Citi to focus on just five FX spot platforms

Citi is cutting ties with another 15 spot foreign exchange trading platforms over the next year, and ultimately plans for 90% of its external electronic volumes to come from just five vendors.

“What that means is that outside of five vendors, all vendors will be marginal to us, and from our perspective, could be offboarded,” says Al Saeed, global head of FX electronics platform and distribution at Citi.

Saeed declines to name the five vendors that are in-line to take the lion’s share of the electronic volumes not sent to the bank’s single-dealer platform, Velocity, but says they would be “electronic communications network-type” platforms.

“If I break the platforms down into connectivity providers, aggregators, multi-dealer platforms and then ECNs, there are only a couple of big ECNs out there at the moment. And so, everybody else potentially is on a list to go,” he says.

Historically, dealers have been willing to connect to any platform that has some client demand – resulting in the slow-motion fragmentation of spot liquidity pools, and an accompanying build-up of platform fees. Over the past 18 months, banks have begun pushing back against those fees, and threatening to cut ties with platforms. The challenge the banks face is to cut those ties without losing business or flow information.  

Citi has conducted an initial review of 53 spot FX platforms, and shared the outcomes of its analysis with the majority of its significant clients over the past couple of months. The bank has already disconnected from 20 vendors, which included some predominantly connectivity-type providers, multi-dealer platforms and aggregators.

The bank says it will take a while longer to offboard the additional 15 venues currently in its crosshairs because some clients have certain limitations regarding how fast they can change vendors. Citi has given those clients more lead time and is helping them find alternatives.

Saeed says the review process has been open and transparent, with vendors engaged throughout. They have been able to contribute to the format of the vendor scorecard, contribute to their own inputs, review the results and submit corrections if necessary.

“Our clients agree with us very strongly with the outcomes of the reviews, have aligned with us entirely and are very keen to see this become a more formal part, a more formal analysis from Citi FX, which we are committed to doing,” he says, adding it plans to update the analysis every six months.

Clamping down

Citi has been vocal about ditching platforms that do not meet its expectations on liquidity, transparency, stability and value for money. In May, its global head of FX told FX Markets that the bank was not trying to remove client choice or limit competition, but clamp down on the recycling of poor liquidity that in the end create no value in the market.

This has been exacerbated by the coronavirus crisis. Saeed says spot market liquidity in most G10 pairs is still not back to normal, with observable liquidity in dealer-to-client and interdealer pools at 60–80% of February levels.

He says that in this environment, clients are finding that on certain platforms there is information leakage from their transactions, which has led to significant market impact during execution.

This has given clients more impetus to review their platform choices. “Their cost of trading has gone up significantly. And so they are making more informed choices and more deliberate determinations of who they are going to direct their flow to,” says Saeed.

Brian McCappin, global head of institutional FX sales at Citi, says the bank recently had a roundtable discussion with a handful of its most important clients on the topic, and they were most interested in stability and simplicity from their platforms.

Stability was top of the list given the market turmoil seen this year: “These clients want to know that when they try to execute through a given platform or through a given channel they are going to get filled, it is going to be clean, no operational risk, and they know that it does what it says on the tin. That has just really jumped off the page,” says McCappin.

Simplicity comes from reducing choice of vendors to a smaller but better pool that focuses on clean execution.

“All the features, all the extra functions, all the supposed add-ons: that’s not what they care about right now,” he says.

From the bank’s side, the costs of connecting to the proliferation of platform vendors in the market runs to tens of millions of dollars a year, says Saeed. These come from connectivity and maintenance costs, governance costs and human resource costs that come from sales, platforms and technology teams managing those interactions.

“The all-in cost is what we have cut down significantly by simplifying our engagement and focusing on a few good vendors, rather than trying to boil the ocean with every vendor out there,” he adds.