Single Dealer Platforms (SDPs) are the latest ‘big thing’ happening in capital markets. A bank’s SDP is its virtual brand champion, providing not only an electronic trading platform but also insight into the bank’s trading ideas, its core brand values, and aspirations.
The rise of the multi-dealer platform
The proliferation of electronic trading has been a defining characteristic of twenty-first century capital markets. Driven by national exchanges centrally defining their e-trading infrastructures, the equities and exchange markets led the way. They exposed their order books for participants to trade electronically with their counterparts, and these became the first multiple dealer venues.
Over the counter (OTC) markets were quick to establish electronic trading, with interdealer venues formed to support primary dealer mandates. Banks then leveraged those infrastructure foundations to open an electronic trading offering to client-side counterparts. These were the initial single dealer offerings; in the Foreign Exchange (FX) space, banks deployed bespoke applications and connectivity offerings, often leveraging the internet to target mass market non-institutional customers. In the Fixed Income (FI) market, focus remained on professional investors' lead banks to leverage the incumbent Bloomberg market data and analytic platform that was already ubiquitous. Electronic order entry functionality was added to single dealer inventory pages.
These early successes made a material change to flow business by scaling the execution process to reach new customers, and demanded internal straight through processing (STP) to deal with the increase in flow. A huge appetite was created at banks for increased electronic distribution, and the tail-end of the first Dot com boom witnessed the creation of a number of Multiple Dealer Platforms (MDPs) in both Foreign Exchange (FX) and Fixed Income (FI) to serve this. New venues were established that presented multiple dealer inventories for price discovery, and where customers could use request for quotations (RFQs) to put dealers into competition on the order.
Price or value?
While customers enjoyed the ability to get dealers competing on each order through MDPs, this eroded spreads. Over time some customer markets had tighter spreads than the interdealer equivalents, and the constraints that each 3rd party MDP placed on how the bank interacted with its customers constituted a material de-franchising threat to the banks, by eroding the preferred basis of competition.
Although customer pressure ensured bank support for MDP distribution channels, banks continued to pursue their proprietary distribution channels. Why? These channels allowed the value of their relationships to be presented and reinforced, and included value-added services which banks offered that helped their customers achieve their investment ambitions. Such services included targeted research, trade ideas, and sales support, as well as structured / bespoke inventory and order types not relevant or not supported by MDPs.
Enter the single dealer platform (SDP)
The first generation of SDP generally focused on execution, as the fragmentation of bank offerings for different services was not a material problem in terms of customer uptake. The early adopters of SDP built a solid reputation by delivering a high degree of certainty of execution to the customer and allowed the banks to grow market share in high volume markets such as foreign exchange.
Banks saw that an electronic execution offering offered the ability to increase scale in order to support new additional 'electronic only' counterparts at negligible incremental cost. This provided market colour, and had the potential to make a material difference to a bank's market share. The initial success was a catalyst for many banks to align and cross-sell electronic distribution, co-branding into an overall e-business franchise that covered their 'siloed' SDP offerings and MDP presence.
Additionally, with many banks undergoing the organisational change to align previously siloed FX and FI activities into a single FICC division, the market has seen a natural drive and budget to break down infrastructure silos to establish single distribution coverage in these markets. As bank-side technology evolved, certainty of automatic execution became the norm rather than a differentiating factor. Offerings that reduce customer-side system fragmentation by offering more cohesive bank 'services' and personalisation have become the prime differentiator in SDPs.
Innovation, innovation, innovation
Investment banks have continued to demonstrate a significant commitment to their SDPs and have invested heavily in a new generation of platforms despite the adverse market conditions. The stakes were raised dramatically in 2009, when a leading US investment bank launched the first example of a 'next generation' SDP, designed with usability as a prime feature. However, the key benefit of the system, was the inclusion of additional trade ideas, research and key social networking features that the latest user-friendly and more intuitive consumer web applications have adopted. At first glance the most obvious thing about this particular SDP is that it has more in common with some of the popularised applications such as Facebook and YouTube.
