The Nordic markets have historically been early users of electronic trading solutions and have quickly embraced new technologies and the benefits these can bring. With that powerful first mover tradition across the region, Vivek Shankar now explores how the growth of its digital FX services has been evolving with demand now focused on even more sophisticated e-FX solutions and automation of the entire trade workflow instead of just portions of it.
Carolina Trujillo, Head of e-FX Distribution at SEB, explains that current trends point towards increasing demand for electronic sophistication, not just adoption. “At this stage, I see two main trends,” she says. “The first one is sophistication for some clients that are more conscious of different offerings, from established platforms or banks to fintech alternatives, and want to understand the implications of those choices, and when it is the right time for them to make those. This can mean anything from adding algos or share class hedging to your trading tools to rebuilding your infrastructure to make sure you have the best solution to fit your needs.” “The second trend,” she continues, “is the broadening of the scope of “electronic FX” from just the execution to pre and post-execution focusing on the automation of those components.”
At first glance, one would think this demand can only be fulfilled by increasingly advanced technology. However, Matti Honkanen, Director, Head of NextGen FX at Nordea, doesn’t think so. “It is a common misconception that the ongoing and upcoming digital transformation will be driven by new emerging, revolutionary and unforeseen technologies,” he says.
“Nordea’s position as one of the leaders in digital FX is not based on the extensive use of technologies, but on a smart and customer demand-driven use of unexciting technologies. We certainly try new technologies, but quite often we figure out the old tech can do the job better.”
Given these trends, how are Nordic banks addressing customer needs and changing market regulations?
Regulatory changes and adoption of the FX Global Code
The FX Global Code has been widely adopted by institutions worldwide, and the Nordics are not an exception. However, mirroring worldwide trends, some work remains to be done. “A very high ratio of the sell side is onboard but the adoption on the buy side is lacking,” Trujillo says. “SEB is very involved in the work done by the FX Global Code and it is surprising how some FX participants of large buy-side firms have not heard of the FX Global Code at all, so there is still a lot of work to be done there.”
She points out that while the Code positions electronification as the best way forward, its true impact lies in clarifying grey areas in workflows. “All signatories of the FX Global Code have an interest in promoting it to their counterparties,” she says. “I would say that the main effect of the Code has been to clarify some grey areas or confirm which market practice to follow. This has made conversations much more fruitful and saved time for all market participants in defining what is acceptable behaviour and what is not.”
While the Code’s adoption is a priority, of more urgency is adapting to the raft of regulatory changes FX has witnessed recently. Trujillo notes that local changes have had a far bigger impact than global ones. She cites a pertinent example. “One of the changes has been caused by SA-CCR. It affects the liquidity offering from some banks forcing a re-shuffle of main providers in the forwards and swaps space.”
A need for constant electronic upgrades in response to regulatory changes is a trend underway in Scandinavia, reflecting the global market. Trujillo believes market participants must think deeply about the value they deliver to clients with tech upgrades versus the need to upgrade tech to keep pace with regulatory changes.
“All global platforms must comply with so many different regulations,” she says. “This is forcing some of them to carry big upgrades that have an impact on all their clients including the Nordic sell-side and buy-side. The challenges are mostly technical on the buy side. The amount of tech resources needed to keep pace with regulatory changes is significant and needs to be carefully balanced with tech activities that deliver value to clients.”
Innovative products and treasury automation
Treasury automation is a good example of an activity delivering significant value thanks to electronification and technological adoption. Nordea’s Honkanen has kept a keen eye on developments in this space. He says automation is steadily progressing, with different market players at different places in the journey.
“Treasury automation is an evolutionary process,” he says, “with the most advanced treasuries improving all the time, while others start their automation journey. Initially, treasuries focus on automating what they have done before, but eventually, they discover that automation enables them to do new things. This move from cost and time savings to increased profits and decreased risk is where things become more interesting.”
When asked about broader technological innovations that might impact FX, Trujillo points to payments. “There is a lot happening in the payment space that will eventually have an impact on FX,” she says. “Some of these changes happened a few years back but are starting to materialise now.”
She highlights the example of the PSD2 directive. “It has not drastically changed the landscape yet but changes are definitely coming,” she says. “Nordic banks like SEB have also incorporated the opportunities and threats it represents into its strategy and there is a big FX component in that.”
Both Trujillo and Honkanen point to existing technology as the primary driver of change, both in the broad market and in applications like treasury automation. “The technologies that revolutionise treasuries are not necessarily revolutionary themselves,” Honkanen explains. “Rather, the way existing, old, and “boring” technologies are used is what makes a difference.” He cautions that getting the basics right is more important than adopting fancy technology. “Hiring people with basic technical skills is more important than hiring an army of AI experts. Put them together with the people who know the treasury functions and practices inside out, and the magic follows.”
