New technology solutions offer regional banks an opportunity to level the playing field, allowing them to increase overall market share. That could be a major boost for mid-tier banks that have faced disruption to long-established business models this year.
2023 has been a mixed year for regional banks. Higher interest rates have boosted net margins for many banks that were able to maintain their deposit bases, and market movements have led to strong years on many FX desks.
Conversely, the impact of higher interest rates was challenging in the US, where concern over unrealized bond losses led to deposit flight and the failure of Silicon Valley Bank, followed by Signature Bank and First Republic. Regulators contained the mini-panic of March 2023, but rating agencies Moody’s and S&P downgraded a number of US regional banks in August, in a sign of ongoing concern.
These combined factors mean that existing business models are being re-examined by mid-tier banks of all types, and boosting profit opportunities is a priority.
One bright spot for regional banks is that new FX technology solutions ranging from deployment of artificial intelligence (AI) tools to improved hedging and liquidity management functions offer an opportunity to level the playing field for revenue generation.
oneZero offers an array of FX technology services that are tailored to help regional banks increase revenue through enhanced pricing, risk management and analytics tools.
Stakeholders ranging from investors to regulators are keen for regional banks to demonstrate that they are using state-of-the-art risk management tools. This applies to FX trading technology, an area where regional banks have an opportunity to improve their risk management practices, allowing them to capture additional yield from flow, while showing improved pricing to their clients.
Regional banks in the past often relied on direct relationships with their end clients. An increasing number of corporates are moving to multi-dealer platforms that offer more choice and the prospect of tighter pricing. oneZero offers solutions that help regional banks to make the most of the shift towards the use of multi-dealer platforms – such as ensuring full compliance with European regulations. Our advanced analytics tools provide regional banks with a greater level of insight into how clients interact with the bank quote data enabling them to win increased market share.
Skewing prices can bring significant benefits for mid-tier banks, allowing them to show better pricing to their end clients when it suits their risk position, and enabling them to capture more flow and thus further boost profitability.
Skew leakage discloses the trading bias of a dealer towards the bid or offer side of a currency, meaning that a trade can be exploited by algorithmic dealing tools. oneZero protects liquidity provider skewed pricing by working with liquidity providers and our clients to restrict how these feeds can be accessed and by whom.
Another way that oneZero can assist in risk management is to manage risk using passive tools such as skewing or algorithmic orders, like pegs, on external venues – potentially reducing market impact and avoiding unnecessarily crossing bid/offer spreads.
AI in action
A key element of oneZero’s offering for regional banks involves delivering more efficient deployment of data analytics, including via adoption of AI tools.
AI algorithms can analyze vast amounts of data, uncover hidden patterns, and identify valuable relationships in sophisticated ways. AI techniques are evolving fast, with development of clustering models one of the areas where we are seeing the biggest early benefits for our regional bank clients.
We use AI to analyze client flow and markout information. This allows regional banks to achieve a deeper understanding of their clients’ trading styles and preferences, with the ability to segment the information in several ways, ensuring all flow is priced and risk-managed optimally.
In order to effectively train this model with sufficient statistical power, a large set of trades is required. Firms of all sizes can benefit from our vast dataset by aggregating their orders in a confidential and anonymized way with information from other market participants for mutual benefit.
Regional banks understandably do not want to give data on their entire trading history to a liquidity provider to run analysis, but as a neutral third party we supply metrics that customers can review and/or share with their counterparties to help build meaningful relationships.
Tailored liquidity management, not repurposed off-the-shelf solutions
oneZero provides the tools to assist regional banks in curating custom price streams and hedging functions, to assist them in managing a myriad of different trading styles.
The optimal set-up of liquidity pools is a key advantage of partnering with oneZero – for both regional banks and their liquidity providers.
Some FX technology solutions available today were designed to meet the needs of the biggest dealers and are now simply repurposed for attempted sales to regional banks on an off-the-shelf basis.
We understand the requirements of a regional bank are different to that of larger participants. Our solutions are designed for the nuances of regional bank workflows and informed by the experience we have gained from partnering with our clients since 2009.
Cost-effective, with minimal upheaval
Crucially, these solutions can be accessed cost-effectively, with the ability to integrate with the existing technology stack.
oneZero offers regional banks the ability to take control of their FX trading revenue, by giving greater insights into client flows and more advanced risk management techniques. Furthermore increased automation, improved distribution and operational efficiencies promote opportunities to expand the franchise.