FX Trading and Technology Trends 2012

FX Trading and Technology Trends 2012 FX algorithms for trade execution are on the rise and here to stay. With the rapid growth of electronic trading and proliferation of trading platforms, multi-bank trading platform providers have aggressively expanded their user bases while sellside firms are concentrating on providing customized value-add services through bank electronic trading platforms. Looking forward to 2013, auto-hedging and risk management capabilities are top of mind for technology improvement among both buy and sell side firms. Key takeaways from the survey include the following: A significant 17 percent increase in the use of multi-bank platforms, and a 7 percent increase in the use of single-bank platforms. Participants seem to be more satisfied with the prices they receive from single-bank platforms. The top five most used multi-bank platforms are Thomson Reuters, ICAP s EBS, Hotspot, Currenex, and Bloomberg. The top five most used single-bank platforms are Barclays Capital, Deutsche Bank, Citi, JPMorgan, and UBS. Reducing latency, connecting to more venues, along with better relationships and algorithms are mentioned most frequently when participants were asked how they could secure better prices. Both buy and sell sides believe that minimizing the market impact with the lowest implicit cost of execution is the most important criteria when it comes to best execution. However, there is still a lack of generally accepted benchmarks.

REPORT 2 In terms of satisfaction ratings, participants are most satisfied with their current liquidity aggregation systems and least satisfied with their current auto-hedging and risk management capabilities. About 54 percent of sell-side firms plan to improve or add real-time liquidity management capabilities to optimize liquidity for customers and to manage risk more efficiently. Regulatory requirements and the growth of emerging markets will continue to play significant roles in how sell-side firms manage their FX business. INTRODUCTION In the summer of 2012, StreamBase Systems conducted its fourth annual online survey on the technology developments in foreign exchange trading. A total of 246 active market participants completed the survey 58 percent identifying themselves as buy-side firms and 32 percent as sell side. Some 54 percent are from the Americas, 33 percent from the Europe, Middle East, and Africa (EMEA) region, and the remaining 13 percent are from other regions (see Figure 1). Figure 1 Survey participants by region The results of this survey were discussed during an online roundtable by Sang Lee, co-founder and managing partner at Aite Group; Soren Haagensen, managing director, head of FX e-commerce at Société Générale; James Taylor, executive director, global head of FX e-distribution at JP Morgan; Ugur Arslan, chief executive officer at AienTech, a multi-asset, multi-strategy hedge fund; and Richard Tibbetts, co-founder and chief technology officer at StreamBase Systems. Comments from the roundtable discussion are incorporated into this report. Some key facts about the survey respondents include that 39 percent use a custodian bank to handle their FX transactions, 11 percent use a currency overlay management firm, and 49 percent do not use services provided by either type of organization. Over half of the respondents trade over 50 million units per day.

REPORT 3 Under the specter of a gloomy global economy and fierce competition between trading venues, the FX market has experienced an unpleasant decline in volume and volatility. Firms are trying to maintain profitability in a challenging environment. Buy-side firms are concerned about increased compliance spending and closely examining the cost of each execution; sell-side firms try to cut costs by moving customers onto to their electronic trading platforms to reduce cost and more efficiently manage low margin business. Although the whole financial services industry has undergone substantial changes due to electronic trading, the FX study points out that trust as a fundamental element in trading still matters, and never more than when firms are facing hard times. While clients are looking into ways to lower the overall cost of trading, they also pay close attention to the value they receive from each service provider. In addition, the speed of trading and demand for electronic execution services highlight the importance of using real-time market intelligence to better understand liquidity and risk. FX PRODUCTS AND CURRENCY MANAGEMENT Compared to last year s survey, there are no significant changes in trading currency pairs; some 95 percent of respondents trade the majors, and some 24 percent trade exotics or emerging markets pairs. Some 61 percent trade crosses, a 6 percent decline as a result of lower trading activity among sell-side firms. Spot transactions are the most traded instrument among all respondents, with 87 percent involved in FX spot trading. About half of the respondents trade outright forwards, FX options, futures, and swaps. Only some 29 percent trade NDFs. Outright forwards, swaps, and NDFs are more commonly traded by sellside firms than buy-side firms (Figure 2). Figure 2 FX instruments

REPORT 4 HEDGING STRATEGIES In terms of hedging strategies, 70 percent of all respondents apply active management strategies; about half of all respondents use dynamic approaches; and 48 percent use passive approaches. There was also a 10 percent increase in the use of dynamic strategies among buy-side firms, but conversely a 27 percent decrease among sell-side participants (Figure 3 and Figure 4). Figure 3 FX trading strategies used among buy-side respondents Figure 4 FX trading strategies used among sell-side respondents