As an example of existing or “boring” tech powering innovation, Trujillo cites the humble API, long a mainstay of the technological landscape. “API adoption continues to play a big role in the development of future-proof solutions going from the SMEs all the way to our largest corporates and financial institutions,” she says. “It broadens perspectives and connects systems from pre to post-trade in a much more efficient way. At SEB, we help our clients implement these APIs, whether integrated or not with third-party solutions, to fit their challenges and automate as much of their workflow as possible.”
“APIs have been available in FX for many years,” she continues. “Smaller clients have preferred Rest APIs for some time now but even bigger firms that were typically focused on FIX are seeing the advantages of the versatility and ease of use of Rest APIs.”
When asked about the impact of this API-first approach on a client’s choice of trading platforms, Trujillo explains that integration, instead of a platform’s size, is the critical differentiator. “The popular platforms are still the first choice in the region,” she says. “They are established and the plug-in is easier. They are also very well connected to different client systems. This means changing main platforms is quite unusual and definitely requires a lot of work from the clients.”
Despite this, she says, smaller players are having success. “It usually happens when the client is undertaking some major technological change and is reviewing the possibilities in their FX workflows. In those cases, both smaller platforms with good integration capabilities, or APIs or a combination of both can be the final choice.”
Honkanen notes that given the relative familiarity the market has with existing tech, getting started is the most important step. “I am not a great believer in detailed pre-planning,” he says. “You don’t really know what lies ahead before you start the journey. Instead, acquire some basic technical knowledge and collaborate with a team of seasoned treasury managers and technology experts.”
And what would this look like in practice? “Identify low-hanging fruit that instil confidence throughout the company and provide the financial means to fund the next stages,” he says. “Don’t try mapping all the possible needs you might have now, let alone in the future, before taking off. The greatest danger is analysis paralysis when your plans get increasingly more detailed, and you realise there are even more unknowns.”
The state of electronic adoption on the buy-side
Honkanen notes that the buy-side’s willingness to try new technology makes the Nordics a fertile ground for those offering buy-side solutions. “In the Nordics, finding early adopters willing to collaborate on building new solutions is not as difficult as in other places,” he says. “This leads to more rapid development. So, I would say the existence of technologically sophisticated clients has made our solutions and services more advanced.”
John Stead, Pre-Sales and Marketing Director at smartTrade, echoes these views. “The technologically advanced nature of the Nordic buy-side community has influenced the development of digital FX trading and electronic payment solutions by driving demand for cutting-edge technology, automation, and transparency. But, we would also argue that end clients are equally sophisticated in awareness of market levels- meaning the banks have to be very competitive to win business.”
He expands this statement by highlighting a few examples. “MBP platforms are very much in evidence, as in other markets, but we believe that the buy side is gradually starting to become more aware of the costs to their bank partners of using these channels,” he says. “In the future, it would not be surprising if more and more clients move to direct bank-to-client channels which favour banks with sophisticated SDP and API offerings. This direct provision of liquidity using smartTrade’s flat fee commercial model, for example, saves the banks money and allows them to pass savings onto their clients which benefits everyone.”
Jusa Santalo, Sales Director, Nordics, at BidFX also points to the adoption of the multi-bank concept 20 years ago as evidence of the Nordic market’s sophistication. “Obviously liquidity is still vitally important but investing in systems that are nimble,” he says, “fast to move, and ‘future proof’ whilst streamlining processes and automating reporting, has become a key focus for a firm’s ability to compete whilst ensuring regulatory compliance.”
Mirroring worldwide trends, buy-side firms in the Nordics continue to adopt algo-based execution. Santalo explains that service offerings go beyond merely offering execution services, though. “Local banks have developed their algo offerings, either directly or via white labelling and we expect further adoption in the market as technology evolves. Investors need to understand how the algos are going to work, and the pools they interact with. They want to know the probability of completion of an algo traded at a certain time of the day, according to volatility, and obviously the associated costs and possible market impact.”
He points to BidFX facilitating access to over 20 LPs’ algo suites across all deal types, including NDFs. “BidFX further supports clients with its advanced TCA solutions that offer a robust analytical framework that can be used to measure and drive performance. Our analytics offer numerous features such as best execution activity LP rankings and hit ratios, market share analysis, spread analysis, and detailed analysis of the best time to trade. Also, BidFX was the first EMS to go live with the FX Algo Wheel which has seen a massive uptick in algo usage across client types as they become more comfortable with the concept in FX.”
smartTrade’s Stead continues the white labelling theme. “We recognize that not all banks wish to develop and maintain their own algos which is why the ability to white label algos from tier 1 banks strikes a good balance between development costs and giving clients a rich offering in line with their peers,” he says.
“The smartTrade AlgoBox tool allows banks to write their algos which are then exposed to end clients,” he continues. “By co-locating the algos alongside the standard front office aggregation, distribution, and OMS components banks can ensure the lowest latency whilst leveraging all the standard clients’ risk and credit controls.”
Platform design choices and future evolution
The move towards demanding greater sophistication and efficiency in technological investments that SEB’s Trujillo pointed out earlier is evident in the buy-side’s platform preferences. Santalo says that while a “herd mentality” exists, this hardly implies a lack of sophistication.
