Hayley McDowell: How does EBS BrokerTec’s fixed income and FX platforms compare to your competitors?
Seth Johnson: Both EBS and BrokerTec, unlike any other platforms out there, play a central role in the functioning of the fixed income and FX markets because they provide a lit environment from which market participants can price. If you think about all of the execution that occurs globally in spot FX, whenever a bank makes a price for a client or a corporate calls a bank and asks for a price, whilst the bank has many different ways of sourcing information as to what the current market price might be, the primary price formation points for the major G3 pairs is EBS Market. This means it plays a central role in the price formation of spot FX.
In fixed income, it’s the same case for BrokerTec. We have a close to 80% market share of the public markets of US Treasuries and they represent about 50% of the overall market, so 40% of the volume traded in US Treasuries goes through the BrokerTec platform on a daily basis. In terms of pricing and understanding where the market is – both of our platforms play a hugely important part in the functioning of the FX and fixed income markets. In the FX space, EBS Direct is one of the three largest multi-dealer relationship based platforms.
In terms of how we differ from our competitors we are able to offer public market central order book capabilities and relationship-based platforms, but we also have a global footprint in distribution, which no other platform can rival or compete with in the FX space.
EBS Institutional has a lot more functionality in terms of its netting process than competitors. However, we are in the very early stages of building the platform out and onboarding clients.
EBS Treasury is the only platform I know of that offers money markets and FX functionality and execution capabilities to the extent it does. We have over 600 corporates on board and we are very optimistic that our FX capabilities we allow us to grow that platform significantly over the next three-to-five years.
HM: Does the most recent acquisition of e-MID signal further expansion plans for EBS BrokerTec? What opportunities do you see and what challenges does EBS BrokerTec face expanding into different markets?
SJ: The e-MID acquisition was important to us because we have a long-standing ambition to be recognised by the Italian treasury as one of the two platforms the primary dealers can fulfil their quote obligations. We’re hopeful that the purchase of e-MID will enable us to become a central part of the Italian banking network and that will improve our chances of getting that recognition. But the Italian fixed income market is a huge market and it’s the biggest market by issuance in Europe. So the purchase of a platform that has a network of all the Italian banks connected to it, will definitely give us options in terms of offering our services to a variety of clients in that space.
It’s challenging moving into any new market, but what we find the most challenging is that increasingly on the sell-side, there are less and less resources available for the sell-side to connect to new platforms or new liquidity pools. Their priorities are more driven by regulatory requirements and the resource allocation is more disciplined now than in the past. So, even if you have a compelling offering that is cheaper and better functioning than your competitor, it’s harder than ever getting the sell-side to connect and embrace it. For the buy-side, they have specific workflow requirements, which are often quite bespoke, without which they won’t consider using a new platform. It’s a challenge, but it requires being willing to invest over the medium-term, an understanding that these things take a lot more time than would be ideal. We have a lot of experience doing this, so that process doesn’t put us off.
With regards to expansion plans with BrokerTec, the most ambitious initiative we have over the next three-to-five years is going to be to build out our BrokerTec Direct platform in the same way as we did for EBS Direct.
HM: How have you managed EBS BrokerTec’s FX trading business and how will you manage it in the future amid growing competition?
SJ: With regards to competition, I think to some extent the number of new ECNs entering the market throughout the foreseeable future, will be significantly less than we’ve seen over the five years. The reason I say that is because advances in technology are driving the proliferation of ECNs, but I don’t see further advances in technology that will change how execution is done in the FX space. So, I don’t expect to see a whole host of new ECNs in the marketplace.
In terms of our current competition, we have invested a significant amount of time, money and resources into upgrading the technology of our central limit order book by EBS Market. EBS Live Ultra, for example, is our new market data product. Whereas before we would update our clients on prices ever 100 milliseconds, we now do so every five milliseconds. This matters because our clients are effectively more confident in where they know our market is, and they are more comfortable providing us with liquidity. So over time, our marketplace will continue to thrive and grow on a relative basis compared to our competition. In terms of our public markets, that’s where our focus is for investment. For our relationship-based channels, the focus there is building out functionality like offering a standard API connection. This will allow us to capture more market share from our current clients and capture new clients as we build the platform out.
HM: How has the regulatory landscape – in particular MiFID II – shaped EBS BrokerTec’s electronic fixed income trading?
SJ: We spend a lot of our time on MiFID II and to some extent, a lot of it is mandatory work evaluating what the wording means on practical basis in terms of a technology build out, for reporting or transparency for example. It will definitely mean our resources will be devoted to building out all of those capabilities required by MiFID II. Unlike what has come out from the regulators themselves, it’s much more about pre- and post-trade transparency rather than regulation and monitoring of behaviour on platforms.
It’s almost an infrastructure project, rather than spending a lot of time on how we think markets should operate. We have a plan in place -which is almost fully implemented- to provide our customers with a MiFID II compliant platform.