REPORT 5 ELECTRONIC FX TRADING ELECTRONIC TRADING PLATFORMS Electronic trading has been widely adopted by our survey respondents with 82 percent executing FX trades via automated order matching systems, single bank platforms, or multi-bank dealing systems. This year, the study finds a substantial increase in the use of online forex trading platforms among the buy and sell sides, from 17 percent to 32 percent (Figure 5). Figure 5 FX execution methods Among all respondents executing FX trades with electronic methods, some 69 percent use electronic broking systems or multi-bank platforms, about half of them use single bank platforms, and 37 percent use third party platforms. The usage of multi-bank platforms and single bank platforms increased 17 percent and 7 percent, respectively (Figure 6). Figure 6 Electronic FX trading platforms

REPORT 6 According to the survey, Thomson Reuters platform is the most used multi-bank platform, especially on the sell side, followed by ICAP s EBS, and Hotspot. Overall the differences between top multi-bank platforms are minimal (Figure 7). Figure 7 Primary multi-bank and independent platform used In terms of single bank platforms, Barclays proprietary platform is used by the largest number of respondents, closely followed by Deutsche Bank. While Citi slipped to number three this year, JPMorgan came up two spots to number four, only slightly behind Citi (Figure 8). Figure 8 Primary proprietary (bank) platforms used

REPORT 7 COMPARISON CHARTS Bank Ratings 2011 RANKING 2012 RANKING Barclays Capital 2 1 ã Deutsche Bank 2 2 = Citi 1 3 ä JPMorgan 6 4 ã UBS 4 5 ä Morgan Stanley 8 6 ã Goldman Sachs 6 6 = Credit Suisse 4 8 ä RBS 9 9 = HSBC 11 10 ã BNP Paribas 10 11 ä Table 1 Proprietary (bank) platforms used by all respondents

REPORT 8 2011 RANKING 2012 RANKING Barclays Capital 3 1 ã Deutsche Bank 1 2 Citi 2 3 UBS 3 4 ä ä ä JPMorgan 5 4 ã Goldman Sachs 5 4 ã Morgan Stanley 9 7 ã Credit Suisse 5 8 ä RBS 8 8 = HSBC 10 10 = BNP Paribas 10 11 ä Table 2 Proprietary (bank) platforms used by buy-side respondents

REPORT 9 2011 RANKING 2012 RANKING Deutsche Bank 3 1 ã Barclays Capital 2 2 = JPMorgan 5 3 ã Morgan Stanley 8 3 ã Citi 1 5 ä Credit Suisse 4 6 ä UBS 5 6 ä Goldman Sachs 5 8 ä BNP Paribas 9 9 = RBS 10 10 = HSBC 10 10 = Table 3 Proprietary (bank) platforms used by sell-side respondents

REPORT 10 CUSTOMER SATISFACTION Compared to 2011 s survey, banks have successfully expanded their customer base while maintaining a high level of customer satisfaction. Most customers are satisfied with the prices received from the banks; about 91 percent of respondents think banks offer accurate and competitive pricing, though this does represent a 5 percent decrease from last year. There is an impressive 17 percent growth in the use of multi-bank and independent platforms, but also a 5 percent decrease in customer satisfaction compared to 2011, from 91 percent to 86 percent. In addition, about 14 percent of respondents say that they are not satisfied with the prices provided by multi-bank platforms. Although the percentage of dissatisfaction on the use of multi-bank platforms is not significantly higher than single-bank platforms, it may be indicative of the need for stronger customer service from electronic communication networks (ECNs). When asked about how respondents try to secure better prices, reducing latency, connecting to more venues, and improving relationships were mentioned most frequently. Although not all firms are in a race to sub-millisecond execution, the speed of execution is still important for firms who engage in high frequency and intraday trading. These firms invest heavily in co-location servers and in-house proprietary algorithms. Relationships between the buy-side and sell-side are still critical to respondents as many pointed out that they regularly discussed and negotiated prices with their brokers. One respondent said that having a personal relationship with a broker is of distinct value for trading less liquid products such as emerging market currency pairs. From the sell-side perspective, broker-dealers have been focused on providing customized services to a wide range of clients; from helping a proprietary trading firm manage their real-time risk exposure, to helping a pension fund execute a large transaction over time in order to minimize market impact. Scale and lower cost seem to be other factors that help sell-side firms maintain high satisfaction amongst clients, as it is prohibitively expensive for a buy-side firm to maintain the connectivity and liquidity options of each electronic trading platform. Another trend worth noting is that buy-side clients are expecting more control and transparency on their trades. This could present multi-bank platforms with the opportunity to rapidly grow their market share. On the single-bank front, with the proliferation of mobile devices, many electronic trading platforms are now able to provide customized user interfaces that transcend desktops, allowing realtime notifications and alerts on mobile phones and tablets that also allow actions to be taken in a timely manner.

