multibank e-fx channels over a decade ago when they were new to the market, as well as the buyside s early adoption of new price aggregation technology in the region. Over the past few years Stockholm 82 april 2013 e-forex

5 pricing from the aggregator platforms, as compared to a euro-dollar transaction. Thomas Vinding The future will be web based. It will also belong to mobile devices however this has changed considerably and FX flows from these operations have dwindled as risk mandates have been taken away. Electronic trading on the buyside has reached a mature level and further expansion is likely to come from a deeper penetration into smaller client segments. Adding more services So while it is a given that clients will always be looking for best execution, this in itself is not enough to win a client s repeat business. The main battleground is in additional services. Danske s integrated approach demonstrates how these can be delivered. The e-market is fairly mature, very competitive and sophisticated, says David Steiner. Danske s clients are using e-fx for all their pre-trade, trade and posttrade needs. Our vision is to integrate products from across all of Danske Bank, not just the Markets space, to include cash management, trade finance, financing and so on and so forth. It is about adding more services on top of the core trading services to include all the other areas where we can support our clients, such as compliance and regulation for example. Also, extra pre- and post-trade services such as research and clearing services in addition to their regular OTC services. Our clients say, keep us informed, tell us what we need to do and help us through the process. And that is what we do. Stina Norrhede at SEB confirms that there is a distinct trend from products to services. Many of the Nordic banks have moved away from product Thomas Vinding at Nordea is very clear where his bank s offering to buyside clients should be focused. We want to market our niche expertise and Scandi currency market-making internationally. What is important to us is connectivity. We need to make sure that we are connected with the market places, with the customers, with the banks that have an interest in Scandi currencies. We are seeing a lot of growth in this and we have all the infrastructure in place. We have the new FIX standards, we have a very strong e-fx franchise on the Scandis and we use all kinds of automated stuff on our price production page based on algorithmic trading. From the customer point of view, Vinding continues, it is important that we can offer all currency pairs in the world, including emerging markets. Though it is not the strongest trading franchise that we have. We quote to Bloomberg, Reuters, 360T, Hotspot and FxAll. And we are also quoting bank-to-bank. But because of the lower liquidity in the Scandi currencies it is not always beneficial for our customers to take their Marcus Hooper There is an awful lot going on at the moment. There is a lot of challenge in reconciling the industry s viewpoint with those of regulators april 2013 e-forex

6 Agora Global Consultants, a specialist market trading technology firm. Everybody exploits algorithms at some level, at some time or other. If you ve got a complex, slightly fragmented market and you want to get round several sources of liquidity and do it quickly in multiple currencies, at one point in time, the only way you can do that is electronically and an algorithm is what you use. He also notes that algorithms and more especially the transition to electronic trading platforms tends to open the way for high frequency trading (HFT) strategies. In order to be able to play in the market, HFT looks for an e-enabled market and liquidity so that they can analyse trends and volatility. After a while they start to manufacture their own future as their own trading gives rise to new volatilities that they can exploit. oriented client offering, which has been reflected in their organisations. One of the reasons for doing this, speaking for SEB, is to provide one point of entry to our clients. The formation of SEB s Markets organisation, headed by Joachim Alpen, was a crucial decision to be able to continue to invest heavily in our product offering, keeping our specialist organisation and at the same time making it much more efficient. While confirming the increasing role played by algorithmic trading which she believes will continue to be popular, she adds that in less liquid currencies the art of managing risk still quite often exceeds algorithmic execution. The view that algorithmic trading is increasingly popular comes as no surprise to Marcus Hooper of Oslo Copenhagen As yet however HFT seems not to significantly have caught on in the Scandinavia currencies, in the broader hedge fund market. Danske s David Steiner notes that there is a need for algo trading or direct market access (DMA). Algorithmic trading is primarily being sought by the alpha generating sub-set of the market. As an international Nordic bank we see demand from outside the Nordic countries but we do not see a strong demand from the Nordic markets themselves. Similarly prime brokerage (PB) services seem not be widespread among the Nordics as in some other markets. The need for credit seems to be the sticking point. SEB however seems to be leading this market as the only Nordic bank offering FX PB services. We offer full service across all clients sectors and product types including HFT and options. PB is strategically important for us in many aspects, says Stina Norrhede. Retail FX Credit seems also to be the principal reason why the major banks, while ministering to some parts of the retail segment, have steered clear of the day trader community. Danske s approach fits this definition. David Steiner says, Retail is a highly demanding subset of the market. The day trading community is a very sophisticated one and products are really advanced. It is a highly competitive space to be in and also involves reputational risk for the bank as well as a high risk for the client to take on. That is partly the reason we don t do highly leveraged offerings. At Nordea, Thomas Vinding says, We considered going fully into the retail segment but decided not to. 86 april 2013 e-forex