“Their choices seem to be much more measured and discerning, with closer attention to detail in their evaluation process, when choosing trading and workflow solutions,” he says. “Clients also want to go with a trading solutions provider that can solve their problems.”
As a result, he says, agility when providing solutions is paramount. As an example, he says, “A potential solution that may be useful to a single client while another client may need an alternative capability from a sell-side firm’s pricing API, which involves other dynamics and different lead times. We are highly agile, allowing our clients to trade via traditional GUIs or APIs – regionally, we receive feedback from many of our clients who place a lot of value on this aspect.”
Stead agrees with these views and notes that agility is in demand even in platform architectural choices. “Clients increasingly prefer smaller, microservice-based platforms over large platforms due to their flexibility, customization, and scalability.” smartTrade’s suite uses open and standard APIs to cater to these needs, echoing Nordea’s Honkanen’s words about standard technology powering innovation.
Santalo and Stead are equally optimistic about the Nordic region’s prospects regarding technological innovation. Santalo, like Honkanen, sees opportunities in the treasury automation space. “Treasury desks here are looking very keenly at what the ‘next generation’ of sophisticated trading platforms can achieve through optimising workflow efficiency whilst simplifying the user experience,” he says.
“The growth in the focus on analytics will continue to rise exponentially,” he continues, “not only due to regulatory requirements but also for alpha preservation and enhanced proof of best execution. Agile platforms with interoperable solutions will continue to innovate to manage the collection, storage, and data management as not all clients have the resources necessary to run a bespoke solution.”
Citing an example of an agile,interoperable solution, Santalo says, “BidFX collects and stores tick data that each LP streams to its clients, and makes that data available to the client, through intuitive query functions and visualisations. This creates a crucial feedback loop that enables pre-trade and in-trade decision making. The client can also anonymise this data where they like to help conversations and relationships between the buyside and sellside and ultimately improve execution.”
“After a period of low volatility, highest interest rates,” Stead says, “financial, and geopolitical shocks have all contributed to a renewed interest and requirement to consider the FX element in any trading or hedging decisions. Our clients in the Nordics are responding to this by offering clients more advanced products and services over e-channels which previously only existed by phone.”
“For example, the ability to self-service adjust cash flows post-trade, trading of new products such as options, and the ability to offer increased transparency thanks to detailed best execution reports.”
“The Nordic e-FX market,” he concludes, “like many advanced FX markets, is poised for growth and expansion.”
Developments in fintech have been transforming workflows in Europe, and the Nordics are no different. A high degree of user sophistication has made the Nordics fertile ground for adoption and innovation. SEB’s Trujillo explains the state of affairs succinctly.
“I think people’s expectations (of technological agility) are really high,” she says. “Nordic countries are some of the most cashless countries and payments for private individuals are extremely efficient and simple. We take this for granted until we travel even to some close neighbours in continental Europe and are reminded of how spoiled we are.”
Trujillo says that much of the fintech innovation taking place is driven by user expectations that every app must work flawlessly. “Even though there are great offerings, I think there are many opportunities to help clients achieve this expectation,” she says. “Mostly in connecting their different areas or systems more closely to avoid gaps and silos.”
BidFx’s Santalo highlights an example of a preference for mobile apps as proof of high user sophistication. “In the e-FX market, there is high demand towards mobile apps like BidFX Trader,” he says. “It was developed to meet the growing demand from market participants to trade via mobile over five years ago and since Covid, it has become even more popular as it allows our clients to securely manage and trade their FX spot, forward, swaps, and NDF positions and orders when working remotely.”
smartTrade isn’t lagging when speaking of innovative solutions. “The demand for our services comes from the competition between banks driving up standards and gradually leading to demand for next-generation products like our LiquidityFX front office solution,” Stead says.
“In past times, with wider spreads and less sophisticated end clients, banks could make do with in-house or legacy tech providers. Nowadays we see many banks moving to use more advanced global technology providers such as smartTrade who offer superior service thanks to greater experience and strategic global expertise.”
Nordea’s Honkanen notes that demand for such innovation comes from a wide range of sources. “Demand for FX solutions is coming from institutional clients, corporates, businesses, and private individuals, each with different FX needs,” he says. “Institutional clients are big and few, while private individuals are small and numerous, with corporates in between. Fintech solutions must cater to these different demands.”
While the market is challenging to navigate from a service provider’s perspective, he sees trends in the manner service providers have positioned themselves. “The roles of the emerging and incumbent companies have become clearer, and maybe a bit more traditional than it looked a few years ago,” he says.
“It turned out that it was harder for the new fintechs to acquire end users than many believed. Now fintechs typically provide technology to banks and other established firms that already have customer trust and relationships.”
The result is an ecosystem multiple layers deep geared toward increasing workflow efficiency and agility. Given the degree of sophistication present in the market, the Nordics will undoubtedly witness additional innovation.