From the trader's perspective, these next generation SDPs allow the bank's customers to "friend" trade advisors, seek advice and view market insight about trading opportunities. These features help investors identify not just the best price, but also the most profitable investment opportunities. And just as the iPhone was a game-changer in the mobile market largely because of its superior user interface design, the aforementioned US investment bank believes that its SDP platform will prove to be a game changer in capital markets for the same reason. How has this become possible? Technology has played a pivotal role. Unlike almost all systems that have gone before, the new SDPs are being built using a truly user-centric approach using Rich Internet Application (RIA) Technology.
The rise of Rich Internet Application (RIA) technology
For a long time there appeared to be a trade-off between style and substance in the world of computing. The web offered the benefit of mass connectivity, but performance was slow compared with desktop applications. The emergence of Rich Internet Application (RIA) technology has changed all that, with these applications now being capable of being hosted solely on the web. Users can enjoy a powerful combination of the best of the web (broad reach, instant deployment and cross-platform support); the best of the desktop (fast performance, immediate feedback and greater directive features like drag and drop); and integrated communication such as audio, video and chat.
The latest SDPs draw on all of these technical attributes to offer users a truly interactive experience. Moreover, users can choose which information they wish to retrieve regularly and can create a personal view. From a bank perspective, an important aspect of rich internet technology is its ability to coexist with legacy back-end systems: banks can offer an integrated solution without a total technology renewal.
Banks have learnt a great deal from consumer markets, which have successfully implemented RIAs to address business challenges and develop brand loyalty. The advantages of RIAs include: improved user experience, streamlining of complex tasks and (potentially) reduced transaction charges as tasks can be completed more quickly.
However, RIAs are complex to develop; requiring specific skills to ensure the user-experience is at the forefront of the design process. The development process is more intricate than for HTML development and can take more time and effort to achieve the desired outcome. Any potential RIA project must be supported by a compelling business case. The potential to incur high costs is aggravated by a shortage of development talent: RIA business applications are being developed across many industries, so demand is likely to outstrip supply for the foreseeable future. Worse still, developing RIAs calls for comprehensive creative skills, therefore re-training existing developers is not always possible. Banks that are considering RIA projects must examine their capabilities very closely before committing to a development that may be risky and expensive.
What next?
Banks are making a huge commitment to SDPs and have continued to invest heavily despite adverse market conditions. Against a backdrop of cost-cutting and slashed IT budgets, SDP budgets have been preserved or even enhanced. Banks have embraced the SDP as a serious channel to market and a major touch point of brand engagement. The continual investment in SDP has allowed banks to include an increasing volume of proprietary information delivered in a streamlined format. Platforms have evolved to meet the emerging needs of traders with closer integration of instruments and asset types. Banks have striven to provide an enhanced online user experience. The SDP has emerged as a major source of competitive advantage to the banks. Will the trend continue?
The widespread adoption of SDPs does not mean the end of MDPs. The two will continue to co-exist and progress in tandem since they have different appeal to different customers. In the near future the MDP is likely to endure as a fast-access price comparison tool and is suitable for executing standalone trades where price is the only consideration, or where regulation dictates execution through this type of venue. But the SDPs will continue to offer banks the opportunity to build long-term client relationships based on the traditional values of trust, loyalty and satisfaction, so will expand to offer additional asset classes in due course. Banks will continue to invest in their SDPs as a major marketing channel that increases client intimacy and builds e-loyalty. The whole SDP initiative is also significant when viewed in a wider context. It offers an insight into how the capital markets are managing their customers and building their systems. One day, perhaps all systems will be built this way…
Automated trading platforms have exerted great pressure on investment banking margins. This pressure is exacerbated by the high costs of servicing customers. The Single Dealer Platform is a response to these new market dynamics: a vehicle that allows a bank to offer highly differentiated products at lower cost. The current generation of SDPs represent a magnificent union of business and technology. They establish the SDP as the perfect vehicle for both delivery of content and transaction execution. This combination is bound to attract new users and dissuade existing users from looking elsewhere. This is great news for those banks that have completed their SDP developments; as for the others, they face a steep learning curve.
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