REPORT 11 ALGORITHMIC TRADING IN FX The percentage of respondents using algorithms to execute FX trades increased on both the buy and sell sides. Among all respondents, there is a six percent increase year-over-year; about half of respondents use algorithms in their FX trading and among those, 75 percent develop their algorithms internally, an 11 percent increase compared to 2011. There is an increase in those developing algorithms internally on the sell side but a decrease on the buy side (Table 4). 2011 2012 YEAR-OVER-YEAR In-house developed FX algos All 64% 75% ã 11% Buy 92% 75% ä 17% Sell 39% 74% ã 35% Bank provided FX algos All 28% 23% ä 5% Buy 8% 19% ã 11% Sell 46% 31% ä 15% Third-party provided FX algos All 16% 18% ã 2% Buy 8% 17% ã 9% Sell 23% 18% ä 5% Table 4 Internal or external algorithmic development Algorithms for liquidity aggregation are the most used algorithms among the buy and sell sides. All the common execution algorithms are used by about half of the sell side while buy-side firms were more creative in strategy design and focused on customization. Figure 9 Primary FX algorithm functionality

REPORT 12 Since most respondents obtain prices from multiple liquidity providers, they also use different metrics to determine the quality of execution. Both the buy and sell side agree that minimizing the market impact with the lowest implicit cost of execution is the most important criteria. Speed of execution and fill rates rank second and third, respectively, with explicit fee charges ranking fourth. Quote time, slippage, and service consistency are also mentioned as important parameters. The FX industry still lacks benchmarks to compare the prices, with only 43 percent of respondents having established benchmarks for systemic measurement. Some respondents still manually compare prices via phones and screens. FX MARKET DATA The fragmented nature of the FX market has resulted in investment in technologies dedicated to ingesting, aggregating, and normalizing FX market data from disparate sources, but this year we find that this has been surpassed by the ability to access low-latency sources for high speed algorithmic trading. This moved up one spot to become the biggest challenge for effective algorithmic trading, while integrating feed/data formats from different liquidity providers ranks second. The demand for building and back-testing trading strategies with historical datasets also increased significantly (Figure 10). Figure 10 Biggest data challenge for effective algorithmic trading in FX

REPORT 13 FX TRADING SYSTEMS This year s survey identifies a decrease in satisfaction in respondents perception toward existing FX trading systems (Figure 11 and Figure 12). Evaluating specific trading capabilities, liquidity aggregation ranks the highest in satisfaction, with 48 percent on the buy side and 54 percent on the sell side. In the future, some 45 percent of buy-side respondents plan to improve their aggregating functionality compared to only 34 percent on the sell side, a 10 percent decrease from last year (Table 5 and Table 6). Figure 11 The buy side s satisfaction in their FX trading capabilities Figure 12 The sell side s satisfaction in their FX trading capabilities

REPORT 14 FX TRADING CAPABILITIES 2012 RANKING Liquidity Aggregation 1 Algorithmic Order Execution and Management 2 Algorithmic Signal Generation 3 Table 5 The buy side s top technology initiatives FX TRADING CAPABILITIES 2012 RANKING Auto Hedging and Risk Management 1 Pricing and Rates Engines 1 Algorithmic Signal Generation 3 Algorithmic Order Execution and Management 4 Table 6 The sell side s top technology initiatives Interestingly, both buy- and sell-side participants are least satisfied with their auto hedging and risk management capability with 11 percent on the buy side and 17 percent on the sell side. Auto hedging and risk management, and pricing and rates engines rank at the top of the list of future improvement capabilities required by sell-side respondents. Although the buy and sell sides have slightly different views and requirements on how they can better manage their risk, it is always closely related to how they can access the current and future available liquidity. For sell-side firms, accurately assessing real-time risk can be valuable to their hedging strategies and their ability to provide competitive pricing. About 54 percent of sell-side respondents plan to improve or add real-time liquidity management capabilities to optimize liquidity for customers and to manage risk more efficiently.

REPORT 15 THE IMPACT OF REGULATIONS Regulatory uncertainty has been an ongoing topic in the FX market for some time. Sell-side respondents are mostly concerned with the infrastructure investment required to cope with the regulations. At the same time they are more optimistic about the growing potential in emerging markets, an area with wider spreads and less competition. Although high frequency trading in FX has gained some attention in the press, its effects on business operations were relatively low compared to 2011 (Table 7). FX TRADING CAPABILITIES 2012 RANKING Infrastructure investment for regulatory requirements 1 The growth of emerging markets 2 Decreasing trading volumes 3 High frequency trading 4 Market fragmentation 5 Table 7 Primary impact on sell-side FX business in 2012 FX TRADING CAPABILITIES 2012 RANKING Regulatory requirements 1 High frequency trading 2 The increased trading activity of other financial institutions (non-reporting banks, hedge funds, pension funds, mutual funds, insurance companies and central banks) 3 The growth of emerging markets 4 Market fragmentation 5 Table 8 Primary impact on sell-side FX business in 2011

