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Investigating the increasingly mission-critical importance of APIs in FX

Investigating the increasingly mission-critical importance of APIs in FX

API usage is prevalent in FX but is witnessing increased growth. How will this growth unfold and what lies in store for FX? Vivek Shankar investigates. 

Manual trading is fast becoming a thing of the past as electronic workflows increasingly dominate the FX landscape. Application Program Interfaces or APIs are central to this rise. APIs are a simple technical concept: They allow one electronic system to talk to another.

Institutions have long adopted APIs, and in response to their changing needs, service providers have begun offering solutions for more use cases. Phil Morris, CEO of Reactive Markets, has kept an eye on these changes.

“Buy-side firms are becoming increasingly more electronically sophisticated and data-driven,” he says. “As firms gain more insight and understanding of their true cost of execution, we see a trend toward separating operational workflow from the execution process. This allows them to choose the best systems for their needs. Using specialist low latency normalised API solutions focused on clean and transparent execution will improve their trading setup whereas using a niche provider for cross-asset risk, positions and analytics could be the best option.” 

The use of best-of-breed systems has also boosted the need for APIs in trading workflows.

“Trading firms are building their technology solutions by integrating features from ‘best-of-breed’ providers rather than using a ‘one-stop shop’,” Morris says. “To support demand for this plug-and-play approach vendors and venues are increasingly opening up more of their core functionality to API integration, such as trading, analytics and operational workflows”

Which other changes in API demand are afoot, and how are service providers crafting solutions to cater to these needs?

Integration, types of APIs, and unified APIs

Alexander Culiniac, Chief Technology Officer at smartTrade, points out that workflow complexity is driving the need for evolution in API solutions. “API needs are evolving quickly from the traditional FIX-based streaming market data and order execution to more complex workflows for pre-trade and post-trade,” he says. “API use is distinctly segregated based on the customer segment. The highest uptake of FX-related APIs is in the corporate and commercial customer segments where pre and post-trade workflows are evolving quickly to accommodate sophisticated technology and in evolving hedging and cash management needs.”

Extending Morris’ point about the need for API integration, Culiniac says integration with non-conventional FX liquidity providers is driving API evolution. 

“Integration with non-conventional FX liquidity providers that offer payment rails integration, integration of hedging and cash management workflows within ERP systems requires an evolution not only of the APIs available on the distribution channels for market makers but also new pricing algos and risk management strategies.”

In response to this demand, smartTrade offers a range of FIX, RESTful, and Websocket APIs. While the latter two are popular, FIX is a mature protocol, and developers have more experience working with it.

“Whilst FIX is never completely standardised between API providers, there is a good shared understanding of the core message sequences and workflows,” Reactive Markets’ Morris says. “With this maturity comes significant developer knowledge and experience along with standard tools and integrations that understand FIX natively.”

He goes on to contrast FIX with RESTful and Websocket APIs. “Trading protocols built on top of REST and Websockets, however, don’t always follow standard approaches which lead to significant variation of implementations. This makes integration with many trading venues more difficult and error-prone. You only need to look at the burgeoning Crypto markets a few years ago to see the fragmentation of trading protocols built on REST and Websockets.”

The rise of new markets, such as crypto, has posed API service providers a few questions. Most notably, institutions have begun demanding a single cross-asset or unified API. On paper, a unified API sounds great – A single thread that connects multiple assets.

However, Culiniac points out a few problems with this approach. “There remain a lot of challenges and shortcomings to overcome in this approach,” he says. “A key concern is that the increasing complexity of the workflows can make a single API too complex to manage, or too rigid for innovation due to the need to normalise into a standard super set.”

Despite these challenges, service providers are exploring solutions in this regard. After all, as Morris says, the rise of crypto perhaps revealed the future of institutional trading technology. “The future of institutional trading technology is multi-asset,” he says. “We added crypto to our multi-asset offering in 2020, providing that single point of access for institutional traders to trade with the markets leading liquidity providers.” 

“Key to this is the normalised API across asset classes which allows crypto to fit in seamlessly alongside a client’s existing execution processes in FX and other asset classes.”

Culiniac notes that smartTrade has added new APIs for services such as venue inventory checks, standard market data, and order sessions. “At the end of the day, all work to support the various asset classes is entirely obfuscated from our customers as smartTrade will normalise and unify the workflows leaving our clients to connect via standard APIs,” he says.

Advanced deployments and improvements in trade processing

Institutions have become familiar with API usage and are increasingly interested in more advanced deployments that optimise their workflows. What are some of these use cases, and do APIs offer a practical solution? For instance, what role can APIs play in liquidity optimisation?

Morris answers by highlighting how some of the processes Reactive Markets’ clients currently execute would benefit from an API solution. “Many of our clients constantly review counterparty pricing and execution performance ranking their counterparties over time and in different areas (like products/CCY pairs/timezones,)” he says. “This optimisation process requires the flexibility to enable/disable counterparties in real time across asset classes, products, and instruments, rather than waiting on costly scheduled updates to implement key business changes.”

In such an environment, an API offers immense value. “A core benefit of consolidating liquidity via a single API is flexibility,” Morris says. “A single API framework allows clients to seamlessly add or remove liquidity providers with ease. They can also quickly and easily tailor new trading sessions and liquidity pools to meet the demands of different trading profiles across the firm.”

