Conference Dailys TRADETech FX Daily 2018 | Page 21

THETRADETECHFX DA I LY
market review
THE BATTLE WITH LEGACY TECHNOLOGY SYSTEMS IS AN ONGOING CONCERN FOR MANY BANKING INSTI-
TUTIONS, BUT ARGUABLY NO MORE SO THAN IN FOREIGN EXCHANGE. WITH AN EXPLOSION OF MARKET
DATA AND INCREASING MARKET FRAGMENTATION, THE TRADETECH FX DAILY FINDS THAT STRATEGIES AT
LARGE FX INSTITUTIONS HAVE NEVER BEEN MORE IMPORTANT FOR STAYING AHEAD OF THE GAME.
T
he bigger the bank, the bigger the
problem. It’s a common perception, and
complaint, when it comes to trading sys-
tems and technology in an increasingly complex
foreign exchange (FX) landscape. Now, more
than ever, FX institutions must process greater
volumes of data and connect to more venues
than ever before, all at phenomenal speed
to avoid high-frequency traders or being left
behind other market players.
In this context, technology is undoubtedly a
game-changer. It’s no secret that some large
institutions continue to rely on numerous
systems which were implemented 25 years ago.
But as the trading game evolves under new
regulation, technologies and changes to the
market structure, banks are rapidly finding out
that those legacy systems simply can’t hack
it anymore. For those firms, the task ahead is
truly monumental.
Around five years ago, FX leaned towards a
relatively small number of venues when markets
were volatile, but now volume scatters across a
larger range of more than 70 FX trading venues.
This means banks are tasked with connecting to
those venues and price streams, as seemingly
infinite amounts of data are sent to systems
which, at many large institutions, are either
considered to be legacy or simply outdated.
Alongside this, fragmentation in FX is a sig-
nificant issue to contend with. Banks typically
connect to between 40 and 70 data and price
streams, combining bank-to-bank streams and
venues depending on the institution, although
in core FX markets there is significantly more
concentration with around 10 major venues
including EBS and Reuters. The rise of FinTech
vendors and new ideas in the FX space means it
is in fact possible to trade with everyone in the
market, but trading with everyone can in some
cases result in sub-optimal execution, with
high rejections and often frustrated liquidity
providers.
“Typically, the larger the buy-side firm or bank,
the more connections they have, which means
more data to manage. The larger institutions
have numerous legacy systems internally,
which often work on legacy technology, not
always the newest and most robust,” says Steve
Toland, co-founder of trading connectivity firm,
TransFICC.
“In the past, many banks tried building every-
thing in-house, effectively fuelling a technology
arms race. Many are stuck in this old way of
thinking, but now commoditised data services
and application programming interface (APIs)
can be externalised to a utility.”
Modular approach
Technology at large sell-side firms needs to
work hard and fast to keep pace with the FX
market. In recent years, when the now deemed
controversial last look method and use of speed
bumps was largely popular, the risk of publish-
ing stale prices or receiving high reject rates was
a little easier to control. But now the laten-
cy-sensitive nature of the market means the
balance between both methods when it comes
to legacy systems.
Richard de Roos, head of FX at Standard Bank,
believes his ‘modular’ approach to updating
legacy systems has paid off. He explains it can
be difficult for large sell-side firms to buy off-
the-shelf, new systems as they could very well
be considered legacy within six months.
“What we try to do is have legacy systems in
place that are newer than other systems. It’s
not proprietary, it’s from a vendor that provides
regular updates on an aggregated basis to en-
sure we are best of breed in most cases,” Roos
explains. “On top of that, we are very aware that
we do not know where the technology evolution
“We need the agility to make sure we aren’t backed into a
corner and don’t buy a system that becomes ‘old-school’ legacy
in six months’ time.”
RICHARD DE ROOS, HEAD OF FX, STANDARD BANK
use of legacy systems at large FX institutions
is becoming more problematic. Those systems
cannot cope with the amount of data and there-
fore cannot provide useful information based
on the data, which is crucial for big players in FX
trading.
“When it comes to legacy systems in FX, they
can be a hindrance especially due to the increas-
ing need for big data and analytics,” explains
Mpumi Makhubu, manager of eFX products at
Standard Bank. “It’s difficult for legacy systems
to hold that type of data and provide accurate
information. Transaction cost analysis (TCA) and
best execution are particularly difficult to lever-
age when using legacy systems. In most cases
legacy systems are also manually operated,
which means there is a far greater risk as they
are prone to human error.”
Banks considered to be ‘technologically ad-
vanced’ are responding to market data challeng-
es by updating legacy data servers, analytics
and storage hardware, but when it comes to
technology, the sell-side has to make a decision
whether to seek help from industry vendors or
confront the challenge in-house. The “build ver-
sus buy” debate around technology continues to
rage across the entire financial services industry,
with industry participants seeking the right
is heading. We need the agility to make sure we
aren’t backed into a corner and buy a system
that becomes ‘old-school’ legacy in six months’
time.
“With that approach we are switching the
costs in terms of moving from one vendor
to another on a modular basis, rather than
approaching one vendor with all of our system
requirements. That has really paid off for the FX
business at Standard Bank.”
Roos adds that systems are regularly and
rigorously checked as part of a review process
approximately every six months to ensure the
FX business at Standard Bank has sufficient
agility in the way it is set up to make changes
if necessary. The trick for large FX institutions,
he concludes, is making everything modular and
API applicable, without breaking stability - but
this has its own risks.
“The other side of the argument is that if
you are too modular and you have the need for
low latency, it can have the opposite affect and
cause instability,” Roos says. “It’s difficult and
there are risks, but banks need to evolve and
remain wise about the decisions they make
rather than being impressionable to stay ahead
of the game.”
Other banks have taken a slightly different ap-
proach to legacy system upgrades. In February
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