REPORT 16 Some 44 percent of sell-side respondents named compliance requirements as their biggest concern regarding the Dodd-Frank Act. Although some 28 percent of respondents worry about mandated central clearing and execution for FX derivatives, many participants believe that the central clearing model will increase transparency and efficiency, which will ultimately have a positive effect on their business. At the time that this study was being conducted, the Department of Treasury issued a determination that FX swaps and FX forwards should be exempt from the definition of swap under the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank), which means both FX swaps and FX forwards are exempt from the trade execution, mandatory clearing, and margin requirements. Other FX derivatives, including foreign currency options, currency swaps, and non-deliverable forwards are not exempt. The Treasury s decision is supported by many market participants who believe that additional rules on trading and clearing FX derivatives will introduce higher costs and greater risk. It is unclear if the European Union will follow the same exemptions. The Dodd-Frank Act is only one piece of the regulatory puzzle that the financial services industry needs to solve. Many firms are already working with clients and legal professionals on how Dodd-Frank, Basel III, MiFID II, EMIR, and geographical jurisdictions will affect their way of doing business. Regulatory uncertainty also affects technology adoption and implementation. Firms are looking for technologies that are not only sufficiently scalable for the anticipated growth in data volumes, but also offer ways to rapidly iterate in order to comply with new regulations as they are mandated. FUTURE OPPORTUNITIES FOR FX With the rapid adoption of electronic trading, the FX market continues to become more fragmented. However, more trading venues do not mean more liquidity, in fact they make it more challenging for firms to accurately access real liquidity. Aggregating liquidity is no longer a matter of simply finding the best prices across all venues at a certain time, but requires understanding how your order flow is viewed from your liquidity providers perspectives. As the industry expects the growth of electronic trading to continue, the human aspect of trading and better customer experience still brings a competitive edge to firms that are able to successfully leverage technology and evolve in the changing market. Many market participants view the growth of emerging markets as a major opportunity, and currencies are perceived as a more favorable investment than other asset classes in these regions. Considering the economic potential and trade flows, emerging market currencies are expected to play a bigger role in FX trading. Restrictions on the future growth of trading emerging market currencies are due to 1) regulations, 2) culture, and 3) technology. Local governments and central banks in the developing countries generally play a substantial role in the trading of their currencies. Also, under Dodd-Frank and related European regulations, some FX derivatives are required to be executed electronically, which could be more challenging when emerging market currencies or counterparties are involved, as a majority of these trades are still placed over the phone.

REPORT 17 The study finds that 48 percent of the buy-side respondents use algorithms to execute their FX trades, a 14 percent increase compared to 2011; with another 27 percent planning to do so in the future, a 10 percent increase from last year. Twenty-five (25) percent of buy-side respondents say that they currently do not use algorithms for FX execution and have no plan to do so, which is a 24 percent decrease compared to 2011. Interestingly, the study also finds that fewer buy-side respondents develop FX algorithms internally, from last year s 92 percent to this year s 75 percent, compared with a 10 percent increase in using bank-provided or third-party provided algorithms. Two of the explanations might be that 1) FX algorithms are no longer used by a limited number of highly quantitative trading firms, but have been adopted by a wider range of buy-side participants; and/or that 2) sell-side firms and trading platform providers have been vigorously revamping their core infrastructure and introducing new technologies to their clients. Although connecting to more venues does not guarantee better execution results, respondents, particularly on the buy side, expressed the need for and challenges of connecting with multiple liquidity providers to improve fill rates. The buy side investment required to establish and maintain individual connectivity can be significant, as can the cost to analyze data across different sources and raises question on their likely return on investment. This might be an area of opportunity where sell-side and platform providers can provide value-added services, including using electronic platforms as ways to share real-time market intelligence that helps improve pre and post trade transparency. Global Headquarters 3307 Hillview Avenue Palo Alto, CA 94304 +1 650-846-1000 TEL +1 800-420-8450 +1 650-846-1005 FAX www.tibco.com TIBCO Software Inc. (NASDAQ: TIBX) is a global leader in infrastructure and business intelligence software. Whether it s optimizing inventory, cross-selling products, or averting crisis before it happens, TIBCO uniquely delivers the Two-Second Advantage the ability to capture the right information at the right time and act on it preemptively for a competitive advantage. With a broad mix of innovative products and services, customers around the world trust TIBCO as their strategic technology partner. Learn more about TIBCO at www.tibco.com. 2012 2014, TIBCO Software Inc. All rights reserved. TIBCO, the TIBCO logo, and TIBCO StreamBase are trademarks or registered trademarks of TIBCO Software Inc. in the United States and/or other countries. All other product and company names and marks in this document are the property of their respective owners and mentioned for identification purposes only. 07/22/2014