Optimizing economies of scale is the way to go – especially when it comes to growing in the foreign exchange space.
Rapid Addition specializes in the provision of high-performance enterprise solutions for electronic trading. The firm is a pioneer in FIX/FAST and FPGA technology and offers a messaging platform that combines the benefit of software configurability with the latency performance of hardware acceleration.
Citi has recently appointed electronic trading platform provider Rapid Addition as one of its core FIX platform partners for currency trading, based on the company’s latency performance and scalability to meet business requirements. Citi has integrated the Rapid Addition FIX engine, as well as the Rapid Addition Hub platform into its new pricing technology for spot foreign exchange transactions, which clients can connect to in co-locations across London, Tokyo, New York, and Singapore.
Rapid Addition Chief Executive Officer Mike Powell discussed this new partnership with Traders Magazine, as well as how his firm helps deliver electronic trading solutions to the markets.
TRADERS MAGAZINE: We saw the recent press announcement by Citi regarding adoption of the RA Platform for their FX API electronic trading business. What drove their decision to select Rapid Addition?
Mike Powell: Citi obviously has a market leading franchise in currency trading, particularly their corporate business. However, over recent years we’ve seen rapid growth in electronic trading of FX by other types of institutions – for instance, firms trading equities that have a forex component, or hedge funds trading FX as a stand-alone asset class. Such clients want to achieve the levels of price transparency, automated workflow and liquidity access that they have in other asset classes.
With an ever more fragmented landscape driving up the cost and complexity of connecting to liquidity, the scale banks provide broad access and improved price transparency through their market coverage. This, in turn, allows customers to implement tools such as TCA, measure sell-side performance, and expect higher execution quality.
Citi wanted to ensure they positioned themselves to capture this growth so benchmarked several vendors with the aim of enhancing their FX price dissemination. Connected into four key co-location centres around the globe, latency was a key criteria for selection, as was throughput given the regulatory scalability requirements of being able to handle double historical peak volumes. Rapid Addition was selected as having the best combination of latency performance and scalability.
TM: What other challenges are you seeing in the electronic trading arena that you are helping customers solve?
Powell: Electronic trading in all asset classes has become increasingly challenging as liquidity fragmentation and more stringent regulations have driven up costs. At the same time firms are seeing revenue squeezed through shrinking margins, removal incentives such as research unbundling, and, more generally, increased competition. Faced with rising costs of participation and falling revenues, it is becoming harder to generate sufficient returns in certain markets – just look at Deutsche Bank’s withdrawal from the institutional equity market.
We strongly believe that reducing the cost and complexity of client and venue onboarding, breaking down internal tech silos, and making it easy to deploy their algos, risk and routing logic is key to helping firms manage costs and remain agile.
One interesting trend we are seeing is the growth in firms leveraging the market connectivity and exchange access of counterparties that were perhaps previously competitors. As the cost of connecting to fragmenting liquidity has grown, this has benefited the scale players. But we are seeing an increasing number mid and smaller sized firms leveraging the trading infrastructure of the large global players. It enables the regional and specialist firms to offer their clients trading access to a much broader investment universe, playing to the strengths of their relationships with their customer base, and means the scale players can offset some of their market infrastructure costs.
However, we’re also seeing this in reverse. Even tier-1 broker dealers can’t afford the investment required for connectivity to all markets, so there are many examples where the global sell-side firms are providing universal coverage to their clients by leveraging the exchange membership and local connectivity of domestic brokers in regional markets. The localk executing brokers will need trading technology capable of offering the latency and throughput required for large DMA order flow, but if successful this strategy can significantly exceed the order volume they achieve through their own buy-side customer base.
TM: Rapid Addition’s platform is helping with these type of use cases and many others, with the flexibility of being both asset class and messaging protocol agnostic creating a core technology on which firms can build any kind of electronic trading workflow.More broadly what are you seeing in the trading technology space?
Powell: There appears to be a renewed focus on trading technology as the post MiFID II landscape has become clearer. This also requires addressing the technology deficit that built up as firms focused on ensuring they were compliant when the new regulations were introduced.
We do see a shift towards a platform mentality – in terms of looking for the performance and scalability that will support future business growth, allow firms to evolve with shifting market structure, and also give them the agility to rapidly deploy their own unique IP. Whether that is execution algos, smart order routing logic, pricing engines and or other expertise, many firms are shifting their investment in ‘building’ towards unique, differentiated capabilities, while being more open to ‘buying’ best of breed infrastructure for essential but common business processes such as client onboarding, venue connectivity and so on.
The increased regulatory burdens for trade reporting, risk management, best execution and market surveillance also appear to be driving a desire to migrate towards more integrated trading technology. The cost and complexity of running siloed technology stacks is hurting firms both financially and operationally. Again, this supports a shift towards a platform approach.
This is further necessitated by the need to integrate multi-asset capabilities. Increasingly we see buy-side firms and counterparties expecting the same services and execution quality across asset-classes, Moving from legacy, asset class specific technology isn’t straightforward but it’s where the industry in ultimately heading.
TM: And what about the future? What trends are you looking at over the next few years?
Powell: Unfortunately, we don’t see huge progress in market standards, which means the challenges of onboarding clients and connecting to fragmented liquidity won’t disappear any time soon. This is an issue as we think there will be continued liquidity fragmentation across all asset classes and increased competition for order flow. The trading ecosystem will also continue to evolve, creating different relationships between counterparties. Firms that were previously a competitor may become clients in an effort to diffuse costs and focus on relative strengths.
We also believe the asset management industry will increasingly have to invest in technology as trading continues to automate and regulation cracks down on incentives and pushes more responsibility onto the buy-side for trade reporting, execution benchmarking and so on. Some firms may choose to leverage outsourced trading capabilities, and we are seeing a growth in this sector, but others will see the value of investing in their own capabilities. This may cause further blurring of lines between traditional buy and sell-side roles.
Finally, we see the continued trend of trade automation across all asset classes, with more onus on execution quality and benchmarking. The growth in low latency FX trading is a good example of this and no doubt there will be similar evolution in other liquid OTC products. Technology investment will become an increasingly important topic on the agenda of senior management teams as they plot their business strategy over the coming years.