7 Regional e-fx perspective on the Nordic countries Firstly, it doesn t suit the Nordea brand. It is relatively high risk. And then the vast proportion of retail trades are euro / dollar and the majors generally. We assist private individuals with the risk management, hedging etc. but we are not in the margin trading side of the retail business. Stina Norrhede of SEB says, We ve had a strong e-platform for commercial retail business since the end of the 90 s in the Nordics. In large the e-offering covers all product within the bank and services clients within the Retail, Private Banking and SME segments. Retail and start up companies are currently one of our fastest growing areas. Retail FX Day trading however has still not seen much of a boost in Sweden and from a bank perspective it is not something we encourage. This leaves a substantial slice of the market for specialist firms such as Copenhagen headquartered Saxo and FXCM. Finland-based FinFX for example describes itself as a true ECN / DMA broker and has in-depth knowledge and experience of the market and can provide up to 1:200 leverage for both currency and commodities retail traders. The Nordic FX retail market currently comprises roughly 5% of global FX traffic, says FinFX chief business development officer Stan Klebaner. The tendency for Northern European traders is to conduct business with Nordic brokers who offer native customer support as well as competitive pricing for Nordic currencies. Since FinFX operates in Finland, the majority of our Nordic clients are from Finland. The account size of a Finnish client is significantly Helsinki Stina Norrhede We offer full service across all clients sectors and product types including HFT and options. PB is strategically important for us in many aspects less than the global average (retail) FX account size of US$2,500. Swedish retail clients are the exception. Swedes represent the largest FX accounts and bring in the majority of volume amongst our Nordic clients. Reliance on automated trading strategies and sound risk management are re-occurring characteristics that make up the bulk of our Nordic business. Klebaner goes on to explain that the overarching themes that characterise customers requirements are fast and fair execution and competitive and transparent pricing. FinFX operates a pure STP model in providing DMA access to traders. The outlook for the future looks pretty positive for the development of retail trading in Nordic countries, according to Klebaner. We see Sweden as the market with tremendous upside. Factors that contribute to our decision-making are population growth, Internet penetration as well as per capita GDP. To ensure our success within the Swedish market, FinFX will be releasing an updated version of our site along with customer support infrastructure. Additional liquidity will be made available in catering to SEK crosses through arrangement with regional local partners Unsurprisingly perhaps given the prevalence of advanced mobile communications in the Nordic region, Klebaner notes that FinFX research indicates that Nordic traders use mobile devices as a tool to monitor their existing accounts as well as to adjust their exposure in order to mitigate risk. The majority of our traders automate order execution which enables mobile to complement their existing trading infrastructure. Mobile is also an important area of development beyond the retail segment as well. David Steiner says that Danske s clients currently have a need to receive information on mobile devices both smart phones and tablets though they may not trade using them. Whether or not they trade on their i-phone, they do want to receive information about their positions for example. Nordea s soon to be launched, upgraded platform will also have a seamless interaction with mobile devices. The future will belong to mobile devices. Customers will be able to connect, and interact, and post comments to us from mobile devices from wherever they are, says Thomas Vinding. Regulation and compliance While mobile will be one area for new technological development in e-fx trading in the Nordic region, a more prosaic but crucial driver will be the growth of regulation and compliance requirements. And it is a Stan Klebaner Reliance on automated trading strategies and sound risk management are recurring characteristics that make up the bulk of our Nordic business. push and pull relationship. On one level, regulatory and reporting demands will require more and better data handling capabilities. On another, electronic data will drive the need for greater efficiency as Agora Global Consultant s Marcus Hooper explains. I am seeing growth in e-trading by banks, asset managers, hedge funds, institutions and this is being driven by process review and process analysis. There is a lot more accountability going on throughout the entire industry. For example, transaction cost analysis is something that has taken five-to-ten years to become popular in equities and is now becoming increasingly common in FX. This is challenging because benchmarking pricing is lot more difficult to do in FX. But a lot of it is about demonstrating accountability and demonstrating risk control as well. Electronic enables you to track these things much better. You don t get human error. And as you do this you enable the market to become computer driven rather than people driven, he says And in pre- and post- trade services there is just more and more demand for record capture and audit against a highly refined record trail, continues Hooper, In this regard I would refer to what is happening with regulation and margining. There is an awful lot going on at the moment. There is a lot of challenge in reconciling the industry s viewpoint with those of regulators. 360T s Alfred Schorno believes that multibank platforms will play a significant role in regulation compliance and reporting. These changes will focus buy side organisations to use regulated multibank portals more than in the past. The European Market Infrastructure Regulation (EMIR) includes FX forwards and swaps, unlike in the US under Dodd- Frank where only options and NDFs are covered. We believe reporting requirements in a first wave will drive buyside firms to multibank portals. Clearing is still somewhere in front of us, but definitely further down the time line and will change the landscape massively, if fully required. We added FX options to our multibank portal to support these new changes. Also awareness of the Markets in Financial Instruments Directive (MIFID) best price regulations among asset managers is increasing and more FX trades will be done over multibank portals. No asset management firm wants to take the risk today of a scandal around not executing on best price. Transaction cost analysis, a big topic in equity markets, is also moving into the FX market, where tracking is much more complicated, but doable. 88 april 2013 e-forex april 2013 e-forex 89

8 Banks such as Danske, Nordea and SEB are all fully alive to the need to keep pace with regulation. They also say that the needs of their clients, particularly those that fall under different regulatory bodies, will condition their responses to what information and support they will offer. This is quite apart from their clients regulatory compliance needs around risk management, reporting and transaction cost analysis. Outlook for Nordic e-fx services So what does the e-fx future look like for the Nordic markets and their currencies? First and foremost, the move to e-trading is inexorable. The rate at which buyside customers move to single bank and multibank portals is accelerating. However banks continue to argue that given the particular patterns of volatility in the three Scandinavian currencies, their market specialist knowledge and intervention can offer customers competitive pricing and trading strategies. That said, the involvement of algorithmic and HFT strategies could condition the trading environment over and beyond the influence of individual banks. In the words of Nordea s Thomas Vinding, The future will be web based. He adds that the future will also belong to mobile devices. He believes that social media will play a part as well, with customer interaction, feedback, reviews and approvals all having roles to play as banks and other service providers struggle for closest interaction with the clients in an ever more competitive environment. Meanwhile data reporting, regulatory compliance and risk management, the buzz concepts that condition global regulation of the financial services sector, will affect Nordic services providers as in every other jurisdiction. How long the Nordic markets can remain islands in the global FX market remains to be seen. If regulation levels the global playing field and electronic markets make pricing and trading ever more transparent, it is difficult to see how any territory, jurisdiction and service provider can remain protected from outside competition for very long. AD