A World of Efficiencies: How Technology Can Transform FX Trading in Emerging Markets Around the Globe

Electronification and increasing competition are among the defining trends in the modern FX trading landscape – and emerging markets sit at the heart of both of them. Whether to better serve clients, hedge interest rates or diversify offerings to gain an edge on the competition, today’s banks are demanding market access in a wider range of geographic locations than ever before. This dynamic cuts both ways, with global entities looking to provide unique investment opportunities for their clients and local entities seeking to bring their powerful onshore liquidity to the wider world.

At Edgewater, we focus heavily on helping all stakeholders turn these visions into reality. By delivering powerful execution technology and a range of credit, liquidity and distribution services, we expand our clients’ universe and stand at the center of flows for virtually any global currency pair, enabling institutions around the world to trade efficiently and competitively across markets.

We pride ourselves on unlocking endless possibilities for our clients by delivering flexible technology that optimizes their trading and workflow for spot, forwards, swaps, NDF and precious metals. We support all trade sizes, time zones and execution methods, representing the full scope and depth of the global FX liquidity pools, by combining a proprietary rate engine and customized liquidity to ensure optimal price discovery.

Worldwide Perspective

Delivering these efficiencies on a global scale requires a keen understanding of the unique dynamics of each local market. Emerging markets are not a monolith – there is significant diversity within the category, with unique sets of challenges depending on the characteristics of each locale:

  • Latin America – We’ve touched on the primary challenges facing Latin American FX trading in previous articles, but the crux is that this region is defined by tension between the rapid electronification brought about by deep-pocketed newcomers and the manual workflows relied on by local players. To compete with the global banks that have flooded into the region, local banks are pursuing innovation along two primary tracks. Efficiencies like algorithmic price discovery and electronic RFQs can help these banks punch above their weight within the region, while avenues to connect with global counterparties and stream their prices to the larger FX ecosystem enable them to diversify, grow and operate more independently of regional forces.

  • Asia-Pacific – APAC markets are somewhat more mature than their Latin American counterparts – the economies are larger, regulatory hurdles are more pronounced and the competitive battlelines are more clearly defined, with global players having a more established presence and local players being more advanced from a workflow standpoint. That said, local banks still struggle with high volumes and an overreliance on middlemen, whether through large entities with wider networks of relationships or especially electronic communication networks (ECNs). In any case, the result is higher trading costs and a more circuitous route to the global markets, depressing overall performance.

  • Middle East/North Africa – While APAC represents a more advanced flavor of FX market access challenges, the MENA region represents a far earlier stage. Technological advancement and travel to the region are minimal. In addition, with antiquated accounting methods and means of posting margin, these markets are highly constrained in terms of credit, so there are very few institutions with high-quality, reliable access to liquidity in relevant pairs – even global banks may struggle to satisfy demand, leading to low volumes throughout the region. In other words, unlike the other two regions, the liquidity issues in MENA are around supply, not demand. Overlaying all this is the fact that most MENA currencies have fixed rates, creating a layer of complexity that isn’t present in more dynamic markets.

Regional Challenges. Global Solutions

Given this array of challenges, it’s easy to assume that each region requires a radically different approach. The currencies themselves have their own distinct qualities, so the paths to trading them efficiently must be just as unique, right?

Wrong. While the respective FX ecosystems in LatAm, APAC and MENA may be in different stages of development, a similar set of strategic and technological efficiencies can fuel success in each. The local connections, relationships and market expertise required may vary widely, but our tried-and-true approach is a constant.

For example, our EdgeFX trading system enables users to view a full range of market makers and takers for a given currency pair, from their own backyards to a dozen time zones away, all through a single point of access. Banks that already have the necessary relationships can rapidly execute with the right counterparties, whether directly or through ISDA contracts, scaling their distribution with new, partner-friendly technology.

In markets where liquidity is particularly difficult to come by, technology on its own might not be enough – and that’s where our execution services come into play. We provide credit intermediation services in markets around the world, drawing upon our deep relationships and granular market and regulatory knowledge to provide a level of access far beyond what could be achieved in-house. The common thread is that we partner with our clients, maximizing their options so they can focus on business differentiation that maximizes their core strengths and ownership currencies where they have an edge.

This is powerful not just for local banks that lack connections to global players, but also larger institutions that don’t have the luxury of building bilateral relationships. Just as a Latin American bank might want an advanced technology platform to reach global economic centers, an Asian bank might lack the bandwidth to build the stable of international connections required to keep up with escalating volumes. In any case, there’s no need to build out a new technology infrastructure or scour difficult credit environments – we’ve already done that heavy lifting.

In sum: despite unique challenges for each currency, the technology to overcome them is not localized, but global. We are proud to have developed a technology and liquidity framework that supports clients in markets around the world, whether they come from emerging markets or want to enter them.