Culiniac highlights a few other interesting use cases he has noticed with smartTrade’s clients. “Many of our clients are choosing to optimise and control internal services via proprietary code hosted in their AlgoBox module. This module allows almost limitless possibilities in terms of the interaction between user-defined algos and platform APIs,” he says. “They integrate liquidity management solutions into an optimised ecosystem where AI-powered real-time analytics interact with the aggregator, smart order router, or pricing engines.”

He notes that Spot was the first area many clients addressed. “The latest trend is to build smart skewed swap pricing internally and then publish this to the internal platform via API,” he says.

APIs can also play a role in assessing liquidity from non-traditional sources. Culiniac points out a few instances of such workflows where APIs can make a difference. “We have clients using futures liquidity to create cash pricing via CME connectors. We see many new crypto markets which require non-FIX protocols, and then we see other venues moving to ultra-low latency protocols like SBE.”

While these examples offer potential API applications, a more current need is improving trade processing efficiency. APIs can reduce processing costs by automating stakeholder interactions. Culiniac notes a few examples.

“We have seen APIs used for pre- and post-allocations for a while now. Also, the use of APIs to pass detailed information to surveillance and regulatory systems is fairly common these days. Clients are increasingly using our ability to consume settlement details (SSIs) and transmit these to the back office to reduce the chance of breakages in the automated flows, which have real costs in terms of time and operational risk.”

He notes that smartTrade has noticed sales and middle office staff are increasingly executing more post-trade workflows within front-office systems. “These actions, such as edits, amendments, splits, etc, all need to be catered for via the API to ensure messages can flow efficiently to all downstream systems,” he says.

Does the intense focus on cost-cutting impact the type of APIs firms choose? Industry data suggests that the long-established nature of FIX APIs reduces overall costs and ramp-up times. Thanks to existing support systems and resources, firms can integrate FIX into their workflows faster.

Morris agrees that FIX offers several benefits. “Developers are backed up by a suite of established open source and proprietary tools and libraries that makes supporting FIX connectivity that bit easier,” he says. “Even popular low-level networking tools now come with FIX support out of the box. Getting started with FIX is easy too with open-source FIX engines available for many languages.”

These factors make FIX a great option for most firms, despite the criticisms the protocol has faced. Morris notes that even if getting FIX in place is simple, firms must still conduct a lot of work to ensure seamless integration.

“The FIX standard does not mean that each liquidity provider has a standard FIX API,” he says. “Bilateral OTC trading networks can help bridge this gap by providing a normalised FIX API to LPs over a single cross-connect. The Reactive Markets model is optimised for this and offers low double-digit microsecond access for zero cost.”

Security risks and open banking’s impact on the ecosystem

Open banking is perhaps the most visible element of finance’s digital transformation. APIs form the pillars of all open banking ecosystems. Has this rise impacted FX in any way? Culiniac says that pre and post-trade workflows have received a boost thanks to open banking’s rise.

“For example via our dedicated payments module, we can now import cash-flow requirements, trades, and payment details from client TMS, ERP, and accounting systems,” he explains. “We can use that information to inform FX transactions and then return that transaction information in a native format to those same systems”

He also explains that APIs to external banks can provide faster funding via account-to-account transfer, account aggregation, and FX sweeping. 

“External services such as audit, advisory, and new payments capabilities can now be accessed directly, securely, and in real-time. FX platforms are a natural hub for this kind of connectivity, and we expect the use cases to continue growing.”

As with all electronic channels, security is paramount. Given the varied ways in which firms use APIs, accounting for network types when designing APIs is critical. Culiniac lists in-transit data encryption, authentication, and authorization protocols as the building blocks of API access security.

The work doesn’t stop there, however. “Sophisticated technical solutions also require rock-solid management and administration by your technology partner.” He highlights credentials such as zero exception SOC2 Type2 reports as evidence of market-leading security that API providers must possess – Something that smartTrade has achieved six years in a row.  

Reactive Markets offers data encryption, two-factor authentication, and role-based control as standard security features. In addition, the platform passes Cyber Essentials Plus certification and complies fully with IASME Governance and GDPR norms.

Which way will API usage go?

There’s no doubt that the demand for APIs will steadily increase. However, where will this increased demand take the market? Will we see any changes in the types of APIs firms prefer, for instance? Mark Aylett, CTO of Reactive Markets, offers an interesting view by accounting for crypto’s rise in popularity.

“A recurring discussion for the near future is the convergence of FX and cryptocurrency trading on venue and vendor platforms,” he says. “With FIX APIs more prevalent in FX and Web APIs dominant in Crypto exchanges, it is likely that both FIX and Web APIs will become first-class citizens in all major FX and Crypto platforms.”

Aylett explains that this trend will force API consolidation and alignment even more, with Web APIs leaning towards standard FIX messages and FIX session layers likely to offer better support for digital certificates. “The web scale of crypto exchanges will necessitate more scalable FIX deployments that can be configured dynamically and require less downtime,” he adds.

Culiniac and Morris agree that complex workflows will result in the removal of information silos and fragmented APIs. Morris points to API adoption in formerly manual execution protocols, such as FX execution algorithms, as an example of this. 

“Tier 1 liquidity providers are looking to leverage highly cost-effective distribution partners to get next-generation products in front of their clients without the cost and technology hurdles faced in the FX market to date, ultimately removing the need for large and fragmented direct API franchises,” he says.

“We believe that the demand for API usage will continue to grow at a fast pace, and the demand for multi-asset APIs with support for complex pre-trade and post-trade workflows will become increasingly the norm in the market,” Culiniac notes. 

Whichever way API-based protocols take us, there’s no denying that the role they play in modern FX is critical and is set to increase.