Fighting for an Edge: How Technology Levels the Playing Field in Emerging Markets FX

The business environment in emerging markets is growing more challenging by the day – and for established local players, success requires fighting for every inch of market share.

With the rise of globalization and consolidation throughout the banking industry, second- and third-tier banks – and particularly onshore restricted banks – have been thrust into an arms race against titanic institutions with widespread name recognition and deep pockets. These competitive pressures are particularly pronounced when it comes to foreign exchange (FX) trading.

Why? It boils down to technology. These global organizations have the resources to not just acquire local banks, but enter their markets electronically, driving efficiency and winning business. Smaller incumbents must claw their way back, but they are hamstrung by a reliance on voice trading, chat conversations and highly manual processes. As a result, many emerging markets are now dominated by large, relatively new entrants, leaving local players to struggle just to survive.

To rise above these challenges, localbanks must fight fire with fire. Technology can greatly level the playing field among local players and better-resourced competitors, unlocking benefits in areas from operational efficiency to market access. In time, with the right technology strategy – and the right people to support it – local banks can win back market share from the newcomers and reclaim their own dominant positions.

The Weapons: Technological Efficiencies at Every Level

Fighting back against and even displacing global institutions can’t happen overnight, but having sophisticated tools in place is a crucial accelerator. Through effective use of technology, local entities can take back their home markets, in terms of the number of trades they are receiving and the revenue they receive from each one.

Too many localbanks are stuck in the past – trades often consist of salespeople looking over their shoulders and yelling at the desk for a price on a given currency pair. To win the battle in emerging markets FX, advanced workflows, such as algorithmic price discovery, are key. These can radically reduce the uncertainty and complexity that have historically defined this space.

With mathematically generated prices – representing different spreading and tiers, based on the bank’s position, market volatility, client-specific considerations and more – users can work with more precision, creating superior prices that can be passed along to clients. In addition to accuracy, this process enables rapid response to electronic RFQs – the risk of missing trades due to slow manual pricing is greatly reduced. All the granular factors that make price discovery so difficult – business intelligence, logic, data consumption – can be addressed by technology, helping local banks to effectively punch above their weight.

This is how technology offers banks in emerging markets a natural path to maximizing their revenue – but it’s more than that. Once they are on a more level playing field with the global competition, they naturally have the inside track to winning business in their home currency. After all, the FX landscape is still full of human decision-makers. As long as speed, execution quality and the like are up to par, buy-side entities on the ground are very often more inclined to give their business to an established local brand whose operations, market intelligence and service model revolve around the local market, as opposed to a global institution operating one of many subsidiaries.

That’s just one example of how technology can help local banks take in more FX volume. Straight-through processing to eliminate trade breaks or reporting discrepancies is another example of an efficiency driver, among many others. All these capabilities are what you’d expect to find at a high-frequency hedge fund or global bank, but for local banks just starting to fight back through modern technology, the impact is even more profound.

But winning the war against the massive institutions means exhausting all avenues. To truly maximize the opportunities in emerging markets FX, working with outside partners is often a smart move.

The Destination: Evolving from Local to Global with Edgewater

At Edgewater, our technology – specifically, our EdgeFX electronic trading system – enables banks in emerging markets to expose their NDF liquidity to a massive ecosystem of counterparties around the world, circumventing much of the work normally associated with this level of expansion and scale. We accomplish this by offering a unique combination of powerful tools, market-specific expertise and a worldwide footprint.

The value proposition is simple: local banks in emerging and other non-G5 markets – Latin America and Africa as well as Eastern Europe, the Middle East and Asia – are generally connected to just one or two global banks, and they almost certainly do not have relationships with macro funds or hedge funds. By serving as the sole distributor for a local bank, the global bank can enhance its franchise. Enter Edgewater. When local banks use our system to generate a price, we send it to global players, allow them to trade on our balance sheet, and then send those positions back to the local bank, delivering them customized executions. We don’t take positions or compete with our clients in any way.

This workflow, while seemingly straightforward, is transformative for emerging markets players. It massively increases their reach, opening their business up to a larger and more diverse set of counterparties, including many that trade pairs for which there simply isn’t a market nearby. The global banks that pushed them to adapt are now in many cases their liquidity takers, relying on them for favorable pricing in markets around the world. This opens up powerful possibilities for local banks looking for ways to win in an increasingly competitive landscape. The global marketplace effectively comes to them, rather than the other way around.

Helping emerging markets clients benefit from globalization requires a wealth of focused expertise on our end, and it must be highly attuned to the nuances of the local market. That’s why we have employees on the ground in countries around the world. Once we connect with our clients’ systems, we integrate a select group of databases and communication networks to get the best prices on the market into our system. These integrations can be complex and nuanced, and we take the time to develop a comprehensive understanding of the dynamics at play so our clients can focus on what they do best.

Building this vast array of capabilities in-house is a mammoth task, requiring development resources that most emerging market players simply don’t have. And while it’s possible to implement them piecemeal, using an array of vendors – one for initial electronification, one for matching trades, one for the balance sheet – EdgeFX is the only one that delivers everything these banks need via a single platform. In an arms race as high-stakes as this one, finding a single partner that can radically expand your stockpile just makes sense.

When it comes to war for emerging markets FX, there’s no going back – local players can only hope to adapt and regain market share from the global competition. The good news is that with the right technology in place, they have the weapons to fight back and eventually come out on top.

Want to learn more? Drop us a line.