With ever-increasing expectations to achieve best execution, the buy-side has highlighted multi-dealer platforms (MDPs) as a means to achieving this goal.
A new report from Coalition Greenwich found that buy-side comments with respect to MDPs reflect that the ability to access dealer quotes while keeping them in competition, helps optimise trading.
The growing use of MDPs from the buy-side is driving electronic trading overall and supports their growing focus on best execution.
Over the next year, 34% of respondents stated that their use of MDPs would increase, while conversely, only 5% thought there would be a reduction.
Comparatively, only 16% stated they would increase their use of single-dealer platforms, with 24% stating they would reduce their use of SDPs.
The usage of manual forms of trading, such as chat and voice, are also anticipated to decline, with 23% expecting to decrease their use of chat and 31% decreasing their use of voice in the next year.
“Using electronic execution methods provides value beyond a single trade execution. For example, it is easier to store and capture data about the bids received from dealers when receiving them electronically,” said Coalition Greenwich in its report.
“This ultimately helps a buy-side firm evaluate a broker, whether they executed a particular trade or not.”
When evaluating a firm’s panel of dealers, a buy-side desk may take into consideration various reasons why it may redirect its flow from one to another. Coalition Greenwich found that there were two key reasons why a trader may reduce flow to a dealer: namely, pricing and quality of institutional coverage.
When asked why the buy-side might redirect trade flow, just over 40% of respondents noted pricing as a key consideration. This comes as no surprise with growing concerns from the buy-side about best execution and investments in tools such as TCA to help evaluate their counterparties.
The quality of sales and relationship management was the second highest reason noted by respondents, with 22% citing it as an important element.
The common thread connecting the FX discussion on dealers and MDPs is competition. End users want their dealers in competition with each other to both receive favourable pricing on individual trades and reduce dependence on an individual counterparty, noted Coalition Greenwich.
Elsewhere in the report, Coalition Greenwich found that single-dealer platforms (SDPs) will continue to play a role in the FX trading ecosystem, particularly for complex trades and structures.
However, it was noted that MDPs are likely to remain the preferred choice for routine trades and spot execution.
“MDPs offer a range of benefits, including ease of use, workflow integration and best execution,” said Stephen Bruel, senior analyst on the Market Structure and Technology team at Coalition Greenwich.
“They are an attractive option for buy-side traders who want to optimise their trading and achieve best execution.”